16 Economic Considerations

The final judgment regarding the installation of any DG system usually comes down to an economic decision. Accounting for all costs and benefits properly, the DG system owner will decide if the benefits outweigh the costs. Because the costs and benefits are numerous and quite different from one another — for example, capital and energy, operation and maintenance, and insurance costs and environmental benefits — one needs a uniform approach to make a fair comparison. Chapter 8 contains all of the details of the mechanics of microeconomics, but it is necessary to understand a few features from the beginning. A few key ideas will be presented here.

Economics is at the heart of both DG design assessments and system operation because it is the tool used to answer several very basic questions:

1. How large should the DG system be — should it be able to carry all of the electrical load (peaking capacity) or just the average load (base load)?

2. What is the cost of DG-produced electric power? Is it competitive with other sources?

3. What is the financial benefit of owning a DG system? Is it a good investment?

4. Under a certain set of electric and gas rates and electrical demands in a building, is it worthwhile to operate an installed DG system? It may not make sense to make power that can be purchased elsewhere at the specific hour under consideration. One must make this judgment every hour of the year.

Residential End-Use Consumption by Fuel Type and by End Use

Natural

Fuel

LPG

Renewable

Site

Primary

End Use

Gas

Oila

Fuelb

Other

Energyc

Electric

Total

Percent

Electricd

Total

Space heatinge

3.58

0.84

0.32

0.15

0.61

0.50

6.00

54.8

1.61

7.10

Space coolingf

0.00

0.54

0.54

4.9

1.72

1.72

Water heatings

1.27

0.10

0.07

0.01

0.39

1.83

16.8

1.24

2.69

Lighting

0.40

0.40

3.6

1.27

1.27

White goodsh

0.05

0.78

0.82

7.5

2.49

2.54

Cooking'

0.16

0.03

0.23

0.42

3.9

0.74

0.93

Electronics)

0.27

0.27

2.5

0.86

0.86

Motorsk

0.05

0.05

0.5

0.18

0.18

Heating appliances'

0.10

0.10

0.9

0.31

0.31

Otherm

0.09

0.00

0.01

0.10

0.9

0.10

Miscellaneous"

0.41

0.41

3.7

1.30

1.30

Total

5.15

0.94

0.43

0.15

0.62

3.66

10.94

100.0

11.73

19.01

a Indicates 0.94 quads distillate fuel oil.

b Kerosene (0.09 quad) and coal (0.06 quad) are assumed attributable to space heating.

c Compound of 0.60 quad wood (space heating), 0.01 quad geothermal (assumed space heating), and 0.01 quad solar (water heating). d Site-to-source electricity conversion (due to generation and transmission losses) = 3.21. e Fan (0.18 quad) and pump energy use included. f Fan energy use included.

g Includes electric recreational water heating (0.11 quad).

h Includes (1.26 quad) refrigerators, (0.39 quad) freezers, (0.09 quad) clothes washers, (0.05 quad) natural gas clothes dryers, (0.62 quad) electric clothes dryers, and (0.15 quad) dishwashers. Does not include water heating energy. 1 Includes (0.14 quad) microwaves and other "small" electric cooking appliances.

j Includes (0.29 quad) color televisions, (0.06 quad) personal computers, and (0.51 quad) other electronics. k Includes devices whose energy consumption is driven by motors. ' Includes appliances such as electric blankets, irons, waterbed heaters, and hairdryers. m Includes swimming pool heaters, outdoor grills, and natural gas outdoor lighting. n Energy attributable to the residential buildings sector, but not directly to specific end-uses.

Source: EIA, AEO 1999, Dec. 1998, Table A2, p. 113-115, Table A4, p. 118-119, and Table A18, p.135; BTS/Little, A.D., Electricity Consumption by Small End-Uses in Residential Buildings, Appendix A for electric end-uses.

©2001 CRC Press LLC

All of these questions are answered using the same principles of microeconomics in different ways. Costs of DG systems are two basic types:

• Initial investments — what it takes to acquire a system, e.g., the installed cost of a microturbine, a one-time payment ($)

• Ongoing costs — what it costs to maintain and operate a system, e.g., the annual maintenance contract on the microturbine, an ongoing series of payments ($/yr)

For a complete picture, we need to be able to express both ongoing and onetime costs in a uniform framework. In this book, all costs are reduced to annual cash flows in units of $/yr. Any currency can be used — the key is to reduce all costs to an annual time scale. This is not all that unfamiliar. Everyone knows that the price of a car is often paid in monthly installments. The car's initial cost has been converted to an equivalent monthly payment; annual costs are used in this book because of the fiscal-year basis of most companies.

