competitor -- a tricky task when there is no proof of what it actually costs
For the first time in over 20 years, the installed costs of wind plant went up rather than down over the course of a year. The 2005 price hike is primarily due to increases in wind turbine prices, caused by rises in the price of energy, steel, copper and blade materials, a shortage of wind turbines and the need for manufacturers to increase the wafer-thin margins on which many had been operating. As a result, the average cost of wind power plant installed in 2005 was about EUR 1200/kW, or 20% higher than in 2004.
The higher prices do not necessarily translate directly to higher wind power generation costs. While the installed cost of wind plant was going up, longer term power purchase contracts for wind electricity were coming in, particularly in Canada and the United States, pushing down the cost of finance. A 20% increase in installed cost raises the cost of wind generation by about 16%, but extending capital repayment periods from the 15 years common today to the 22 years found in the best contract terms wipes out the increase.
Higher wind generation costs have not made wind power less competitive with gas -- generally the option of choice for new generation -- than it was last year. Increases in the price of gas during 2005 pushed up its generation costs by more than 25%.
Coal generation remains a tough competitor, even though the price of the fuel went up 10% during 2005. Much of the time it can beat wind on cost at wind's prices today, especially in markets where fossil fuels do not yet carry a carbon penalty. On the other hand, where winds blow strongly and wind plant can be installed relatively cheaply, even coal does not get a look in.
But it is not coal and gas that wind is increasingly being measured against these days, but nuclear. Challenged by evidence that global warming is happening and is man-made, governments are being persuaded (some say panicked) to believe that renewable energy is a limited technical solution to limiting carbon emissions. According to the nuclear industry, only it can save the world -- and to do so it claims it needs less government support than wind.
Wind plant built subject to the commercial reality of private sector economics cannot produce power as cheaply today as nuclear power plant built in a large series under the protective wing of government -- not at the prices the nuclear industry says it can build plant for. If nuclear is subject to the same economic conditions that wind power is built under, however, then wind stations on land can generate power for less money than nuclear can achieve. Offshore, it is likely that wind will be competitive with nuclear by 2015.
Generation costs are not everything. The cost of running a power system is also part and parcel of the consumer price of electricity -- and because of its variable nature wind adds extra costs to system management. But even when the extra cost of managing variable wind supply is taken into account, the public will end up paying less for their electricity today if wind is built instead of gas. They will probably also pay less if nuclear is built instead of gas, especially if governments step in to shield it from the risk premium imposed by the financial markets. If nuclear is built by the private sector, only when wind supplies a far greater proportion of total electricity production than most governments envisage today would there be an opportunity for the economic balance to tip in its favour.
THE Risk factor
Nuclear and gas share a problem -- uncertain economics. The cost of wind power is a known quantity and despite its first price hike in 20 years, generation costs are still expected to decline as more and larger wind plant get built.
With gas, nobody can be sure where the price trajectory for the fuel is heading. With nuclear, nobody knows whether the stations can be built to time and cost and nobody knows what financial guarantees private sector investors will demand if governments decline to expose the public to the economic risk of becoming nuclear plant owners.
The nuclear industry also needs orders for several power stations to achieve its current stated cost. Governments (or investors) will need to commit to programs for several gigawatts of plant. In the UK the nuclear industry's demand is for a commitment to 8 GW to achieve its cost estimates.
The cost of wind
No power generation technology has a single cost. Location, financing parameters, operating costs and, for the thermal technologies, the cost of fuel, all play a role. For wind power, location is paramount as variations in generation costs are strongly influenced by variations in wind speed.
Capital costs of wind farms are primarily a function of the size of the installation (due to economies of scale), but location is again a factor. Very windy sites are often in remote locations, pushing up construction costs. On the other hand, lower prices for both wind turbines and completed wind stations are associated with projects in the developing world, including China, Morocco and India. The lower prices are possibly due to the enthusiasm of manufacturers to develop a bridgehead in these markets, but are also connected to the relatively low labour costs in those regions.
