The installed costs for gas and coal plants were steady in 2011 but fuel prices increased, making wind more competitive overall - and making the prospects for wind farms in the next few years decidedly bright.
Costs for nuclear plants are hard to calculate at this stage, as the nuclear industry is still grappling with the impact of the Fukushima accident in March 2011. At a recent Economist Intelligence Unit online debate on energy, Jose Goldemberg of the University of Sao Paulo in Brazil and a former president of the local energy company, said the issue of safety was on the table and that "in most countries the private sector would not invest in nuclear energy". Even a slight increase in nuclear construction costs will improve the competitive position of onshore wind, while the gap between nuclear and offshore wind is closing.
In the low-carbon arena, wind has few challengers. The prospects for carbon capture and storage are uncertain; while it enjoys the support of policymakers who see renewables, nuclear and "clean" gas and coal as equal partners in a low-carbon energy future, its feasibility and viability remain unproven. Plans for one demonstration plant in the UK were abandoned last year.
Determining true costs
When calculating the cost of energy, several factors come into play. For a start, in this article the cost of plant relates, wherever possible, to actual projects, based on material published in Windpower Monthly and elsewhere. This is backed up by analyses from authoritative sources. Nuclear project costs are not entirely transparent, but benchmarks are provided by recently updated cost projections for new reactors at Turkey Point by Florida Power and Light in the US, along with other sources.
A clear distinction must be drawn between installed costs, which are broadly similar worldwide, and generation costs, which depend on the markets into which electricity is sold. This analysis aims to compare prices on a level playing field.
The generation costs quoted here would allow investors to realise an 8% real rate of return on their capital investment. In practice, 8% might be inadequate in some instances but generous in others. National support frameworks that offer fixed prices - for example feed-in tariffs in Germany - are often seen by developers and financing institutions as relatively low risk and may be financed at comparatively low rates of return of 5-8%, based on the total capital cost.
Locations where energy prices are not guaranteed are seen as more risky, so lenders and investors demand higher rates of return, which can range up to 12% or more. Nuclear and the higher end of offshore wind prices have been derived using a 10% rate of return. An additional estimate is made for nuclear with a 12% rate of return, reflecting the higher perceived risks in some quarters.
Wind costs clarified
In 2011 the average cost of a fully installed onshore wind farm, excluding projects of less than 10MW, was around EUR1,500/kW, marginally less than in 2010. Suggestions from authoritative sources range between the European Wind Energy Association's EUR1,250/kW and EUR1,700/kW from UK consultants Arup. The United States Energy Information Administration (EIA) also suggests a figure at the high end of this range.
Wind turbine costs account for roughly two thirds of total onshore project costs. The average price manufacturers charged was just under EUR1,000/kW for turbines installed in 2011. This has changed little over the past two to three years. Although very large wind farms can benefit from economies of scale, these are often masked by other factors, such as the higher construction costs associated with remote sites in hilly terrain.
The trends in turbine and wind farm costs in Europe and the US are similar (see chart, previous page). The divergence between turbine and installed costs since 2008 is probably due to the fact that turbine contracts for recently completed wind farms were most likely placed around 2008 - before wind turbine prices started to fall. Turbine prices have dropped since then and as these feed into the market, wind farm prices could fall further.
For offshore wind farms, a wide range of installed costs is quoted, from the EUR3,350/kW put forward by trade body RenewableUK to the US Department of Energy's estimate of nearly EUR4,300/kW. The US National Renewable Energy Laboratory suggests the average price worldwide was EUR3,000/kW.
RenewableUK expects prices to rise after 2015, but an analysis for the Danish Energy Agency suggests they might fall. The agency suggests a near-term installed cost of around EUR2,700/kW at the lower end of the cost range. The choice of an appropriate range is therefore a little subjective, but the majority of estimates fall between EUR2,700/kW and EUR3,500/kW.
