Generation costs rise across the board

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In a world where energy prices are becoming ever more uncertain, the attraction of wind power as an electricity generating technology with no fuel price risk has never been greater. Wind power did get more expensive in 2007, but so did electricity generated from burning fossil fuels -- and nobody knows where oil and gas prices are headed. In contrast, the price of wind power is a known quantity for the entire life of the plant

The price of wind energy rose during 2007, but so did the price of electricity generation from coal and gas. If the cost of pollution is ignored and average prices are used for comparison, gas as well as coal come in cheaper than wind for the second year running -- with the gap between wind and the fossil fuels marginally wider than in 2006. Wind continues to be slightly more expensive than gas -- when no pollution cost is factored in. But fuel switching from expensive oil to gas could yet push up demand for gas, driving up its price again: in 2004 and 2005 the price of gas generation was higher than that of wind power.

Comparing generation costs, however, is becoming increasingly meaningless without consideration of the rising cost of complying with carbon abatement policies. In most countries with wind power markets, carbon emission control is an important price factor when selecting bids for new power generation. Once the full "cost of carbon" is accounted for, as defined in a variety of studies, including the "Stern report on the economics of climate change," a different picture emerges.

Add carbon costs to fossil fuel generation prices and in 2007 onshore wind power was the cheapest electricity available at the wind speeds found at most sites. This is so even when construction costs were high due to the remoteness of a location or the difficulty of its terrain. Offshore, 2007 added little to the knowledge base on what wind generation actually costs, but in some circumstances offshore wind can compete even with coal if the full cost of carbon is brought into the comparison (figure 1).

Establishing the cost of electricity generation for a fair comparison of prices from the various technologies does not get easier from year to year. By the end of 2007, energy prices were in turmoil with oil hitting an unheard of $100 a barrel, up at least 50% in a year. If this price is sustained, the impact on fossil fuel electricity prices is likely to make wind more competitive. By how much depends on two variables, one negative and one positive.

First, the knock-on effect of higher fuel prices is higher prices for steel, copper and other raw materials. These higher prices hit wind harder than the fossil fuel technologies, because nearly all its generation cost lies in hardware while much of that of its polluting competitors lies in fuel costs. The upshot is that higher raw material prices add relatively more to the cost of wind turbines and wind farms than they do to the cost of building coal and gas plant.

Second, gas prices have yet to follow the steeply rising path of oil prices -- at least in America, where, historically, industry has paid roughly the same price for energy from gas as from oil (box page 56). Oil prices are expected to fall back a little in 2008 and gas prices could rise to match them. If nothing else, such uncertainty in energy prices serves as a reminder that future prices of electricity from the fossil fuels sources are inherently uncertain, but the price of wind energy is known and is stable as soon as the project is complete.

What wind stations cost

The first step in establishing the price of electricity generation from any technology is to unearth the full cost of a power plant once it is fully installed and ready to run. For the fossil fuel technologies, these prices are well documented for 2007 by a number of respected authorities, including the US Energy Information Agency. For nuclear prices, the industry's own estimates are available. For wind power, it is a matter of gathering information from the field over the past year.

The major cost of an installed wind plant lies in the wind turbines. From prices reported during 2007 for a sample of 3700 MW of wind plant across the world, the average price of a wind turbine was EUR 972/kW, some 17% higher than last year. The spread of prices in the sample is relatively narrow, with two-thirds lying between EUR 879/kW and EUR 1065/kW.

As contract prices often include provision for some of the installation costs and/or two or three years of an operation and maintenance contract, prices in the sample for turbines only are probably a bit lower, at around EUR 900-950/kW. That is consistent with prices quoted for the US in the first annual report by the Lawrence Berkeley National Laboratory (LBNL) on wind installation, cost and performance trends. Although that study only covered contracts until January 2007, it estimated that wind turbines cost a little under $1200/kW (EUR 900/kW).

Significantly, not all of the 17% price increase in the technology is reflected in prices for completed wind power stations, indicating they are getting cheaper to install. Taking a representative sample of the reported costs of over 40 wind farms in 2007 with a cumulative capacity of 3000 MW, the average installed cost of wind plant comes in at just under EUR 1300/kW. This is only 11% higher than for 2006 (Windpower Monthly, January 2007). As always, the spread of prices in the sample is wide, but two-thirds lie between EUR 1066/kW and EUR 1532/kW. The cheapest wind farms are in the developing world and the most expensive in Canada, Japan and the United Kingdom. American projects were often slightly cheaper than the average.

