3rd IASME/WSEAS Int. Conf. on Energy & Environment, University of Cambridge, UK, February 23-25, 2008 A Concise Review of Exergy-Based Economic Methods MARC A. ROSEN Faculty of Engineering and Applied Science University of Ontario Institute of Technology 2000 Simcoe Street North, Oshawa, Ontario, L1H 7K4 CANADA Abstract: In the analysis and design of energy systems, techniques are often used which combine scientific disciplines (mainly thermodynamics) with economic disciplines (mainly cost accounting) to achieve optimum designs. For energy conversion devices, cost accounting conventionally considers unit costs based on energy. Costs are better distributed among outputs if cost accounting is based on the thermodynamic quantity exergy, partly because exergy, but not energy, is often a consistent measure of economic value. In this article, we critically review relations between exergy and economics, and exergy-based economic methods (exergoeconomics, thermoeconomics, exergy-based pricing, EXCEM analysis, analysis based on the ratio of thermodynamic loss to capital cost). Most such methods aim to determine appropriate allocations of economic resources for optimal design and operation, and/or economic feasibility and profitability. Key-Words: energy, exergy, economics, thermoeconomics, exergoeconomics, costing, prices, environment. 1 Introduction The exergy of an energy or material quantity Although the merit of a system or process is usually measures its usefulness or quality. Although energy based on such varied factors as technical performance, cannot be destroyed, exergy can. Energy efficiencies efficiency, resource availability, environmental impact, do not always assess how nearly performance health, safety and societal acceptance, economics is a approaches ideality and do not properly describe central consideration. Analysis, design and factors that cause performance to deviate from ideality. optimization often utilize techniques that combine Exergy analysis (e.g., [2-6]) overcomes many of the technical disciplines like thermodynamics with shortcomings of energy analysis, yielding efficiencies economics. Cost accounting applied to energy systems which provide a true measure of approach to ideality, normally considers unit costs based on energy. and identifying properly the causes, locations and Many authors suggest the second law of magnitudes of inefficiencies. Exergy indicates thermodynamics, which embodies entropy concepts, theoretical and practical limitations imposed on a has significant implications for economics. A system, which show that a real system can not thermodynamic theory of economics sought, for conserve exergy as only a portion of input exergy can instance, considering the first and second laws [1]. be recovered. Through its illuminating, rational and Relations between utility and the law of diminishing meaningful approach, exergy analysis can help marginal utility and a thermodynamic model of a improve and optimize designs. Applications of exergy money system and thermodynamic-based measures for have been reported for power generation, cogeneration, economic value were developed. geothermal plants, thermal, chemical, and Some researchers note that the thermodynamic metallurgical processes, transportation and countries quantity exergy, which stems from the second law, is (e.g., Canada, United States, United Kingdom, often a consistent measure of economic value, while Sweden, Italy, Turkey, Saudi Arabia, Japan) [2-6]. energy is not. Many recommend that cost accounting Several exergy-based economic analysis methods and pricing are better based on exergy than energy. For have been developed. Their goal is usually to instance, costs based on exergy are more rationally determine economic feasibility and profitability, or distributed among outputs, since exergy-based unit appropriate allocations for economic resources for costs are more meaningful than energy-based ones. achieving optimal or improved designs. Here, we critically review relations between exergy and ISSN: 1790-5095 Page 136 ISBN: 978-960-6766-43-5 3rd IASME/WSEAS Int. Conf. on Energy & Environment, University of Cambridge, UK, February 23-25, 2008 economics and many analysis methods which integrate commodity flow as a quasi-thermodynamic irreversible exergy and economics. This article is an abbreviated process [16]. In that work, which supposes version of a much longer chapter [7]. thermodynamics can explain commodity diffusion, a coupling relation between commodity price and quality is derived. 2 Exergy and Economics A cost balance can be written for a system as Exergy is a useful concept in economics [8,9] and crucial to cost accounting and economic analyses [10]. cost input + cost generation − cost output Costs should reflect value, and since value is not = cost accumulation generally associated with energy but with exergy, assignments of cost to energy lead to Cost input and output represent respectively the cost misappropriations, which are common and often associated with all inputs and outputs. Cost significant [10]. It has been further pointed out that accumulation represents build-up of cost, while cost exergy possesses an intrinsic and direct correlation generation corresponds to the capital and other costs with economic values [11]. On the one hand, therefore, associated with the creation and maintenance of the exergy allows rational evaluation of efficiencies and system. The cost generation term emphasizes that cost inefficiencies (including internal exergy consumptions is a non-conserved quantity. due to irreversibilities and waste exergy emissions), as Although cost and thermodynamic balances appear well as the value of fuels and resources. On the other similar, they exhibit several significant differences: hand, exergy facilitates the determination of the costs • Energy is conserved but economic cost is not. associated with thermodynamic losses and the values • Both cost and exergy are not conserved, with cost and costs of the outputs and accumulated quantities for generated due to the cost of devices and exergy processes and devices. Consequently, using exergy as a consumed due to irreversibilities associated with basis for cost accounting can help determine the real their operation. costs of producing commodities and in pricing such • In energy and exergy balances, the values products. Also, exergy can help evaluate economic associated with all quantities are defined by viability and profitability. thermodynamics. Only cost input and generation are Exergy can interface broadly with economics. In defined for the cost balance, however, as the microeconomics, exergy can be combined with cost- distribution of costs over outputs and accumulations benefit analyses to improve designs. In is subjective. If costs are not allocated macroeconomics, exergy provides a basis for appropriately, it is difficult to gauge the cost- increasing efficiency, reducing resource utilization and effectiveness of a device and to set prices for losses, and reducing environmental damage. These salable commodities, especially when there are objectives can be accomplished with, for example, multiple products. exergy-based incentives or exergy taxes. Exergy more Exergy is also useful in understanding and broadly can help in optimizing designs and making assessing environmental impact, non-renewable operating decisions. Exergy-based concepts and resource depletion, ecology and sustainable methods for analyzing and optimizing energy systems development [2-6]. The ties between exergy and including life cycle exergy analysis have been economics can be extended to environmental and described [10], as has the relation between exergy ecological aspects in several ways: destructions and investment costs in thermal systems • The potential of exergy to be an indicator of [12]. environmental impact can be incorporated in Thermodynamics, including exergy and entropy, exergy-based economic assessments. has been linked to economic systems [13]. Related • The costs associated with environmental impact and work involved modelling the economic order quantity protection can be included in the economic portion based on the second law [14], and using entropy cost to of an exergy-based economic assessment. evaluate the economic order quantity for repair and Extending exergy and economics to account for waste disposal [15]. Diffusion-like economic environmental effects permit one to minimize life commodity flows were considered from a cycle costs and thereby find the most appropriate thermodynamic perspective, by modelling a device or process. This can be accomplished while ISSN: 1790-5095 Page 137 ISBN: 978-960-6766-43-5 3rd IASME/WSEAS Int. Conf. on Energy & Environment, University of Cambridge, UK, February 23-25, 2008 reducing environmental effects, for prevailing approach is proposed which was tested using US data economic conditions. over 25 years. The effect of energy and exergy values on fuel pricing has been examined, including how 3 Exergy-based Economic Methods energy and exergy values and their differences affect Methods integrating exergy and economics have been energy commodity prices [10]. developed over the last several decades. Georgescu- The characteristics of different fuels and energy Roegen [17] is often cited as a pioneer in the field of forms vary. Energy and exergy prices are equal for the thermodynamics of economics. Details on exergy- electricity and for work, and are approximately equal based economic methods are reported in books (e.g., for hydrocarbons.