Goodbye gas and squaring up to coal

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Just two short years ago our annual comparison of power generation costs, published in the January issue each year, boasted that wind had only gas left to beat. Gas prices have since risen so fast that onshore wind power costs are comfortably within the range of gas fired generation. Coal remains cheaper than wind at its most economic, but on windy sites in easy terrain, new wind stations are giving coal a tough target to beat

Any power company planning to add gas-fired generation to its portfolio a year ago will by now have discovered that wind can be the far cheaper option. Sky-rocketing gas prices have dramatically influenced the competitive position of power generation technologies over recent months. At this time last year, the cheapest available wind power was just nudging cheapest gas. Today, wind, even on less windy sites and towards the higher end of the project cost range, is undercutting gas on both sides of the Atlantic.

But while the era of cheap gas fired electricity generation may be over, the competition from fossil fuels is certainly not. Coal prices changed little in the same period -- and wind prices fell more slowly in 2004 than seen in recent years. Coal is becoming an attractive generation option once again. It is now the competitor that wind has to beat.

The fall from economic grace suffered by gas has been swift. Futures contracts for fuel deliveries tend to produce delayed market reaction, so the price rise hit home in 2004. Delivered gas prices to electricity generators in the United States in 2003 were 40% higher than in the previous year. The US Energy Information Administration expects the 2004 average price to be 11% higher still. Gas futures at one of the American hubs seem set to stay at around $6 per thousand cubic feet until at least 2009. At the beginning of 2004, the maximum price at one of the key European hubs for 2006 was expected to be around EUR 0.38/therm -- the equivalent of $5 per thousand cubic feet. By November that price had risen to around EUR 0.55/therm.

Translated to a fuel cost in a combined cycle gas turbine with an efficiency of 50%, these gas prices yield broadly similar results -- around $40/MWh in the American case, or EUR 39/MWh in the European case. Add on operation and maintenance costs and capital charges and the range of overall costs for gas-fired generation comes to at least EUR 45-55/MWh.

Wind energy can easily beat these prices on a good site -- and there is no risk of escalating fuel costs in the years ahead or costs associated with securing fuel supplies. Price stability (low risk) is important. Nobody knows where oil or gas prices are heading. Inclusion of the extra cost of managing this risk is becoming standard in power company planning, at least in markets outside the protection of the "public sector" (the sheltering wing of soft government financing). Add in the cost of risk and a significant rise in the price of gas-fired generation results. Electricity from gas is pushed to between EUR 50/MWh and EUR 60/MWh, depending on the approach adopted to risk management (box page 34).

Rock solid coal

Gas, however, is no longer wind's principal competitor on price. Two of the largest German utilities are proposing construction of over 4000 MW of coal fired plant and support for coal remains strong in the United States. Coal supplies are not subject to the same uncertainty as gas supplies. Governments signed up to the Kyoto Protocol may be placing economic constraints on coal to make up for some of its environmental damage -- and shareholders may be exercising a similar role in the US -- but further development of coal-fired plant seems likely.

Without taking environmental costs into account, the cost of installing a coal plant is around EUR 1100-1300 for each kW of generating capacity. With fuel costs around EUR 10-17/MWh and operation and maintenance costs around EUR 5-8/MWh, coal generation costs are in the EUR 35-45/MWh range, undercutting gas at the lower end of the range and only beaten by the very cheapest wind power.

From next year, purchasers of fossil fuel generation will also be bearing the cost of some of its emissions, effectively pushing up its price. On January 1, the European Union's Emissions Trading Scheme (ETS) kicks off. Polluters must buy permits if they emit more CO2 than their allowances under National Allocation Plans. The expectation is that CO2 will trade at around EUR 8/tonne, pushing up new coal generation costs by about EUR 8/MWh and new gas by about EUR 3.2/MWh.

Unknown nuclear

With little new nuclear build, its generation costs remain uncertain and are based on assumptions by the nuclear industry. The risk of financing new nuclear plant, to prove the estimates right or wrong, is not one investors are lining up to take. Many shirts can be lost on a bad nuclear bet.

The lowest cost for series construction is being cited at EUR 1600/kW, with the upper bound defined by reported project costs of EUR 1800/kW for a new Finnish station, construction of which was recently approved.