The price of electricity

Interest rates on borrowed capital have a huge influence on the cost of any project. These and the percentage returns on the equity investment determine project interest rates, which are weighted values that apply to projects as a whole. A range of project interest rates (real, net of inflation) is used in the power sector, also in wind energy. Even when applying interest rates at the low end of the scale, which is of benefit to high capital cost technologies like wind and nuclear, coal and gas generation came in cheaper than wind in 2007, based on average installed cost and excluding carbon costs.

Using a low 5% interest rate under those conditions, wind comes in at EUR 49/MWh, compared with gas at EUR 47/MWh and coal at EUR 35/MWh. At a higher 8% interest rate, the gap between the price of wind and fossil fuel generation widens, though mainly with reference to gas -- a corollary of gas prices losing their link with oil prices. Wind comes in at around EUR 60/MWh, compared with gas at EUR 49/MWh and coal at EUR 41/MWh. Again the prices exclude the cost of carbon.

That the average price of gas generation shorn of carbon costs is once again cheaper than the average price of wind -- after being more expensive than wind in 2004-2005 -- is a direct result of the broad ramp-up in wind turbine prices, in part sparked by the arrival of Ditlev Engel to turn Vestas around to a profit-making enterprise. GE Energy quickly followed Vestas' lead, with others in a hard pressed wind industry of tight margins soon catching on. Technology prices leapt in 2005 (figures 2-3).

At the lowest range of wind's costs, however, and with good financing, wind can still be cheaper than both coal and gas on sites with below-average installed costs or high winds -- even without accounting for carbon costs. Once the cost of carbon is factored in -- and that cost differs depending on which market force is the overriding one -- wind is frequently cheaper than both coal and gas.

Contract prices

Information available in the public domain on energy contracts (table 1) supports this price range for wind. Projects are being built in China with power purchase prices running at EUR 41-49/MWh, driven down by highly competitive bidding processes. Whether the low prices can be maintained in the long term should technology quality problems strike remains to be seen. Back in 2006 in America, negotiated power purchase contracts were returning even lower prices, with the range starting at $50/MWh (EUR 34/MWh) and rising to $85/MWh (EUR 58/MWh), with the average running at EUR 52/MWh, according to the LBNL report. More recent data from the American Wind Energy Association suggests the range is now ($78-107/MWh (EUR 57-79/MWh). Towards the top end of the scale lies Canada, now one of the hottest wind markets in the world. Although generation costs from some of the contracted projects in Canada have been quite low, the Ontario Power Authority says C$75-110/MWh (EUR 56-83/MWh) is needed in Ontario to ensure viability once transmission costs are included.

The spread of wind energy contract prices around the world will largely be a reflection of lower or higher wind speeds. Institutional factors play a big role, however, such as how much is charged -- and who pays -- for electricity network upgrades and for grid connection of wind stations.

Overall, the prices being paid for wind power in the developed world, whether under a negotiated contract or at a rate fixed by government, suggest onshore wind currently costs between EUR 50/MWh and EUR 90/MWh. America and Britain illustrate this range (box below).

Offshore wind

Strong signals of a serious market developing for offshore wind power, particularly off the British coast, are flashing brightly. But with so few projects yet being built, information on contract prices is scant and often not reflective of the true cost. A British study, The Costs of Offshore Wind Generation, by Offshore Design Engineering (ODE), suggests that offshore wind power costs around EUR 2400/kW. Another study, by Ernst & Young and submitted to the British government for its Energy Review, indicated a mid-range cost of EUR 2300/kW, though this excludes grid connection costs. In Britain these are to be borne by the system operator, but reflected in transmission "use of system" charges.

In real life, however, some prices are coming in well above that. In the Netherlands, the 120 MW Q7 plant of Vestas 2 MW turbines, in the last phases of construction, carries a price tag EUR 3000/kW. Other recently quoted prices for projects in British waters go higher still, though earlier this year Denmark's Dong Energy put a price ticket of EUR 2500/kW on its 108 MW project on the Gunfleet Sands off the English east coast. As with onshore wind, the cost of fully installed offshore wind stations is likely to vary widely, dependent on the size of the development, the difficulty of construction and the cost of grid connection -- if it is borne by the developer.

