Our analysis of key data and figures from a number of reliable sources also demonstrates that wind continues to improve its competitive advantage over fossil fuels and other renewables.
The competitive position of onshore wind continued to improve during 2014-15 as construction costs carried on falling. Fossil-fuel prices were generally unchanged from the previous year; any small reductions being offset by slightly higher thermal-plant construction costs, so the cost-of-energy targets - based on the generation costs from coal and gas - are much the same. Wind's other principal competitor is nuclear, and in this respect prices under the UK's contracts-for-difference regime confirmed that new onshore wind is cheaper than new nuclear.
Offshore wind generation costs are still roughly double those of onshore's, but encouraging data from projects due to come online in the next few years suggest the trend of rising installed costs may have halted. The first commercial project on floating foundations was announced in 2015 (Hywind Scotland), providing the potential to access a larger resource that includes high-wind-speed regions in deep water.
Cheaper turbine and installation costs
Onshore turbine prices and project costs have both dropped by about 25% from their peak in 2008 to 2014. The Lawrence Berkeley National Laboratory rated turbine average price in 2014 at $1,150/kW ($1.15m/MW). The latest financial reports from two of the major European manufacturers suggests that prices into 2015 continued to follow this downward trend to $1,070/kW ($1.07m/MW). The fall in wind-turbine prices obviously has a knock-on effect on installed costs.
A median installed cost for onshore wind of $1,700/kW has been assumed for the detailed analysis, slightly below the level in the Berkeley Laboratory report. The lower bound cost has been taken as $1,200/kW, quoted in the International Energy Agency (IEA) report (reviewed in WindEconomics, November 2015), which is $100/kW below the previous year's value. The upper bound cost is harder to specify as projects built at very high costs can always be identified somewhere, although they are usually either small or in remote regions, or both. A symmetrical distribution about the mean, or average, costs indicates $2,200/kW would cover the values in most high-cost locations.
The median price of offshore wind had been drifting upwards for some years. For 2015, however, there are encouraging signs that the trend may be downwards. A September 2015 report from the National Renewable Energy Laboratory in the US, 2014-15 Offshore Wind Technologies Market Report, tracks the costs of numerous projects in Europe, the US and elsewhere, and the capacity-weighted data, taking into account project sizes (see graph, below) indicates that the average cost in 2015 was slightly less than in 2014.
Last year, the median cost was assumed to be around $5,000/kW, and the latest analysis suggests this figure should stand. But the lower bound cost, taking into account prices of projects that have been announced and will be commissioned up to 2020, can be set at $4,000/kW - $500/kW below last year's value. Both the upper ($6,000/kW) and lower bounds take into account data from the US report and the IEA analysis.
To derive estimates of the generation cost of energy, expenses for operation and maintenance (O&M) need to be taken into account. Drawing on data from several sources, the median O&M cost for onshore wind has been taken as $50/kW a year, which translates to $19/MWh at a wind speed of 7.5m/s. That is higher than the IEA's range of $35-47/kW a year quoted in last year's report. But the median O&M figure for offshore wind has fallen significantly - from over $170/kW a year to $130/kW a year, or $40/MWh, at 8.5m/s.
At the median installed cost, and with an 8% interest rate and 20-year life, the generation cost of onshore wind is around $135/MWh at 6m/s, falling to $78/MWh at 8m/s. There are relatively few sites with higher wind speeds, and projects in such locations would be more likely to have installation costs near the upper bound of $2,200/kW. At this level, and a 9m/s wind speed, the generation cost is around $82/MWh. At the lower bound of installed cost of $1,200/kW, generation costs are $98/MWh at 6m/s, falling to $57/MWh at 8m/s.
Installed costs and wind speeds vary widely, so it is difficult to pick a single figure to quantify generation costs. However, onshore costs have moved down a little and, at the lower bound of installed costs and a wind speed of 7.5m/s, it works out at around $64/MWh. The comparable figure from last year was $66/MWh, indicating a slight fall. The wind speed of 7.5m/s is good, but not exceptional, onshore.
Offshore wind generation costs are significantly more expensive, but a downward trend is again discernible. At the median installed cost of $5,000/kW and a 9m/s wind speed, generation costs are just under $192/MWh. Higher wind speeds are found further offshore, but the installed and O&M costs are likely to be greater. With a 10m/s wind speed, at the upper bound installed cost of $6,000/kW, generation cost is around $194/MWh. At the lower end of installed costs of $4,000/kW, costs really start to tumble — from $200/MWh at 7.5m/s to $150/MWh at 9m/s.
