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Back to being a model of stability

Wind power generation costs stabilised last year after their unprecedented leap upwards in 2005. Gas prices dropped slightly, while coal remained the cheapest option, though on a rising trajectory. Nuclear is still anybody's guess. Our annual costs analysis shows that wind plant on good sites with long term power purchase contracts continue to be highly competitive, even when the cost of carbon pollution permits is kept artificially low

While the price of wind energy remained constant during 2006, the fortunes of all three major generating technologies, gas, coal and nuclear, changed. Gas prices, on the rise since 2002, dropped a little but are not expected to fall much further and may go up again. The price of electricity from coal maintained its modest pattern of annual increases, but is being pressured by increased recognition of its pollution costs in markets for trade of carbon emission allowances. As for nuclear, there is still no indication of what it might cost in an open market, but it has once again successfully persuaded governments in the West that it should be considered an economic power generating option for the future. Britain, America and Australia all beat the nuclear drum over the past year.

Compared with the volatility of gas prices, wind generation costs are looking ever more stable. They will probably stay level for another year or so, despite increases in hardware costs. The increases are being counterbalanced by economies of scale in the construction of more and larger wind power stations. Once the pressures of an overheated market for wind technology ease, there is every expectation that wind energy prices will resume their long term downward trend. That gives wind power the edge over carbon emitting fossil fuels.

Nuclear, meantime, is these days looking like wind's most formidable competitor. Over the past year it has benefited from the release of government backed reports in the UK and Australia, each purporting to show that nuclear is significantly cheaper than wind. But analysis of nuclear generation costs in the reports does not hold up under close inspection. A claimed cost for nuclear in Britain of £38/MWh (EUR 57/MWh) is more likely closer to £53/MWh (EUR 78/MWh) once the correct basis for comparison is used (Windpower Monthly, October 2006). Construction in Finland of the West's first nuclear plant for more than a decade is already proving that estimated build schedules for nuclear are optimistic: the 1600 MW Finnish plant is already 18 months behind schedule after the first 18 month construction period. Meantime, the EU has been asked to investigate allegations that the technology suppliers from France are receiving illegal state aid. Both these problems add to the uncertainty over nuclear's capital costs. Concerns have also been raised over supplies of uranium, the cost of which has increased by a factor of eight since 2000.

What wind stations cost

Compared with nuclear, wind's costs are a model of clarity. The average installed cost of wind power plant in 2006 was EUR 1175/kW, based on data from about 40 wind farms with a combined capacity of 3400 MW. Average wind farm size was 88 MW.

The average installed cost for 2006 is a drop lower than for 2005, but many of the turbines installed last year would have been ordered before the most recent price rises became evident. Prices reported for some wind farms may not account for "intangible" pre-construction costs, particularly those associated with site permitting, but these are most likely balanced by prices for other wind farms that may overestimate the installed cost as they include two or three years of operation and maintenance costs.

The reported prices for wind plant show significant variation around the mean value. Even so, about two- thirds of the wind farms recorded installed costs between EUR 945 and EUR 1405/kW. Only four wind farms had costs above the top end of this range (three in Britain) and six had costs below the bottom end, in various locations, including China.

The average wind turbine price in 2006 was EUR 832/kW, with two-thirds of the 3400 MW sample lying between EUR 682/kW and EUR 982/kW. The average price for 2006 is about 4% higher than in the previous year. It may go higher still: some prices towards the end of 2006 moved above EUR 1000/kW. Given that wind turbine manufacturers are basking in the benefits of a "seller's market," the indication is that they are charging what the markets will bear.

The interest rate factor

Unlike gas and coal, where fuel cost is a major element, most of the cost of a wind generated kilowatt hour lies in the capital cost of the wind station. As a result, interest rates on borrowed capital have a significant impact on the cost of generating power from the wind. There is no single wind project interest rate, which is dependent not only on where in the world a project is being built, but on who is doing the building.

In mature liberalised power markets, 8% marks the higher end of typical interest rates for wind station financing over 15 years, representing a high cost of finance. At the other end of the scale, 5% is a typical low cost of finance boundary for developments mostly undertaken by publicly owned utilities and also financed over 15 years (figure 1). Between these two boundaries lie a broad mix of possibilities. In the United States, some contracts run for 20 years, but a 7% interest rate over 20 years delivers almost identical generation costs to the application of a 5% interest rate over 15 years.