Real world data on the generation cost of offshore wind is also in short supply. The German government has recently decided that payment of EUR 120-152/MWh is sufficient to drive an offshore wind power market, giving an average purchase price of EUR 140/MWh. This is similar to Ernst & Young's mid-range estimate for the UK of EUR 135/MWh. Ernst & Young argues that a 12% interest rate is appropriate (compared with the 10% used for onshore wind) as the technology is less mature.

Carbon costs

Recent projections of carbon costs under the European Emissions Trading System (ETS) suggest these are working their way up to around EUR 30/tonne of carbon dioxide, having plummeted last year when it was discovered that governments had allocated an excess of "permits to pollute." At EUR 30/tonne, carbon costs would add around EUR 12/MWh to the price of gas and EUR 27/MWh to coal fired generation, pushing its total cost to around EUR 68/MWh. At that level, wind becomes significantly more competitive -- on land it can undercut coal at wind speeds down to around 7.8 m/s.

If the full cost of carbon estimated in the much discussed Stern report was applied to gas and coal prices, their costs rise to EUR 74/MWh and EUR 98/MWh, respectively. At those prices, most wind power generation on land becomes cheaper than gas and coal generation. The Stern report was compiled for the British government by its chief economic adviser, Sir Nicholas Stern, and published in October 2006.

Nuclear night

Reliable costs for nuclear generation are difficult to come by. During the past year, government talk of future construction of nuclear in Finland, Britain and in the US became more serious, but estimates of what it would cost did not. Finland is the only Western country currently building a new nuclear plant: it is already way behind schedule and above cost.

The US Energy Information Administration indicates nuclear generation will cost around $60/MWh (EUR 44/MWh) in 2015, slightly less than wind at today's prices, but more than that of coal and gas without their carbon costs. A more recent estimate in a wind energy update report from LBNL puts nuclear at about EUR 66/MWh, which is closer to the estimate of around EUR 57/MWh emerging from the UK government's major review of energy policy.

To arrive at that figure, however, the government's energy review uses a 10% interest rate and 40-year repayment period. Whether those terms would be available in the private sector financial markets is not discussed in the review document. The British government has categorically stated it will not be subsidising nuclear. A more realistic private sector generation price might be about EUR 80/MWh, as suggested by Greenpeace's, The Economics of Nuclear Power.

The British government has not indicated how it will create a market for nuclear to compensate for the technology's high cost and its high risk investment profile. The idea of a "nuclear obligation," similar to the existing Renewables Obligation, is a possibility, or a guaranteed "floor price" for carbon. A minimum carbon price would also benefit wind. Large scale development of both wind and nuclear power, however, would come at very high cost: it would require switching off nuclear or wind plant at times of low demand, pushing up their generation costs dramatically since most of these lie in the capital cost rather than in fuel purchases (Windpower Monthly, June 2006).

The future

The unexpected departure of gas prices from the rising oil price curve is clouding the crystal ball picture of energy market economics. If gas prices stay where they are, wind's competitive position is unlikely to change in the foreseeable future. But if oil stays at around $100 a barrel, the price disparity with gas could still narrow. That would restore the link between gas and oil prices seen for the past several years (box).

If gas prices rise to match an oil price of $100/barrel, the price of gas-fired electricity generation rises to over EUR 100/MWh, making wind competitive on a wide range of sites worldwide. If gas prices went to that level, however, the fuel of choice for electricity generators would most probably be coal. The competitive position of wind would then become dependent on the magnitude of carbon costs on coal generation -- and that lies in the hands of politicians.

The future costs of wind are also uncertain. Some analysts expect them to rise, others to fall. Much of the uncertainty is linked with rising electricity prices and the resulting higher production costs for the raw materials wind turbines are made from. Perhaps the most probable scenario is that wind turbine prices will move slightly upwards, but that installed costs of complete wind farms will move up at a slower rate. This trend was evident in 2007, probably reflecting the move towards larger wind farms and more efficient methods of construction.

On the presumption that energy policies around the world continue to press for the inclusion of carbon costs in power prices, the fossil fuels will became more expensive than wind power. That leaves nuclear as the main competitor. It remains unclear, however, if quoted costs for nuclear include the recent increases in the price of raw materials. Nuclear, like wind, is capital intensive and so raw material costs have a crucial bearing on installed costs. If nuclear cost quotes do not include the material prices rises that the wind sector is already passing on to customers, wind still looks to be the cheapest generation option for the years ahead.

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