EME 801
Energy Markets, Policy, and Regulation

Basic economics of power generation, transmission and distribution

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In most industrialized countries, electric power is provided by generating facilities that serve a large number of customers. These generating facilities, known as central station generators, are often located in remote areas, far from the point of consumption. The economics of central station generation is largely a matter of costing. As with any other production technology, central station generation entails fixed and variable costs. The fixed costs are relatively straightforward, but the variable cost of power generation is remarkably complex. We will examine each of these in turn.

The fixed costs of power generation are essentially capital costs and land. The capital cost of building central station generators vary from region to region, largely as a function of labor costs and "regulatory costs," which include things like obtaining siting permits, environmental approvals, and so on. It is important to realize that building central station generation takes an enormous amount of time. In a state such as Texas (where building power plants is relatively easy), the time-to-build can be as short as two years. In California, where bringing new energy infrastructure to fruition is much more difficult (due to higher regulatory costs), the time-to-build can exceed ten years. Table 5.1 shows capital cost ranges for several central-station technologies. Although the ranges in Table 5.1 are quite wide, they still mask quite a bit of uncertainty in the final cost of erecting power plants.

Operating costs for power plants include fuel, labor and maintenance costs. Unlike capital costs which are "fixed" (don't vary with the level of output), a plant's total operating cost depends on how much electricity the plant produces. The operating cost required to produce each MWh of electric energy is referred to as the "marginal cost." Fuel costs dominate the total cost of operation for fossil-fired power plants. For renewables, fuel is generally free (perhaps with the exception of biomass power plants in some scenarios); and the fuel costs for nuclear power plants are actually very low. For these types of power plants, labor and maintenance costs dominate total operating costs.

In general, central station generators face a tradeoff between capital and operating costs. Those types of plants that have higher capital costs tend to have lower operating costs. Further, generators which run on fossil fuels tend to have operating costs that are extremely sensitive to changes in the underlying fuel price. The right-most column of Table 5.1 shows typical ranges for operating costs for various types of power plants.

Table 5.1: Typical capital and operating costs for power plants. Note that these costs do not include subsidies, incentives, or any "social costs" (e.g., air or water emissions)
Technology Capital Cost ($/kW) Operating Cost ($/kWh)
Coal-fired combustion turbine $500 — $1,000 0.20 — 0.04
Natural gas combustion turbine $400 — $800 0.04 — 0.10
Coal gasification combined-cycle (IGCC) $1,000 — $1,500 0.04 — 0.08
Natural gas combined-cycle $600 — $1,200 0.04 — 0.10
Wnd turbine (includes offshore wind) $1,200 — $5,000 Less than 0.01
Nuclear $1,200 — $5,000 0.02 — 0.05
Photovoltaic Solar $4,500 and up Less than 0.01
Hydroelectric $1,200 — $5,000 Less than 0.01

Because of the apparent tradeoff between capital and operating cost, comparing the overall costs of different power plant technologies is not always straightforward. Often times, you will see power plants compared using a measure called the "Levelized Cost of Energy" (LCOE), which is the average price per unit of output needed for the plant to break even over its operating lifetime. We will discuss LCOE in more detail in a future lesson - it is an extremely important (and often-used) cost metric for power plants, but it has its own problems that you will need to keep in the back of your head.

Irrespective of technology, all generators share the following characteristics which influence the plant's operations:

  • Ramp rate
    This variable influences how quickly the plant can increase or decrease power output, in [MW/h] or in [% of capacity per unit time]
  • Ramp time
    The amount of time it takes from the moment a generator is turned on to the moment it can start providing energy to the grid at its lower operating limit (see below), in [h]
  • Capacity
    The maximum output of a plant, in [MW]
  • Lower Operating Limit (LOL)
    The minimum amount of power a plant can generate once it is turned on, in [MW]
  • Minimum Run Time
    The shortest amount of time a plant can operate once it is turned on, in [h].
  • No-Load Cost
    The cost of turning the plant on, but keeping it "spinning," ready to increase power output, in [$/MWh]. Another way of looking at the no-load cost is the fixed cost of operation; i.e., the cost incurred by the generator that is independent of the amount of energy generated.
  • Start-up and Shut-down Costs
    These are the costs involved in turning the plant on and off, in [$/MWh].
Table 5.2: Typical ramp and run times for power plants.
Technology Ramp Time Min. Run Time
Simple-cycle cumbustion turbine minutes to hours minutes
Combined-cycle cumbustion turbine hours hours to days
Nuclear days weeks to months
Wind Turbine (includes offshore wind) minutes none
Hydroeletric (includes pumped storage) minutes none
 Relative comparison of operating cost and operational flexibility for different power plant technologies (this excludes most renewables since their operational flexibility is partially dependent on prevailing weather conditions such as irradiance and wind speed/direction)
Figure 5.3: Relative comparison of operating cost and operational flexibility for different power plant technologies (this excludes most renewables since their operational flexibility is partially dependent on prevailing weather conditions such as irradiance and wind speed/direction)
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The minimum run time and ramp times determine how flexible the generation source is; these vary greatly among types of plants and are a function of regulations, type of fuel, and technology. Generally speaking, plants that are less flexible (longer minimum run times and slower ramp times) serve base load energy, while plants that are more flexible (shorter minimum run times and quicker ramp times) are better-suited to filling peak demand. Table 5.2 and Figure 5.3 show approximate (order-of-magnitude) minimum run times and ramp times for several generation technologies. It is important to realize that, in some sense, these are "soft" constraints. It is possible, for example, to run a nuclear plant for five hours and then shut it down. Doing this, however, imposes a large cost in the form of wear and tear on the plant's components.

The cost structure for transmission and distribution is different than for power generation, since there is basically no fuel cost involved with operating transmission and distribution wires (and their associated balance-of-systems, like substations). At the margin, the cost of loading a given transmission line with additional electricity is basically zero (unless the line is operating at its rated capacity limit). Capital cost thus dominates the economics of transmission and distribution.