A fair comparison of wind generation costs with those of coal and gas requires comparing like with like and applying the same financing parameters to each technology. Taking a higher cost of finance over the past six years using an interest rate of 8%, wind is marginally the most expensive option throughout the period. Between 2000 and 2002 gas is cheaper than coal at 8%, with its cost bottoming at just under EUR 30/MWh in 2002. After that it rises above coal before peaking at just below wind at EUR 55/MWh in 2005. Last year it falls back to around EUR 47/MWh. Wind financed at 8%, using an average wind farm cost and typical 30% capacity factor for onshore plant, falls steadily between 2000 and 2004, from EUR 50/MWh to EUR 48/MWh, before rising to EUR 57/MWh in 2005 and 2006.

At the lower discount rate of 5%, however, the tables are turned. Wind becomes cheaper than gas in 2004 and 2005 and only marginally more expensive than gas in 2006. Coal generation becomes the cheapest option throughout the period, aside from when gas drops to below it in 2002. But coal prices are inexorably on the rise, moving from EUR 30/MWh in 2000 to around EUR 32/MWh in 2006. Gas financed at 5% would have started at EUR 33/MWh in 2000 and peaked at EUR 52/MWh in 2005, before falling to EUR 45/MWh last year. Wind under the same condition starts at EUR 41/MWh in 2000, falls to a low of EUR 39/MWh in 2004, before rising to EUR 46/MWh in 2006, a fraction higher than gas.

The carbon cost

None of these cost comparisons take the "cost of carbon" into account. Despite efforts in Europe to impose emissions caps on heavy polluters and create a market for trade of emissions allowances, or carbon credits, there is still no clear consensus on pricing carbon. A thorough analysis of the economics of climate change, recently produced for the UK government by economist Sir Nicholas Stern and commonly known as the Stern Report, put the realistic price of a permit to emit one tonne of C02 at $85 (EUR 64). That figure tallies with work by Germany's respected Fraunhofer Institute, a world expert on the external costs of power generation.

In the unlikely event of $85 being factored into a "carbon tax," or reflected in emission trading markets, the cost of coal generation would rise by about EUR 64/MWh and gas fired generation by about EUR 25/MWh. As a result, wind, without question, would become the cheapest generating technology. In practice, current carbon prices are considerably lower than the real value assessed in the Stern Report. A near collapse of the European Trading Scheme (ETS) was precipitated last year by governments allocating too many free "permits to pollute" to big industry and power producers in the form of C02 emission allowances. In December, ETS prices were poised to fall to about one-tenth of the Stern valuations. Even so, that adds EUR 2.5/MWh to the price of gas, making wind more competitive at the 5% discount rate.

Allocation of C02 pollution allowances under the second phase of ETS have yet to be finalised, but last month carbon was trading at a price approaching EUR 20/tonne. Factoring this into fossil fuel generation prices pushes gas up to EUR 56/MWh and coal up to EUR 59/MWh, compared with wind at EUR 57/MWh, all financed at an interest rate of 8%.

The cost of wind

As with coal, gas and nuclear, there is no single generation cost for wind. It dances to the twin tunes of a range of installation costs and a wider range of capacity factors corresponding to differing wind regimes. Differing discount rates, most typically in a range of 5% to 8%, set the beat. Ranges of generation costs can be established, however, plotted for lower and higher installed costs and a range of wind speeds (figure 2).

Lower cost wind farms tend to be built on lower wind speed sites. Assuming a typically low-end 5% discount rate over 15 years for a wind farm installed for as little as EUR 1000/kW, wind generation costs on a site with good winds of eight metres a second (m/s) can be as little as EUR 42/MWh, rising to EUR 52.5/MWh at 7 m/s and EUR 71/MWh at 6 m/s.

A good windy site onshore will almost invariably be more difficult to access and lie in challenging terrain, with the result that it will cost more to build a wind farm there than on a low wind site. Assuming a high-end installed cost of EUR 1400/MWh and an 8% discount rate, generation costs come in at EUR 57/MWh on a windy 9 m/s site, rising to EUR 68/MWh at 8 m/s and EUR 85/MWh at 7 m/s.

Data for offshore wind plant costs remains scarce, with just two coming online in 2006: the 90 MW Barrow offshore wind farm off the English north-west coast and Shell's 108 MW Nordzee project in Dutch waters. The range for installed costs seems to start at EUR 1600/kW (higher than in 2005) and finish at EUR 1900/kW. At an installed cost of EUR 1600/kW and using a 5% discount rate, generation cost can be as low as EUR 60.5/MWh at 8.5 m/s but rise to EUR 104/MWh at 6.5 m/s. At EUR 1900/kW and an 8% discount rate, generation cost at 9 m/s comes in at EUR 81/MWh and EUR 122/MWh at 7 m/s.

And its competitors

So much for the cost of wind. The typical cost of gas and coal last year is well established internationally from a variety of sources (figure 2). Not well established, however, is the size of the sum being added to generation costs to account for the cost of carbon. The glut of carbon permits under the EU's ETS trading system pushed prices down to unrealistic levels.

