Cost of Electricity

In order to determine the cost-effectiveness of DER technologies, the estimated cost of electricity from a DER system may be compared with the local retail price of electricity from the electric utility or the estimated cost of electricity of another DER technology. For additional accuracy, it is recommended that the cost of electricity be calculated for a specific manufacturer's DER system, as well as for the location and application of the DER system.

The cost of electricity (COE) is comprised of three components: capital and installation (C&I), operation and maintenance (O&M), and fuel (F). The total cost of electricity from a DER device is the sum of these three components, expressed in dollars (or cents) per kilowatt-hour:

The breakdown of the three components will vary with the size and type of equipment. However, the figure below provides an example of the breakdown for a 4.5 MW natural gas combustion turbine. As illustrated, the fuel component is typically the largest portion of the cost of electricity in a system that utilizes fuel.

The capital cost component varies based on the capital and installation costs, as well as on the fixed charge rate and capacity factor of the DER system. These factors are described in more detail in the Decision Analysis section. The cost of electricity decreases as the amortization period of the DER device increases (e.g., as the fixed charge rate decreases). DER systems with high capacity factors (i.e., baseload units) also have a lower cost of electricity.

The operation and maintenance cost component takes into account both the fixed and variable O&M costs of the DER technology. Mature technologies, like internal combustion engines, tend to have lower O&M costs due to standard product designs and established networks for parts and maintenance.

The fuel cost component is simply the cost of the fuel required to generate electricity with the DER device. The fuel cost component varies with the efficiency (or heat rate) of the equipment and with the cost of fuel. Therefore, a specific DER technology may have a lower cost of electricity in some geographic locations than in others due to fluctuations in the cost of natural gas, propane, or diesel. Some DER equipment, such as photovoltaic systems and wind turbines, will not have a fuel cost as no fuel is required.