Size matters -- getting bigger and cheaper

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As individual wind turbines get bigger and as wind stations use more

machines, the cost of wind generation goes on falling. In a strictly fair comparison -- leaving out the issue of external costs -- power from the cheapest built wind plant is competitive with all fossil fuel generation. And while gas generation costs could well rise, wind costs are far more likely to fall. Even offshore wind is on track to be fully competitive with gas by as early as 2010

Two factors further strengthened the competitive position of wind against the thermal sources of generation in 2002. First, the cost of producing electricity from the wind continues its downward path. The cheapest wind stations on land are producing wind power for as little as EUR 0.03/kWh on windy sites -- well within the range of generation costs for thermal plant -- and for EUR 0.05/kWh on the more numerous and less windy sites (fig 1).

Second, the increasing uncertainty over both security of gas supplies and the cost of the raw resource has made wind, with its secure supplies of electricity at fixed costs, look steadily more attractive in comparison. Unlike non renewable energy sources, the wind is readily available on-site and there is no risk of fluctuating market prices for the raw resource. Since wind's toughest competitor is gas, it is the one to beat.

More about gas and the other fossil fuel competitors comes later, after a good hard look at where and how wind is getting cheaper.

It is not one-off cost reductions from technological breakthroughs that are making wind power more competitive, but the ability of the industry to chip away at all the cost components of producing a kilowatt hour, from foundation construction to rotor installation, from grid connection to the finance terms, which become less stringent as lenders become more confident of the technology. The end price of a wind kilowatt hour depends on five parameters: the installed cost of all the hardware, running costs such as insurance and maintenance, the cost of capital and the repayment period, and the wind speed (the stronger the wind, the cheaper the electricity).To start with, the cost of wind turbines from the factory is falling. A new trend in 2002 is that "bigger" may now be "best."

Purchase and installation

List prices for machines with rated capacities in the 300-2000 kW range start at around EUR 1000/kW for smaller turbines and fall to just over EUR 700/kW for big units. There is a lot of scatter among machine prices (fig 2), but the overall trend with increasing size is downward. As with all commodities, discounts are offered for large orders and sales lists probably paint a picture of machine costs that are slightly higher than in the tough world of commercial reality. Recent contracts for large numbers have yielded prices in the EUR 508-940/kW range, with the average around EUR 660/kW.

The price of the turbines is only one part of the installed cost of a wind plant. There are also balance of plant costs -- the costs of foundations, access infrastructure and the electrical connection -- which add between 15% and 30% to the cost of turbines on land. Balance of plant costs are also falling. Published costs for installed wind power plant (table) reveal that several recent contracts hover around the EUR 1000/kW mark, a drop in real terms of around 15-20% compared with just five years ago. Indeed, project developer reports over the year suggest that the bottom of the range for the installed cost of an onshore wind station is down to about EUR 750/kW.

Next, operational costs are falling as turbines increase in size. In Germany, combined annual operating costs have fallen from around EUR 25 per installed kilowatt at the 250 kW size to around EUR 13/kW at 1500 kW (fig 3).

The cost of capital

The financial structure of a wind station, especially the cost of capital, is a crucial element of the generation cost of the resulting wind power -- and far more so than for most fossil competitors. A good part of the cost of producing a kilowatt hour from gas and coal is dependent on the purchase price of the fuel, so their capital costs account for a relatively smaller proportion of the total. Since wind has no fuel cost, around 80% of its production cost lies in the capital cost of installing the plant -- and that usually requires a massive up-front loan. In other words, the terms of the loan for a wind plant have a disproportionate influence on the final cost of producing wind power compared with most thermal competitors.

Since the cost of capital can vary greatly from country to country, so do wind power production costs. Access to cheap loans (soft finance) is a major reason for the success of wind power in Germany. In Denmark, "public sector" interest rates and repayment periods tend to be used, whereas in the United States and the UK, where all projects are undertaken by the private sector, interest rates are higher and repayment periods shorter. Nervous investors in markets like that of the Netherlands, made risky by uncertain policies, also demand higher returns over a shorter space of time, making finance more expensive.