Since the installed cost of wind power is moving up, establishing a year-round average cost is not as certain as when prices are stable. The average price of the 2300 MW of wind turbines in Windpower Monthly's 2005 project data base for onshore wind is a fraction under EUR 800/kW. The highest reported price is EUR 936/kW. For completed wind farms on land, which in our data base have a combined capacity of 3200 MW, the average cost is EUR 1191/kW, the minimum cost EUR 869/kW, and maximum EUR 1559/kW. Quoted prices for both wind turbines and wind farms sometimes include provision for the first two to three years of a maintenance contract, but this is not always made clear.
Operation and maintenance (O&M) costs are expressed in several ways. Some analyses express them as the annual cost per kilowatt of generating capacity and values between EUR 15/kW and EUR 40/kW are found. Others express them as a percentage of the capital cost per year, which can vary between 2% and 5%. O&M costs expressed as the extra cost on a unit of electricity are less common, but still found. A typical range is between EUR 1/MWh and EUR 1.5/MWh. As with construction costs, the higher values tend to be associated with the more remote sites.
Based on a realistic range of O&M costs, at an installed cost of EUR 1000/kW from the lower end of the cost scale in 2005, generation costs from onshore wind range from EUR 45/MWh at 8 m/s (a typical good site wind speed) to EUR 75/MWh at 6 m/s (a low site wind speed as found in Germany). Towards the upper end of the installed cost range, a wind plant built for EUR 1400/kW can generate electricity for EUR 48/MWh at 9.5 m/s and for EUR 90/MWh at 6.5 m/s (fig 2). The generation costs demonstrate why building an expensive wind plant in a remote location can easily pay off if the wind speed is high enough.
Installed costs for offshore wind are more uncertain and there are less cost data readily available. Most of the offshore wind plant recently completed have realised installed costs around EUR 1800/kW.
Future prices are more uncertain; installed cost for two offshore wind stations -- in Sweden and the Netherlands -- is expected to be around EUR 1300/kW, but at a recent conference in Copenhagen (Windpower Monthly, November 2005) the offshore wind business referred to costs going above EUR 2000/kW. At that price, it is doubtful any projects would be built as the generation cost would be uneconomic.
Generation costs for offshore wind installed for EUR 1300/kW range from a low of EUR 53 at 9 m/s to EUR 80/MWh at 7 m/s. At the high end of the scale, an offshore wind plant costing EUR 1900/kW to install would generate electricity for EUR 83/MWh at 9 m/s and EUR 111/MWh at 7.5 m/s.
Compared with coal
With the upward drift in coal prices of about 10% during the year, its generation costs are in the range EUR 35-42/MWh before any carbon penalties are added. Even at the high end of that range, few wind plant, if any, can beat coal. But add in coal's carbon penalties and low-cost wind can compete.
Under Europe's new Emissions Trading Scheme, the "cost of carbon" is running at EUR 20-24/tonne, which pushes up the price of coal by EUR 20/MWh to EUR 45-52/MWh, presuming the carbon penalty remains unchanged. That is within the range for wind power built on an accessible site with a typically good wind speed. In North America, where some of the cheapest wind plant are being built, utilities are currently adding about $10/MWh (EUR 8/MWh) in anticipation of future carbon penalties for coal plant, making coal a tough competitor.
Gas the yardstick
The generation costs of electricity from combined cycle gas turbines tend to be the yardstick against which other technologies are compared, because it is mainly gas being built. The principal uncertainty in determining these is the future cost of gas, as fuel accounts for about two-thirds of the total generation cost.
The average price of gas in 2005 will probably end up about 40% higher than in 2004. That means that the price of electricity generated from gas has increased by about 25%. This year, gas prices delivered to power stations everywhere are expected to be anything up to 50% higher than in 2005.
Average installed costs for gas plant are in the EUR 600-750/kW range and operation and maintenance costs lie mostly in a range of EUR 30-45 per kilowatt of generating capacity each year. But gas prices have varied over a wide range in the past 12 months and there are significant differences between American, British, and continental European prices.
