Economics of Energy Systems

Energy is the capacity to do work and power is the rate of energy delivery. Energy is essential for most activities of modern society. Its use or consumption is generally taken as an index of standard of living. We use energy in the form of fire wood, fossil fuels and electricity to make life comfortable and convenient. At home we use electricity for our lights and fans, air-conditioner, water heater and room heaters, oven, microwave, washing machine and drier etc. We use petrol, diesel, CNG for our cars, buses, autos etc. Large amount of energy is consumed in agriculture and industry. In offices we use energy to run air conditioners, fans, lights, computers, copying machines etc. Therefore energy engineering is very important branch of engineering for the society. This chapter gives an overview of economic tools related to energy systems. The differences between current and constant monetary amounts are first introduced, followed by two types of economic evaluation of energy projects, both with and without discounting of cash flows to take into account the time value of Money. The latter part of the chapter considers direct versus external costs, and ways in which gov- ernments at times intervene in energy related decision making in order to further social aims such as diversity of energy supply or a clean environment.