Likewise, benefits are accrued over the economic lifetime of a system. An example of the benefit of a DG system is the reduced electricity bill of the owner. In very simple terms, the DG investor prefers a system that will produce benefits larger than the costs.

Suppose that a 100 kW DG system operates at full capacity for 8000 of the 8760 hours in a year. If the electricity produced offsets grid power priced at $0.05/kWh, then the annual benefit B of this particular DG system is

The installed cost of this system is also known to be $1200/kW or a total of $120,000. If a loan for this system is paid off in eight years, then the annual payment A (ignoring interest) is

The DG system superficially appears to be beneficial because it saves $25,000 per year. This hasty conclusion is far from correct because a number of key costs have been ignored:

• Cost of money (interest charges at 8% for eight years will add $6000 to the annual cost above)

• Cost of maintenance of equipment (depending on the technology, maintenance could add $7000 to the cost above)

• Cost of fuel (this is very dependent on the local gas cost, but could amount to $3000-$4000/yr)

Therefore, properly accounting for all costs has changed a strongly feasible project to a marginally feasible one.

On the other hand, suppose that the DG system produces exhaust heat that can be used for useful purposes on site. That will reduce the portion of the fuel cost associated with power production by two-thirds. Perhaps a better loan interest rate can be found for the DG system initial purchase. With this combined scenario, the DG economics are much more advantageous. The conclusion is that careful cost and benefit analysis must be conducted for every project. The use of rules of thumb (e.g., if the "spark spread" is $7/MM Btu, then DG is feasible anywhere) is not correct in every case. For example, notice that the three simple cases above had the same spark spread, but three sets of assumptions resulted in three levels of economic feasibility.

Three key economic indices are developed in Chapter 8. The simple payback period is the time required to pay back an initial DG investment using the energy sales proceeds to pay off the equipment. For example, the system above saved $40,000 per year with a system cost of $120,000. The payback period P is

The payback period is seriously deficient in evaluating projects because of all the shortcomings and ignored costs listed above.

A better index is the internal rate of return (IRR), defined as the earning rate that the DG system produces for the system owner. The owner invests in the DG system and earns money on the electricity (and thermal energy) sold much like one would invest in stocks and earn dividends on that investment. The IRR is more difficult to calculate, but the effort is worth the trouble because the IRR is the correct way to rank competing investments.

The third approach used to assess DG costs and benefits is called life cycle costing (LCC). This approach can also be used to correctly rank investment options. The costs that are considered in the LCC and IRR methods include:

• DG system capital cost

• Maintenance

• Operational costs

The benefits that are weighed against the listed costs include the following:

• Electricity payment savings

• Exhaust heat energy savings

• Power quality support benefits

• Other ancillary services that DG can provide

• Environmental benefits

Note that the payback period includes only a few of the listed key parameters. Exactly who owns DG equipment, pays for the energy, and reaps the benefits depends on the ownership scenarios — leased, owned by utility (i.e., energy service company), or owned by building owner.

The final topic that needs to be introduced, with details to follow, is the method for calculating the cost of electricity produced by DG systems. This calculation is simple after the terms listed above have been determined. The cost of power is the number of kilowatt-hours produced divided into the annual cost of owning and operating the DG system. For example, suppose that a DG system produces 100,000 MWh per year using a system that costs $7.2 million per year to own and operate. The cost Ce of electric power produced is found from

Ce = $7,200,000 / (100,000 MWh/yr x 1000 kWh/MWh) = $0.072 / kWh

Solar Stirling Engine Basics Explained

Solar Stirling Engine Basics Explained

The solar Stirling engine is progressively becoming a viable alternative to solar panels for its higher efficiency. Stirling engines might be the best way to harvest the power provided by the sun. This is an easy-to-understand explanation of how Stirling engines work, the different types, and why they are more efficient than steam engines.

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