Windpower Monthly's annual energy-cost comparison examines the latest trends in electricity capital and generation costs and finds wind energy well placed to take advantage of future price hikes in oil and gas.
Despite the low oil, gas and coal prices of the past two and half years, the renewable-energy industry has remained buoyant.
In November 2016 the International Energy Agency (IEA), in its World Energy Outlook, noted that low oil prices had discouraged the development of new oil fields, and so price rises are inevitable.
The outlook is bright for renewables, with the IEA noting that "as a result of major transformations in the global energy system that will take place over the next decades, renewables and natural gas are the big winners in the race to meet energy demand growth until 2040". It went on to assert: "The majority of renewables-based generation is competitive without any subsidies."
In December 2016 the oil price started to recover, climbing above $50 a barrel, following a complex deal with Opec, so the prospects for renewables, particularly wind power, improved further.
Onshore wind energy is already proving to be commercially competitive in some markets. If the cost of electricity from conventional fossil-fuel sources increases, that process will accelerate.
The most dramatic price reductions in 2016 came with offshore wind. In November 2016, Swedish developer Vattenfall announced it had won a tender to build a 600MW offshore wind project in the Danish Baltic Sea at a price of €49.90/MWh ($53/MWh). Allowing for grid connection cost, this puts offshore wind prices in the same range as those of nuclear.
When setting representative costs for wind farms in 2016-17, the indications are that installed costs are now a little lower than one year ago, but there is some scatter in the data.
However, the latest quarterly report from turbine manufacturer Vestas suggests that turbine-selling prices in the third quarter of 2016 were $941/kW, 8% lower than in the corresponding period in 2015.
If it is assumed that installed costs have come down by the same percentage, this suggests the average installed cost was around $1,600/kW in 2016. The upper bound may be set at $1,900/kW, consistent with the UK level that formed the basis of the research quoted in the January issue.
The lower bound can be set at $1,250/kW, reflecting the average for China quoted by the Renewable Energy Policy Network (REN21). These upper and lower bounds attempt to capture roughly two thirds of all projects, but there are outliers as low as $958/kW and as high as $3,752/kW, according to the REN21 report. These figures reflect modest reductions since last year.
In contrast to American and European average turbine prices of around $1,000/kW, typical Chinese wind turbine prices — from the Goldwind 2016 interim results — are around $600/kW.
The dramatic reductions in bid prices for recent Dutch and Danish wind projects have been documented in the monthly summaries. These prices do not include the grid connection costs.
Taking these into account, the total energy price for the Danish Kriegers Flak project is likely to be around $80/MWh. This suggests that costs throughout the supply chain are falling more rapidly than originally anticipated.
An earlier announcement by Danish developer Dong Energy also confirmed the steeply falling trend. Its bid for two Dutch projects was $72.7/MWh, which, allowing for the cost of the grid connection, corresponds to a little over $90/MWh.
Both these projects are in very windy regions, which would have facilitated the low bids.
Vattenfall estimates that the cost of the Kriegers Flak wind farm alone will be around $2,100/kW. Allowing for the grid connection costs and the preparatory studies that were carried out by the Danish system operator, this suggests that the total installed cost may be around $2,600/kW.
However, according to the REN21 report cited earlier, lower costs (down to $2,100/kW) apply in China and elsewhere. Recent reports from the UK - reviewed in the January column — suggest an average cost for projects commissioning in 2018 of $3,100/kW, which can be used as a central value.
The upper bound may be taken as $5,000/kW, although, as with onshore, there are higher-cost outliers.
The interest rate used for the calculation of levelised costs this year is 7%. There are wide variations, with the UK tending to use higher rates, while lower rates are common in some parts of mainland Europe.
European gas prices fell by around 35% during the year, but were still about 30% higher than US prices, which fell by around 9%.
The current price range for gas-fired electricity generation is between $56/MWh (US) and $71/MWh (UK), excluding any carbon costs.
The corresponding range for onshore wind is approximately $50/MWh (US) to $80/MWh (UK), with this spread partly attributable to higher UK fuel and finance costs.
Generation cost estimates from the US Department of Energy do not include "carbon costs", but these are included in the recent estimates prepared for the UK energy department.