There have been no major changes in the generating costs from wind's main competitors in the past year. Coal and gas prices fell slightly, but the construction costs of power stations rose, affecting generation costs. There is still very little clarity over the costs of nuclear generation. A final investment decision has yet to be taken on a proposed UK power station, whose contract price of £94/MWh ($144/MWh) remains a benchmark.
In every instance there is a wide range, but particularly in the case of nuclear, where the maximum price is that of the proposed UK power station, and the lowest is from China and South Korea. The latest cost estimate for the UK's planned 3.2GW Hinkley Point C is £18 billion ($27.5 billion) and the unit price for the power is $8,600/kW. On the other end of the cost estimates, China and South Korea's lowest nuclear installed costs come in at around $2,000/kW. Gas, coal and utility-scale photovoltaic (PV) installed costs are all lower than those of onshore and offshore wind, but this gives no clue to their competitiveness.
With gas and coal, the price of the fuel is the principal component of the total generation cost and, in the case of PV, a lower capital cost is offset by lower productivity, expressed in terms of the capacity factor. There is a wide range of installed costs for hydro, reflecting the considerable diversity in types of plant, some of which use reservoirs and others being "run of river". Geothermal plant also have a wide range of costs, the crucial factor being the temperature of the available steam (or water) and whether or not it is necessary to drill down to access high-temperature resources.
The productivity of electricity-generating technologies is an important determinant in establishing generation costs. Capacity factors for different technologies are shown in the bottom chart below, many drawn from the IEA report.
For nuclear, coal and gas, a standard capacity factor of 85% was used by the IEA, but the Open Energy Information technology database supported by the National Renewable Energy Laboratory (NREL) quotes a figure of 90% for nuclear and this has been used for the generation-cost calculations in this article. For PV projects, the lowest value reported was 11% (Germany) and the highest was 21% (US). Offshore-wind capacity factors range from 30% (South Korea) to 48% (Germany) in the IEA database, but the NREL report showed a high of 52%, with higher values expected at sites with wind speeds up to 10m/s. Onshore wind capacity factors range from 20% (Japan) to 49% (US). There is a very wide range of values for large hydro, from under 20% to over 60%, depending on the availability of the water resource.
Comparing generation costs
Generation costs for the fossil fuel sources and other renewables have been derived using an interest rate (strictly speaking, the weighted average cost of capital) of 8% and an amortisation period of 20 years. These are considered realistic values that would enable the generating plant to be financed and, if electricity sales were remunerated at a level at or above the generation cost, then the cost of the plant would be repaid by 20 years. The IEA uses plant lifetimes to calculate costs, so the generation costs are lower in the case of wind, solar, gas and coal plants, and significantly lower for nuclear, where they use a 60 year life. In locations where lower interest rates are used, generation costs would be lower in all cases.
With the capital costs and capacity factors as shown in the two graphs above, the generation costs for gas, coal, nuclear and utility-scale solar PV are shown in the chart below. For gas and coal the cost of carbon has been taken as $30/tonne of CO2, in line with the IEA assumption. Generation costs from gas and coal plant are heavily dependent on the price of fuel and there are significant variations. The availability of cheap gas in the US means that American combined cycle gas turbine (CCGT) plants are able to deliver the cheapest electricity, at just under $70/MWh. At the other end of the scale, in Japan, where gas is expensive, electricity from CCGT needs to be priced at double this figure.
There is a relatively narrow range of generation costs for coal-fired generation - from around $80/MWh in China to $111/MWh in Japan, which has expensive plant costs and coal. For nuclear, there is a wide range of generating costs, from $45/MWh in China to $156/MWh in the UK (using latest cost estimates for the proposed 3.2GW plant). This is higher than the "official" figure, on account of the 20-year amortisation period used.
The ranges of generation costs for hydro and geothermal are too wide for meaningful comparisons, so only solar PV is included in the generation cost chart below. It is cheapest in the US at $97/MWh and most expensive in Japan at $273/MWh.
When wind's generation costs are compared with those of the fossil-fuel sources, geothermal and solar PV, it is clear that the range of prices for gas-fired generation is similar to that for onshore wind. At its cheapest, gas-fired generation is hard to beat, except at high wind speeds. But at the top end of the gas cost range, wind is competitive at all but the lowest wind speeds.
