Capstone Turbine Corporation is the world’s leading provider of micro turbine based Micro CHP (combined heat and power) systems for clean, continuous, distributed-generation electricity. The Micro CHP unit is a compact turbine generator that delivers electricity on-site or close to the point where it is needed. This form of distributed-generation technology, designed to operate on a variety of gaseous and liquid fuels, first debuted in 1998. The micro turbine is expected to operate on demand or continuously for up to a year between recommended maintenance (filter cleaning/replacement). The generator is cooled by airflow into the gas turbine, thus eliminating the need for liquid cooling. It can make electricity from a variety of fuels—natural gas, kerosene, diesel oil, and even waste gases from landfills, sewage plants, and oil fields.

Capstone’s focus applications include combined heat and power, resource recovery of waste fuel from wellhead and biogas sites, and hybrid electric vehicles. And, unlike traditional backup power, this solution can support everyday energy needs and generate favorable payback. With the current design, which has a 60-kW rating, one of Capstone’s generators would cost about $84,000. The expected annual expenses, including capital costs as well as operating costs, would run close to $19,000. These expenses yield an annual savings of close to $25,000 compared with the corresponding expenses for a conventional generator of the same size. The investment would pay for itself within three to four years.

One of the major questions among the Capstone executives is: How low does the micro turbine’s production cost need to be for it to be a sensible option in some utility operations? To answer this question, Capstone must first determine the cost per kilowatt of its generators.

How does Capstone come up with the capital cost of $1,400 per kilowatt? Suppose you plan to purchase the 60-kW micro turbine and expect to operate it continuously for 10 years. How would you calculate the operating cost per kilowatt-hour?