Page 98 - Piston Engine-Based Power Plants

The Economics of Piston Engine Power Plants 89

converted to the equivalent cost today by using a parameter known as
the discount rate. The discount rate is almost the same as the interest
rate and relates to the way in which the value of one unit of currency
falls (most usually, but it could rise) in the future. This allows, for
example, the cost of replacement of a plant component 20 years into
the future to be converted into an equivalent cost today. The discount
rate can also be applied to the cost of electricity from the power plant
in 20 years’ time.
The economic model is called the LCOE model. It contains a lot of
assumptions and flaws but it is the most commonly used method avail-
able for estimating the cost of electricity from a new power plant. One
particular problem is that the model does not take into account cost
risks. For example the cost of natural gas can fluctuate widely so that
it may be cheap to buy gas when a plant is built but 5 years later the
cost is so high that operation of the plant is uneconomical. The level at
which the discount rate is set can also be problematical. It is typical to
use a discount rate of 5% and 10% in calculations. However in the
middle of the second decade of the 21st century the actual interest rate
is close to zero.

FUEL COSTS
One of the main cost elements for a piston engine power plant is the
fuel needed to operate it. There will be cases, such as where the plant
is intended to provide emergency backup, where the cost of fuel is a
subsidiary consideration. In most cases, however, the fuel cost will
help determine the optimum power plant configuration.

The main fuels for piston engine power plants, gasoline, natural gas
and diesel, are all commodities whose costs are determined based on
market demand. The cost of gasoline and diesel is generally determined
by the global cost of oil. As this rises and falls, so does the cost of the
fuel.

During the last 40 years cost of oil had fluctuated widely. For
example the price of a barrel of Brent Crude in 1981 was $36. By 1986
it was down to $15/bbl, in 1998 it was $12/bbl but in 2011 and 2012
1
the average price was $111/barrel. In 2016 the price was $44/bbl.
1 BP Statistical Review of World Energy 2017.