1
= . =
As an example of single payment discounting, suppose that an investor wants to have Rs.
1000 in savings account 5 years from now and the bank is paying7% compound interest,
to calculate the single payment,
That is Rs. 712.99 has to be deposited for 5 years in order to have Rs. 1000, (the interest
rate is 7% p.a.)
Uniform Series Present Worth Factors
In economic analysis, there often exists uniform series of annual payments (annuity) that extend from today through n
years. To compute, the present worth for the uniform annual series of payments, a convenient formula can be derived as
illustrated,
The formula is computed by calculating the present worth of each one of the annual payments by discounting it back to
time zero, as shown below,
= + + + + -------- (1)
(1+) (1+)2 (1+)3 (1+)
As an example, an investor might want to know the equivalent payment, or one-time payment, that is the same as making
equal payments into a savings account on a regular basis. Suppose that Rs. 100 is saved on the last day of the year for 10
years in a savings account, that pays 6% interest. What is the present worth equivalent amount? The amount is,
= 7.36009 100 = . 736.01
Capital Recovery Factor
CRF, finds equivalent value of a future annuity given the present cash equivalent. This is noted in
equation below (1), where CRF is merely inverse of the uniform series present worth factor as
shown (1) and (2).
(1+)
= = CRF P
(1+) 1
1 (1+)
= =
(1+) 1
As an example of CRF calculation, assume that the interest rate is 10% for 30 years The CRF of
equation (2) can then be calculated. Thus Rs. 1 today is equivalent to 0.10608 rupees per year for
the next 30 years, assuming a discount rate of 10% per year. Given P, find R for n years
0.1(1.1)30
= 30, = 10%, = = 0.10608
(1.1)30 1
= . 1,00,000
= 0.10608 1,00,000 = . 10,608 . .
Compound Amount Factor (CAF)
The CAF calculates the future worth of a uniform series. The CAF helps to determine what future
amount an investor would have if equal amounts R were placed in a savings account at the end of
each year for N years. The CAF is the product of
= =
1+ 1 1+ 1
= (1 + ) =
1+
1+ 1
CAF = Compound Amount Factor =
The CAF helps one determine how much money can be saved by regularly putting equal amounts
into a savings account. Suppose that Rs. 100 is saved at the end of each year for 10 years in a
Savings account that pays 6%. On the same day the last payment is made, the saver will have
10
1 + 0.06 10 1
= (1 + 0.06) 10
100
0.06 1 + 0.06
= 13.18079 100 = . 1,318.08
Sinking Fund Factor (SFF)
The SFF is uniform series interest factor. In this case, a future payment is given and the objective is to
calculate the value of an annuity in order to accumulate a future cash equivalent.
The formula for the SFF can be calculated using the CAF or the results of CRF formula. A recurring annuity
has a present worth equal to P, the present cash equivalent times the CRF; P is equal to Present Value Factor
PVF times the future value, as shown in the equation (1). Thus sinking fund factor is merely equal to the
present-value factor times the capital recovery factor as shown in equation (2),
= = =
1 1+ 1
= = = = ----- (1)
1+ 1+ 1 1+ 1
= ----- (2)
1+ 1
The SFF tells the saver how much money must have put into a savings account each year (a sinking fund) in
order to have a given amount at the time the last payment is made. For example, a mortgage bonds with a face
value of Rs. 1000, must be redeemed in 20 years. How much money should be put into a savings account at the
end of each year to meet that bond commitment if the savings account pays 7%?
1 0.07 1 + 0.07 20
= 1000 = 0.02439 1000 = . 24.39
1 + 0.07 20 1 + 0.07 20 1
Economic Evaluation
A business enterprise participating in a free-market system attempts to maximize
its profit over a long-term period.
In most cases, this method of conducting business encourages competition and
assures that consumers and society receive the greatest benefits in terms of the
lowest acceptable price for standards of product quality.
An electric utility, however, is granted a monopoly franchise within a service
territory subject to the condition that its rates be regulated in a manner that
allows a fair and reasonable return on its investment
The electric utility must charge the lowest electric rates possible consistent with
providing an acceptable rate of return on its investment and an acceptable
quality of electric service
A business enterprise in a free-market system and an electric utility have
distinctly have different business objectives, and their economic evaluation
methods are markedly different.