A premium of $24/MWh is quoted for plant commissioned in 2020, somewhat higher than the estimates in a report by VGB Powertech in Germany, where the maximum estimate of carbon prices implies a CO2 premium of about $5/MWh.
Carbon capture and storage
There is considerable worldwide interest in the prospects for carbon capture and storage (CCS) but very little operational experience. The technical challenges are considerable, and overcoming them means there is a cost premium.
The CCS Association suggests this will initially add €60-90 per tonne of carbon dioxide abated. Taking the midpoint of this range implies the premium will be around $30/MWh.
The analysis carried out by the UK, cited earlier, suggests a higher premium than this. But even adding the most optimistic estimate to the American gas-fired price indicates that CCS with gas is unlikely to challenge onshore wind in the near future.
CCS with coal delivers electricity that is even more expensive and, consequently, less competitive with onshore wind.
The protracted negotiations that led to the settlement price for a new nuclear power station in the UK, Hinkley Point C, have been covered by this publication.
As the strike price is index linked, the original level of the contract for difference (CfD), set at £92.5/MWh in 2012,now corresponds to around $120/MWh.
It should be noted that the electricity prices for the recent Dutch and Danish offshore wind farms discussed earlier, are not index linked. They also only run for 15 years, whereas the UK nuclear CfD runs for 35 years.
The US DOE's report suggests that nuclear power in America will cost around $100/MWh in 2022, but there are lower estimates, particularly for a Finnish project.
The capital costs of this are expected to be around $5,500/kW, quite close to Hinkley Point C's projected cost, but the electricity will cost around $53/MWh, suggesting that finance is available at significantly lower cost than in the UK.
Prices are falling rapidly — faster than for wind — and two projects that will be commissioned in 2019 have tendered prices at or just below $30/MWh.
The Lawrence Berkeley National Laboratory suggests the latest power purchase contracts correspond to around $54/MWh when the subsidy provided by the production tax credit (PTC) is stripped out.
In sunny climes, PV may undercut wind and can compete with the fossil-fuel sources.
Capital costs for utility-scale installations fall mostly in the $1,000-4,000/kW range, with outliers above and below.
Recent analyses of solar PV costs in the US suggest the average installed cost is between $2,000 and $2,400/kW, with an overall worldwide average of around $2,000/kW. Capacity factors range from 0.1 to 0.4, depending on locations.
As in the case of wind, there are presentational issues that complicate cost and capacity-factor comparisons.
Some authorities use the net AC output as a reference level, which is lower than the DC rating, so capacity factors and prices per kilowatt will appear higher in these instances. Regrettably, it is not always clear which convention is being followed.
Hydro and Geothermal
These are similar inasmuch as the resource depends critically on the location.
Although there is scope for small-scale "run-of-river" hydro systems in many places, higher-powered systems need either a high head or space for a large reservoir.
The US DOE puts generating costs at $64/MWh, although the National Renewable Energy Laboratory's annual technology baseline points to around $80/MWh. Capital costs are mostly in the $3,000-4,000/kW range with load factors of 50%.
Geothermal is even more restricted in its application. In zones where there is a good resource, electricity can be delivered at below $100/MWh, but capital costs are generally high — averaging around $3,500/kW. Capacity factors are generally good, however, at around 80%.
Comparing data from all the technologies with generation cost estimates for wind — onshore at 7.5m/s, offshore at 8.5m/s — shows just how competitive wind has become.
At higher wind speeds, or at lower interest rates, the renewable cost estimates would be cheaper, although the impact on gas would be modest.
Wind-turbine performance: Putting capacity factors into perspective
Prices of wind projects and turbines in this article are quoted in US dollars per kilowatt, in line with standard practice.
However, this is a somewhat misleading way of presenting the information because the relationship between the rating of a wind turbine and its size has varied over the years, and between manufacturers.
A wind turbine with a low power rating for its size will appear to cost more than one of the same size with a high rating.
But the price per square metre of rotor area may be the same. In recent years, there has been a general trend worldwide towards lower ratings for any given size, and this has masked the magnitude of the price reductions.
Data from the Lawrence Berkeley National Laboratory (Berkeley Lab) shows that turbine prices in 2008 were about $1,600/kW, And in 2015 they were around $1,000/kW, an apparent cost reduction of 38%.
