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Becoming respectable in serious circles

The wind industry has delivered impressive reductions in cost along with

serious increases in productivity over the past 20 years. Wind generation prices -- tracked by Windpower Monthly in a series of annual articles starting in 1999 -- are today almost level with those of fossil fuels and have long since beaten nuclear. Further wind price reductions are highly likely, while

increases in gas and oil prices are projected across the board

Two-thousand-and-three looks as if it will go down in history as the year in which wind energy became economically respectable. In past months it has appeared with increasing frequency as a resource option in the energy plans of governments, utilities and investment banks -- a significant step up from its more cautious categorisation as a rising star with potential.

A new wealth of data on wind energy costs has accompanied its entry into the ranks of the respectable. Even the tradition-bound International Energy Agency includes a positive analysis of wind power in its report on Renewables for Power Generation -- Status and Prospect, pointing out that wind's cost is near enough to being fully competitive with traditional generation technologies to be forcing policy makers to sit up and take notice.

There are two reasons for wind energy's new found status. First, with installed wind plant capacity now exceeding 37 GW worldwide -- and capacity doubling every three years -- the database on performance and cost is becoming increasingly robust. As a result, energy professionals are more inclined to view wind as less of a one-off wonder. Second, electricity markets are becoming increasingly nervous about the future price of gas, the most popular and cheapest generation resource in recent times.

Even if wind prices, against all projections, failed to continue their downward progress, the generation cost from gas could well be higher than that from wind by 2010. The uncertainty accompanying the rise in gas prices is also pushing up the level of risk -- and risk adds cost. Uncertainty can be overcome by negotiating long term contracts, but the premium needed to fix gas prices within contracts over a ten year period is around $5/MWh, according to two recent reports from the respected Lawrence Berkley Laboratory in the United States.

There were no marked changes in 2002-03 in the various parameters from which the cost of wind power is derived. Overall, the cost of installing a complete wind plant continued to hover a little above last year's targets -- $1000/kW for onshore and $1500/kW for offshore. The slowing of the downward trend in wind's installed costs, however, is more a reflection of the dollar's fall relative to European currencies, than lack of progress by the wind industry. A cheap dollar has the effect of making European technology -- and most wind turbines are made and installed in Europe -- appear more expensive.

A similar standstill in the fall in installed costs for thermal plant is for several more fundamental reasons, including higher insurance costs, more stringent utility connection requirements -- and tighter limits on emissions. The net effect is to leave the competitive position of wind today in much the same place as it was last year -- cheaper than nuclear, frequently on a par with coal, and knocking on the door of gas or, in the US, competing with gas (box). Future prospects still have wind steadily edging its way down the price scale faster than its competitors.

The average turnover per megawatt of turbines sold by Danish manufacturers is virtually unchanged between 2002 and 2003, after allowing for inflation, and stands at just over DKK 6 million/MW ($1000/kW). But while an indicator of the trend in wind power's cost, the figure includes both large and small orders, as well as spares and servicing contracts, so it is not a precise measure for establishing the installed cost of a typical wind plant today.

A more reflective measure is to consider the cost of a range of larger wind stations (table previous page), since it is these that are in increasingly close competition with the conventional sources of electricity generation. There are wide variations, from $886/kW in Tunisia to $1194/kW in Canada, but the average installed price for onshore wind farms remains at just over $1000/kW. For offshore wind, the increased installation activity this year provides an extended range of installed prices for the first time. In sheltered waters, prices start as low as $1150/kW, with the upper end of the range at a little over $2000/kW, with the costs of grid connection often accounting for a significant (10-15%) proportion of the total cost.

Public or private

Institutional factors are responsible for the spread of values for wind's installed costs and the even wider spread of generation costs. In Denmark, utilities almost invariably use public sector test discount rates and depreciation periods, typically 6% and 20 to 25 years, respectively. In Britain and the United States, however, there are no fixed criteria and project developers are at the mercy of financiers operating in a tough commercial world.