Annual average prices of gas delivered to power stations -- measured by energy content of the fuel -- have in America moved from $15/MWh (EUR 13/MWh) in 2000, to $21/MWh (EUR 18/MWh in 2004), while the estimated levels for 2005 and 2006 are $27/MWh and $33/MWh (EUR 23/MWh and EUR 28/MWh), respectively. UK prices have been 20-30% lower, rising from under EUR 9/MWh in 2000 to EUR 11/MWh in 2004, probably coming in at around EUR 16/MWh for 2005, and possibly reaching EUR 23/MWh in 2006. The uncertainty makes generation costs -- now or in the future -- almost impossible to predict.
The fuel price for gas could fall as more liquid natural gas (LNG) terminals are commissioned. US Department of Energy forecasts show a dip in prices around 2008, which reflects the expected freeing up of supply that more LNG terminals will result in, followed by a continuing upward trend. On the other hand, as demand for gas soars, some European commentators seem less confident these days that any fall in gas prices will come about.
An optimistic scenario for gas generation costs in 2006 assumes fuel prices go no higher than the 2005 average between America and Britain, which is about EUR 20/MWh. A pessimistic figure assumes prices go 25% higher than this to EUR 25/MWh, which is the average of the authoritative scenarios being projected in America and Britain for their respective gas costs.
Using the lower and upper estimates of gas plant construction and O&M costs, generation costs will lie in the EUR 50-62/MWh range. Add in the current carbon penalty for gas in Europe of EUR 8/MWh, and gas generation costs are EUR 58-70/MWh. That is mostly outside the range of wind power, which even in relatively low wind speeds of 7.5 m/s comes in at EUR 55-EUR 70/MWh.
Nuclear to beat
The make-up of nuclear generation costs is similar to that of wind energy: repayments of capital, plus interest, are the dominant feature, accounting for around 75% of the electricity cost. So just like wind, nuclear generation costs are sensitive to assumptions about the "cost of capital" and the repayment period.
The big difference between nuclear and wind is that the installed costs of wind plant are well known. In most of the developed world, there has been so little construction of nuclear plant in recent years that installed costs are not available. Instead, costs must be based on the nuclear industry's estimates of what it believes it can build nuclear stations for (Windpower Monthly, June 2005).
The range of nuclear generation cost estimates is wide. They depend on whether projects are financed by the public sector, or the private sector. The low end of the range, for projects built by government, which passes the risk premium on to future electricity consumers, is about EUR 30/MWh. The upper end of the cost of nuclear generation, with the private sector factoring in the risks of cost overruns and construction delays, is EUR 80/MWh, or more. This is because the weighted cost of borrowing capital for nuclear plant contains a risk premium, pushing it up to at least 11% of the capital sum; for a wind plant it is 5-8%.
Private sector nuclear investments are a rarity, however. Like offshore wind at the moment, nuclear is not likely to get built if subject to the economic reality of the private sector. Governments will need to play a role. In the UK a new nuclear program is being considered. Other governments may follow the UK lead, particularly in the US.
The financing effect
Discussions of nuclear generation costs are often confused by the nuclear industry's tendency to assume it can secure long term contracts for the electricity and low interest rates of 5-7% for the capital repayments. This is only true in a diminishing number of countries where governments build power plant. The private sector offers shorter contract periods and higher interest rates (table).
Our reference financial assumptions for generation cost, however, assume a long 15 year capital repayment period and a low 6% real project interest rate, though this is unlikely to be realised outside the public sector. Under those conditions, nuclear can deliver electricity at about EUR 42/MWh; onshore wind power with a mid-range installed cost of EUR 1200/kW can generate at EUR 57.5/MWh and mid-range offshore can generate for EUR 83.5/MWh.