Average specific ratings (power rating per unit swept area of rotor) for turbines sold in the US in 2008 were around 400W/square metre, so $1,600/kW corresponded to $640/m2 of rotor area.
In 2015, the average specific rating of machines installed in the US was 246W/m2, so $1,000/kW corresponded to $246/m2. A more realistic figure for average cost reduction was therefore 62%.
A corollary of these changes in rating philosophy is that capacity factors have moved upwards. The International Renewable Energy Agency (Irena), for example, shows that the global capacity factor increased from 20% in 1990 to around 28% in 2015.
Data from Berkeley Lab shows that the annual capacity factor in 2015, for turbines commissioned in the US in 2008, was about 32%, rising to around 41% for machines commissioned in 2014.
The reason for this is straightforward; the lower the rating of a wind turbine, the more time it spends delivering rated power.
Its capacity factor (the ratio of the mean power delivered to the rated power) therefore goes up. Conversely, wind turbines with high ratings spend less time at rated power and so their capacity figures are lower.
When published data for a number of commercial wind turbines are analysed, it emerges that at a site with a mean wind speed of 8m/s, the capacity factor of a wind turbine with a specific power rating of 585W/m2 is around 0.3. For a turbine with a rating of 280W/m2, the capacity factor goes up to around 0.48.
Capacity factor is therefore a very unreliable parameter to use when comparing the performance of wind turbines.
Energy productivity in kilowatt hours per square metre of rotor area per year would be preferable, provided information was available on rotor sizes.
The only way is down: Offshore leads the tumble in costs
The installed costs of onshore wind might normally be expected to rise as developers face the greater expense of exploring new markets and tackling more complex sites.
But the evidence indicates that the trend remains downwards, although at a modest rate. The upper-bound limit of $1,900/kW compares with last year's figure of $2,100/kW, for example.
Generating costs are falling faster, reflecting improved technology, greater reliability and lower interest rates. With a wind speed of 7.5m/s, onshore generation costs range from $44.4/MWh at the lower bound of installed costs to $70.3/MWh at the upper bound.
The fall in installed and generation costs is much more pronounced in the offshore wind sector, though. In our 2016 report installed costs were calculated at between £4,000/kW and $6,000/kW. This year they range from only $2,100/kW to $5,000/kW.
Last year we arrived at a figure of just under $192/MWh as a representative cost of offshore wind electricity generation, assuming a wind speed of 9m/s and the median installed costs of $5,000/kW.
The equivalent figure this year, assuming installed costs of $3,000/kW, is $89.5/MWh, or slightly less than half. Slightly higher wind speeds could push that down to below $80/MWh.
At that level, offshore wind is extremely cost-competitive with natural gas, provided a carbon price is applied, and well within the wide range of nuclear generation costs. The economic case is impossible to ignore.
Costly option: The fall and rise of tidal power
Tidal power is not new — the 240MW La Rance tidal power station in Brittany, northern France, has been generating electricity since 1966.
But the technology's high costs and the length of time before it pays back its investment have deterred energy developers.
However, in January, tidal power was granted a vote of confidence when an independent review, commissioned by the UK government, gave support to a proposal to build a 320MW tidal lagoon project at Swansea Bay in south Wales.
The estimated cost of the scheme is £1.3 billion (€1.5bn/$1.6bn) with annual electricity production forecast at 570GWh. Over its proposed operating life of 90 years its costs work out at much the same level as those for the Hinkley Point C nuclear plant, so rather more expensive than onshore wind.
Supporters of the scheme say that if Swansea Bay gets the go-ahead, the lessons learned from its construction will help reduce the costs of future and bigger tidal lagoon projects around the UK coast.
The Swansea Bay proposal envisages a ten-kilometre U-shaped breakwater with 16 seven-metre diameter hydro turbines. Tidal Lagoon Power, the firm behind the project, says construction could start in 2018 and be completed in four years.
- Renewables 2016, Global Status Report. Renewable Energy Policy Network, Paris (REN21)
- 2016 Annual technology baseline. National Renewable Energy Laboratory (US)
- Annual Energy Outlook, 2016. United States Energy Information Administration
- Electricity Generation Costs, 2016. Department for Business, Energy and Industrial Strategy (UK)