In the private sector, the overall interest rate on a wind plant loan is in practice dependent on the relative proportions of debt and equity and the appropriate interest rates. A weighted average, appropriate for the project as a whole, tends to be around 11%, although higher and lower values are found. Depreciation periods also vary, but are generally in the region of 12 to 15 years.

Taking into account all the possible options is impractical and generation cost calculations are more sensibly calculated using two alternative criteria for public and private sector projects (table). The public sector criteria -- 6% project discount rate and 15-20 year depreciation -- are consistent with those being used by the International Energy Agency (IEA). As well as taking account of financing parameters, appropriate values for capital cost, load factor, thermal efficiency and operation and maintenance are also taken into account to arrive at generation costs.

The effect of moving all the generation sources from public to private sector financial criteria is dramatic. All the prices move up, but the impact on capital intensive generation sources, such as wind and nuclear, which cost a lot to build but not much to run, is far more pronounced. Moving from public to private sector typically pushes the price of gas fired generation up by around $5/MWh (say from $33/MWh to $38/MWh), but the corresponding increase in the price of offshore wind is five times greater at $25/MWh (from $49 to $74/MWh). While a study by Danish utility Energi E2 suggests the prices of offshore wind and gas may be roughly equal, these are based on public sector financing, a good wind site and a high gas price. It could not be repeated under private sector terms.

Onshore wind and gas are neck and neck under public sector criteria, coming in at just under $32/MWh at the low end of the price range. The wider spread of prices for wind compared with gas reflects the wider spread of wiind's capital cost estimates (Fig 1).

Under private sector criteria, wind at $47/MWh undercuts coal at the low end of the scale, which comes in at around $50/MWh. Wind is comfortably below nuclear at 53-87/MWh, by around $5/MWh. But private sector gas-generation is cheaper than wind power. The price of gas, both in Europe and America, has fallen back from the high levels observed in 2000-01. With fuel purchases of gas now costing around $13/MWh, gas-fired generation once again becomes the cheapest option within a price range of $34-$44/MWh. Higher gas prices are encountered in some regions.

The other renewables

In its report, the IEA includes both a high and a low range of costs for a series of renewable energy technologies (fig 2). At first sight, wind in the low range at $30-$50/MWh seems to face stiff competition from small hydro and biomass power, which start at $20/MWh. Geothermal also starts at $20/MWh, although it upper low-range cost of $50/MWh is on a par with wind.

Potential for small hydro, however, is restricted by a very limited resource. Geothermal resources are more widespread, but the amount of energy that can be produced at a rock bottom prices is extremely limited -- few places have steam issuing from the earth. Biomass is only cheaper than wind for generation plant built where the resource is available on site, such as forestry residue in Scandinavia or bagasse in warmer climates.

Energy crops are another potential renewable energy source, but their economic potential continues to be uncertain. Energy crop economics are linked with those of farming and farming subsidies, while the development of commercial high-efficiency generating plant is proceeding more slowly than expected. The UK government has a starting price for energy crops of $80/MWh.

The IEA ignores wave energy, currently the subject of increasing research activity in the UK and elsewhere, probably because its commercial costs are unknown. The wave energy community suggests that a near-term generation cost target is around $80/MWh.

Future prices -- onshore

Looking forward to 2010, few analysts expect dramatic changes in generating costs from the thermal sources. The big imponderable is the price of gas. Estimates for gas rise with each successive edition of the US Department of Energy's Annual Outlook. Gas fired generation, however, at $49/MWh in 2010, will remain cheaper than coal at $53/MWh, even though coal prices are set to decline, according to the Department of Energy (DOE). Nuclear comes in at around $65/MWh.

