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Onshore wind is more competitive than ever

WORLDWIDE: It has never been cheaper to generate electricity from wind. We analyse the latest data and find that onshore wind looks set to remain the most cost-effective renewable energy source for the foreseeable future, despite falling solar PV prices.

Although most wind-power developments still attract financial support - either in the form of capital subsidies or premium payments for the energy — the gap between the generation costs of wind energy and electricity from conventional thermal plants continues to narrow and, in some cases, to disappear completely.

Onshore wind costs fell in 2014 and, having analysed global data and statistics, we conclude that a realistic best generation cost for onshore wind is now $71/MWh (€62/MWh), compared with $81/MWh (€70/MWh) a year ago. Meanwhile conventional sources of electricity generation remained broadly stable — with a rise in plant prices countered by a fall in fuel costs — so, overall, wind has become both cheaper and more competitive. Although the price of oil plummeted by around 40% in the latter part of the year (and continues to fall), this has so far had little impact on the price of gas and coal. How long oil prices will stay depressed, and how that will affect the price of other fossil fuels, is hard to predict.

Wind faces increasing competition from photovoltaics and nuclear. Now that a "strike price" has been set for a new nuclear power station in the UK, there is a little more clarity over nuclear generating costs, at least in Europe. Onshore wind can already undercut it, and analysis suggests that is quite likely that offshore wind costs will be close by the time the nuclear power station is in operation, which is scheduled for 2023.

Prices this year are expressed in US dollars, following the practice of the International Energy Agency (IEA), from which much recent information on energy costs is derived.

Evaluating wind generation costs

A site's wind speed is, of course, all important. The higher the wind speed, the greater the energy productivity, and the lower the generation cost. A common measure of productivity is the capacity factor (the annual ratio of the actual output to nameplate capacity). So, offshore wind projects, which tend to operate in higher wind conditions, are expected to achieve higher capacity factors than onshore.

In the case of solar energy, productivity is equally important and the higher the solar radiation, the higher the capacity factor. Broadly speaking, the highest solar capacity factors are encountered nearest the equator, falling off towards the poles.

The funding regime in the state where the wind project is located largely dictates the basis of the financial calculation. What is loosely termed the "interest rate" varies considerably. Strictly speaking it is the weighted average cost of capital (Wacc), as it depends on the interest charged on any loan and the return on the equity contribution. For state-funded projects that draw funding directly from governments, WACC is the rate of return demanded by the exchequer, sometimes termed the test discount rate.

Values of Wacc tend to vary between 4.7% and 7.5%, but the UK Department of Energy and Climate Change (Decc) generally uses a 10% test discount rate. The IEA uses an 8% test discount rate, and that is the figure we have used here.

Amortisation periods for paying off the loan vary widely, like discount rates, and are not necessarily as long as the expected life of the plant. The latter represents an upper limit and is rarely used outside public-sector utilities. The amortisation period, which is frequently governed by the nature of the support mechanism, usually ranges from 12 to 20 years.

To illustrate how the various factors (technical and institutional) combine to yield a wide range of generation cost estimates for onshore wind, an IEA study gives figures for typical installations that vary from $95/MWh in Denmark to $167/MWh in Switzerland. The Swiss figure is high because the assumption about installed costs was high at $2,131/kW compared with the average of $1,724/kW, and productivity was low with a capacity factor of 23% against the average of 30%.

Cost trends

Wind power costs have been falling steadily for decades. For onshore wind in the US, the levelised cost of energy - the cost of energy required to break even over the lifetime of the project — fell from $170/MWh in 1991 to $60/MWh in 2003. After the turn of the century, however, partly due to increased commodity prices, particularly steel and copper, wind turbine prices rose, driving up installation costs.

The latest estimates for the price of wind turbines and installed onshore costs in the US are $1,100-1,300/kW and $1,630/kW respectively, according to the 2013 Wind Technologies market report, published by the US Department of Energy, Lawrence Berkeley National Laboratory (see chart, below). The data in the chart apply to utility-scale wind farms from 10MW upwards. There are wide variations about the mean, depending on the degree of difficulty of building the wind farm, with remote hilltop sites costing more to develop than level low-land sites. National factors also influence costs.

Although wind-turbine prices are broadly similar in Europe and the US, they are significantly cheaper in China. Two Chinese manufacturers reported selling turbines for around $500/kW, less than half the US average, with the result that installed costs of wind projects in China are about 30% below US levels.