For the purposes of establishing today's wind power production cost (fig 1), these political vagaries cannot all be taken into account. A typical commercial cost of capital for wind projects is 6.5% (a level the UK electricity regulator is using) with typical loan repayment periods running at 15 years.

Wind turbine size is ever increasing and taller towers mean higher winds. Winds at 60 metres, say, are around 4% higher than winds at 45 metres. This corresponds to another 7% more energy, with energy productivity improving by over 30% as the diameter increases from 40 metres to 80 metres -- from 1000 kWh per square metre of rotor area per year to a little over 1300 kWh. So large machines harness more wind and deliver more energy -- and the more energy squeezed from each square metre of rotor area the lower the resulting electricity cost.

The influence of wind speed is relatively easy to take into account as the way that energy yields increase with wind speed is broadly similar across a range of machine types. Contrary to popular mythology, energy yields do not increase with the cube of the wind speed; data from operating wind plant reveal a lower rate, used here to calculate wind power production cost curves (fig 1).

Competitive factors

There have been no dramatic changes in the cost of electricity from the thermal sources during the past year, although the minimum levels for each source have edged down a little compared with last year (Windpower Monthly, January 2002). Gas now comes in the range EUR 0.03-0.04/kWh, coal in the range EUR 0.04-0.05/kWh, and nuclear in the range EUR 0.05-0.07/kWh. It is, however, still difficult to quantify nuclear generation costs with any accuracy as much of the industry's own claims are based on the assumption that series orders will be placed. That seems highly unlikely.

As for the other renewable energy sources, although hydro and geothermal may be competitive in some locations, they are limited and site-specific. Wave energy research has been stepped up in Britain and Denmark and elsewhere, but commercial devices have yet to emerge.

Production costs for thermal plant, just as for wind, are influenced by national market frameworks, but the overall conclusion is clear: the difference between wind costs and those from the thermal sources is now small. This is true even without taking account of external costs -- those associated with environmental damage and protection of fuel supply chains. But with carbon taxes on the horizon and penalties for exceeding emissions quotas being introduced, wind is increasingly looking like the safest option for cheap generation. Although external costs are difficult to quantify, they are real and there is a rough consensus that the external costs of coal-fired generation are around EUR 0.01/kWh, excluding the cost of global warming. Add that to coal's production cost today of EUR 0.04-0.05/kWh and only the most costly plant on low wind speed sites produce more expensive electricity.

Another fact to be taken into account is that renewables generally feed electricity into local distribution networks rather than the main transmission system. This often means the point of feed-in is closer to the customer, thus the electricity has a higher value to the power system since it does not require wheeling over miles of lines. Studies are in progress to quantify the appropriate reward for this advantage. Although these are inevitably site-specific, the end result should be regulation that allows this embedded value to be recognised in wind power costs.

What to expect next

With no slowing of the potential for cost cutting in the wind business, the future looks bright and breezy. Each doubling of the world's installed wind capacity has been accompanied by a 15% reduction in wind turbine production costs. Indeed, a study by the International Energy Agency (IEA) says there has been an 18% reduction in energy prices. If wind energy capacity continues to double every three years, and the cost trend continues, there will be a 30% reduction in prices by 2006 -- a trend confirmed by studies in both North America and Europe (fig 4).

The main drivers for future reductions in the cost of wind power will be ever larger machines and lower production costs in the factory. Even if the largest machines are not the cheapest, fewer are needed, which brings down both balance of plant and transport costs. In the factory, manufacturers will reap the advantages of large production runs to meet the market's continued rapid growth.

Ever bigger wind farms will also provide further "quantity discounts" in turbine costs and additional savings in the civil engineering infrastructure and electrical connections. Future projects, which make use of the turbines sold at prices down to EUR 600/kW, are likely to be cheaper than today's lowest cost for an entire installed wind plant of about EUR 750/kW

All these trends seem set to continue. Furthermore, continuing attention to control systems, blade surface finish and other small but important details also contribute towards improved performance. About the only place where wind power cannot get any better is in the reliability of operating wind plant. It is now the norm for wind turbines to be available for operation 98%-99% of the time -- a figure hard to improve upon.

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