Production Costs

The cost of electricity from each generator includes both fixed and variable costs. Fixed costs include costs of financing plant construction, equipment leases, and taxes. Variable costs, such as fuel expenses, and operation and maintenance, are those that increase roughly proportional to generator use.

If a plant is expensive to build but is inexpensive to operate it makes sense to run that unit as much as possible as a base-load plant. Oil and gas units are usually more expensive to operate but are less expensive to construct, so they make more sense for peaking service -- that is, to provide electricity for those few hours of the day and days of the year when power use is at its peak. The relatively high cost of fuel oil and gas as fuels for these units does not matter so much because they are used for shorter periods of time.