For more on this see:
Just one year ago, the economics of generating electricity from wind energy did not look particularly healthy against those of its competitors. Oil prices had fallen to around $45 a barrel as the global recession took hold, while gas and coal prices had followed suit, dropping from their mid-2008 peaks. Relatively, wind - with the cost of a ready-to-run facility coming in at around EUR1500/kW - had lost its competitive edge. Only on the windiest sites could a new wind farm's generation costs comfortably match those of new gas, coal and nuclear stations. A year later, however, the tables have once again turned.
The price of oil is running at $80/barrel or more and, as oil prices rise, gas and coal prices are coming under increasing pressure. The consensus is that all three will continue upward. Costs will also escalate with the application of increasingly stringent carbon emissions penalties to fossil fuel consumption, a market regulation that is becoming evermore likely. In contrast, the cost of a wind plant has fallen slightly during the past year and further decline seems likely. As for nuclear, with more detail now emerging on its construction costs, wind can also look that particular competitor squarely in the eye.
Wind plant cost
In 2009, the average cost of a fully installed wind farm on land - EUR1500/kW, based on reported costs for a collection of new faculties with a combined capacity of more than 4 GW - is a fraction less than it was in 2008, but still up by about 15% on the average cost in 2007. The spread between the most expensive and the cheapest installations in 2009 is wider than in 2008, but two-thirds of the 2009 projects fall within a range of EUR1200-1800 for each kilowatt of wind capacity built.
The cheapest projects, perhaps unsurprisingly, are in China, but projects in the UK, Canada and Portugal also appear at this end of the spectrum. Canada has projects towards the top end of the range, too, along with the US, Japan and Bulgaria. The average project size in the 4 GW sample for 2009 is 130 MW, and the largest is 600 MW. Evidence of a link between wind farm size and kilowatt price is not apparent in the data, probably because of the strong influence of factors other than size on construction cost, particularly the ease of access to any specific site.
The average selling price of wind turbines eased slightly during the year to EUR1050/kW from EUR1100/kW in 2008. That difference may not be particularly significant, as the scope of published contract prices is not always clear. Published prices sometimes include provision for up to five years of initial operation and maintenance (O&M), spares and other extras, but the details of exactly what a stated price includes tend to be confidential. Some evidence of a slight upturn in prices towards the end of the year is perhaps visible, but the upward pressure on wind turbine costs seen in previous years from rapidly rising raw material prices is dissipating. Most steel prices halved between July 2008 and July 2009, which should give turbine manufacturers more room to manoeuvre.
That there is room for wind turbine prices to fall is also indicated by recent history. Broadly speaking, the price of both wind turbines and wind farms has increased by about 50% over the past six years (see figure 1, page 41). In 2004, the average price of turbines was EUR650/kW and the average price of wind farms was EUR1000/kW. By 2007, prices were EUR972/kW and EUR1300/kW, respectively, while they have now reached EUR1050/kW for turbines and EUR1500/kW for completed wind farms.
Not only have prices risen since 2004, the gap between the cost of the hardware and the cost of a fully installed and ready-to-run wind farm, known as the balance of plant cost, has also widened, from EUR350/kW in 2004 to EUR450/kW in 2009. That represents an increase in balance of plant costs of 29% - somewhat less than the increase in the price of wind turbines. Both cost elements have been strongly influenced by raw material prices, but installation costs less so, since they include a significant proportion of labour costs, diluting the impact of commodity price changes.
Over the life span of a wind plant, its O&M cost is an intrinsic part of the cost of generating electricity As more data emerges on O&M costs as the industry matures, their range grows ever wider, more often than not reflecting differing approaches in national jurisdictions rather than different wind power technologies.
When a wind farm is located on land bought outright by the project developer, the land appears as part of the total installed cost. When an annual rental fee is paid to the landowner, this cost appears in the O&M budget. Other variables are local taxes on wind farms and charges for sending electricity to customers over grid networks. Different equity investors in wind farms and insurers demand different sums in operational budgets to cover for risks, such as the replacement of failed components - sums that can be included in O&M costs. The gathered data reveals that for onshore wind power, a typical O&M cost at the lower end of the scale amounts to EUR22/kW a year, while a high value is typically EUR42/kW a year.
