Economic comparisons in planning for electricity supply

After outlining general principles for setting up a comparison of alternatives, the paper describes the single basic concept for economic comparisons, namely, present-valuing. Present-valuing (or discounting) is essential to take account of the timing of costs and revenues (or cash flows). Three equally acceptable methods of making comparisons, commonly known as discounted-cash-flow, present-value and annual-cost methods, are described and compared. The most convenient and widely accepted yardstick for deciding between alternatives is that of interest rate or return on capital. The minimum return required to justify spending optional capital requires judgment, but should take into account incentive, risk, opportunity cost, inflation and accountancy procedures. The weight given to each of these factors depends on whether the aim is best use of human and material resources or lowest cost of electricity, and whether the study is made from the point of view of the utility or from the point of view of the nation as a whole. Usually, the minimum required return for purposes of taking a decision is at least some 2% higher than the interest rate payable on capital. Decisions based on conventional economic comparisons rarely result in the lowest cost of electricity to the consumer. Other aspects covered include interest during construction, lives of assets, cost of losses, contractor financing and sensitivity tests. The Appendixes derive formulas associated with present-valuing and various methods of depreciation.