The IEA's World Energy Investment Outlook tabulates installed costs of wind energy for nine locations around the world, and provides a basis for identifying the low-cost and high-cost values. China delivers the lowest cost for onshore and offshore wind, with installed costs of $1,300/kW and $4,440/kW respectively. The US quotes the highest costs — $1,890/kW for onshore and $5,390/kW for offshore. (The IEA quotes a higher onshore cost than the Berkeley National Laboratory. Although its report was published in 2014 it possibly did not capture the cost reductions that have occurred recently.) The figures have been rounded and used to derive the generation costs shown in the "Gap Narrows" chart further down. The IEA estimates of operation and maintenance costs have also been included.

For onshore wind, these range from $35/kW a year in China to $47/kW a year in the US. For offshore they are $155/kW a year in China and $189/kW a year in the US.

Where onshore wind can be built for $1,300/kW, generating costs range from $99/MWh at a 6 metres per second (m/s) site, down to $49/MWh on a site where the annual mean wind speed is 9m/s. However, even in China, high wind speed sites are likely to cost more to develop than low wind speed sites, and so this low cost is unlikely to be realised in practice. With an installed cost of $1,900/kW, generating costs range from $142/MWh at a 6m/s site, down to $71/MWh at a 9m/s site.

Offshore wind generating costs remain significantly more expensive. At the low end with an installed cost of $4,500/kW, and a site mean wind speed of 8m/s, the generating cost is about $222/MWh, falling to $185/MWh at 9m/s. At the high end with an installed cost of $5,400/kW and a mean wind speed of 8m/s the generating cost is about $267/MWh; at 10m/s this falls to $188/MWh.

Photovoltaics

Photovoltaics has made extremely rapid progress in the past few years, with the result that generating costs - on good sites — are now close to those of onshore wind. Like wind, solar PV generation costs are critically dependent on the capacity factor, which ranges from about 9% in Norway to 16% in central US, and approximately 24% in Phoenix, Arizona. Taking the IEA's 2015 estimate for solar PV installed costs of $1,900/kW, the generating cost with a 10% load factor is around $250/MWh, falling to just under $150/MW with an 18% load factor, and $110/MWh with a 23% load factor.

The chart below shows how the generating costs of onshore wind and photovoltaics compare.

An average installed cost of onshore wind of $1,600/kW has been used, and the graph shows that the generating costs for high-productivity PV and low-productivity wind (20% capacity factor in each case) are very similar, at about $120/MWh.

Nuclear and fossil fuels

The installed costs of the principal generating technologies from three sources are summed up in the chart on the right (facing page). For each technology there is a wide range of costs. As in the case of wind, the cheapest estimates come from China; its estimate for nuclear, for example, for 2020 at $2,800/kW is less than half the European estimate ($6,200/kW).

The installed costs of the thermal sources of energy have increased slightly since last year, by about 10%. There are wide variations in the cost of coal and gas, but prices have dropped slightly. This means there is little change in the overall estimates of generation costs from thermal sources.

Operations and maintenance costs

Operation and maintenance (O&M) costs vary with wind-farm size and location. However, the exact scope is not always clear. Routine maintenance and the operational costs are only part of the total cost of running a wind farm. Unless the operator owns the land, rents will be payable, together with business rates and "use of system" charges to the utility network to which the wind farm is connected. The total costs are therefore very location-specific.

A recent review for the European Commission by Ecofys, Subsidies and costs of EU energy, gave a range of O&M costs for onshore wind from €6/MWh to €32/MWh, with an average of €11/MWh ($14/MWh). This may be a bit on the low side. The Fraunhofer Institute suggests €22.5/MWh ($28/MWh). An alternative way of expressing these costs is in dollars /kW/yr, and the table (below) summarises estimates for anumber of technologies from a recent IEA publication.

Operation and maintenance costs typically account for 20-25% of total generation cost for both onshore and offshore wind; about 15% in the case of coal, 10% for gas and 5% for nuclear.

Comparative generation costs

There is no single picture of comparative generation costs that applies everywhere. Performance levels vary, depending on the location of wind and solar installations. For wind plants, lowland sites in Germany may yield capacity factors around 15%, but hilltop sites in the UK may be twice as productive, with a 30% capacity factor. Offshore wind capacity factors tend to be higher than this — around 35-40%. As we have already seen, capacity factors for solar range from single figures to 24%.

When making comparisons with thermal sources of electricity generation, the price of the fuels is an important issue. Broadly speaking, prices tend to be low in the US, but higher in Europe although there are significant variations.

The chart below shows generation-cost data derived from the sources cited in this article. Generation costs at the low end of the range generally apply in the US and the figures at the high end mostly apply to Europe. Regrettably there was insufficient data on fuel costs in China to include reliable estimates.

As the range of generation costs for onshore wind is around $60-90/MWh, this makes it the cheapest renewable technology. However, gas is often cheaper as the range starts below $50/MWh. Coal, however, is somewhat more expensive. Nuclear ranges from $92/MWh to $146/MWh, with the contract price in the UK at the top of the range. Offshore wind comes in at $110-214/MWh, with European prices towards the upper end of this range.

