A totally free market - where all methods of making electricity compete on the
same level - does not exist anywhere. In every country the price of
electricity depends not only on the cost of generating it, but also on the
many different factors that affect the market, such as energy subsidies and
taxes.
With
wind energy, and many other renewables, the fuel is free. Therefore once the
project has been paid for, the only costs are operation and maintenance and
fixed costs, such as land rental. The capital cost is high, between 75% and
90% of the total for onshore projects.
The capital cost breakdown of a typical 5 MW onshore project is shown below.
What influences the costs?
Here are two main influences which affect the cost of electricity generated from the wind, and therefore its final price:
- Technical factors, such as wind speed and the nature of the turbines
- The financial perspective of those that commission the projects, e.g. what
rate of return is required on the capital, and the length of time over
which the capital is repaid.
Technical factors
The more electricity the turbines produce the lower the cost of the electricity. This depends on:
The windiness of the site.
The power available from the wind is a function of the cube of the wind speed. Therefore if the wind blows at twice the speed, its energy
content will increase eight fold. In practice, turbines at a site where the
wind speed averages eight metres per second will produce around 80% more
electricity than those where the average wind speed is six metres per second.
Figure below shows how generation cost varies with wind speed.
Wind turbine availability: This is the capability to operate when the wind is available. This is typically 98% or above for modern European machines.
The way the turbines are arranged: Turbines in wind farms must be arranged so that they do not shadow each other.
Financial perspective
The economics of grid connected wind power depend very much upon the
perspective taken.
How quickly investors want their loans repaid and what rate
of returns they require can affect the feasibility of a wind project: a short
repayment period and a high rate of return pushes up the price of electricity
generated, as shown below.
How the cost of wind energy varies with wind speed and rate of return on capital.
The cost of wind energy has fallen since these figures were calculated, nevertheless the graph shows an indication of how wind speed and interest
rates influence the cost.
Public authorities and energy planners tend to assess different energy sources on
the basis of the levelised cost. These calculations do not depend upon
variables such as inflation or taxation system. However, the perspective of private
investors or utilities is different, and takes into account the variables
introduced by government policy and shifts in financial and foreign exchange
markets. These investors make decisions on project cash-flow and payback
time.
Public authorities and energy planners require the capital to be paid off over the
technical lifetime of the wind turbine, i.e. 20 years, whereas the private
investor would have to recover the cost of the turbines during the length of
the bank loan. The interest rates used by public authorities and energy
planners would typically be lower than those used by private investors.
Although the cost varies between different countries, the trend everywhere is the same
- wind energy is getting cheaper. The cost is coming down for various
reasons. The turbines themselves are getting cheaper as technology improves
and the components can be made more economically. The productivity of these
newer designs is also better, so more electricity is produced from more
cost-effective turbines. There is also a trend towards larger machines. This
reduces infrastructure costs, as fewer turbines are needed for the same
output.
The cost of financing is also falling as lenders gain confidence in the technology.
Wind power should become even more competitive as the cost of using
conventional energy technologies rises.
It is difficult to compare the cost of making electricity from different energy
sources because many of the benefits of renewable energy (e.g. no pollution
and never-ending supply) do not have a universally accepted price. However,
it is important to try and compare 'like with like' when contrasting wind
generation costs with those of the fossil fuel sources and so prices bid into
the Non-Fossil Fuel Obligation, which offered 15-year contracts, are a good
guide. In the last round of all, the third Scottish order, around 1000 MW of
wind was bid at 2.8 pence per kilowatt hour (p/kWh) or less - 3.2 p/kWh at
2004 prices while the minimum bid was around 2.2 p/kWh at 2004 prices.
Nevertheless, even if some of these crucial benefits are ignored, the figure below shows
that onshore wind energy is competitive with new coal fired plant, and
cheaper than new nuclear power.
The prices for fossil-fuelled generation used in the figure below have been drawn
from recent government White Papers - except in the case of gas. In this
instance, the recent price movements have been taking into account and, as a
result, generation costs from new plant are likely to be close to 3p/kWh. In
early autumn 2004, gas prices in the futures market were moving upwards,
which could result in higher generation costs.
Offshore, the Department of Trade and Industry (DTI) has suggested that present-day
generating costs are around 5.1 p/kWh. Although some early wind farms have
reported higher capital costs than this, experience in Denmark suggests that
the lower costs are also achievable and so a range of plus or minus 10%
around the central value has been used.
To determine the true cost of generating electricity, the cost of pollution and
other 'external costs' should be included in the calculations. External costs
are the costs to human health and the environment which are not reflected in
the price of the electricity.
Society bears the cost of pollution in terms of poorer health (leading to higher
health service costs funded by the taxpayer) and a degraded environment
(which increases the cost of food and farm products).
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