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On track as the cheapest in town

By 2020 wind power will be the cheapest option for electricity generation of all the technologies, with lower costs than the fossil fuel sources. This bullish projection has just emerged as part of the British government's major energy review. The review team has clearly been impressed by wind power. Coal comes in more expensive than offshore wind, and nuclear follows behind coal. Energy crops and wave energy share the same starting price as coal and nuclear, but the range is considerably higher in the case of wave and the level of certainty is marked as "low."

While the price of coal and gas fired generation remains static or shows

signs of going up, the price of wind power is going nowhere but down. On good sites wind is now beating coal and can compete with gas.

Nuclear has long been left behind. These market prices, however, do not

take any external costs into consideration -- a point that our annual costs

comparison survey is at pains to stress this year

By 2020 wind power will be the cheapest option for electricity generation of all the technologies, with lower costs than the fossil fuel sources. This bullish projection is not contained in wind lobby literature, but has just emerged as part of the British government's major energy review. The task of the review team is to gather input from the various power technology sectors and set objectives for the UK's future energy policy. It has clearly been impressed by wind power.

The projected price range for a single unit of electricity (kilowatt hour) from wind power in 2020 is £0.015-0.025 ($0.022 to $0.036). This undercuts the projection for combined heat and power (CHP) in the same year by a small margin -- and is significantly cheaper than the price for gas fired plant: £0.018-0.021 per kilowatt hour (kWh), or $0.026 to $0.030/kWh. Offshore wind comes in fourth, the price starting at £0.02/kWh ($0.029/kWh), although the figure is qualified as less certain.

Coal, with a price range starting at $0.044/kWh, comes in more expensive than offshore wind, and nuclear follows behind coal. Nuclear is given the same starting price as coal, but the top figure in the nuclear cost range is as high as $0.065/kWh. Energy crops and wave energy share the same starting price as coal and nuclear, but the range is considerably higher in the case of wave and the level of certainty is marked as "low."

The energy review team is not alone in its assessments of future costs (figure). Similar price forecasts are being made for 2020 by the United States Department of Energy (DOE). The DOE's estimate for gas is a bit higher and that for coal are a little lower -- reflecting the widespread use of coal fired generation across the US. The American projection for nuclear power is towards the top of the range suggested by the British review team. The DOE does not use price ranges, but quotes single prices.

Back to the present

Compared with the price of electricity generation today, wind's estimated price in 2020 -- especially offshore generation -- is expected to fall markedly more than that of gas. Coal, on the other hand, is expected to get more expensive over the next two decades, at least if the British review team is on track with its projections. Nuclear's cost today is a tough one to pin down, but governments on both sides of the Atlantic do not appear to be expecting it to get any cheaper, contrary to the industry's claims. More about nuclear and its claims a little later. First, news on prices for the more straightforward technologies.

On good onshore sites today -- those with wind speeds of eight metres a second (m/s) -- wind at just $0.04/kWh is still slightly more expensive than the $0.036/kWh which the British review sets as the top price in 2020. The $0.04/kWh fixes the lower end of wind's price range today and is based on a cost for each kilowatt (kW) of installed capacity of $700 -- the cheapest reported wind farm prices during the past year. At that installation cost, wind's price on a site with wind speeds of just 6 m/s rises to $0.06/kWh. The mid-range cost of installing wind power today remains at around $1000/kW for small wind farms or those installed in more difficult terrain, with a resulting power price of $0.043/kWh at wind speeds of 9 m/s, rising to just under $0.08/kWh at 6 m/s.

And offshore

Offshore wind speeds are generally higher and so the best sites -- where average wind speeds may be as high as 9 m/s -- can deliver electricity at just over $0.06/kWh. This is cheaper than from low wind speed sites on land. Offshore sites with low winds are never likely to be utilised, but if they were, offshore wind would cost just over $0.09/kWh on a site with a wind speed of 7 m/s. The offshore kilowatt hour prices assume an installation cost of $1500/kW, a mid-range figure for installations so far built, or to be commissioned.

Collecting the data

The end of competitive bidding for contracts under a public program in Britain, the Non Fossil Fuel Obligation, has meant the end of readily available data on wind's kilowatt hour prices in the market. Business considerations keep most power purchase contract prices under wraps on today's commercial markets -- the only other source of actual price data. In countries with fixed tariffs, under which most wind power has been built, no real world price benchmark exists.

