Calculate Costs for On-Site Electricity Generation

This article applies to those farmers who buy fuel oil or gasoline to run their on-site generation equipment.
Calculate Costs for On-Site Electricity Generation - Articles


With all the talk about electricity prices increasing when the rate caps expire within the next year or two, you may be tempted to consider generating your own electricity. After all, you probably already have a back-up generation system to provide electricity during blackout periods.

Even though you may think that the charges for electricity from your utility company are outrageous at times, do not even consider the possibility of "pulling the plug" on your utility company and generating all the electricity you need for your farming operation. There is no way that you can generate electricity as cheaply or as dependably as your utility company! This statement is true for those who have their own on-site generation equipment as well as those who rent a generation unit.

When you calculate your costs to operate an on-site generation system, you must take into account the following factors:

  • Fuel
  • Initial investment for the generation system and fuel storage
  • Periodic maintenance
  • Major overhauls
  • Management time

The amount of diesel fuel required for generation is one gallon of fuel for each 11-13 kWh of electricity generated. For a fuel price of $2.50 per gallon, the corresponding cost of the electricity you would be generating is 19 - 23 cents per kWh. And that is just considering the fuel expense! When you consider all the other expenses involved, the cost of the electricity you would be generating on site is well over 25 cents per kWh. That is much higher than any projected prices of electricity after the rate caps expire.

The price of fuel varies considerably based on volatility in market prices and also the quantity purchased at one time. The cheapest price for both the fuel and the delivery of the fuel is when a full tanker load (approximately 7,000 to 8,000 gallons) is purchased at one time.

Therefore, adequate on-farm storage of 10,000 to 20,000 gallons is necessary for most economical operation of the generation system that is planned for heavy usage. Also, bear in mind that your stand-by generation system is most likely designed for short-term, sporadic usage rather than heavy usage. If you want heavy usage, then you need to purchase a heavy-duty generator system, designed for continuous usage.

My recommended approach is to buy electricity from the utility company when you can and generate yourself whenever necessary during blackout periods. An exception is for the situation when you may want to use the generation equipment for "peak shaving" during the hot, afternoon hours in the summer when you are likely to set your peak demand. Just a modest reduction in your peak demand during a summer month can have a significant impact on the price you will pay for all of your electricity used that month and possibly for the next several months as well.