Wind rock solid as uncertainty reigns

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Europe has committed to getting more than one-third of its electricity from renewables by 2020 and America is talking about similar legislation. The media is asking how much this green energy revolution will cost. It should be reporting the probable savings. Even with a temporary reprieve in fossil fuel price rises, the cost of electricity from a new wind plant is competitive with that from new thermal plant, as our annual costs analysis reveals

Wind power plant costs increased by about 10% during the past year, fossil fuel prices went up by around 50% or more, before heading down again, and the mists started to clear, at least in the United States, on what nuclear plant might cost to build. Amid all the turbulence, there is now little difference between the cost of generating electricity from a new wind plant or a new gas, coal or nuclear plant, presuming nuclear's current cost projections should prove to be accurate.

Wind, however, has an extra advantage. After a year of wildly fluctuating fossil fuel prices, it is a technology offering rock-solid generation costs once the plant has been built, with no fuel price fluctuations to worry about, giving it a clear competitive edge over coal and gas -- even without assigning a risk premium to fossil generation costs (box, page 55). As for nuclear, the lengthy and uncertain build times for new reactors, which carry a high risk of cost overruns, put it at a distinct disadvantage to wind power and its rapid construction timetables and certain costs.

Whether wind is the cheapest option in any particular country depends on the cost of coal and gas in that market, as well as on the influence of government policy on financing costs. Around 70% of wind power generation costs lie in the cost of capital and debt, compared with 15-35% of the cost of generating electricity from fossil fuel, where fuel prices are the major variable. As a result, changes in interest rates on borrowed money have, relatively speaking, a much bigger impact on the end price of wind power than on coal and gas prices. Consequently, a drop in interest rates will bring down wind's generation cost much more than that of the fossil fuel technologies.

The relatively high capital cost of wind also makes it more sensitive than the fossil fuel energy technologies to changes in the price of raw materials. Price trends for steel, copper, aluminium followed a similar path to those for fossil fuel during 2008: they peaked around the middle of the year and are on their way down again. The impact of the high material prices has been greatest for wind power, accounting for most of its 10% hike in generation cost. Whether wind plant costs follow those of raw material prices and come down again remains to be seen.

The energy price seesaw

For coal and gas generation it is fossil fuel prices that have played havoc with their generation costs. In the UK, base load electricity was trading at about EUR 50/MWh in September 2007 and one year later at about EUR 125/MWh. Based on current prices in the futures market, the average for 2009 is likely to be about EUR 100/MWh. Wind power, at its current cost, comes in cheaper than that. If EUR 100/MWh for electricity becomes the norm in Britain -- and elsewhere -- wind, in a head-to-head price competition with fossil fuel, comes out the winner.

Should the cost of gas-fired generation fall back to EUR 50/MWh, then wind has a more difficult job undercutting it. Where the price of fossil fuel might settle is getting ever harder to project. In years past, the market price of gas shadowed that of oil: customers faced with rising oil prices switched to gas, pushing up demand and, with it, the price for gas. With less demand for oil, its price fell and customers switched back to gas. But in the energy market disarray of the past two years that link has been broken, turning gas and coal price predictions into guesswork.

Just over a year ago, the price of oil was around $90 a barrel. It then followed a steady upward trajectory, peaking at just over $140 in early July 2008 before plummeting to below $40 a barrel in December. Although the prices of gas and coal have not followed those of oil, the pattern has been similar, but with the swings much less pronounced. Trends in the United States (table 1) have been similar to those in Europe, although prices in Europe have been generally higher. European coal hit $200/tonne early in July last year, before falling back to about $170/tonne.

Nothing indicates that fossil fuel prices will stabilise in future. On the contrary, when the world comes out of recession, demand for oil will rise once again, with oil producers likely struggling to keep up. Presuming that oil prices go up once again to around $140/barrel and that market forces come back into play and relink oil prices to those of gas and coal, wind would undoubtedly be the cheaper option for electricity generation. With oil at $40 a barrel, however, wind struggles to compete, probably only matching the price of gas-fired generation on windy sites or in jurisdictions where interest rates are low.

Nuclear still misty

As for nuclear power, a little more clarity on its possible costs emerged during the year, with data from a number of pre-construction hearings in the United States providing better estimations of production costs (table 2). The clearest data comes from Florida Power and Light, which presents a range of capital costs from $5780/MW to $8070/MW, including financing, depending on the type of reactor chosen. Progress Energy quotes a low cost for a second reactor at an existing facility, which after financing brings the cost per installed kilowatt to between $4500 and $6800/kW. The developer recommends adding one-third of the equipment cost to arrive at costs after financing. A cost pitch from South Carolina Electric comes in lower, but may not include all the costs of the ancillary plant -- the proposed new units will apparently use at least some of the facilities at an existing power station site. There are other nuclear cost estimates, including one up to $10,000/kW, but with less detail provided.

