The justification for this huge disparity in prices is far from clear. If it exists, the onus is on German wind plant operators to prove that generating wind power in Germany actually costs twice as much as in Britain, or in the United States for that matter. Without such proof, the credibility of wind energy in Europe's biggest market would seem to be at stake.
Wind strengths account for a good deal of the difference in the cost of generating a kilowatt hour in Germany compared with in Britain. It blows far harder in Britain, where a site with just average winds is equal to the very best sites available in Germany. As a result, identical wind power stations in the two countries will not generate the same amount of energy -- and thus not the same income with the same tariff. A higher price must be paid for the kilowatt hours generated by a German wind plant if it is to generate the same income. But how much higher should this be to compensate for lower wind speeds?
The average forecast yield from a sample of 140 MW of German plant is 808 kWh per square metre of rotor swept area. From a sample of similar size in Britain it is 1154 kWh/m2. In other words, the productivity of British wind farms -- on average -- is about 43% higher than the productivity of German wind farms. The resulting supposition is that to account for the difference in wind speed, prices in Germany would need to be 43% higher. In fact they are greater by an average of 80%.
Translated into turnover, the higher price paid for wind in Germany means that wind turbines there can earn more than in Britain. A typical 40 metre diameter machine in a British wind farm will earn around ECU 72,500 a year, whereas a similar machine in Germany will earn around ECU 91,300, despite the lower wind speeds. That is 26% more. This 26% extra turnover applies to an average wind farm in Germany. Wind power stations with wind speeds above average will be generating an even greater disparity in turnover between Germany and the UK, and less of a disparity on sites with lower wind speeds.
The implications of the higher earnings in Germany are fivefold. It could be that much higher profits are being made -- on average -- by wind farm operators. This seems unlikely, especially in view of the three recent reports by recognised professional institutes concluding the opposite (Windpower Monthly, March 1997). It could be that wind turbines sold in Germany are more expensive than those sold in Britain. There is a deal of evidence to suggest this is the case. It could be that the cost of a wind plant's infrastructure -- grid connection, access roads and so on -- costs more in Germany than it does in Britain. Oddly, considering the more complicated topography in the UK, this also seems to be the case. Or it could be that operational costs are greater in Germany, along with the cost of financing. But neither would seem to be significantly greater.
Wind turbine sales prices
In Britain's highly competitive market, turbine prices are confidential, but there is every reason to suppose that a British developer pays considerably less for its wind technology than does a German co-operative. Several of Britain's newest wind farms were built, in their entirety, for less money, or not much more, than it would have taken to buy the wind turbines alone in Germany. Conveniently, the prices of German wind turbines -- most of which are made in Germany -- are listed and it appears that owners usually pay the list price.
Since most of Britain's wind turbines come from Denmark, the Danish domestic market provides a good indication of their current sales price. Last year in Denmark competition to clinch sales with a new wave of buyers was fierce among the Danish companies. Taking the overall value of total sales in Denmark and the corresponding capacity, on a yearly basis, average Danish wind turbine prices have fallen from ECU 1050 per kilowatt of installed capacity in 1992, to around ECU 725/kW in 1996. This is a 30% drop in machine prices and most likely applies to Britain too. The corresponding German prices show less of a fall -- only about 15% -- and currently hover around ECU 900/kW. Thus, for German investors the price of wind turbines is, on average, around 24% higher than in Denmark or Britain (fig 1).
Wind turbines make up around 75% of a wind plant's total price, so the 24% extra cost of buying the same product in Germany compared with in Britain goes some way to explaining why German wind turbine owners are not millionaires, despite averaging a 26% greater turnover per kilowatt of capacity.
Total capital cost
The extra cost of buying wind turbines in Germany is reflected in the capital cost of complete wind farms. These have not fallen in Germany as they have in Britain. A British wind farm's installed price (before operating and financing costs) dropped 36% between 1993 and 1996, while the price of German wind plants fell by only 17% (fig 2).
Machine price is not the whole story here. Not only do wind turbines cost more in Germany, so does building a wind plant. Over the past year the total capital cost, including the wind turbines and the "balance of plant" costs, of a wind power station in Germany has been around ECU 480 for each square metre of rotor swept area. In Britain these installed costs have dropped to ECU 390 m2. So the installed price of a German wind farm is 25% greater -- with only around 18% of this accounted for in higher turbine prices. The remaining 7% lies in the "balance of plant" costs (fig 3).
The puzzle here is that the generally flat terrain in northern Germany should have made wind farms cheaper to build than in the hilly sites chosen for most projects in Britain, more than balancing out the probably higher civil and electrical costs.
Higher grid connection costs in the sparsely populated windy regions of northern Germany might be a reason for some of the extra cost. According to the German wind lobby, the falling price of wind turbines has been consistently negated by the rising price of grid connection. Similar pressures are at work in Britain, but as the utilities no longer have a monopoly on carrying out the work, there has also been some downward pressure. On the evidence available, though, the average price of connecting a wind plant to the grid is roughly the same in both countries.
Statistically there is considerable scatter on wind farm capital costs in both countries, but much more so in Germany (figs 2 and 4). The scatter in both sets of data is due partly to the differing sizes and types of wind farm, partly to differing interpretations as to what comprises "wind farm cost."