The influence of interest rates on the cost of wind power generation cannot be over-emphasised. While 15-35% of the cost of fossil fuel generation lies in the capital cost and debt servicing of the plant, for wind generation the cost of financing makes up around 70% of the generation cost. A single percentage point change in the project interest rate has a significant effect on the end price of the electricity produced. A project interest rate takes account of the expected return on both the capital invested and the debt secured. Currently, the applicable rate, used in this annual cost analysis, is an average 8% net of inflation, since that falls in the middle of the known range of wind project financing rates. Depreciation over 20 years, the norm, is also used here.
Pinning a single figure to the cost of wind power is a meaningless exercise given the range of installed costs, the number of operating cost variables, the strong influence of wind speeds on wind power economics and the equally strong influence of interest rates on project financing. But for any specific project, those variables are known - and with a fair degree of precision, unlike nuclear where cost overruns are the norm. Plug in the specifics of installed cost, O&M cost, site wind speed and the cost of financing for a selected wind project, and the generation cost becomes a known commodity for the next 20 years and beyond. That is a lot more than can be said for fossil fuels, given the volatility of coal and gas prices at source and their upward trajectory.
In the case of a wind project built for EUR1800/kW, which is at the high end of the selected range of installed costs, and applying a typical upper-level O&M cost of EUR42/kW a year and a project interest rate of 8%, the cost of wind power generation at a commonly found hub height mean wind speed of 7 m/s is EUR102/MWh (see figure 2, page 43). Using the same parameters for a project with a healthy 8.5 m/s wind speed, the generation cost falls to EUR73/MWh and on a windy 9.5 m/s site to EUR61/MWh. It is unlikely that a wind farm with an installed cost of EUR1800/kW and high O&M costs would ever be built on a site offering no more than 7 m/s, so a generation cost as high as EUR102/MWh is probably purely theoretical.
At the lower end of the cost range for installing a wind power facility, EUR1200/kW, and applying a typical annual O&M cost at the low end of the scale of EUR22/kW, the cost of wind power generation is EUR90/MWh at 6 m/s, falling to EUR66/MWh at 7 m/s and EUR52/MWh at 8 m/s. The same 8% project finance rate applies. It is unlikely that low-cost wind farms could be built at sites with wind speeds higher than this, since high wind speed sites are inevitably remote, pushing up the cost of infrastructure and, as a result, the installed cost. A generation cost of EUR52/MWh is not the lowest that wind power can achieve, but lies within the range of projects selected as representative of a clear majority of our 4 GW sample.
It might be supposed that a still lower cost of wind generation could be achieved should wind project interest rates follow the downward trend in bank lending rates around the world. But wind's risk profile is higher in the eyes of bankers and investors, who only have recourse to a project's income stream to cover their repayments. Should the project collapse, their money is lost - unlike investment in real estate.
A median range for wind power, based on the selected projects from the 4 GW sample, is EUR66-73/MWh at sites with wind speeds typical in countries with good resources. Those costs measure up well against the three main thermal rivals - coal, gas and nuclear - even when only a low carbon penalty is applied, well below the accepted EUR30/tonne of carbon dioxide. Without carbon penalties, wind struggles to compete with coal on all but the higher wind speed sites (see figure 2, page 43).
Applying the currently accepted modest price for carbon of EUR30/tonne, a low to middle-of-the-range price for coal is EUR73/MWh, just within the typical cost range for wind. Even high-cost wind of up to EUR88/MWh can compete with most expensive coal at that level of carbon penalty. The EUR30/tonne is representative of a broad consensus of the average price expected in the EU.
Gas is a harder competitor to beat, with a top price of just over EUR70/MWh including a modest EUR30/tonne penalty. But even without a carbon penalty applied to gas, lowest-cost wind on a good site can still show it a clean pair of heels. Looking forward in the short term, the price of carbon emissions allowances is bound to rise as governments get serious about policies to slow global warming. Once it reaches EUR50/tonne, wind clearly becomes the cheapest option given today's parameters.
Nuclear generation costs are still somewhat uncertain, but a number of recently published analyses suggest generation costs in the EUR54-69/MWh range, which comfortably undercuts middle-of-the-road wind power. The risk of nuclear costing a lot more than projected is far greater than for wind, however, giving wind a clear advantage in competing for investors. Europe's first nuclear plant to be built in years, in Finland, is years behind its construction schedule and already way over budget. A plant in France is suffering similar woes.
