Coal is the biggest Cost but provides the best profit margin?

Question

What am I missing in my analysis? Yes, Coal is the biggest cost driver, but it produces the best profit margin due to it's ability to create more energy per hour.

When I completed the case, I calculated the Cost per unit of Energy considering that a unit of Energy would sell at the same price, irrespective of the source.

For Coal cost per Gigawatt:

$110 * (20 * 350 / 1000) hours

= $770 per GwH produces 3.5GwH

= Thus $770 / 3.5 = Cost $220 to create 1Gigawat energy

For Gas cost per Gigawatt:

$85 * (20 * 350 / 1000) hours

= $595 per GwH produces 2GwH

= Thus $595 / 2 = Cost $297.5 to create 1Gigawat energy

Based on the calculation above I would conclude that Gas is a bigger cost to our company considering it has a lower profit margin than Coal due to a higher cost to produce 1Gigwat of Energy.

Answer 1

Hello Peter!

The great thing about the library is that you can find the author here, feel free to reach out to him directly, or solve the case together in a session to squeeze it to the next level.

Cheers,

Clara

Answer 2

Hi Peter,

Coal does not provide the best profit margin

One mistake here :) Colum 2 is total production. It has nothing to do with margins.

Column 3 is the operational cost per MwH. There are literally no calculations you have to do to see that Gas at $75 per MwH is the cheapest.

Coal is the most expensive (when accounting for carbon tax) at $110 per MwH.