Fixed Cost : The cost which is independent of maximum demand and units generated is termed as fixed cost. The fixed cost is due to the annual cost of central organisation, interest on capital cost of land and salaries of high officials.  The annual expenditure on the central organisation and salaries of high officials is fixed since it has to be met whether the plant has high or low maximum demand or it generates less or more units.  Further, the capital investment on the land is fixed and hence the amount of interest is also fixed.

 

Semi-fixed cost: The cost which depends upon maximum demand but is independent of units generated is termed as semi-fixed cost. The semi-fixed cost is directly proportional to the maximum demand on power station and is on account of annual interest and depreciation on capital investment of building and equipment, taxes, salaries of management and clerical staff.  The maximum demand on the power station determines its size and cost of installation.  The greater the maximum demand on a power station, the greater is its size and cost of installation.  Further, the taxes and clerical staff depend upon the size of the plant and hence upon maximum demand.

 

Running cost: The cost which depends only upon the number of units generated is termed as running cost. The running cost is on account of annual cost of fuel, lubricating oil, maintenance, repairs and salaries of operating staff.  Since these charges depend upon the energy output, the running cost is directly proportional to the number of units generated by the station.  In other words, if the power station generates more units, it will have higher running cost and vice-versa.

 

Interest: It is the difference between the money obtained and the money returned and may be charged as simple interest or compound interest. A power station is constructed by investing a huge capital.  This money is generally borrowed from banks or other financial institutions and the supply company has to pay the annual interest on this amount.  Even if company has spent out of its reserve funds, the interest must be still allowed for, since this amount could have earned interest if deposited in a bank.  Therefore, while calculating the cost of production of electrical energy, the interest payable on the capital investment must be included.  The rate of interest depends upon market position and other factors, and may vary from 4% to 8% per annum.

 

Depreciation : The decrease in the value of the power plant equipment and building due to constant use is known as depreciation. If the power station equipment were to last forever, then interest on the capital investment would have been the only charge to be made.  However, in actual practice, every power station has a useful life ranging from fifty to sixty years.  From the time the power station is installed, its equipment steadily deteriorates due to wear and tear so that there is a gradual reduction in the value of the plant. This reduction in the value of plant every year is known as annual depreciation. Due to depreciation, the plant has to be replaced by the new one after its useful life.  Therefore, suitable amount must be set aside every year (called annual depreciation charge) so that by the time the plant retires, the collected amount by way of depreciation equals the cost of replacement.  It becomes obvious that while determining the cost of production, annual depreciation charges must be included.