This survey thus calculates today's kilowatt hour prices from the prices per kilowatt of capacity installed. For operations and maintenance, $20-30/kW is added each year, plus $0.002-0.004/kWh. Price calculations for wind kilowatt hours are thus as reliable as they would have been had actual price data been available. A plant lifetime of 15 years has been assumed and a project test discount rate of 7.5% (the DOE implicitly uses similar values). Price studies using "public sector" price estimates will be lower as these assume longer project life and better discount rates. So if anything, this analysis errs on the side of caution in setting future wind prices; they could well be lower in some cases.

Setting upper and lower bounds to the cost of a kilowatt of wind power installed involves a degree of subjective judgement, but as prices are steadily falling, it is almost certain that today's minimum prices will be eclipsed within a short space of time.

Thermal competition

The prices of electricity from new thermal plant have changed little during the year and remain at similar levels to Windpower Monthly's last price assessment (January 2001), although gas prices still appear to be on an upward trend. On both sides of the Atlantic there is agreement that electricity from new gas fired plant costs around $0.035/kWh, with American prices a little higher due to the higher price of gas. With coal the position is reversed, European prices are around $0.048/kWh and American prices a little lower at $0.043/kWh. Nuclear comes in at around $0.06/kWh at the bottom of its range.


The upshot is that without taking external costs into account (box), wind at an installed cost of $700/kW beats coal at wind speeds above about 7.5 m/s; at $1000/kW it beats nuclear at about the same wind speed. It cannot yet touch gas, but wind's price continues to go on plummeting while the price of gas has risen by over 60% since 1999 with some forecasts suggest it will go on rising.

Nuclear prices are the most difficult to quantify. Recent estimates, including several from the nuclear industry itself, span a range from $1020 to $2200 for each installed kilowatt of capacity. The average was about $1750/kW. Using these estimates together with actual fuel and operating costs for nuclear, the mid-range estimate of current electricity production from a nuclear plant built today is around $0.06/kWh, in line with current DOE estimates in America.

With an energy review in progress in Britain and the United States needing to reduce its CO2 emissions -- whether or not it signs up to the Kyoto agreement -- the nuclear lobby is strongly promoting its carbon-free credentials with a view to securing a place in the future energy mix. Price projections for nuclear as low as $0.022/kWh have been quoted in Finland and Britain.

In America the DOE seems to be taking a fairly neutral line when quoting just under $0.06/kWh for 2020. But Britain's Department of Trade and Industry, and other submissions to the energy review, come up with price projections for nuclear of $0.04/kWh, or less. On closer inspection, however, the reason for this discrepancy with the DOE figure becomes clear. The UK figures have assumed: "Series build, low discount rates, long station lifetimes (60 years) and high load factors (90%)," none of which have ever been achieved by the nuclear industry.

"Series build" means that whoever finances the plant must take a deep breath and commit, say, $10 billion to build 10,000 MW of plant on the basis that only an order of this size will bring prices down to $1000/kW (Most of the submissions are a bit reticent as to exactly what the capital costs are). That seems a pretty high risk, which is inconsistent with the low discount rates also being assumed. The financial sector mostly reckons that building nuclear demands a risk premium of around 1-2% on the project test discount rate. Long life and high load are equally naive assumptions. No commercial reactor has yet operated for 60 years and the long-life stations have not achieved a 90% load factor over their total life.

nuclear highligHts

Last, but not least, the nuclear industry optimistically reckons on governments hearing its pleas for the public sector to take on some of the risks of financing a program of new build. Whether or not governments respond to these pleas is uncertain. In the UK this now looks unlikely. Even if they do, wind remains in a strong position as long as it also receives money at preferential rates. In that case, the price of wind comes down in the same way as nuclear.

The problem areas with nuclear generation serve wind in another way too: they highlight the virtues of wind. These include projects of a much more manageable size and little risk of cost overruns. Time overruns are also rare; even if they do occur, they are much less of a threat to the whole financing package -- and therefore the cost of a kilowatt hour -- on a one year time scale.

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