Economics of the Power Industry

Electricity is generated and supplied to the electric grid from a variety of sources, including fossil fuel (coal, oil, and natural gas), nuclear, and renewable energy (solar, wind, and hydroelectric) power plants.  Each of these sources has economic benefits and drawbacks – none being superior to all.  It is crucial for power plant operators and management to be aware of the economics surrounding the different types of generation so that steps may be taken to maximize profit.

If you were to ask which form of generation was most cost-effective… Is it coal-fired power plants? Is it solar power?  Surely it’s hydro?


It isn’t that simple. Many different factors affect spending and profits for the power industry.

When it comes to generation, costs depend on two main factors: fixed costs and variable costs. Fixed costs remain relatively stagnant, and variable costs are continually changing.

Standard Fixed costs include:

  • Capital Costs
  • Land

Typical variable costs of generation include:

  • Cost of fuel
  • Maintenance Cost
  • Operations Cost

For fossil-fueled type power plants, the cost of fuel is by far the highest variable cost and has the most significant impact on profits.  Most renewable type generation has negligible fuel costs, and maintenance and operations are the highest variable costs.  Also, the weather, time of year, and time of day have a significant impact on profits for renewable type generation.  Thus, maximizing efficiency in fossil plants has a significant effect on profit as it will reduce fuel costs, and reducing maintenance costs in renewable type generation will have a considerable impact on profit.

Fixed Costs

Fixed costs come from capital and land costs. These will likely be different depending on location, as permits, approvals, and laws influence them.  Different rules based on power production and region will create different timelines for construction. (1)

The Capital Costs vary among the power resources. Natural Gas Combustion Turbine Generator (CTG) plants have the lowest capital cost at around $974 per Kilowatt, followed by Coal-Fired, Biomass, and Photovoltaic Solar. The most expensive Capital Cost for a power plant is Offshore Wind. (5)

Natural Gas CTG (85 MW)$83 million$974 $/kW
Natural Gas Combined Cycle (540 MW)$542 million$1,003 $/kW
Onshore Wind (100 MW)$244 million$2,438 $/kW
Hydro-electric (500 MW)$1.5 billion$3,076 $/kW
Coal-Fired Rankine Cycle (650 MW)$2 billion$3,167 $/kW
Waste-to-Energy Biomass (50 MW)$193 million$3,860 $/kW
Thermal Solar (100 MW)$470 million$4,692 $/kW
Photovoltaic Solar (150 MW)$716 million$4,775 $/kW
Nuclear (2,236 MW)$12 billion$5,335 $/kW
Geothermal (50 MW)$279 million$5,578 $/kW
Offshore Wind (400 MW)$2.4 billion$5,975 $/kW

Variable Costs

Variable costs are the costs of day-to-day operations. Characteristics of costs that affect variable costs are:

  • Fuel costs
  • Labor Costs
  • Maintenance Costs
  • Start-up and Shutdown Costs
  • No-Load Cost – the cost of the plant to operate before electricity hits the grid
  • Ramp Rate – the rate of increase or decrease of power output
  • Ramp Time – the time it takes for power to hit the grid after the generator is fired up
  • Capacity – the power output
  • Lower Operating Limit – the minimum amount of power produced once the generator is fired up
  • Min Run Time – the minimum amount of time a plant can operate once it is turned on

While fixed costs are lower for coal and higher for solar/wind, the reverse is typically true for operating costs. (5)

Waste-to-Energy Biomass (50 MW)$105.50 per megawatt-hour
Geothermal (50 MW)$93.91 per megawatt-hour
Nuclear (2,236 MW)$90.79 per megawatt-hour
Thermal Solar (100 MW)$64.00 per megawatt-hour
Offshore Wind (400 MW)$53.33 per megawatt-hour
Coal-Fired Rankine Cycle (650 MW)$40.22 per megawatt-hour
Onshore Wind (100 MW)$28.07 per megawatt-hour
Natural Gas CTG (85 MW)$21.68 per megawatt-hour
Natural Gas Combined Cycle (540 MW)$17.82 per megawatt-hour
Photovoltaic Solar (150 MW)$16.70 per megawatt-hour
Hydro-electric (500 MW)$13.44 per megawatt-hour


Similar to fixed and variable costs, profits are also affecting by multiple factors. The most significant profit factors are typically the sale price of electricity and the price of fuel. The weather, season, and time of day affect these factors. Moreover, people might use their heat or air conditioning more or less often based on the time of year and the time of day, which has a significant effect on the price of natural gas and electricity rates. In addition, although unaffected by fuel costs, wind turbines and solar panels might produce less power if the sun is down or the wind is slow.

Beyond the environmental factors are operational factors. Profits can be affected by whether or not/how the plant chooses to store off-peak electricity, charge for peak-times, offer incentives for reducing usage, and adjusting production outputs depending on peak times. (2)

Economics of Training

You may be thinking that much of these profits are out of the plants’ control. And you would be right. One factor that is not out of the plants’ control is operating efficiency.

It is true that labor costs makeup a small portion of overall operating costs; however, worker quality can impact the operation of plants. A Berkeley study found that in the U.S. individual operators could influence fuel efficiency by more than 3%. (4)  Plant operators and managers should take steps to maximize their plant’s operating efficiency and in turn, profits.

Fossil Consulting Services is experienced in developing and delivering customized operator training which provides in-depth, detailed instructions about YOUR plant. Raising the level of knowledge for both experienced and junior operators at your plant contributes toward improved plant efficiency, an increase in profits, and a reduction in downtime and operational costs.