Electric utility economic evaluation methods
For a competitive business enterprise, the widely used economic evaluation method is
discounted cash-flow rate-of-return method. In this method, all of the cash flows are examined
for each alternative through the time horizon of the evaluation (several different present worth
rates).
For each alternative, the cash flows are discounted at several different present-worth rates. That
discount rate which results in the future cash flows equalling the initial investment is called the
discounted cash-flow rate of return.
The project with the highest discounted cash-flow rate of return is considered the best choice. All
projects that have a discounted cash-flow rate of return that exceeds the cost of money are worth
while projects (ignoring investment risk).
For regulated utilities, the economic evaluation method most widely used is called the
minimum-revenue-requirement method. Because the utility is regulated, the rate of return on
any investment is determined based on the allowed regulated return on investment.
Another evaluation method, the investment-pay-back-method is used by both utility and free
market enterprises for scoping analysis.
The pay-back method is simply calculated as the number of years required for the net benefits to
equal the initial investment.
Economic evaluation contd.
The primary objective of the economic analysis of power projects is to determine the cost of
generation / transmission at their true resources cost to the economy as the financial cost of the
generation / transmission may not reflect the true cost of power to the economy on account of
distortion inherent in the market prices.
While working out the economics, cost of generation / transmission, both the costs and power
generated have to be valued at their true resources cost.
This process involves removal of taxes and duties from their costs as they are not the costs to the
society. Similarly subsidies are also not taken into account as they are only transfer payments.
Coal, fuel oil or other liquid fuel oils have to be valued at their resources cost which may be the
economic cost of production plus transportation cost and international prices in case of gas or
petroleum fuels. Apart from adjustment in the costs, the economic analysis also covers the impact of
the proposed project on the power system.
Efforts should be made to bring out the possible reduction in operating costs for the rest of the system
on account of addition of the proposed project.
Economic Comparison is usually best made on the basis of present worth economics and accounting
for all costs to ascertain total cost of ownership.
Contd,
The life cost of the system consists of
Capital cost or fixed cost (cost of land, building, machinery installation)
Working capital
operating cost (mostly cost of electrical loss and maintenance)
Interest
Insurance
The truly optimized project is one in which the total lifetime cost is
minimized (for example in case of overhead transmission lines conductor
selection, bundling, tension, effects of terrain, structure configuration and
design all have great potential for cost saving).
For an estimation of the specific energy cost / unit of electricity generated
(expressed in Rs/kWh), the following additional parameters have to be
specified:
The rate of discount (in per cent) as determined by the regulatory body
The systems total lifetime (in years)
The annual electricity production (in kWh)
Contd,
In first step, If these parameters are known, then the initial investment costs can
easily be transformed into annual costs.
In a second step, summed up to the current costs (O & M) to get the total
generation costs for the power plant. The first step is done by means of the
conversion factor (CF)
(1+)
= , = , =
(1+) 1
In the last step, total generation costs have to be divided by the annual electricity
production (provided this is constant)in order to receive specific energy cost,
which then can easily be compared to the respective cost figure of conventional
energy system (eg. Thermal, diesel generation).
To keep the calculation effort minimum, the cost comparison should always be
conducted in real terms, i.e. all costs should be measured in constant prices
prevailing at the beginning of the investment period, and the discount rate used
to determine the CF should be a real discount rate.
Benefit-Cost Analysis
It is method for determining the economic justification of a power project
Compute Benefit Cost ratio (B-C Ratio) - Benefits are defined to mean all
the advantages, less any disadvantages to the utility, consumers and public.
The time frame must be clearly specified to list out all cost and benefits for
each year over the life cycle
Comparison of various projects for final selection of an economical project
(Generation or Demand side projects)
The B.C. ratio must be more than one for a worthwhile scheme
,
. . =
The benefits and cost present, or equivalent annual amount are computed
using the rate of discount.
Many benefits which embrace valuable benefits also result in inexcapable
disadvantages.
Contd
Rural electrification in India is done in contrast to the view of private
enterprise which evaluates the investment on the basis of some
measures of profitability.
The forest clearance involving the forest areas of more than 5
hectares in hills or 20 hectares in plains for lines/hydro project is
taken on the basis of B-C analysis (as per forest conservation act
1980).