Coal is a little more expensive than gas, and so wind can compete more comfortably. The wide range of costs for nuclear generation means that onshore wind can compete over most of the range, except at lower wind-speed sites, while offshore wind, in some locations, is cheaper than the more expensive solar PV.
WINDPOWER MONTHLY GENERATION COST ANALYSIS GRAPH
Was 2015 the year the costs of offshore wind began moving in the right direction? Construction overruns and expensive remedial repairs have been feeding into the data for several years now, driving up installation and O&M costs beyond initial projections.
The most recent figures, analysed for this year's report, show a downwards shift. Greater experience and expertise, wider availability of purpose-designed vessels, the growing deployment of 6-8MW turbines in place of 3-4MW machines, and a signficant drop in O&M costs are combining to make the economic case for offshore wind stronger.
Further encouragement is provided by the performance of some operating projects. The 630MW London Array in the UK, for example, achieved an average capacity factor of 44.5% through the whole of 2015, and average wind speeds of 11.9m/s yielded a capacity factor of nearly 79% in December. Situated in the Thames Estuary, it is hardly the sort of deep water, far-from-shore location that might have been expected to tap into winds speeds this high.
At the lower bound of installed costs, and assuming an average wind speed of 9m/s, offshore wind's generating costs fall from the current ballpark figure of around $200/MWh to just $150/MWh. If this can be realised in practice rather than on paper, then offshore wind is highly competitive with new nuclear.
Clearly, offshore has greater potential for cost reduction than onshore, but both sectors are enjoying lower costs in manufacturing and transport due to the collapse in oil prices.
Steel and copper prices have also fallen sharply in the past year, with production outstripping falling demand. That should also contribute to a future cut in the costs of turbines and towers.
Most projections indicate the cost of wind energy will continue to fall, but there are caveats. Perhaps the most important is that there is no sudden surge in commodity prices, nor shortages of wind turbines, two issues that caused a sharp rise in turbine prices about ten years ago.
However, there is a general consensus that electricity prices from wind will continue to fall, although at a slower rate than the 25% drop recorded between 2008 and 2014, mentioned earlier. NREL's annual technology baseline suggests prices may fall by 15% between 2015 and 2030.
By 2030 the generation cost is likely to be around $50/MWh on sites with average wind speeds of 7.4m/s. BVG Associates, in its Future renewable energy costs: onshore wind report for KIC InnoEnergy, took a more cautious view, suggesting a 6% drop by 2025.
Offshore generation costs are expected to fall at a faster rate (see graph below). The NREL annual technology baseline suggests costs will fall from $200/MWh in 2015 to $173/MWh in 2020, and $139/MWh in 2030. A similar trend is evident in another BVG Associates report, Offshore wind: delivering more for less, with costs falling to $142/MWh in 2020 and $116/MWh in 2030. The differences between the US and European numbers are not significant and reflect, among other things, the later start date of US offshore wind.
Solar PV is now wind's principal competitor, with costs coming down rapidly. However, this is unlikely to constrain wind development to any great extent, as it is easier to develop large-scale wind installations, particularly offshore. An increasing number of countries are now implementing measures to account for the cost of carbon, and this is likely to improve the competitive position of wind still further. After a period of some uncertainty, offshore-wind developments are now gathering momentum, and this is leading to further reductions in cost.
COMPARING COSTS — GENERATING vs WHOLESALE
There are three parameters associated with all electricity-generating technologies that are key to calculating their costs.
Installed costs Usually quoted as the cost per installed kilowatt, this, broadly speaking, is primarily a function of the size of the energy project, due to economies of scale. It varies from region to region.
Operating costs Expressed in dollars /MWh or dollars /kW/yr, the full spectrum of operating costs includes the operation and maintenance costs of the power station or wind project, and such factors as local taxes, grid connection and usage charges. It is not always clear whether the latter are included in reports, which can invalidate comparisons between wind farms in different locations.
Fuel costs These are zero for wind energy and quite low for nuclear, but for gas and coal, represent a significant portion of the total generation costs.
Although it is customary to compare wind energy generation costs with those of gas or coal-fired generation, another approach is to compare wind with the value of the electricity that is displaced.
In practice, this is the wholesale price of electricity in a network, which is usually higher than the marginal fuel cost. Wholesale electricity prices vary between different systems, and on an hourly basis, so reference figures cannot easily be specified.