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25th Anniversary Special - Generating Costs - Electricity that gets cheaper and cheaper

Critics of wind energy have often cited its relative expense compared with other electricity generating technologies as a reason not to support it, but the facts tell a different story. The cost of wind power generation over a 25-year period has dropped steadily.

Wind power costs are now comparable to fossil fuels and in future may significantly reduce electricity prices, writes David Milborrow.

Critics of wind energy have often cited its relative expense compared with other electricity generating technologies as a reason not to support it, but the facts tell a different story. The cost of wind power generation over a 25-year period has dropped steadily.

Twenty-five years ago the Danish wind industry was accelerating towards its first production peak. That was reached in 1985 when about 250 MW of wind turbines were manufactured for a total price of DKK 2.1 billion. The resulting cost per kilowatt of manufactured capacity, at today's prices, was EUR2100. By 2008, wind turbine prices were about half that cost, a convincing demonstration of just how far they have fallen.

The cost of electricity generated by wind turbines has fallen even faster, and today's larger machines operate with roughly double the productivity of the 1985 machines. Put simply, the cost of wind-generated electricity has fallen by a factor of about four during the last 25 years, and wind power prices have now converged with the prices of electricity from gas, coal and nuclear plant.

 

Recession a blessing or curse?

There was a more or less continuous fall in wind turbine prices from 1984 to 2005, by which time the cheapest machines were selling at about EUR800/kW. Then, from 2006, prices surged in response to raw material cost increases, particularly steel and copper. But construction costs for coal, gas and, most significantly, nuclear all rose around the same time, so the competitive position of wind was maintained.

For the last 12 months, with the world plunged into economic turmoil, the real price of electricity is no longer clear. Oil prices have dropped along with natural gas prices (wind's fiercest competitor) by 40%, and coal prices have fallen by about 50%. On the other hand, the price of steel, which has a significant influence on wind turbine prices, has also fallen by around 30-40%. It may take some time to feed through, but this should enable wind turbine prices to be reduced.

There are some similarities between the status of wind in 1984 and its current status, even though wind is now much more competitive. In 1984, wind was seen as a hedge against rising oil prices and an extreme position was to view it as an 'insurance' technology. Today, wind can point to approximately one million megawatt years of experience - electricity generating costs that can be quantified with reasonable precision and a cost of energy that will not change once the plant has been constructed.

Recent fluctuations in the price of generating energy from the fossil fuels highlights the advantage of wind - here is a technology that offers rock-solid generation prices after the plant is built. Wind is exempt from the vagaries of the fuel price markets.

With capital cost repayment being one of the principal determinants of wind energy generation costs - about 70% - the current global financial crisis may improve the competitive position of wind. If interest rates come down, capital cost repayments come down.

Yet it remains to be seen whether the markets will see wind as sufficiently low risk for the cost of capital to fall. But wind developers can point to its reliability, and that means low risk to financiers. Some of the machines that were built in 1984 are still operating.

 

Good odds

With fossil fuel prices having tumbled, current wind costs have weakened competitively. Coal and gas are delivering electricity for about EUR50-60/MWh, a cost that wind can match only on sites with the best wind speeds and the lowest construction costs. Even if carbon penalties on fossil fuel generation are included, wind still struggles to compete on cost with gas (see Figure 1). Against coal the odds are better. Once carbon penalties are added, coal costs go up to about EUR80/MWh. Wind can match this price if construction costs are low and the wind blows hard enough, which is at sites with mean annual wind speeds above 7.5 m/s.

The range of nuclear costs is as uncertain as ever (EUR50-80/MWh) and will remain so until new stations are built in Europe or the United States. Onshore wind and nuclear share a similar range of generation costs, but the balance tilts in favour of wind if a nuclear risk premium - the extra risk of nuclear not being built on time and to budget - is accounted for in the financing.

Although the path of future fossil fuel prices is unsure, the futures markets, and most commentators, expect them to rise. If they return to the levels seen at the start of the recession, then gas-fired generation costs move up to about EUR90/MWh (including the carbon price), a level that can be matched by wind turbines on sites with modest wind speeds. As for offshore wind power, its price will become much clearer once the current construction projects in north European waters start to produce.

 

When the wind stops blowing

Critics of wind energy often argue that because electricity flow from wind plant is variable - sometimes non- existent - the cost of providing standby power makes it hopelessly uneconomic. In fact, spread over a broad consumer base, the cost of providing additional megawatts of fossil fuel on standby should the wind die down is modest.

Any power system has to schedule reserves to cope with any sudden large thermal power station shutdown. In a typical electricity network, reserves amount to about 3-5% of the total demand and can cater for unexpected changes in consumer demand or wind power supply.

Contrary to popular perception, wind power production - like consumer demand - is to a certain extent predictable. If the wind production in western Denmark (with 2400 MW of wind) is 1000 MW at nine in the morning, then at ten it will probably lie between 928 MW and 1072 MW. It may fall outside this range, but with a significantly lower probability. Information of this kind enables system operators to determine the appropriate amounts of reserve needed on a system with wind on it, accounting for the unpredictable aspects of consumer behaviour and the likelihood of plant breakdowns.

Utilities around the world have made these calculations with broadly similar conclusions. When the amount of wind on an electricity network is modest, up to maybe 10% of total demand, the extra uncertainty is very small and so the costs of additional reserve are modest.

 

Balancing supply and demand

With attention focused on meeting new European Union renewable energy targets, UK electricity and gas supplier National Grid has estimated the additional costs associated with introducing 40% wind energy. These could add up to EUR9/MWh of wind energy generation, but if new methods of providing balancing services are developed the cost could halve, or increase by 6%.

One of these new methods, "demand response" technology, is being actively researched in the UK and United States. The concept uses consumer appliances or industrial processes that can react to changes in system frequency to reduce their demand for power at any specific time. If the wind stops, demand could be reduced.

Attention is also being paid to improving predictions of wind strength. This would reduce the uncertainty, and the cost, of coping with the variable nature of wind.

 

More wind, less cost

In light of the European Union's commitment to deliver 20% of EU primary energy consumption from renewables by 2020 (along with similar aspirations in the United States and elsewhere), attention is focused on how much it will all cost. Several analyses have concluded that the additional costs of renewables, with wind usually predominating, are likely to be modest.

In the long term, the cost of electricity is likely to drop, depending on fuel prices. The threshold at which large amounts of wind start to save the consumer money appears to be a gas price of a little over EUR1/therm. It is not unrealistic to expect it to reach that level. Gas prices have hit EUR1/therm before the fuel price plunge and, as the world economy recovers, could well do so again.

 

THE COST OF GENERATING ELECTRICITY.

1. Wind and thermal technologies compared

Competitive: The wide range of costs from coal and gas-fired plant indicates the uncertainty associated with fluctuating fossil fuel prices, while the nuclear range reflects the spread of cost estimates claimed by that industry. Prices for wind, however, are known and can be predicted accurately for the life of any plant. The range above merely reflects building on sites with different average wind speeds over a year, starting with a 6 m/s site and concluding with a windy 9 m/s site. The windier a site, the cheaper the generation. Also taken into account are different installed costs for wind plant from our 2008 data base. A typical onshore plant in flat terrain and close to the grid came in at EUR1300/kW and offshore peaked at EUR3000/kW. Our graph reveals that wind at EUR70/MWh is cheaper than coal plus its carbon costs, but more expensive than lowest-cost gas. If nuclear can be built at its lowest claimed cost, wind cannot yet match that, but nuclear has yet to prove that it can come in at the bottom range estimates the industry publishes.

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