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A PRICE WORTH PAYING

The article contends that wind energy should not be sold at dumping prices. However, today's advanced technology should lead to lower operation and maintenance costs. A cover-charge for research and development expenditure is still essential for non fossil fuel energy resources to survive and manifest themselves as reliable, inexhaustible and non-polluting energy alternatives.B. Madsen and P. Krogsgaard, BTM Consult, Denmark.

Has wind energy lived up to the expectations of a decade ago? It is a question fundamental to any evaluation of the status of wind power after ten years of development. The answer is straightforward. The exploitation of wind power has lived up to the most daringly optimistic expectations of ten years ago -- and that goes for the cost of wind energy, its production and its reliability.

This fact is thoroughly documented, both in California and Denmark where wind stations have delivered a decade of power to the grid. Today, wind plant can be installed for $1000-1200/kW and output from the most modern turbines in a good wind area averages 800 kWh a year per square metre of rotor swept area. Average availability for commercial plant is 97%, or more. Compared with ten years ago, this means that specific energy yield has increased by 60% and installation costs have halved. The result has been an improvement in cost effectiveness by a factor of three to three-and-a-half. In contrast, the non specific costs associated with wind development -- financing, the permitting process, legal fees, insurance, and so on -- have nearly all increased. Nonetheless, the bottom line is that wind energy today costs $0.05-0.07/kWh compared with $0.20/kWh a decade ago.

These prices are based upon average costs for wind power plant in good wind regions and the assumption that operation and maintenance costs can be restrained to $0.01-0.02/kWh. Whether this is realistic or not is open to discussion, but more on that topic later. Meanwhile, it is important to note that independent electricity producers can only live off wind power if the price they get is more than the basic cost of production. There has to be room for a risk premium, too. Here we come to another bottom line. Private investors selling power to the grid, dependent on local conditions, must receive $0.08-0.10/kWh. If they do not, there will be no future investment in independent wind power development.

Wind plant operators who installed their turbines in the mid nineteen-eighties were rewarded with tax breaks or subsidies. This is why technology, which was then relatively expensive, got into the ground in the first place. Today, with investment for each kilowatt of capacity considerably less, wind power should be good business. It is not. The reason why has nothing to do with wind technology, but a lot to do with the dramatic fall in the cost of producing electricity from fossil fuels, because the price of oil and gas has spiralled downwards. As a result, the economics of many older wind power plant now rest on a knife edge. In California, the end of the Standard Offer 4 power purchase contracts and the start of payment based on avoided costs -- some $0.035/kWh -- will hit owners hard. In Denmark, too, the story is similar. Wind tariffs there have fallen steadily since 1990, now averaging $0.087/kWh. In contrast, tariffs in Germany and England are $0.10/kWh and $0.16/kWh, respectively, albeit the high UK price is for short term contracts which expire in 1998.

The moral of this tariffs story is not hard to find. In Denmark, paying just eight-and-a-half cents for wind power has resulted in development grinding to a halt. Yet Germany and England now boast the most dynamic wind markets in the world. The economic logic is crystal clear. If it is worth an investor's while, wind development forges ahead. If not, it stops.

A challenge to the industry

If a wind plant is established on the basis of reliable wind measurements, the greatest remaining risk becomes its future operating costs. These include service, maintenance, repairs, the interconnection fee, administration costs, and, last but not least, the associated downtime with these activities. Annual variations in wind flow can influence cash flow considerably, but in the long run these ups and downs should cancel each other out. In the early days, before we had much operating experience, operation and maintenance (O&M) costs were a matter of qualified guesswork. Typically they were assessed at $0.01-0.02/kWh. In 1984 in Denmark these were based on 1.5% per year of the total investment in the wind plant, amounting to DKK 0.04-0.06/kWh. Amortised at 3% annually to 1993 this resulted in a final O&M cost of DKK 0.053-0.08/kWh ($0.008-0.012/kWh).

Time has revealed that even the most qualified of guesses can shoot wide of the mark. A Danish study from 1993 reveals that O&M costs for old wind turbines, installed 1981-1983, are as high as $0.023-0.038/kWh -- more than double the sum estimated in 1983. The same study also reports that O&M costs for newer wind turbines in the 225 kW to 500 kW size range are markedly lower, ranging between $0.005-0.012/kWh. But are these O&M costs likely to escalate in the same way as they did for wind turbines of a decade ago? It is unlikely. The industry's designers are now far more skilled in optimisation -- even though their willingness to take the borders of the possible to their limits carries an associated risk. But there are good reasons for not being overly optimistic. Wind energy economics are today so robust that there is nothing to be gained by underestimating O&M costs.

Which brings us to our third bottom line. In our view, operation and maintenance costs for wind turbines installed today will amount to about $0.02/kWh over the life time of the machine (in 1994 dollars). The challenge to the industry is to halve these costs for the next generation of wind turbines. It can be clearly seen, from any analysis of a new wind power plant, that O&M costs are consuming a steadily growing portion of the final cost of each kilowatt generated, when levelised over lifetime.

Why sell ourselves short?

In recent years the catch phrase of wind industry promoters has been "five cents a kilowatt hour," or even four-and-a-half cents. In a highly competitive market -- with fossil fuel prices rattling down -- this burning desire to cut costs is understandable. But is it wise in the long run? Should wind power be constantly compared with electricity from coal fired plant?

It has already proved its competitiveness. We should now be fighting from another sales platform -- the fact that wind plant can deliver what the world is demanding. Electricity free from C02. At a reasonable price. To continue pressing the industry and developers to sell a high quality product at dumping price is akin to putting discount labels on vintage wine. The product the wind industry is delivering should be compared with technology which can also supply electricity without an environmental penalty -- and not with yesterday's sinners.

Governments the world over are asking for C02-free electricity, either because they have set their own environmental goals or because they are committed to reducing C02 levels internationally. The wind industry can fulfil this request. It costs perhaps $0.01-0.03/kWh more than electricity from coal, dependent on local conditions. But this modest price difference should not prevent governments from giving wind its well earned place in our electricity systems. If it does, then decision makers -- both politicians and electric utility experts -- have totally failed to understand what sustainable development of the energy sector is all about. And let's not forget that on its current development trend, there is every reason to believe that wind power will become the absolute cheapest form of electricity generating technology in existence -- as well as churning out power with no polluting emissions at all.

Birger Madsen and Per Krogsgaard of BTM Consult in Denmark have been involved in the wind energy business since 1978.

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