A wide variety of criteria play a part in the economics of distributed energy resources. The following table lists some of the questions that may be asked in the decision-making process for the implementation of DER technologies. The cost of electricity variables in the right-hand column may be defined by answering the questions on the left. The cost of electricity generated in a DER device may then be calculated based on the equations in the previous section. The cost-effectiveness of the DER system can then be determined by comparing the DER cost of electricity to the electricity price from the grid. An example is provided below for calculating the cost of electricity.
Residential, commercial, or industrial?
Baseload, backup, or peak shaving?
Grid independent or grid parallel?
Capacity Factor (CF)
PEMFC , SOFC, ICE, CT, PV, Wind?
Average electric load?
Ideal power rating of the DER system?
Heat rate of the DER system?
Reliability of the DER system?
Capital cost of the DER system?
Installation cost of the DER system?
O&M cost of the DER system?
Method of payment for the DER system?
DER system life?
Fixed Charge Rate (FCR)
Total Installed Cost (TIC)
Operation & Maintenance Cost (O&M)
Average Annual Net Plant Heat Rate (NPHR)
Natural gas, propane, or diesel?
Natural Gas Price (NGP)
Diesel Oil Price (DOP)
Propane Price (PP)
The cost of electricity calculated based on the above criteria may be affected by additional economic factors, such as:
- Utility stand-by charge
- Net metering
- Incentives or rebates for DER
- Energy efficiency credits for DER
In addition to economic factors, there are a number of intangible issues that may have a role in the DER decision analysis:
- Prestige/status of early adopters
- Global warming concerns
- Emissions concerns
- Green/renewable power advocacy
- Strong feelings for or against utility
- Desire to have independence from the grid
- Safety concerns
- Fuel price instability/volatility
- Special siting and permitting requirements
The following example utilizes a simplistic method for determining the cost of electricity. The cost of electricity (COE) is comprised of three components: capital and installation (C&I), operation and maintenance (O&M), and fuel (F) per the following equation.
As an example, a small convenience store may utilize a significant amount of electricity during peak daytime hours. The installation of a DER system in a baseload configuration may be a money-saving alternative for the business owner. For this example, the following assumptions are made:
- A natural gas-fueled, 30 kW microturbine is the chosen DER technology.
- The price of natural gas is $6/MMBtu.
- The microturbine will operate 19.2 hours per day, 365 days per year.
- The microturbine has a five-year life.
- The electrical efficiency of the microturbine (based on the lower heating value of the fuel) is 27%.
- The total installed cost (TIC) of the microturbine system is $1,000 per kW or $30,000. The interest rate is 0%.
- The total operation and maintenance (O&M) cost of the microturbine system is 0.5 cents per kW. (The total O&M cost is the sum of fixed O&M and variable O&M costs.)
- The price of electricity purchased from the utility is 12 cents per kW.
- The waste heat WILL NOT be utilized for cogeneration.
Based on the above information, we can determine the total cost of electricity generated by the microturbine:
- The Self-Generation Incentive Program provides a credit of $1.00 per watt, up to 30% of the project cost. In this case, the maximum credit is $9,000 (30% of $30,000), reducing the total installed cost (TIC) to $700 per kW or $21,000.
- The capacity factor (CF) is equal to the number of hours per year that the DER system operates divided by the total number of hours per year (8,760).
- The fixed charge rate (FCR) is equal to the annual amortized installed cost ($/yr) divided by the total installed cost ($). In this example, the cost of money was not included. Therefore, the amortized installed cost is simply one-fifth (or one over the amortization period) of the total installed cost.
- The heat rate (HR) of the DER system is based on the higher heating value of the fuel. It is assumed that the lower heating value is equal to 0.904 times the higher heating value.
- The total cost of electricity (COE) is equal to sum of the components for capital and installation (C&I), operation and maintenance (O&M), and fuel (F).
At a price of 10.9 cents per kilowatt-hour, the electricity generated from the microturbine in this example is less expensive than the 12 cents per kilowatt-hour from the grid. Therefore, in this case, the installation of the microturbine would be cost-effective for the business owner.