This method is appropriate for appraising of investments in multi
purpose hydro-projects.
The life cycle costs (LCC) can be expressed as follows:
LCC = CI + CP + CO + CG + CD
CI total cost of installation, CP Cost of planned corrective maintenance, CO operation costs, CG outage costs, CF
cost of modernization/refurbishment/extension, CD Cost of decommissioning, disposal
Example
Economic analysis on the basis of project life-cycle cost in real terms suggests that
small or micro hydro generation must be preferred over thermal power generation even
if is a few times costlier than the latter, in interest of overall grid economy. Improvement
in load carrying capacity due to peaking support gives a weightage factor of
approximately 1.3 in favor of hydro.
The hydro projects are proposed on the basis of 90% hydrological dependability. The
actual generation in the long term comes to 10% higher, thereby leading to a weightage
factor 1.1. an escalation of 6% annum in case of thermal over hydro, statistically gives a
weightage of 8.89 in favor of hydro having project life of 60 years or more. Double the
life of hydro projects than thermal leads to weightage of 2. Small projects have
environmentally higher weightage than thermal.
Life-cycle cost in case of new equipment proposed for installation may be called total
owing cost such a transformers, circuit breakers, computer etc. For example, in case of
transformers, there are two kinds of costs purchase price and cost of energy lost in
losses during the active life of the transformer. The total owning cost of a transformer is
the sum of purchase price and net present value of energy losses. The transformer or any
other equipment should be procured on the basis of lowest owning cost.
Cash flow statements
The basic principle of the cash flow is that revenue receipts (inflow)
and revenue expenditure (outflow) are counted for the financial year.
The gross operating surplus / deficit cash flow is calculated as a
difference between these and are compared.
Annual balance sheets are made as per the Electricity (Supply) Annual
Accounts Rules, 1985
Cash flow statements can be attained through
Break-Even Point
Payback method
Rate of Return on investment
Net Present Value Method
Internal Rate of return method
Break Even point
This method is used to determine minimum revenue requirement
analysis.
The tariffs in public power utilities are generally fixed to break even
costs (fixed and variable ), i.e. at break even point the fixed annual
cost of capital equalizes the revenue earned over the financial year
period as shown in figure.
The method is applied for economic analysis of power system
improvement schemes
Payback method
Payback period definition: The length of time required to recover the
initial investment is computed or It is the time in which the initial
cash outflow of an investment is expected to be recovered from the
cash inflows generated by the investment. It is one of the simplest
investment appraisal techniques.
This does not consider the time value of money and life of investment
after payback period.
But this measure is used as an indication of the amount of the
investments risk in small generation schemes, energy conservation
schemes and system improvement schemes.
Contd
The formula to calculate payback period of a project depends on whether
the cash flow per period from the project is even or uneven. In case they
are even, the formula to calculate payback period is:
=
When cash inflows are uneven, we need to calculate the cumulative net
cash flow for each period and then use the following formula for payback
period:
= +
Where A = last period with a negative cumulative cash flow
B = absolute of cash flow at the end of period A
C = total cash flow during the period after A
Example 1: Even Cash Flows
A electric utility company is planning to undertake a hydro project
after orographic survey requiring initial investment of Rs. 105 million
(inclusive of survey). The project is expected to generate Rs. 25
million per year for 7 years, (if favourable weather conditions exists
and it is persistent, capable of bulk power supply into the grid on the
par capacity) . Calculate the payback period of the project.
Solution
Payback Period = Initial Investment Annual Cash Flow
= Rs. 105M Rs. 25M = 4.2 years
Example 1: Un-Even Cash Flows
A electric utility company is planning to undertake another wind energy
harvesting project, requiring initial investment of Rs. 50 million and is expected to
generate Rs. 10 million in Year 1, Rs. 13 million in Year 2, Rs. 16 million in year 3,
Rs. 19 million in Year 4 and Rs. 22 million in Year 5 (varying revenues owing to
varying average wind flow conditions). Calculate the payback value of the project.