Comparable data for European nuclear construction is hard to come by. Our analysis assumes that the American costs will travel safely across the Atlantic. Historically, European power plant costs have been higher than those in America, so the assumption seems to be a relatively safe one to make. Based on the capital costs for nuclear in the US, its range of generation costs is close to that of wind power on land, but the balance tilts in favour of wind if a "risk premium" is applied to nuclear to cover the serious chance of construction cost overruns and low availability. The size of that risk means that lenders to nuclear projects expect higher returns on their money than when lending to wind power, pushing up the cost of finance and, consequently, the generating cost of nuclear power. Should governments around the world decide to provide some kind of support for nuclear, that would work to negate the risk premium disadvantage that nuclear labours under, passing it on to the consumer instead.

What price wind?

Establishing the price of electricity generated by wind turbines can be done with far greater certainty than for the fossil fuel or nuclear technology. Wind turbine prices continued to move slowly upwards during 2008, reflecting increases in the price of raw materials and energy. Now that these prices appear to have stabilised, the chance is that wind turbine prices will stabilise too. The pressure to keep on increasing prices has eased now that the world's major turbine suppliers are achieving realistic profit margins, unlike earlier in the decade.

The average price of wind turbines in 2008, derived from reports of a representative collection of land-based projects with a combined capacity 4700 MW, was a fraction over EUR 1100 for each kilowatt supplied. That average excludes prices for offshore machines, which were significantly higher, and machines built in China by Chinese companies, which were significantly lower. The spread around the mean value was plus/minus EUR 200/kW. Quoted prices for turbines can be "machine delivery only" or include spare parts and/or maintenance for the early years, which can account for the spread.

Based on a data base of reported prices in 2008 for 3600 MW of fully installed projects, the average price for a complete wind farm, including installation and grid connection costs, was EUR 1502/kW, about 15% up on our figure last year, with most projects lying within a range of EUR 1300/kW to EUR 1700/kW. No clear geographic trends are discernible in that spread of prices, indicating that the range probably reflects the local ease or difficulty in building the wind farm. Projects built in remote areas would tend to be more expensive than those installed in flat land close to access roads and electricity grid lines.

Offshore wind

Information on the cost of wind power plant installed offshore continues to be sparse. The price of the Siemens turbines for an expansion to the Rødsand wind farm in the Baltic Sea just off the Danish coast at Nysted indicates that offshore machines will be significantly more expensive than onshore machines, at around EUR 1300/kW. The limited data on completed offshore projects suggests that a fully installed wind plant will come in at around EUR 3300/kW. In Britain, power company Centrica, which is involved a series of offshore projects, recently suggested a price nearer EUR 4000/kW, although the slide of the British pound against the euro may be an influencing factor. Other analyses of offshore wind power costs have suggested prices around EUR 2800/kW.

It is not only the cost of the actual technology, its installation and maintenance that decides the end price of the electricity generated. Government policy also plays a major role. Legislation controls the cost of carbon emission abatement. That cost is being expressed worldwide in the market cost of carbon emission allowances or emission reduction units. In one way or another, the "cost of carbon" is now generally included in prices for fossil fuel generation. In Europe, the price is set in the emissions trading market and in the United States, electric utilities factor in the cost of future carbon penalties in their resource planning. In Asia, emission reduction units are the carbon currency of choice. Currently, the cost of carbon abatement is running at about EUR 28/tonne of CO2 emitted, but that is expected to rise.

Power plant financing costs are another big factor influencing generation cost. Interest rates on loans and the return that investors demand on their capital outlay must be taken into account, along with the number of years a power plant will be earning money. For wind power plant, there is fairly broad agreement that their economic lifetime is around 20 years, although some contractual arrangements assume a 22-year life. No such agreement exists, however, for a standard project interest rate. In many parts of Europe, a 6% interest rate is assumed in market studies, but the UK government's energy department uses a 10% interest rate and a similar level is used in the United States, although it can also be lower. "Interest rate," also known as the "test discount rate," takes into account the entire cost of financing both the debt and the equity in a project.

In wind power markets where revenue is considered to be a variable subject to risk, such as in Britain, investors demand fairly high returns on their capital, while in stable wind markets like that of Germany or Spain, lower returns on invested equity may be acceptable.

Wind generation costs

The higher the wind speed, the more energy is produced and the greater the revenues from sales of that energy over the lifetime of any wind farm. Assuming an 8% discount rate, generation costs of onshore wind start at EUR 50/MWh for a project with an installed cost of EUR 1300/kW operating at a site with a high mean wind speed of 9 m/s. They increase to EUR 106/MWh on a site offering just 6 m/s winds. For a project with a relatively high installed cost of EUR 1700/kW, the electricity generation cost comes out at EUR 60/MWh on a really good site with an annual wind speed average of 9.5 m/s and moves up to EUR 99/MWh for a site with 7 m/s winds. The range of installed costs is for the most part governed by the accessibility of the project site and how close it is to existing electricity lines. The more remote the site and the more difficult the terrain, the higher the installed cost. Such sites are only likely to be exploited if the higher cost is compensated for by higher wind speeds.

