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Economic analysis of cogeneration systems

Economic analysis of cogeneration systems

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Cogeneration systems are capital-intensive installations. Even if a cogeneration system has high-energy efficiency, it will not be possible to proceed with the investment unless it is also economically viable. The procedure for evaluation of the economic performance of cogeneration systems is presented in this chapter, supported with information about the various types of costs, definition of the most important of the economic parameters and measures used for evaluation, as well as examples of economic analysis. Two additional issues are also tackled: (a) the distribution of costs of a cogeneration system among its energy products and (b) the effect of the internalization of environmental externalities on the cost of covering energy needs either by a cogeneration system or by the conventional approach, that is separate production of work and heat. Care has been exercised so that the values of costs given here to be realistic. However, they can be considered indicative only, as they change with place and time. Consequently, the economic performance evaluation of any cogeneration project should be based on cost information obtained for the particular project.

Chapter Contents:

  • 10.1 Introduction to economic analysis of cogeneration systems
  • 10.2 Types of costs
  • 10.2.1 Installed capital cost
  • 10.2.1.1 Equipment costs
  • 10.2.1.2 Installation costs
  • 10.2.1.3 Project costs
  • 10.2.1.4 Examples of installed capital costs
  • 10.2.2 Operation and maintenance costs
  • 10.2.2.1 Main components of operation and maintenance costs
  • 10.2.2.2 Estimation of operation and maintenance costs
  • 10.3 Definition of economic parameters
  • 10.3.1 Interest and interest rate
  • 10.3.2 Price index
  • 10.3.3 Inflation and inflation rate
  • 10.3.4 Life cycle and life-cycle cost
  • 10.3.5 Estimation of the value of money in time
  • 10.3.5.1 The time value of money
  • 10.3.5.2 Present and future worth of money
  • 10.3.5.3 Present worth factor
  • 10.3.5.4 Capital recovery factor
  • 10.3.5.5 Constant and actual values
  • 10.4 Measures of economic performance
  • 10.4.1 Net present value of the investment
  • 10.4.2 Net present cost and present worth cost
  • 10.4.3 Internal rate of return
  • 10.4.4 Payback period
  • 10.4.4.1 Simple payback period
  • 10.4.4.2 Discounted payback period
  • 10.4.4.3 Benefit-to-cost ratio
  • 10.5 Procedure for economic analysis of cogeneration systems
  • 10.5.1 Estimation of the initial cash flow ( F0)
  • 10.5.2 Estimation of the net cash flow for the yearsof analysis (Fn, n 1)
  • 10.5.2.1 An expression for Fn
  • 10.5.2.2 Annual operation profit (fn)
  • 10.5.2.3 Payments of principal and interest of loan (ALn)
  • 10.5.2.4 Taxable income (Tn)
  • 10.6 Costing of thermal and electrical and/or mechanical energy
  • 10.6.1 Statement of the problem
  • 10.6.2 Methods of cost allocation
  • 10.6.2.1 Equality method based on energy
  • 10.6.2.2 Equality method based on exergy
  • 10.6.2.3 By-product heat method
  • 10.6.2.4 By-product work method
  • 10.7 Internalization of external environmental costs and their effect on the economic performance of cogeneration systems
  • 10.7.1 Introductory remarks and definitions
  • 10.7.2 Evaluation and internalization of external environmental costs
  • 10.8 Examples of economic analysis of cogeneration systems
  • Nomenclature
  • References
  • Further Reading

Inspec keywords: power generation economics; cogeneration

Other keywords: economic analysis; energy products; cogeneration systems; cost information; economic parameters; capital-intensive installations; high-energy efficiency; investment; cost distribution; environmental externality; economic measures

Subjects: Power system management, operation and economics; Thermal power stations and plants

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