Cash flow in Rs. Millions Cumulative Remarks
= +
Year Cash flow Cash flow P Positive Where
N Negative
A = last period with a negative cumulative cash flow
0 -50 -50 N
B = absolute of cash flow at the end of period A
1 +10 -40 N
C = total cash flow during the period after A
2 +13 -27 N
+16 N = +
3=A -11 = B 11
= 3 + 19 = 3.58
4 +8 P
+19 = C
5 +22 +30 P
Contd
For example, a cogeneration plant in a sugar factory will give an idea
about pay back analysis. A typical example (1993) is given below:
Cogeneration project cost Rs. 44 Millions
Power feed to grid (in kW) 4750 kW
Power to grid in units considering 19 GWh
4000 hours per annum as the
season for sugar plant
Revenue from power (19 * Rs. Rs. 23.75 Millions
1.25 per unit)
Expenditure per annum (excluding Rs. 9.681 Millions
depreciation)
Net cash revenue Rs. 14.069 Millions
44
= =
14.069
= 3.127 3.15
Advantages and Dis-advantages
Advantages Of Pay Back Period Disadvantages Of Pay Back Period
1. Pay back period is simple and easy to 1. In the calculation of pay back period, time
understand and compute. value of money is not recognized.
2. Pay back period is universally used and easy 2. Pay back period gives high emphasis on
to understand. liquidity and ignores profitability.
3. Pay back period gives more importance on 3. Only cash flow before the pay back period is
liquidity for making decision about the considered. Cash flow occurred after
investment proposals. the PBP is not considered.
As it can be seen, the only variable in this equation that management wont know
is the IRR. They will know how much capital is required to start the project and
they will have a reasonable estimate of the future income of the investment. This
means we will have to solve for the discount rate that will make the NPV equal to
zero.
Example
A private investor, is considering to purchase a year Revenue IRR Innvestment NPV
new wind turbine system for commissioning 1 20000 8% 18518.52 100000 5393.167
2 30000 8% 25720.16
and bulk power supply, but he is unsure if its 3 40000 8% 31753.29
the best use of his funds at this point in time. 4 40000 8% 29401.19
With the new Rs. 100,000 wind turbine unit, Total Revenue 105393.2
the investor will be able to inject power into
the grid based on the forecasted wind power year Revenue IRR Innvestment NPV
level, such that he will get a revenue of Rs. 1 20000 9% 18348.62 100000 2823.371
2 30000 9% 25250.4
20,000, Rs. 30,000, Rs. 40,000, and Rs. 40,000
3 40000 9% 30887.34
in subsequent assessment periods. Lets 4 40000 9% 28337.01
calculate investors minimum rate. Since its Total Revenue 102823.4
difficult to isolate the discount rate unless you
use an excel IRR calulator. You can start with an year Revenue IRR Innvestment NPV
approximate rate and adjust from there. Lets 1 20000 10% 18181.82 100000 348.3369
LCC Analysis is a multi-disciplinary activity. An analyst, involved in life cycle costing, should be fully
familiar with unique cost elements involved in the life cycle of asset, sources of cost data to be
collected and financial principles to be applied.
He should also have clear understanding of methods of assessing the uncertainties associated
with cost estimation. Number of iteration may be required to perform to finally achieve the
result. All these iterations should be documented in detail to facilitate the interpretations of final
result.
Stage 1: LCC Analysis planning
The Life Cycle Costing process begins with development of a plan, which
addresses the purpose, and scope of the analysis.
The plan should:
Define the analysis objectives in terms of outputs required to assist a
management decision.
Typical objectives are:
Determination of the LCC for an asset in order to assist planning,
contracting, budgeting or similar needs.
Evaluation of the impact of alternative courses of action on the LCC of an iv. Identify alternative courses of action to be evaluated.
asset (such as design approaches, asset acquisition, support policies or The list of proposed alternatives may be refined as new
alternative technologies). options are identified or as existing options are found to
violate the problem constraints.
Identification of cost elements which act as cost drives for the LCC of an
asset in order to focus design, development, acquisition or asset support v. Provide an estimate of resources required and a
efforts. reporting schedule for the analysis to ensure that the
LCC results will be available to support the decision-
Make the detailed schedule with regard to planning of time period for each making process for which they are required.
phase, the operating, technical and maintenance support required for the
asset. Next step in LCC Analysis planning is the selection or
development of an LCC model that will satisfy the
Identify any underlying conditions, assumptions, limitations and constraints objectives of the analysis. LCC Model is basically an
(such as minimum asset performance, availability requirements or accounting structure which enables the estimation of an
maximum capital cost limitations) that might restrict the range of acceptable asset components cost.
options to be evaluated. Identify alternative courses of action to be
evaluated.