Looking aside from prices set in carbon trading markets, another approach to bringing renewables and fossil fuel generation costs on to a level playing field is to add in the costs of "carbon capture and storage" (CCS). Doing this increases plant costs, reduces the efficiency of thermal generation and increases operation and maintenance costs. The effect on fossil fuel generation costs is uncertain, but the overall increase seems to be in the region of EUR 15/MWh for both coal and gas. Even at that relatively low level, onshore wind becomes significantly more competitive with both coal and gas over a wide range of installed costs and wind speeds. Offshore wind remains more expensive, but would become more attractive if the costs of carbon capture and storage were higher, or if "the cost of carbon" is higher than EUR 15/MWh.

What wind is being paid

Do the prices consumers are asked to pay for their wind power tally with generation costs? In broad terms, yes. Wind prices from around the world show that electricity consumers pay a low of EUR 41-48.5/MWh in China and a high of EUR 117/MWh in Italy (figure 3). The lowest prices, in Canada and China, result from competitive bidding for power purchase contracts. The highest price, in Italy, results from a green certificate rate arbitrarily fixed by the regulator once a year, while in Britain and Spain the high rates are a consequence of structurally linking wind prices to the ever-rising price of fossil fuel.

Between the low and high extremes, remaining prices paid for wind are all based on some form of standard payment, mainly fixed by government in dedicated wind tariff structures established for renewable energy. India has the lowest fixed payment with a price range that starts at EUR 54/MWh. Greece sets the top boundary with a price range starting at EUR 73/MWh.

Price ranges are largely a factor of countries choosing to vary pay rates according to energy productivity, which is dictated by wind speeds at the site. In Denmark the range is EUR 57-60/MWh, in Germany EUR 64-82/MWh, in France EUR 68-82/MWh and in Brazil EUR 69-78/MWh. In Greece, installations that are not grid connected receive a higher price (EUR 85/MWh); grid-connected projects received EUR 73/MWh. In the United States, the Southern California Edison tariff of EUR 47/MWh before the value of wind's federal production tax credit is added roughly reflects the costs avoided by the utility in choosing to buy wind power instead of other generation.

The price range in Britain starts at EUR 101/MWh and rises to EUR 111/MWh. The higher price assumes that the value of Renewable Energy Certificates (ROCs) falls linearly to zero in 2020 and is for a project commissioned in 2002. ROC prices may not fall that sharply. The lower estimate is relevant for a project commissioned in 2007. Wholesale electricity prices in Britain have risen by about EUR 30/MWh since the Renewables Obligation was introduced; if this rise is stripped out, UK prices line up with those in the rest of the world.

Fixed rates of pay for offshore wind are few and far between. The German offshore wind tariff starts at EUR 91/MWh, payable for at least 12 years. The French tariff starts at EUR 130/MWh, payable for at least ten years before it steps down. Extensions of Denmark's offshore wind farms at Rødsand, near Nysted in the southern Baltic Sea, and at Horns Rev, in the North Sea, will be paid EUR 67/MWh and EUR 69/MWh, respectively, for 12 years, rates that result from a competitive tendering process for government contracts. The prices suggest the developers expect to build at EUR 1600/MW, or less, unless they are prepared to accept rates of return on the investment lower than 5%.

The future

Overall, the economic prospects for wind energy remain bright, despite the present shortage of wind turbines and the fact that this, and higher raw material prices, means that wind generation costs may only slowly regain the downward path they abruptly left a year ago. Once raw material prices stabilise and the present "seller's market" eases, the benefits of improved production techniques, larger machines, larger wind farms and technology advances will be reflected in falling prices.

All the generating technologies are suffering from higher prices of steel and other materials. Although not generally in competition with wind, even the prices of photovoltaic cells rose during the past year. Higher steel prices will inevitably affect the construction costs of nuclear power stations, although to what extent is unclear. Although construction costs have only a relatively small bearing on the generation costs from gas, fuel price uncertainties remain. Only coal fired generation costs are reasonably stable and predictable and coal -- even with a carbon penalty -- could re-establish itself as a strong competitor to wind.

The lack of any new nuclear plant means that its cost remains an unknown quantity. A comparison of nuclear's costs with those of wind, gas and coal inevitably succumbs to subjective selection and guesswork, which impedes rigorous scientific analysis. There is no sign that nuclear's construction costs have been revised upwards to account for increased raw material prices, or the serious construction delays to the new nuclear plant in Finland. That plant is frequently held up by the nuclear industry as a vital indicator of things to come, but the construction problems will inevitably increase generation costs. In light of the nuclear industry's reticence to come forward with clear figures, sensible projections of nuclear costs are impossible to make.

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