Embedded cost

Embedded cost, in the context of energy costing, refers to the full amount required in order for a certain amount of energy to be provided. This includes the expenses incurred from the use of facilities which are necessary for energy generation and distribution. These are called embedded costs because it is quite impossible to disassociate them from the total cost of the energy supplied to end users. One example of embedded cost is the expense incurred from the set up and maintenance of electric poles and lines. The original cost for such infrastructure may have been incurred in the past, thus making it even more difficult to separate it from the cost of electric distribution at present.

On the other hand, the term embedded cost may also refer to sunk costs. This involves expenses that had come up or had to be settled in the past but can no longer be recovered. This does not necessarily mean that the cost is to be considered a loss, because the term only covers the amount involved, and not necessarily the consequences of paying the amount, or the difference between the original value of the purchase and the current price at which it may be sold.

In addition, although embedded or sunk costs are sometimes associated with loss, it is important to make the distinction. For instance, a piece of office equipment was purchased three years ago. The price paid for it is the sunk cost. This is not necessarily a loss, especially since the equipment did serve its purpose for a few years. However, should it eventually be sold at half the price, then the loss also amounts to 50% of the equipment’s original price.

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