We have a few channels selling items, each channel would request these images from the server using a script like this as a user views them, so they would be generated ad-hoc and bandwidth would be used to supply the image.

I don't think the PNG images will use that much space up, as there is one 'set' of items which each new picture is applied to, so I think the main concern would be bandwidth.

With that in mind, what would be the best / most economical server setup option to run this script?

Wow, thank you, that looks very, very close to what we require. I'll ask our coder to take a look and hopefully get it working. Thank you for pointing us in the right direction!