Stage 2: Life Cost Analysis preparation
The Life Cost Analysis is essentially a tool, which can be used to control and
manage the ongoing costs of an asset or part thereof. It is based on the LCC
Model developed and applied during the Life Cost Planning phase with one
important difference: it uses data on real costs.
The preparation of the Life Cost Analysis involves review and development
of the LCC Model as a real-time or actual cost control mechanism.
Estimates of capital costs will be replaced by the actual prices paid.
Changes may also be required to the cost breakdown structure and cost
elements to reflect the asset components to be monitored and the level of
detail required.
Targets are set for the operating costs and their frequency of occurrence
based initially on the estimates used in the Life Cost Planning phase.
However, these targets may change with time as more accurate data is
obtained, from the actual asset operating costs or from the operating cost
of similar other asset.
Stage 3: Implementation and Monitoring
Implementation of the Life Cost Analysis involves the continuous
monitoring of the actual performance of an asset during its operation
and maintenance to identify areas in which cost savings may be made
and to provide feedback for future life cost planning activities.
For example, it may be better to replace an expensive building
component with a more efficient solution prior to the end of its
useful life than to continue with a poor initial decision.
Phases in a Life Cycle of a product
Every product goes through a life cycle. A product life cycle can be divided into five phases.
Development
Introduction
Growth
Maturity
Decline
(a) Development. The product has a research and development stage where costs are incurred but no revenue is generated.
(b) Introduction. The product is introduced to the market. Potential customers will be unaware of the product or service, and the
organization may have to spend further on advertising to bring the product or service to the attention of the market.
(c) Growth. The product gains a bigger market as demand builds up. Sales revenues increase and the product begins to make a profit.
(d) Maturity. Eventually, the growth in demand for the product will slow down and it will enter a period of relative maturity. It will
continue to be profitable. The product may be modified or improved, as a means of sustaining its demand.
(e) Decline. At some stage, the market will have bought enough of the product and it will therefore
reach 'saturation point'. Demand will start to fall. Eventually it will become a loss-maker and this is
the time when the organization should decide to stop selling the product or service.
Power Supply Reliability
System Reliability Consumer Centric
Modern society excepts that the supply of electricity should be continuously available on
demand. This exactly may not be possible due to random system failures which are
generally beyond the control of power system engineers.
The probability of consumers being disconnected, however, can be reduced by increased
investment on power systems by providing high quality equipment or redundancy and
better maintenance.
The economic and reliability constraints are conflicting in nature and make the planning
decisions difficult.
The reliability of supply to consumers is judged from the frequency of interruptions, the
of each interruption and the value a consumer places on the supply of electricity at the
time that service is not provided.
The value to consumers is determined by the benefits which they can derive from using
it e.g. the production of goods, lighting, TV viewing, air conditioning and heating at home
and in shops and offices, improvement in their standard of living and for entertainment
purposes in theatres, cinemas etc.
These factors depend upon the individual reliability of equipment, circuit length and
loading, network arrangement etc.
Uncertainty
System planners advise the decision makers by evaluating the major alternatives for facing the
future. The economic crisis experienced during the recent years, the technological developments
and the changes in the sociological environment reinforced the importance of the factors which
were poorly taken into account in the past-the uncertainty of the future and the call for security
from the system.
A first answer to the problem of uncertainty consists in devising a system sufficiently robust to
withstand the impacts. This approach was usually followed in the past. However, at the present
time the amplitude and the number of the possible impacts is such that the cost of a robust
system becomes prohibitive, if one wants to face most of the uncertainty factors.
A second answer adapted to the present time is to introduce flexibility within the system
development. From the planners point of view a flexible system which will be able to be adapted
quickly to any external change. This is achieved either because the planner made provisions to
change over to diverse fuels or diverse power generations or because it was decided to install
equipment which makes better use of existing system.
In most utilities, a temporary degradation of the reliability in case of deviation of the
development parameters will be accepted, but some countries do not accept such degradation
and consider that this is not acceptable for facing external impacts.
