Question

Suppose that an electricity provider would build a power plant at the cost of $50 million. Once the plant is built, it would cost the plant $0.07 per kilowatt hour of electricity that it produces. Over its lifetime, the plant is expected to generate 100 million kilowatt hours. Suppose that the regulators believe that the investors who put up capital to build the plant should be able to recoup its investment plus a 300% return throughout the life of the plant. Calculate the price per kilowatt hour that the regulators should allow the plant operators should charge.

Answer 1

Total investment = $50 million.

So total amount to be recouped = (300% + 100%) of $50 million = 200million

Total electricity generated = 100 million kilowatt hours.

Cost per kilowatt hour = 0.07

Let the price be x per kilowatt hour.

Profit per kilowatt hour = x-0.07

So total profit = (x - 0.07) * 100 million

Now, (x - 0.07) * 100 million = 200million

pr x - 0.07 = 2

or x = 2.07

So the electricity should be priced at $2.07 per kilowatt-hours to recoup the initial investment plus 300% return.

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