EBF 483
Introduction to Electricity Markets

3.1.0 Basic Cost Concepts


Before we dive too deeply into understanding the economics of power plants, it will be useful to review some basic cost concepts that you may remember from your microeconomics courses.

  • Total cost: The total cost of producing Q MWh of electricity (takes units of dollars);
  • Average cost of energy: The average cost of producing one MWh of electric energy (takes units of dollars per MWh)
  • Average cost of capacity: The average cost of one MW of electric power capacity (takes units of dollars per MW)
  • Marginal cost of energy: The incremental cost, in dollars per MWh, of producing an additional unit of electric energy.
  • Variable costs are those that change when output changes. Examples of variable costs for power generation include the cost of fuel, the cost of labor or materials, costs to start up and shut down plants, and some types of environmental costs.
  • Fixed costs are those that remain at a fixed amount no matter how much electricity the plant produces. Examples of fixed costs include capital, some types of labor costs, insurance and land.

For virtually all power plant technologies, the cost of capital and the cost of fuel are the biggest drivers in overall power plant economics. The relative importance of fuel and capital costs vary widely by technology, as we will see.