Uncertainty contd
In recent years the need for flexibility has become particularly
apparent because both planners and operators had to cope with
more and more significant trends:
Industry structure trends:
Financial trends:
Technical trends:
Environment and health issues
POWER SUPPLY RELIABILITY
TOPICS
SYSTEM RELIABILITY
RELIABILITY PLANNING
RELIABILITY EVALUATION
FUNCTIONAL ZONES
RELIABILITY INDICES
INTRODUCTION
Modern society expects supply of Electricity should be continuously
available on demand
Probability of failures fail to supply reliable power to consumers
Providing high Quality equipment or redundancy and better
maintenance with increased investment on power system improves
reliability of supply
SYSTEM RELIABILITY
Judged from
Freq. of interruptions,
Duration of each interruption,
And value a consumer when supply fails.
Value to consumers is determined by
Benefits from using appliances (production of goods, lighting, TV, air
conditioner, etc).
Reliability factors depends on
Individual reliability of equipment
Circuit length and loading
Network arrangement etc.
SYSTEM RELIABILITY- Uncertainty
(Contd)
System planners advise decision makers to consider major
alternatives for future like
economic crisis
Technological development
Changes in sociological environment
Which are not taken in past
Two ways to solve uncertainty of supply
Devising robust system to withstand uncertain impacts
Introduce flexibility by the planner within system
development to meet external changes
SYSTEM RELIABILITY- Uncertainty
(Contd))
Need for flexibility among plannners and operators to cope with
more significant trends are:
1. Industry structured trends
De-regulation
Privatisation
Vertical disaggregation
Wheeling for non-utility generation, transmission access for
consumers for power purchases from other utilities
2. Financial trends
Capital availability and cost uncertainity
Rate base incentives and constraints
Stockholder risks and uncertain rates of return
Construction expenditure recovery risks
SYSTEM RELIABILITY- Uncertainty (Contd)
3. Technical trends
Load management and conservation
Generation technology and licensing issues
Transmission technology
4. Environment and health issues
Emission limits
Power frequency and electromagnetic field constraints
Radio active waste storage/ disposal
SYSTEM ADEQUACY AND SECURITY
Adequacy :
Capability of system to meet system demand within major component ratings and in
the presence of scheduled and un-scheduled outages of generation, transmission and
distribution facilities.
Relates to static system conditions
Security :
Capability of system to withstand disturbances arising from faults and un-scheduled
removal of equipment without further loss of facilities or cascading.
Relates to dynamic system conditions
SYSTEM ADEQUACY AND SECURITY
(Contd)
Basic aim power utility is to meet
Various demands of energy and power at lowest possible cost to consumers
while maintaining acceptable levels of quality (V, f, wave shape, flicker, etc.)
Continuity of supply.
Task of power system planning is
To configure an electric power system
With compromise between requirements perceived by consumers for
adequacy and security
To achieve continuity and quality of supply
Economics of power system in terms of operating and capital cost.
RELIABILITY PLANNING
Basic function of power system is to meet electricity requirements with adequate
quality and reliability in an economical manner.
Reliability levels are interdependent with economics since more investments are
necessary to increase reliability / even maintain it at current and acceptable
levels
Reliability preferences can shift over time due to
Changes In technology
Consumer needs and lifestyles
Economic factors
Above requires periodical revision
RELIABILITY PLANNING (Contd)
In HL-II studies bulk transmission is included and there are two sets of
adequacy indices namely individual load bus indices and system indices.
Functional zones (Contd)
The basic HL-III system indices are
The system average interruption frequency index(SAIFI)
The system average interruption duration index(SAIDI)
Consumer average interruption frequency index(CAIFI)
Consumer average interruption duration index(CAIDI) etc
The most commonly used indices are SAIDI,SAIFI,CAIDI
Reliability indices
1. The system average interruption duration
index(SAIDI): Average total duration of interruptions
of supply per annum that a consumer experiences.
2. The system average interruption frequency
index(SAIFI): Average number of interruptions of
supply in the year for consumers who experience
interruption of supply.
3. Consumer average Interruption Duration
index(CAIDI): Average duration of an interruption of
supply in the year for consumers who experience
interruption of supply.