For an offshore wind farm that costs EUR 3000/kW to complete, the cost of generated electricity starts at EUR 101/MWh for a site with an annual wind speed of 9.75 m/s and escalates to EUR 154/MWh if the mean wind speed at the site over a year is no more than 7.5 m/s. Given the uncertainty about the cost of an offshore wind plant, however, these generation costs may or may not reflect reality today. At the best onshore sites, wind, even at its higher installed cost, is competitive with lowest-cost gas generation at EUR 59/MWh (fig 1) and the cheapest coal, at around EUR 83/MWh. On an average onshore site with a wind speed of 7.5 m/s, the generation cost range for wind is EUR 68-87/MWh, putting it comfortably below the upper end of the range for both coal (EUR 120/MWh) and gas (EUR 90/MWh).

Pollution cost

The fossil fuel estimates include a pollution cost of EUR 30/tonne of carbon dioxide emitted, which is a consensus of expected price going forward. If there is no carbon price, the cost of electricity produced by a new coal plant today falls to below EUR 60/MWh at the lower end of the cost range and gas falls to around EUR 47/MWh at its cheapest. At those levels, the price of electricity from fossil fuels can undercut the cheapest wind power generated by new installations.

Nuclear power at it cheapest comes in at around EUR 46/MWh, if the plant can be built for an installed cost of EUR 2000/kW. At the upper end of nuclear's installed cost range, EUR 3400/kW, plus higher estimates for waste processing and decommissioning, the generation costs rises to EUR 84/MWh, on a par with wind at its most expensive. If the economic life of a nuclear plant is set at 40 years, as is commonly the case, amortising its costs over 40 years could push its generation cost down to EUR 40/MWh. Applying the same 20-year period to nuclear as used for wind and accounting for nuclear's economic risk by using a test discount rate of 12%, the technology's generation costs lie in the EUR 62-111/MWh range. The bottom of that range is just under wind's lowest cost and the top of the range higher than wind plant built today at their most expensive.

Changes in interest rates for debt and equity have a significant effect on wind energy generation costs. Applying a lower 6% project interest rate to a wind farm built for an average cost of EUR 1500/kW on a site with wind speeds of 7.5 m/s moves the generation cost down from EUR 76/MWh to EUR 66/MWh. A 10% interest rate moves the generation cost up to EUR 86/MWh. Lower interest rates make wind more competitive with coal and gas, but make little difference to its relationship with nuclear.

Power systems operate with reserves of generation to cover the risk of a power plant going offline unexpectedly. The addition of wind power to a system requires those reserves to be slightly increased. The more wind power on the system, the greater the small increase. The cost of the additional reserves should arguably be added to the generation cost of wind power to give a complete economic picture, although it is seldom applied so specifically to other generation technologies. In some electricity jurisdictions this does occur, although at today's low levels of wind energy penetration, the sum is a modest one.

If the cost of reserve balancing power is being added to the cost of wind, then logic dictates it should be charged to other generation for its balancing costs too. The addition of large units of nuclear generation, which can suddenly drop offline, can have an appreciable influence on the cost of balancing supply and demand. Britain' system operator, National Grid, suggests that up to another EUR 150 million a year would be added to UK balancing costs if a new 1800 MW nuclear plant came online in Britain. Estimates of the additional balancing costs associated with running the UK power system on 40% wind energy have also been provided by National Grid. These range up to around EUR 7/MWh, but could be about half that level, adding about 6% to wind's "mid-range" generation cost, if new methods of providing balancing services are developed.

More efficient ways of balancing supply and demand are being explored. Management of demand by automatic "demand response" technology would take the pressure off generators to keep the system in balance. The technology makes use of consumer appliances or industrial processes which can react to changes in system frequency -- either automatically or upon instruction -- to reduce demand in stressed periods by cutting out and automatically cutting in again when the frequency demands it. Both the North American Electric Reliability Corporation and Britain's Department of Energy and Climate Change have issued reports that suggest the concept is both feasible and likely to have a significant impact on the efficiency of electricity networks -- with or without wind power.

At the beginning of 2008, generating electricity from wind was close to being no more expensive than generating it from burning coal and gas. By the middle of the year, with oil prices going through the roof, the competitive position of wind had improved significantly. That did not last long. Oil prices dived and wind generation once again was no longer a clear winner as the cheapest option.

Oil and gas prices, however, are unlikely to stay at their current low levels for very long. Market corrections are already taking place, with the mothballing of high-cost oil wells. The International Energy Agency expects oil prices to bounce back to $100/barrel by 2010 and to continue on up after that. With gas prices following oil -- even with a time lag on occasion -- discerning investors are still seeing wind power as the best option ahead.

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