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1.4.3 Marginal Cost of Energy

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The LCOE cost can be considered the average cost of a particular type of generating source. Utilities are interested in the marginal energy cost also. It is the cost experienced by the utilities for the last (peaking) kWh of electricity produced and sold. The marginal cost is highly variable and could vary throughout the day between negative pricing when there is over generation and could increase to hundreds of $/MWh when the demand is high and supply is low. The marginal cost determines the ranking of the type of generating source that will be dispatched. Those with the lowest marginal costs are the first ones to be energized to meet the demand, while the plants with the highest marginal costs are the last to be brought on line.

For example, a wind or solar power plant has no fuel cost and relatively low O&M costs. It yields the lowest marginal energy provided when the sun is shining and the wind is blowing. There is a big difference in production cost whether the plant is generating 1 or 100 MW. Similarly, a gas turbine plant also has low marginal cost if the gas price is low, which it is right now (2017).

Practical Power Plant Engineering

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