The low interest rates for debt that are now available on the money markets may also mean that lower rates than the 8% applicable to wind project finance become available for robustly structured wind projects using tried-and-tested technology. As the banks recover, they are showing considerable interest in entering a wind sector that is relatively unscathed by financial chaos, in part thanks to swift supportive action by governments. In areas where project interest rates may fall to 7%, the EUR66-73/MWh range for wind power would drop to EUR61-68/MWh. This means that wind can undercut coal even without a carbon penalty, it can also comfortably challenge nuclear and is within a stone's throw of gas.
Just as no single figure can be applied to the cost of wind power, no single figure can quantify the exact costs and performance of electricity generation from any technology. Specific cost depends on a specific project's parameters, the other renewables being no exception. A parameter particularly relevant to renewables is the local availability of the resource. In some countries geothermal heat is plentiful, while in the UK there are no geothermal sources sufficiently attractive for commercial electricity generation although heat is used in some locations. Hydropower has similar restrictions around the world. Biomass tends only to be economical if there is a plentiful local supply of fuel, otherwise transportation costs can be prohibitive. For wind and solar, energy productivity varies significantly with the strength of the resource. Solar installations near to the equator are more productive than those in, say, Sweden or New Zealand. Wind energy variations are even more diverse, with the windiest regions of the world found in New Zealand, the UK and Antarctica, while wind speeds in central Europe and many equatorial regions are low.
Aside from resource availability, the key economic parameters for electricity generation are capital cost, O&M costs, the price of any fuel required and the load factor (see table, left). Load factor, or capacity factor, is the percentage of maximum output achieved by the plant over the course of a year. The wide range of load factors across the generating technologies - from 20-30% for land-based wind power to 90% for geothermal, combined-cycle gas turbines and nuclear - explains the wide spread of generating costs. Technologies with low load factors must either have lower capital costs or low or no fuel costs to be price competitive with their high-load-factor competitors. Wind's relatively low load factor (only solar PV is lower) is a reflection of the variability of the resource.
While wind turbines generate power most of the time, they only produce at maximum capacity in the narrow band of wind speeds for which each machine is designed to operate at its rated power, be that 300 kW or 3 MW. The average output of wind turbines is generally between 25% and 45% of the rated output, with wind speed the governing factor. Most wind farms are available to operate 95% or more of the time. With coal, gas and nuclear, availability rather than wind speed is the key influence on the load factor. No generating facility operates at a 100% load factor. Long-term averages for the thermal plants are typically 85-90%, but plant breakdowns can deliver quite low values in some years.
Since the cost of generating electricity is a function of the specific parameters relevant to any specific power plant, a range of construction and operating costs for all the competing technologies must be taken into account to give a fair picture of energy economics. Selecting typical parameters for each technology reduces the size of the spreads, providing a fair basis for comparison of what it actually costs to generate electricity (see figure 3).
Cheapest of all is geothermal power, with hydropower and onshore wind at EUR1500/kW also giving coal, gas and nuclear a good run for their money. Geothermal's lowest capital cost is EUR1100/kW (only beaten by coal, gas and hydro at their cheapest) and it has a high load factor of 90%, equal to the best in class, though annual O&M costs are high at EUR165/kW. The end result is a generating cost for geothermal that can be as low as EUR40/MWh. Large hydropower has a low-end capital cost of EUR1350/kW, relatively low O&M costs of EUR40-75/kW a year (though higher than wind) and a load factor of 90% at the upper end of its range, resulting in a generating cost of around EUR37/MWh.
The spread of costs for geothermal and hydro is wide, however, with the upper end of the range for geothermal coming in at EUR50/MWh and at EUR75/MWh for hydro, on a par with wind energy's full range in countries with fair wind speeds. Furthermore geothermal and hydro have a major handicap - the highly site-specific nature of both technologies for large-scale deployment means there are many regions of the world where neither technology can be exploited economically.
Biomass at its cheapest can undercut onshore wind but, for the most part, it is more expensive, with its top cost nudging EUR98/MWh. Offshore wind is a good deal more expensive than biomass as yet. The spread of offshore generating costs starts at EUR140/MWh, rising to EUR155/MWh using typical levels of installed cost and wind speed. It is cheaper than most of the estimates for the Severn Tidal Barrage, a well-researched UK project with a generating cost in a range of EUR173-257/MWh. Data for the cost of wave power and tidal stream is in short supply, but the few estimates available suggest they are more expensive than offshore wind.