Based on the low installed cost of EUR 1600/kW and using a public sector interest rate of just 6%, the lowest estimate for nuclear generation cost is EUR 35/MWh. At the EUR 1800/kW installed cost and assuming that private sector investors will demand at least 11% and banks not much less, nuclear comes in at EUR 58/MWh. The higher return allows for the additional risks that financiers tend to associate with nuclear. Indeed, a recent study, "The future of nuclear power," by the Massachusetts Institute of Technology takes a high interest rate as given.

At EUR 35-58/MWh, nuclear comes in low enough to match cheap coal and wind, but is higher than the most expensive coal and hits price parity with wind. It is the first time in several years that nuclear's cost estimates have come down far enough to threaten wind. It remains to be seen if it can deliver on that promise.

Wind onshore

A database of the installed costs of 30 wind projects on land from around the world with a combined capacity of 3400 MW reveals an average project cost of a little under EUR 1000/kW. The range is wide (table). Two-thirds of project costs, however, are between EUR 800/kW and EUR 1150/kW, representing typical upper and lower bounds. Reports of the cheapest wind projects are from China, India, and a large 310 MW project in the United States.

The most expensive wind farms built last year are in Japan and Australia. Australia also reported one of the cheapest projects. The spread is perhaps a reflection of a new market maturing rapidly. The International Energy Agency has also remarked on the high cost of wind power in Japan. Its estimate of worldwide average wind costs, $1250/kW, is nonetheless similar to that derived from the Windpower Monthly database.

Using a project interest rate of 6% (real, net of inflation) and an operating life of 15 years, wind plant built for a total installed cost of EUR 800/kW on land can deliver energy at prices ranging from EUR 32/MWh on a good windy site with average wind strengths of 9 m/s, rising to EUR 64/MWh on a relatively poor site with wind speeds of 6 m/s. For the more expensive wind projects costing EUR 1150/kW to install, generation costs at the same windy site are EUR 45/MWh, rising to EUR 90/MWh at 6 m/s (graph right).

The link between wind speed and energy generation is based on the performance characteristics of several large commercial wind turbines and representative capacity factors. Particular wind farms may generate more or less energy per kilowatt of installed capacity, but the overall spread in capacity factors for a given wind speed is not large.

The most expensive projects are often on high wind speed sites built in complex terrain, with difficult access pushing up costs. On the other hand, low cost projects are mainly found on flat sites, but with low wind speeds. Taking this into account, the spread of costs may in practice be less than the EUR 32/kW to EUR 90/kW spread that the database implies. Between EUR 40/MWh (EUR 1150/kW, at a 9.5 m/s site) and EUR 64/MWh (EUR 800/kW, at a 6 m/s site) is likely to be more realistic.

and offshore

Offshore wind power costs have not yet settled down and there are large question marks, particularly over the cost of operation and maintenance. The retrofit of all 80 wind turbines at the world's first major project in truly offshore waters -- Horns Reef in the Danish North Sea -- after just two years, has jittery project sponsors making greater allowances for O&M.

With this caveat, near-shore, lower cost installations being built for EUR 1250-1400/kW in sheltered waters, probably benefiting from only relatively low wind speeds, are likely to have a generating cost ranging from EUR 68/MWh at 8 m/s up to EUR 98/MWh at 6.5 m/s. At the higher end of offshore project development cost, EUR 1800/kW, generating costs range from EUR 96/MWh at 8 m/s down to EUR 71/MWh at 9.75 m/s.

Historic price comparisons

Examination of power price movements in recent years puts wind at the top of the class. Wind turbine prices have declined about 1.3% a year since 1994, based on list prices published in Germany. Such small annual price movements are difficult to detect in published data for entire wind turbine projects, which explains why conventional wisdom held for some years that the installed cost of complete wind farms was static at about $1000/kW.

The depreciation of the dollar is now coming into play. Since 2002, it has declined in value by over 20% relative to most other currencies. The consequence for 2004 was that the "dollar value" of wind power projects, at $1250/kW, was higher than in 2003. The average euro value, however, at EUR 970/kW, is less than in 2002, by about 3%. The drop cannot be taken as strong corroboration of a corresponding fall in turbine prices, but it is certainly consistent.