Interestingly, the German data shows no significant downward trend as the number of machines in a wind farm increases. Economies of scale have shown in Britain that the more wind turbines, the cheaper the price. There is no immediate explanation for why the German data do not reveal the same trend.
Operating and financing costs
Broadly speaking, levels of operation and maintenance costs are similar in Britain and Germany, although their make up is different. The lower wind speeds in Germany mean that the fixed annual costs are spread over a lower energy production which results in the cost per unit of electricity being slightly higher than in Britain. However, this does not appear to have a significant impact on the overall assessment of price differences.
The story repeats itself when comparing the cost of money. In Germany, expected rates of return on projects, taken as a whole, are similar to those in Britain, although the financing arrangements tend to be different. In Britain most developers aim for real rates of return on projects of around 8-9%. In Germany, the equity partners are likely to require higher rates of return than that, but the availability of cheap bank loans from the Deutsche Auglische Bank (see following story), which cover about 50% of the cost, means the average level for the projects is generally similar.
Payments for wind power in Germany, however, continue indefinitely, whereas UK payments are limited to 15 years at a premium rate. In theory this makes the German rates of return on investment more attractive in the longer term. In practice, though, the need for refurbishment of uncertain cost in later years makes the returns difficult to quantify. Suffice to say, the difference between the overall returns in Germany and the UK is not great -- and would not appear to have a major effect on the existing disparity in wind plant costs.
The bottom line
It would seem that it is no coincidence that the average price paid for wind in Germany is 80% greater than that paid in Britain. With installed wind plant prices established at around 25% higher in Germany than in Britain and British energy yields discovered to be higher by 43%, the cost of producing a wind kilowatt hour in Germany is, indeed, around 80% higher than in Britain. (The rules of adding percentages of this size disallow simple addition and the necessary calculation here is 1.25 x 1.43 = 1.79, or, rounded up, 80%).
In a comparison of data from sets of 20 wind farms from each country, the facts bear this out (fig 3). Recently constructed British wind farms cost on average ECU 340/MWh to install while in Germany they cost ECU 600/MWh -- nearly 80% higher. This analysis confirms the deduction made from our earlier examination of installed prices and wind speeds. Per annual megawatt hour of output, the installed price of German wind power capacity is 80% greater (fig 4). It follows that energy payments need to be 80% higher if similar rates of return are to be realised.
Again, there is considerable scatter in the data, but in Britain the evidence points to a discernible downward trend in installation costs over time. No clear trend is evident in the German data. Granted, projects are being pushed onto lower wind speed sites in inland Germany now that most of the readily available coastal sites have been developed, but even at high wind speeds there is no evidence of a downward trend in the German cost of installation. In fact there is even a weak statistical indication that turbine prices tend to rise in Germany with wind speed; or, as cynics say, with what the market can bear.
Even so, it would seem there is a margin for greater profit the windier the site. In terms of averages, the higher German energy payments result in similar rates of return to those in Britain, due to lower wind speeds and higher total plant costs. But on the few high wind speed sites in Germany it would be fair to assume that wind turbine owners are making more profit than on lower wind speed sites and compared with British owners. Presuming that 50% of the equity is in the form of a low cost loan in Germany, profits would seem to be healthier at the coast. On Germany's windiest sites, estimated profits are in excess of those in Britain by a margin of 7% with a ten year loan and as much as 10% with a 15 year loan (fig 5).
The ten year returns increase from around 5% at wind speeds of 6 m/s at hub height, to around 27% at the (very few) sites with winds of 7.5 m/s. The 15 year returns are higher but more uncertain, as major repairs are more likely in later years. Equivalent British levels depend less on wind speed and more on the policy of the developer and his skill in negotiating low prices with suppliers; estimated levels are between 15 and 25%.
The 80% differential between German and British wind energy prices is consistent with the differences in wind speed and total capital cost of a wind plant. In other words, looking purely at the prevailing economics, higher payments for wind power in Germany can be justified at the end of the day.
What is harder to justify is the 25% extra capital cost of a wind plant in Germany -- and the fact that this cost has declined far more slowly in Germany than in Britain. The same rate of decline is the least that might have been expected. It is true, however, that the German cost of living is higher than Britain's and relatively this will tend to push up all costs. A mechanism for measuring this, the Purchasing Power Standard, shows the German cost of living to be 35% higher than that of Britain.
This could account, in part at least, for why the civil and other costs associated with building a wind plant in Germany are greater than in Britain. Labour and material costs are simply higher. But it cannot explain the difference in sales price between wind turbines sold in Germany and those sold in Britain. This is because most of Britain's turbines come from Denmark, where the PPS is even higher than Germany's, by 5%. Most of Germany's turbines, over 70%, are made in Germany, with nearly all the remainder built in Denmark. Thus there is no question that cheaper labour market costs could account for the considerably lower price of turbines sold to Britain, because these are higher in Denmark.
Far more likely is the supposition that the Danish wind industry, with several years more manufacturing experience, has been able to reduce its manufacturing costs by more than the relatively younger German industry. Furthermore, the probable extra margins of profit for manufacturers on German sales gives room to plough money back into research and development. The same cannot be said of the British market.