To beat a target of $49/MWh, installed costs of wind on a moderately windy onshore site need to be around $900/kW. Some plant are being built today at below that price, but not all. Taking a conservative estimate of $1100/kW for current wind plant costs, an 18% reduction by 2010 seems to be well within the bounds of feasibility. Five independent analyses have suggested that the reduction in costs per doubling of worldwide wind capacity, based on a learning curve ratio, lies between 12% and18%. Even if the current rate of global wind plant installation (a doubling of capacity every three years) is not maintained, capacity is likely to increase by a factor of at least four by 2010. Accepting the pessimistic 12% end of learning curve reductions, a fourfold increase in capacity will lead to wind plant costs coming down by around 24% by 2010. As this is significantly higher than the target of 18%, that also leaves room for pessimism in the rate of growth.

Accepting a 24% rate of decline in wind power costs and using data for gas prices drawn from the US Department of Energy, the crossover point with gas comes around 2009 for a wind plant using today's typical installed cost of $1000/kW on a site with winds blowing at a healthy 8 m/s (fig ?). With a more rapid decline in wind costs, or at sites with higher wind speeds, or with lower interest rates, the crossover date may be significantly earlier. The crossover point with coal comes much earlier -- around 2005. In locations with good wind regimes, wind is already cheaper than coal.

The IEA report enables 2010 price projections to be made by another route. IEA data reveal that wind turbine prices fell by about 16% each time the average size of wind turbines doubled, to reach about $800/kW for 750 kW machines. Given that 1500-2000 kW machines are already standard items and that larger sizes are coming onto the market, another 16% reduction by 2010 seems a very modest target.

Future prices -- offshore

Offshore, a $49/MWh cost target is tougher. Offshore wind turbines are typically 10-15% more expensive than their onshore counterparts and foundations, installation and grid connection are usually significantly more expensive. Onshore, "balance of plant" costs typically add 25-50% to machine costs, but offshore the additional costs can almost double the turbine costs, bringing the total to $1800-2100/kW.

Significant offshore cost benefits are likely to come from the much larger sizes of offshore wind farm now in planning -- with a 40% cost reduction on the cards for 2012, with energy yields up by 20% as construction moves further offshore (Windpower Monthly, April 2003). Meantime, an analysis by the University of Utrecht in the Netherlands suggests that generation costs for offshore wind might fall by around 25% by 2010.

No challenge

Drawing the various generation cost estimates together, it is hard to see wind on good sites being challenged come 2010. The most optimistic projection for onshore wind for 2010 ($20/MWh) comes from the IEA, but uses public sector financing assumptions. Using the same installed cost ($700/kW) and a slightly less optimistic capacity factor, brings the figure to just under $40/MWh in the private sector.

Although the American DOE suggests $49/MWh to be appropriate for gas-fired generation, if the price of the fuel does not rise as expected, then $40/MWh may be a more appropriate figure -- the same as anticipated for wind. Offshore wind is likely to cost in the range $60-80/MWh, unless the development of large scale wind farms gets underway within the next six years. After 2010, the prospects for both onshore and offshore wind become increasingly brighter.

Wind is already competing with coal, it is cheaper than nuclear, and cheaper to exploit at large scale than any of the other renewable energy sources. In some regions it can be competitive with gas-fired generation today. By 2010 it is likely to be a serious competitor to gas. This projection is based on a conservative view of how steeply the curve for wind plant costs will fall -- and on kind assumptions on behalf of gas generation that its fuel prices will not rise as the very latest projections suggest.

Data sources: Data on generation costs used for this article (main story) come from a wide variety of sources, including the International Energy Agency, the United States Department of Energy, the UK Department of Trade and Industry, a recent analysis by Energi E2 of Denmark, and an analysis by the Deutsche Bank. Other data are drawn from conference publications for the thermal and renewable energy sectors. Private information gathered in personal conversations with members of the power generation industry, including wind generators, forms a major part of the assessment. The application of internal knowledge to assessment of specific project costs is vital for ironing out data inconsistencies which would otherwise contribute to a skewed picture of the comparative costs of power generation. Prices are expressed in dollars since much of the data originated in the United States, which was one of the most active markets for wind plant development over the past year.

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