How much does it cost to generate electricity from wind? The graphs above reveal the very wide range according to the location of the project and the available wind speeds.

Theoretically, in ideal conditions, say an easy-to-develop onshore site with high winds speeds in a country where manufacturing and labour costs are low, it could be as little as $49/MWh. At the other extreme, such as a far-from-shore, deep-water offshore location with low wind speeds, it could be as much as $267/MWh, more than five times as expensive.

A more realistic figure for onshore wind, assuming the upper bound installed costs of $1,900/kW and wind speeds of 9m/s, is $71/MWh. At this level, onshore wind is comfortably cheaper than nuclear and solar PV, is level-pegging with gas, and competitive with all but the cheapest (and dirtiest) coal.

Onshore wind costs have fallen slightly since our report last year, but offshore costs still appear to be rising, a consequence of new projects being built in deeper water and further from shore, which makes both construction and operations and maintenance more expensive.

However, at the lower-bound installed cost of $4,500/kW, and assuming average wind speeds of 9m/s, it works out at around $185/MWh. That cost is expected to fall by about a quarter by 2020, which would make offshore wind competitive with nuclear and low-capacity factor solar.

There is also evidence emerging that some offshore projects are exceeding the generally recognised high capacity factor of 40%, at least at certain times of the year.

Over the winter of 2013-14, for example, the 630MW London Array averaged a capacity factor of 56%.

The future

The generating costs for wind energy have been on a downward trend for many years, and this is likely to continue, although less rapidly. There are high hopes for offshore wind costs, which are presently on a par with nuclear, but likely to undercut it in the near future. Solar photovoltaic prices are falling more rapidly than those of wind energy, and generation costs, particularly in sunny climes, are expected to be roughly similar to those of onshore wind in the near future.

The chart below shows the estimated costs of offshore and onshore wind according to a number of sources, compared with other generation technologies. It shows that offshore wind costs are expected to fall by about 25% by 2020 and then by another 12% by 2035. Onshore wind costs, in comparison, are expected to fall more slowly, typically by 5-6% by 2020 and then another 4% by 2035. It also shows solar PV and onshore wind costs overlapping by 2020, although no date can be specified for the crossover. Authorities differ.

The UK's Solar Trade Association suggests solar PV will start to undercut onshore wind by around 2022, but the IEA's Energy Technology Perspectives shows the two roughly equal by 2030, but with solar PV significantly cheaper by 2050. Data in the IEA's World Energy Investment Outlook, however, suggests wind will still be cheaper than PV in 2035.

This comparison suggests that onshore wind will often be the cheapest electricity-generating technology by 2020, except in a few locations where low-cost geothermal or hydro can be exploited. Offshore wind costs need to fall further to level with fossil-fuel sources, but start to challenge nuclear by 2020 or soon after.

Although the price of oil fell significantly during 2014, this has not yet had much of an impact on anticipated future prices of natural gas in the US or Europe. The US Department of Energy suggests natural gas prices for electricity generation will move slowly upwards (by about 10%) during the next ten years, and so the competitive position of wind relative to gas is likely to improve during that period. It is suggested that the low oil prices may make shale oil less attractive, and a resulting decline in production may mean that oil prices rise again.

COMPARING COSTS - GENERATING vs WHOLESALE

Generation cost

There are three parameters associated with all electricity-generating technologies that are key to calculating their costs.

— Installed costs Usually quoted as the cost per installed kilowatt, this, broadly speaking, is primarily a function of the size of the energy project, due to economies of scale. It varies from region to region.

Operating costs Expressed in dollars /MWh or dollars /kW/yr, the full spectrum of operating costs includes the operation and maintenance costs of the power station or wind project, and such factors as local taxes, grid connection and usage charges. It is not always clear whether the latter are included in reports, which can invalidate comparisons between wind farms in different locations.

Fuel costs These are zero for wind energy and quite low for nuclear, but for gas and coal, represent a significant portion of the total generation costs.

Wholesale price

Although it is customary to compare wind energy generation costs with those of gas or coal-fired generation, another approach is to compare wind with the value of the electricity that is displaced.

In practice, this is the wholesale price of electricity in a network, which is usually higher than the marginal fuel cost. Wholesale electricity prices vary between different systems, and on an hourly basis, so reference figures cannot easily be specified.

In Europe for example, wholesale prices during the third quarter of 2014 varied from $33.3/MWh (€28.7/MWh) in France to nearly double that much in Lithuania.

Wholesale electricity prices in the US are generally lower than in Europe, but last year, during the first quarter of 2014, they spiked to more than twice that of European levels. They have since settled to $35-40/MWh (€30-34/MWh) range.


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