Environmental Engineering Reference
In-Depth Information
7.2.2 Total Generation Costs
Capital costs are not a reliable guide to competitiveness. For example, low capital costs of
combined cycle gas turbine plant does not result in low electricity generation costs unless
the cost of fuel is also low. Similarly, although geothermal plant has a high capital
cost it also has a high load factor and may therefore have similar generation costs to gas or
wind.
National institutional factors have a major infl uence on the fi nancing terms for borrowing
money and on investors' expectations for the return on the equity they put into a project. In
some places all the investment is provided by the state, or by nationalized industries, and so
the equity contribution is zero. Irrespective of the sources of fi nance, however, a cost of
capital can be derived that expresses the interest rate that can be applied to the total cost of
the project to determine generation costs. Alternative terms for this parameter are test discount
rate and project interest rate . Before privatization of the electricity industry in the UK the
test discount rate was set by the Treasury and was 8% in 1990. In Denmark today, utilities
almost invariably use public sector test discount rates , which are typically around 5-6%. In
Britain and the United States, there are no fi xed guides and project developers use criteria
that tend to be strongly infl uenced by the fi nanciers. The overall interest rate is, in practice,
dependent on the relative proportions of debt and equity and the appropriate interest rates. A
weighted average, appropriate for a project as a whole, tends to be around 11%, although
higher and lower values are found.
The other parameter that strongly infl uences generation costs is the capital repayment
period. The longer this is, the lower the annual payment to cover depreciation and interest
and hence the lower the generation cost. In Denmark, this period often corresponds to the
expected life of the project, where 20 to 25 years is common. In the private sector, deprecia-
tion periods also vary, but are generally in the region of 12 to 15 years.
The annual charge rate is the fraction of capital payable each year to cover repayments
of the original investment, plus interest, and depends on both interest rate and repayment
period. Typical values are shown in Table 7.2. Once the annual cost has been determined, the
corresponding generating cost component is simply the annual cost divided by the annual
energy generation.
Table 7.2
Typical annual charge rates. (Courtesy of David Milborrow)
Interest rate (%)
Repayment period (year)
Annual charge rate
Comments
5
20
0.0802
Used in Denmark
8
20
0.1019
Old ' nationalized industry '
UK fi gures
10
15
0.1315
Possible present - day UK
criteria
12
12
0.1614
Applied to investments if
seen as more risky
 
Search WWH ::




Custom Search