Fixed costs and variable costs in your life

Good Evening FPO Readers,

This is a mini lesson in economics.  There are two types of costs, fixed and variable.  A fixed cost is one that remains the same independent of other variables.  A variable cost is a cost that changes based on a combination of variables.  Many bills and purchases in our life have a combination of fixed and variable costs.  A utility bill is a common example.  For any consumable, there is a fixed base account/delivery charge and a variable change based on the amount delivered.  This applies the same to a water, electricity, or natural gas bill.  The fixed cost must be overcome before any variable costs are encountered.

The important concept here is that it is easier to cut variable costs than it is to cut fixed costs.  However, the counter to this is that the price per unit consumed raises since the fixed cost becomes more of the dominant cost of the two.

A useful application of this principle would be a household that has both an electricity service and natural gas service.  The only device on the natural gas line is the hot water heater.  The fixed monthly cost is for delivery is $14 and the consumption by this house is low at approximately $8 per month average.  In this case, it is likely beneficial to switch to an electric water heater when the natural gas unit reaches the end of its life.  With a variable cost that would likely be $12 to $14 per month, the natural gas fixed cost is eliminated since hot water is now provided by the electric service, whose fixed costs are already covered.  Though an electric unit does not heat as fast, this should be an acceptable trade off since the hot water consumption was low enough to start.

An energy cost comparison

The below cost comparison is between the cost of heating with a propane furnace (standard 80% efficient) and an electric heat pump. An electric heat pump is a heat exchange device, where mechanical energy (in the form of an electric motor) is used to compress a fluid, and when decompressed, the fluid creates a difference of heat between two separate spaces. For heating, the hot side of the exchanger is inside the house, and the cold side is outside of the house. No net heat is created as a result except for the power consumed to facilitate this process. What happens is the inside becomes warmer by a given number of BTUs and the outside becomes colder by the same number of BTUs. 1000 Watts of electric power input to the motor can add 2500 watts of heat to the inside by removing 2500 watts of heat from the outside. The 1000 watts from the motor contributes to the heat of the outside because that is where the motor is located.

The ratio of the 2500 watts gained to the 1000 watts consumed is referred to the coefficient of performance (CoP). In this case the Cop is 2.5.  In reality this number is between 2 and 3.5. In our example we will use a CoP of 3.0.

Propane is currently $2.75 a gallon. A gallon has 92000 BTUs of energy. An December example usage of 9,000,000 BTUs consumed at the gas line (7,200,000 heated the house based on 80% efficiency) would cost $269.02. Propane and Gasoline are both expensive, but portable. A heat pump with a CoP of 3.0 would cost $70.32. Still more expensive than natural gas, but a good option. In freezing weather, the CoP of heat pumps goes down fast. In cold weather natural gas wins by a greater margin.

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