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Mind the price trap

Prices paid for wind power today are not always related to the cost of producing it. Where demand outstrips supply -- in markets like that in Britain where renewables mandates are in operation to stimulate growth -- price has apparently risen above production cost. On markets with fixed tariff payments for wind power, the price is set by a formula only as good as the bureaucracy behind it. It may or may not reflect the production cost with a margin for reasonable profit.

Nearly all energy markets are structured to meet political goals and it is the precise structure that determines the price of wind, not the actual cost of producing it. This aberration causes no end of confusion in public discussions of whether wind power is expensive or not. In Britain, wind was being sold for as little as £0.02/kWh under the retired Non Fossil Fuel Obligation, which focused on driving down cost. Under the Renewables Obligation introduced last year, which aims to drive market growth, the sales price is hitting £0.06/kWh and more.

Current British wind prices are also a reflection of the uncertainty created by a new market mechanism and the scarcity of green power, which means short term contracts are being negotiated. Many economists argue that imposition of carbon taxes is the desirable long term solution to a stable market for power prices (Windpower Monthly, April 2002).

Actual production costs are derived from using actual prices for recent large wind farms and calculating generating costs using project interest rates and depreciation periods that are typical of well established markets. Institutions tracking power prices, such as the International Energy Agency and the OECD, also take this approach.

Different combinations of financial parameters produce different cost curves to those based on a test discount rate of 6.5% and 15 year depreciation (fig 1). An interest rate of 10% and repayment over ten years for a wind plant priced at $1000/kW will push the production cost up to around the topmost curve on the graphic. Conversely, a "public sector" offshore wind farm built for $1500/kW using cost of capital of 5% over 25 years, yields a production cost in line with the central curve. A "public sector" wind station at $1000/kW would yield prices in line with the lowest curve.

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