Alongside the fall in machine costs, the productivity of new turbines has also increased -- from around 1300 kWh for each kilowatt of capacity installed in 1983, to over 2000 kWh/kW in 1996. With machine prices falling and energy productivity rising, the cost of producing a wind driven kilowatt hour has fallen rapidly: prices have dropped by a factor of three and energy productivity has increased by 50%, meaning that wind energy prices have fallen by a factor of about 4.5.
So much for the good news. The bad news is that the competition is also getting cheaper. Similar cost mechanisms are at work in the conventional generation sector. Plant costs are falling and efficiency is rising. Moreover, fuel prices have steadily decreased over the years. The installed costs of combined cycle gas turbines have fallen by about a third in the past eight years and the price of coal delivered to American utilities fell by 40% in the ten years to 1996. Gloomy predictions of fuel shortages are rarely heard these days, so the downward trend in fuel prices looks set to continue. So too, therefore, are generation costs from the conventional thermal sources of electricity. The price of industrial electricity sold in the United States fell by one-third in just ten years, between 1985 and 1995. There is every expectation that these trends will continue, albeit at a slower rate.
The crux of the matter
The crucial question is whether wind energy can maintain its current high speed progress along the learning curve, thereby firmly securing its newly won status as one of the cheapest technologies around for generating electricity -- given enough wind. Before answering that question, the complications of establishing a fair basis for comparing the price of electricity from all the front-runners need to be understood and a method of comparison established.
Most other direct comparisons of the prices of wind and thermal plant do not take embedded generation into consideration. To swim with the stream this analysis also deliberately neglects to account for the benefits of using an energy source, such as wind, which is delivered much closer to the point of use than electricity generated in a large power station. Like-for-like comparisons should really be made taking into account the benefits of embedded generation. Although these vary widely (Windpower Monthly, April 1998), broadly speaking they bring a price advantage to wind up to about Euro0.004/kWh.
No single price can be assigned to electricity from any source, wind being no exception. Prices depend on many factors, especially on plant size and location, partly because plant and fuel costs vary across borders and partly because of differing institutional frameworks. Denmark and Germany might be next door neighbours, but that does not mean that electricity prices, or even wind prices, are the same. Indeed, while wind appears to be cheaper than thermal plant in Denmark, that does not necessarily mean it will also be cheaper in the United States or Great Britain, even at sites with the same wind resource.
The institutional factors
Wind prices vary not only with wind speed, but also with institutional factors, which is why the same product ends up with three different prices in Germany, Britain and Denmark (figure 1). Denmark's public sector utilities often calculate wind energy prices assuming an interest rate of 6%, net of inflation (the "real" interest rate) and that capital costs can be written off over the life of the plant, say 20 years. Thus the Danish price, Euro0.093/kWh in low winds, dropping to Euro0.038/kWh at an 8.5 m/s site, is consistently cheaper than for Britain and Germany.
Prices in Britain are slightly higher because the contracts for premium payments run for a shorter period -- 15 years -- and the private sector developers use interest rates from about 8% upwards. So a project on a 7 m/s site -- even if it costs the same to build -- will need Euro0.054/kWh in Britain, compared with Euro0.0472/kWh in Denmark, to achieve an acceptable rate of return. High wind speeds in Britain, however, mean that prices fall to around Euro0.038/kWh on a 10 m/s site.
In Germany, most wind installations are funded by private developers who obtain money from the Deutsche Ausgleichsbank, with a loan period of ten years. What's more, the loan is typically for only 80% of the total cost. The remaining 20% is "equity" and most equity investors expect higher rates of return and 10% upwards is usual. The net result is that German wind energy prices appear to be significantly higher than those in Denmark. So a wind farm, again on a 7 m/s site, will need about Euro0.064/kWh in Germany, 35% more than in Denmark. Moreover, the lower wind speeds in Germany, meaning less energygenerated per kilowatt, widens the apparent discrepancy even further; most wind plant operate with wind speeds around 6 m/s, and the corresponding energy price is around Euro0.085/kWh.
When the price of wind is such a clearly variable quantity, it is hardly surprising that the price of electricity from thermal and nuclear sources is just as difficult to pin down, especially when thermal plant costs are influenced by fuel prices too. For this article, data is drawn from a series of recognised sources. Making comparisons between all the sources is complicated, in particular, by interest rates. These have a decisive influence, especially on capital intensive technologies like wind and nuclear compared with gas, the cheapest of the thermal sources, where the cost of fuel is the overriding price element. Wind is more sensitive to interest rates than gas, but less sensitive than nuclear (figure 2). The price of electricity from gas fired plant is only slightly sensitive to interest rates, simply because the capital cost of the plant does not figure prominently in the price calculation. Wind, along with nuclear, is capital intensive because the bulk of its price is dictated by the capital payments.