Solar thermal can beat offshore wind on a good day, but the top of its range is higher than offshore at its most expensive. Solar thermal has an estimated price range of EUR150/MWh, plus or minus EUR25/MWh. Solar photo-voltaic has a median price range of around EUR430-560/MWh, rendering it uncompetitive today for centralised generation. Despite their high costs, both the solar technologies can be attractive in remote off-grid areas where there is no competition from cheap fossil fuels and/or where the delivered costs of fossil fuels is high.
The world is coming out of recession and economic activity is picking up, with a resulting steady rise in oil prices. Most authorities expect them to continue rising for several years (see figure 4). Data from both the UK and US governments suggest an oil price of around $100 a barrel by 2012 and $120 a barrel by 2020. The International Energy Agency's reference scenario for future oil costs assumes slightly lower oil prices.
If gas prices rise to match oil prices - as they have done for many years whenever the world switches from high-priced oil to lower-priced gas and gas prices respond to the laws of supply and demand - that would take the price of gas-fired generation (without any carbon cost) to around EUR114/MWh, compared with wind's EUR102/MWh at the upper end of the range.
Indications of likely trends for future coal prices are mixed. Even if fossil fuel prices fall, the likelihood of a sharp rise in the cost of allowances to emit CO2 will hit coal hard, as will policies requiring compulsory carbon capture and storage. The estimate for gas-fired generation costs is currently the best available yardstick for measuring wind against future fossil fuel generation.
Given present-day installed costs for onshore wind, it can comfortably undercut gas at EUR114/MWh. Opinion is divided on the likely cost trajectories for both onshore and offshore wind - some expect them to rise, others to stay level and others to fall. Given stable prices for raw materials, the increasing competition within the wind industry, a maturing technology and more productive manufacturing techniques, it is reasonable to expect wind prices to fall. Wind is likely to become firmly established as the cheapest electricity-generation option in many parts of the world. Early movers to large-scale wind power will be the first to enjoy the economic benefits. [BX] Editor's note
This analysis of power generation costs is the latest in an annual series initiated by Windpower Monthly more than a decade ago. Note that while the costs of generating power from wind, gas and coal are taken from recent project data, there are no project data for nuclear, so quoted costs are from several recent analyses. See windpowermonthly.com for previous annual power cost comparison articles, along with separate articles comparing the cost of wind and nuclear.
[BX] Facts: Ready-to-run onshore wind power facilities in 2009 cost between EUR1200/kW and EUR1800/kW, based on data from a large sample of representative projects. The range above for onshore wind is for a limited spread of wind speeds, 7 m/s to 8.3 m/s, representing the lower and upper ends of the most commonly selected sites. That excludes really windy locations, as well as the low wind sites used in parts of Germany, reducing the load factor range to 20%-35% and narrowing the cost spread for onshore wind. Applicable to both onshore and offshore facilities is a 20-year financial payback period and a typical 8% real project interest rate to cover debt and equity repayments. Nuclear's generation cost, some argue, should be assessed using higher financing costs than the commonly accepted level applied here, because investors expect an extra reward for the risks they are asked to take.
Technology Capital cost O&M cost Load Fuel price
EUR/kW EUR/kW/yr factor % EUR/MWh
Geothermal 1100-2350 165 90 0
Wind onshore 1200-1800 22-42 20-35 0
Hydro, large 1350-4500 40-75 50-90 0
Wind offshore 2800-4000 62-100 30-40 0
Biomass, large 2020-3220 124-161 85 4-8
Solar thermal 4000-6000 50-120 31-73 0
Solar PV 4100-6900 72-100 9-21 0
Tidal barrage 2500-4100 150 22 0
Coal with FGD1 1000-1400 45-83 85 5-10
CCGT2 480-730 19-26 90 15-22
Nuclear 2200-3100 65-108 90 3
1 Flue gas desulphurisation; 2 Combined cycle gas turbine
SOURCE: US EIA, UK Ofgem, EU, CEC (US), others
Apply precautions: The cost data in the table above provide an
idea of the likely current spread for the technologies listed.
They do not encompass all projects. The load factor range for wind
is the most commonly found for onshore and offshore projects, but
can be lower and higher. Data on solar thermal electricity
generation is limited, as few facilities exist. Biomass comes in
various forms, but the data above are consistent across the
Edited by Lyn Harrison