14. Economics of Energy Projects

When one asks the question, “why there are no more wind or solar photovoltaic power generation units in the world?” the simple answer is: “because fossil fuels and nuclear energy were cheaper sources to produce electricity in the near past.” When a new coal power plant produces a kWh at 3.5 cents and an old nuclear power plant for less than 1 cent per kWh, it is difficult for an electricity producing corporation to justify purchasing a wind turbine that would produce electricity at 12 cents per kWh or a solar farm that would produce at 16 cents per kWh. When the price of electricity produced from renewable sources of energy becomes less than the price produced from conventional energy sources, the economic considerations will favor the development of more geothermal units, solar plants, wind generators, etc. A combination of rising fossil fuel prices, the probable initiation of carbon credits, and a favorable regulatory environment that provides tax credits and accelerated depreciation may change these economic and financial circumstances for alternative energy. This chapter provides a succinct exposition of the entire decision making process that leads to the construction and operation of a power plant, from the realization of the need for more electric power, to the enumeration of the alternatives, to the choice of the optimum alternative solution that maximizes profitability for a corporation or, equivalently, provides the needed amount of electric energy at minimum cost. Central to the financial considerations are the concept of the time-value of funds and the Net Present Value method for the appraisal of an investment. Because this book is aimed for the engineering student with little or no knowledge of economics and finance, the level of this chapter is rather elementary. There are no highly sophisticated economic concepts and methods to be presented, while simple and comprehensive definitions of all the concepts used are offered in the text.