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Wind narrows the price gap again

In a year when the price of energy from conventional sources of generation has continued to fall, wind prices have more than held their own. Based on reports from the United States and Britain, the indications are that wind has narrowed the price gap. The kilowatt hour differential between wind and its nearest rival, new gas, is now just one-and-a-half cents, or less, depending on wind speeds at specific sites. This article also looks at the emergence of a surprising consensus on the price of offshore wind energy.

The news on costs continues to be good. In a year when the price of energy from conventional sources of generation has continued to fall, wind prices have more than held their own. In both the United States and in Britain, the indications are that wind has narrowed the price gap and the kilowatt hour differential between wind and its nearest rival, new gas, is now just one-and-a-half cents (Euro or dollar), or less, depending on wind speeds at specific sites.

A year has passed since our last detailed appraisal of the comparative costs of wind energy and the conventional thermal sources of electricity generation (Windpower Monthly, February 1999). At that time the trend in wind energy prices was strongly downward, bringing it close to, at, or in some cases below, the levels from conventional sources. Over the comparatively short space of a year, tracking the downward trends is not easy, but the signals are encouraging.

One good guide to wind energy prices can be seen in the latest Non-Fossil Fuel Obligation (NFFO) contract prices in England and Wales and the Scottish Renewables Obligation (SRO) prices in Scotland. In June last year, the third round of SRO contracts were announced, showing wind prices at their lowest level ever. The minimum price, at £0.019/kWh, or about i0.03/kWh, is a fraction below generating costs for combined cycle gas turbines in the UK. This is a fair comparison. NFFO bid prices must cover all the developer's costs -- there are no other subsidies in the UK -- and the contracts run for 15 years.

Prices halved

With the UK support schemes running in their present form for some five years, it is now possible to track trends over time. Minimum price bids more than halved between 1994 and 1998, from just over £0.04/kWh (i0.064/kWh) to below £0.02/kWh (i0.032/kWh).

Minimum prices do not, however, tell the whole story. Wind prices are highly site specific because of the wind speed factor and the minima might be unrepresentative, especially as winds in Britain are among the best in the world. A more representative presentation is the price needed to secure 1000 MW of wind plant at each subsequent round of contracts under the NFFO bidding process. This price also halved between 1994 and 1998 -- and a bit more besides. The calculation, unlike minimum price bids, is a fair way of establishing the realistic level for the "private sector" price of wind energy. The latest price on this measure is just under £0.03/kWh, or i0.05/kWh, which is about £0.01/kWh more than the price of electricity from a new gas plant.

Even within the private sector, however, prices vary depending on the institutional framework and the wind speeds in the country concerned. Although the prices for wind quoted here are attractive -- and falling -- the price of energy from the conventional sources is also falling. Wind is still shooting at a moving target.

The latest installed prices for combined cycle gas turbine plant in the United States are around $500/kW, which is around half the price of onshore wind. But as our assessment a year ago showed, given the right site and the right financing conditions, wind energy prices can now fall within the price ranges for conventional plant.

A recent report from the US Department of Energy, in which comparisons are made for several regions, confirms this. Geothermal and combined cycle gas turbines come out cheapest at about $0.04/kWh, although the report emphasises that the geothermal resources are limited. The price range for wind ($0.040-0.063/kWh) is very similar to UK wind prices, with lower interest rates possibly offsetting lower wind speeds.

At least some of the fall in the price of wind power can probably be accounted for in the falling costs of operating wind turbines, as revealed in new data from Germany's official wind energy measurement program. The data also show there is a reasonably consistent trend towards lower costs with increasing size of machine (see figure). These are actual costs for all machines which have been operating for two or more years. It looks as though the largest machines may still have some teething problems, but the overall trend is downward. Furthermore, this is without accounting for the reduced capital costs of building wind farms. For a wind farm of a given size, fewer but larger machines are used today, resulting in savings on access tracks, cable connections and transport costs.

Offshore Progress

An interesting development during the last 12 months has been the emergence of a surprising consensus on the price of offshore wind energy. Although relatively few installations have been built, there are a number of costed proposals and an expectation that installed costs will be around $1600/kW. The UK Department of Energy and the Danish Energy Agency both use this figure.

Generation costs depend, again, on the precise institutional framework and wind speed. "Public sector" electricity prices may be derived assuming a test discount rate of 5% and an amortisation period of 20 years. "Private sector" prices may be based on a test discount rate of 8% and an amortisation period of 15 years. These are typical levels for UK NFFO projects and although interest rates have fallen recently, lending institutions may regard offshore wind as slightly more risky than onshore, thus sending the real interest rate back to around 8%.

Based on these assumptions, the price of offshore wind will be around i0.076/kWh (private sector price) or i0.06 (public sector price) at 7.5 m/s, falling to around i0.063 and i0.050/kWh respectively at 9 m/s. Higher wind speeds offshore partially offset the higher capital costs and so these prices are about 30 to 40% higher than onshore costs. In locations such as off the coasts of Britain and in Greece, however, the price differential is higher as the onshore sites benefit from very high a wind speeds in hilly regions.

It is not possible to cover all the permutations of prices and discount rates. Danish estimates of offshore costs, for example, are often quoted using a 5% or 6% discount rate, which would bring them roughly into line with the higher curve for onshore wind.

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