In the hands of the private sector, however, a much tougher examination is made of the financial risks associated with nuclear than that conducted by the public sector, which tends to pass them on to future generations. The financial terms assumed for nuclear would not be acceptable to the private sector. A possible "best" combination for private sector financing (20 year life, 12% interest) would push the price of nuclear up to EUR 58/MWh. That compares with EUR 53.5/MWh for wind on land under similar "best private sector" terms (22 year life, 7.5% interest), using wind's average installed cost for 2005 in winds of 7.5 m/s.
Offshore wind cannot currently compete with nuclear under any terms. But any new nuclear plant in Britain will not be completed until 2016, at the very earliest. By that time, offshore wind is likely to have overcome its present difficulties, which mainly revolve around how to get the power ashore and contractual difficulties over risk sharing. Once offshore wind's risk premium is reduced, its finances start to look a good deal healthier. Assuming a modest drop in installed costs to EUR 1350/kW (slightly higher than projections for new build this year in Sweden and the Netherlands), then at winds of 7.5 m/s, offshore wind could match the EUR 58/MWh estimated for nuclear (table). In the stronger winds often found offshore, wind can also compete at a slightly higher installed cost.
It is possible to make nuclear appear very cheap. Some nuclear cost estimates assume a 40 year capital recovery period and a 5% weighted average cost of capital, which halves the generation cost to EUR 29/MWh. Forty year contracts are unrealistic for wind, which puts it at a disadvantage. Using the same interest rate as presumed for nuclear, the generation cost for a wind plant at today's mid-range installed cost, running for 25 years in winds of 7.5 m/s, is EUR 42/MWh -- on the face of it, a lot more than nuclear. At winds of 7.5 m/s, the installed cost of wind must drop to EUR 750/kW to match nuclear's projected generating cost of EUR 29/MWh. Wind's lowest installed cost today is about EUR 870/kW, but by 2015-2020 it is likely to have fallen significantly.
An inkling of whether nuclear really generates power over 40 years as cheaply as it claims it can may be revealed in 2009, when Finland is scheduled to complete construction of a new 1600 MW nuclear reactor. The station is now being built using technology from France, with the French government effectively underwriting much of the construction risk.
What the consumer pays
The cost of generating electricity from different resources is an essential starting point for a comparison of their respective economics, but for consumers it is the end price of delivered electricity that matters. That includes the cost of power system management and power delivery.
Once a wind plant is built it makes economic sense to use all its output as each kilowatt of wind power saves on fossil fuel. System operators must manage a wind plant's variable output by adjusting other generation, which is where "balancing" costs come into the picture. With low volumes of wind power feeding into a big central system, the ups and downs of wind supply are invisible in the ups and downs of demand and it adds no extra costs for balancing the system. But with increasing volumes of wind generation, system operators are required to juggle with an extra layer of uncertainty -- and that has a cost.
The cost is small, however, as the extra uncertainty is small. With gas prices predicted to go on rising, adding wind to power systems at its current cost instead of adding gas still means cheaper power for consumers in the long term, at least until a system is operating with very large volumes of wind (Windpower Monthly, June 2005).
Another way of looking at the issue of total system costs, particularly at a time when wind prices are also uncertain, is to calculate the "break even" price for wind energy: how little does an installed wind plant have to cost to result in a zero cost premium for the electricity consumer, including the cost of extra balancing uncertainty?
The answers are still dependent on a number of institutional factors -- particularly financial parameters. But with gas costing a likely average of EUR 0.7/therm in the UK, the cost of onshore wind needs to be around EUR 1100/kW if a power system getting 5% of its supply from wind (spread equally between onshore and offshore) is not to incur additional costs to the electricity consumer. If the price of gas moves up to EUR 0.8/therm, the target for the installed cost of a wind plant is a little over EUR 1200/kW (fig 3). Since the wind industry achieved prices as low as EUR 869/kW in 2005 and the average was EUR 1191/kW, consumers can rest easy that installing wind instead of gas will not cost more today and will most probably lower electricity bills in the future.
Whether building nuclear instead of wind will lower total costs in the long run is anybody's guess.