The risk factor
To muddy the waters still further, banks and other financial institutions in the private sector often set interest rates to match the perceived risk of a project. The higher the risk, the higher the test discount rate. Gas turbine technology is proven and regarded as low-risk and a real interest rate around 8% might be considered appropriate. Wind is now coming into this category. Nuclear, on the other hand, tends to be regarded as higher risk. In a major energy sector review, the British government recently suggested a test discount rate for nuclear of around 11%.
Capital repayment periods also have an important influence on the cost of generation. The less time in which to repay a loan, the higher the cost, with the "capital intensive" technologies most sensitive to shortened repayment periods (figure 3). Risk is also an influencing factor here. High risk technologies tend to make banks nervous so they reduce the risk by requiring the finance to be repaid over a shorter period. Early wind projects in the UK secured loans for just ten years. Today 12 to 15 years is more common. No nuclear plant would ever be built if short repayment periods were coupled with high discount rates, so the compromise is to use a moderately long repayment period but a high test discount rate.
Capital repayment periods are decided in different ways. If premium prices for wind energy only last for a fixed period -- 15 years is quite common -- this fixes the term. Similarly, the term of bank loans may dictate the period. If these constraints are absent, private developers may choose periods up to, say, 20 years, if projects are being financed from internal funds, but this is unlikely. It is mainly public sector utilities that use "plant lifetime" as the yardstick for capital repayments.
Adopt a common set of theoretical interest rates and accept that depreciation periods are equal to plant life times and the basis for comparing differing power production technologies is laid. This procedure is used by the International Energy Agency (IEA). The prices which result are not real -- and may not be relevant in any national framework -- but they make fair comparisons possible.
Assuming a fixed set of interest rates and depreciation periods, wind speed now becomes the key factor in determining whether or not wind is competitive with gas, coal and nuclear, since wind energy prices vary with wind speed. The comparison is encouraging. At wind speeds over 6.5 m/s, wind energy falls within the price range of all the thermal technologies. Mid-range costs for the thermal technologies are around Euro0.05/kWh, which corresponds to the price of wind energy price at wind speeds of 7.5 m/s (figure 5).
For a real world picture of the competitiveness of wind, a closer look needs to be taken at particular national situations. Finding a clear cut analysis of prices from thermal plant can be tricky, though. Just as for wind energy, prices vary with plant size and location and with estimates from varying sources. In America the Centre for Economic Development -- a think tank backed by the coal industry -- has produced studies showing that coal is the cheapest electricity generating option in the US. Other analyses, however, indicate that gas is the cheapest option -- as it is in most of the rest of the world.
Since precise prices do not exist, comparison using a range of electricity prices from all four energy sources is the best option (see box). It is also perfectly realistic as the exact costs will vary from plant to plant even within a single state. Just as with the IEA procedure, wind again emerges as a close competitor to most of the other generating options, with the possible exception of gas, whether in the United States, Germany, France or the UK.
Wind's acid test
Looking to the future, forecasts of electricity prices from thermal sources of generation cannot be as accurate as those for wind. Future movements of fuel prices need to be taken into account -- and these can be influenced by political factors beyond economic control. Recent trends show fuel prices -- and subsequently electricity prices -- on the way down. Some current forecasts, however, firmly hold that prices will eventually rise, while others are equally firm that prices will drop.
The RWI Economics Institute in Essen, Germany, suggests the price of coal fired generation in the country may rise from its 1995 level of Euro0.057/kWh to just over Euro0.1/kWh by 2010. That makes wind look very secure. In the US, however, the Department of Energy is predicting a significant reduction in the price of coal. As coal is highly likely to remain the mainstay for electricity generation, electricity prices in the US are expected to move steadily downwards. The US Department of Energy reckons the cost of coal may fall by 24% by 2020, which corresponds to a reduction in the cost of electricity of about $0.0035/kWh (Euro0.003/kWh). The final cost of electricity sold to industrial consumers is projected to fall by a similar amount, 27%.
That wind's price target is getting ever smaller to hit is no reason for undue pessimism. There is nothing to suggest that wind power capacity will not continue to double every three years or so, accompanied each time by a 15% reduction in wind turbine manufacturing cost. The scope for reduction remains considerable.
In this scenario, machine costs will continue to drop every three years from today's Euro750/kW, to Euro609/kW in 2002, and Euro496/kW in 2006. The projection fits well with a similar forecast for installed wind turbine costs completed by the Renewable Energy Policy Project (REPP), an American renewables think tank, which explores technical and policy issues (figure 4). REPP's costs are for completed projects, thus making them slightly higher than basic plant costs, and start at Euro812/kW in 1998, falling to Euro513/kW by 2006. A third projection, for electricity prices rather than plant costs, comes from Danish consultants BTM Consult. It suggests a 30% reduction may not be realised until around 2009. But the downward trend in all three cases is indisputable.
Here looms the question for which this article is providing an answer. Can wind stay competitive with the very lowest prices being quoted anywhere for thermal energy sources? This really is wind's acid test. The answer? Yes, it can. In a projection to 2006, the rate of fall of wind energy's cost is significantly steeper than that for all the thermal technologies (figure 6). Reason for optimism in the wind camp, indeed, though not for complacency.