Corresponding movements in electricity generating costs for wind, coal and gas since 1994 show that wind prices have declined slightly faster than coal prices, while gas has shot up by 75% (Figure 1). Wind, with a generating capacity factor of 35%, has dropped from EUR 46.6/MWh to EUR 42/MWh and coal from EUR 40.4/MWh to EUR 37.7/MWh. Gas-fired generation today costs EUR 42/MWh, roughly on a par with wind, though on sites with better wind speeds, higher capacity factors will deliver cheaper wind. No allowances are made here for the cost of carbon emissions.

These price comparisons use an annual charge rate of 10% (box). For wind, it is assumed the turbine price accounts for 85% of the total project cost. Prices for gas and coal are from the US Department of Energy. All prices have been rebased to 2002 dollars and converted to euro using the current exchange rate (EUR 1.0=$1.3).

Stand back from the details and the picture is clear. Onshore wind costs are now comfortably within the range of gas-fired generation and there is a clear parity with coal, when the likely carbon costs are taken into account, even without reference to the other hidden costs of pollution. Offshore wind prices in competitive markets are not yet competitive with those from thermal generation. In Denmark, however, a combination of low public sector interest rates and project lifetimes of at least 20 years, put even offshore wind prices within the bounds of other generation.

Future costs

In a year of price turmoil on global energy markets, wind power has stood out as a firm rock of price stability. Never before has there been so much interest in its future cost and the implications of increasing the proportion of wind power supply in electricity networks.

Before the recent rise in gas prices, a British study suggested that the extra cost to the electricity consumer of 20% wind in the UK electricity network would be around EUR 4.5/MWh -- about 5% extra on a consumer bill. That estimate is now out of date. More wind and less gas will mean a far smaller increase. In America, a "balanced energy plan," including wind power, put forward by Western Resource Advocates, concludes that the interior west of the United States can save "at least $1 billion per year in lower electricity production costs if any of the risks [of increased gas and other prices] occur." By 2020 these savings would amount to $5.3 billion a year. Studies in Pennsylvania came to the same broad conclusions that more wind power development on a system will decrease rather than increase consumer costs.

Most recently in Europe, a contribution to the national energy policy debate in Denmark is an in-depth analysis concluding that EUR 13 billion can be knocked off the national electricity bill by 2030 if a sustainable energy strategy is pursued -- the savings are without taking the cost of pollution into account. A unanimous Danish power industry is lobbying for an aggressive move to renewables (Windpower Monthly, December 2004). Ireland is moving towards the same conclusion. A study for the Irish Wind Energy Association argues that the electricity consumer can save money from about 2010 with an expanded wind program (Windpower Monthly, December 2004).

A number of detailed analyses of future trends in wind energy costs (graphs right) have been carried out to support the rash of recent studies. Some have based their projections on "learning curve theory," looking at the way costs have fallen with increased production; others have looked at the engineering aspects of both wind turbines and wind farms.

The trend towards larger wind turbines shows no sign of slackening, bringing with it reduced project costs from savings in foundations, transport and electrical connections -- even though the wind turbines may be slightly more expensive per kilowatt of rated capacity. The trend in larger wind farms is also likely be more pronounced, with associated savings in the construction phase, in project management, more efficient utilisation of heavy lifting equipment and, not least, in grid connection costs. Increases in project size do not lead a proportional increase in grid costs, which depend on the length of new lines required and the costs of transformers and switchgear.

A broad consensus

For onshore wind, the consensus of the many studies suggests that by 2010 installed costs will drop by between 11% and 23% compared with 2003. A report commissioned by the Australian Wind Energy Association, "Cost Convergence of Wind Power and Conventional Generation," suggests the drop could be as much as 37%, but this is to be expected, given that Australian wind energy is at a relatively early stage of development, with current costs on the high side.

By 2020, the studies suggest that at a minimum costs will fall by 19-36% (again with the exception of Australia, which is expecting them to nearly halve). The reduction may be more pronounced with the achievement of additional savings in operation and maintenance and perhaps small increases in energy output. The expected reductions in offshore costs are more impressive. By 2010, the studies agree that offshore project costs will be down by 20%, to EUR 750-900/kW. By 2020, they will have been eroded further to around EUR 700-750/kW. At these levels, offshore wind power generation will be fully competitive with that from fossil fuels -- unless their prices fall dramatically. There is no sign of that happening.

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