Electrical Power Economics/Introduction

Introduction to Economics of Power Generation

One of the most prominent in the monthly bill of every household is the Electricity bill. In most countries the cost of electricity has seen a steady increase, which has resulted in ordinary people being forced to question the electricity levy system. How is the electricity bill constructed, regulated and justified?

This is the first of 6 lectures that will discuss how the per unit cost of electricity and other economic factors are determined to ensure sustainable electrical energy supply to the modern power-hungry consumer. After this brief introduction, we will look at the expressions for cost of electrical energy and an in-depth discussion of tariffs, formulation and how they are regulated for the overall benefit of the consumer.

Lesson Preview

By the end of this lesson, the student is expected to be comfortable with the following:

  • Definitions in economics of electric energy
  • Cost of electrical energy
  • Depreciation involved in the economics of electrical energy

Electrical Power Economics/Introduction/Part1

This lesson is an Introduction to the economics of electrical power generation. The following are some important definitions.


  • The cost of use of money.


  • decrease in value of power station due to constant use.

These definitions are important as they will be tapped on to from time to time in this course. The student is encouraged to commit these to memory.

Electrical supply companies (usually called Utilities) have to make profit for the effort of producing; transmitting and distribution of electrical energy. It is thus desirable that the perunit cost of production is as low as possible, that is to say that it must be cheap for them to produce electricity and yet be able to make profit from the amount that they will be selling each unit to the consumer.

The following factors influence the production cost of electrical energy:

  1. cost of land and equipment
  2. Depreciation of equipment
  3. Interest on capital investment

We can now define the economics of power generation as:

The art of determining the per unit ( 1kWh ) cost of production of electrical energy


  • This resource is prepared from Lecture notes by Thuvack.
  • V.K Mehta & Rohit Mehta :- Principles of Power systems (1st ed.). S.CHAND .ISBN 81-219-2496-0