The cost of energy depends on various factors, including financing and the mean wind speed at a site. The higher the wind speed, the lower the cost of electricity. For example, onshore wind at EUR1,300/kW financed over 20 years with an 8% interest rate delivers electricity at about EUR108/MWh where the mean wind speed is six metres per second (m/s). However, a wind farm on a 7m/s site will generate electricity at EUR79/MWh, while one on a site with mean wind speeds of 9m/s will generate at EUR52/MWh.
Construction costs reported for thermal plant increased slightly in 2011, with combined cycle-gas turbine plant generally in the range EUR730-940/kW, coal plant in the range EUR1,600-2,300/kW and nuclear plant in the range EUR2,700-4,000/kW. Gas prices eased up slightly and coal prices were fairly stable.
Globally, there are wide variations in the price of gas, with US prices roughly half those in Europe. US gas is now significantly cheaper than the price of oil, whereas for many years the prices, based on the energy content of the fuel, were very similar. The EIA anticipates a steady rise in the price of gas for electricity generation over the next few years (see chart, top left).
Gas-fired generation is currently the cheapest source of energy in the US, with prices starting at EUR37/MWh. In parts of Europe, where gas is significantly more expensive, coal is cheaper.
Although the price of coal itself, based on the energy content, is cheaper than gas, the electricity is more expensive and so the 'low-end' price of coal-fired generation is about EUR55/MWh. The wide spread of coal prices worldwide leads to a big range in coal prices, with the high-end price at EUR97/MWh. In the EU, a carbon cost of EUR15/tonne of CO2 needs to be added to coal and gas prices. This corresponds to around EUR6/MWh extra for gas, and EUR12 for coal.
Carbon prices have been depressed in the past few months, falling below the EUR10/tonne level. As a result of the sovereign debt crisis throughout Europe, analyst Thomson Reuters Point Carbon has recently revised its forecast downwards and now expects an average price of carbon of EUR12/tonne until 2020, some EUR10 less than previously estimated.
On nuclear, the EIA has estimated a capital cost of EUR3,800/kW, although Florida Power and Light suggests a slightly lower cost. An analysis by Mott Macdonald for the UK Department of Energy and Climate Change points to an upper limit of EUR5,080/kW. The range for the purposes of this analysis has been set at EUR3,800-5,000/kW. A 2% risk premium adds about EUR14/MWh to generating costs.
How they compare
Onshore wind prices overlap coal and nuclear (see chart, above). The thermal sources are cheaper at the lower end of their price ranges, but wind is cheaper compared with the most expensive coal and nuclear.
At the upper end of the installed cost range - EUR1,700/kW - wind-generation costs are around EUR99/MWh at 7m/s, falling to EUR78/MWh at 8m/s and EUR65/MWh at 9m/s. These prices are only competitive with the higher end of gas prices at wind speeds above about 8m/s. Wind on sites above 7m/s is competitive with gas-fired generation in Europe if the upper end of the generation cost range for gas is used and a carbon cost of EUR15/tonne of CO2 is assumed. In the US, wind struggles to compete, because gas is so cheap.
Wind prices at EUR1,700/kW are still competitive with nuclear unless its costs come in at the lower end of the price range. Coal is only competitive with high-cost wind if it comes in at the lower end of its range and there is no carbon cost attached. However, wind energy from sites with wind speeds above 7m/s is cheaper than the more expensive estimates for coal.
Offshore wind can only compete with thermal sources of electricity generation at high wind speeds and low costs. But the most expensive nuclear electricity is already comparable to offshore wind.
Here comes the sun
This year we are including solar energy in our analysis as solar photovoltaic (PV) installations experienced significant growth in 2011. Costs for solar PV are falling rapidly due to considerable worldwide research and development activity. Although it is expected that installation costs will fall further, generation costs are still about two-and-a-half times those of wind on average, according to the Intergovernmental Panel on Climate Change (IPCC).
The installed costs quoted range between the International Energy Agency's EUR2,357/kW and the EIA's EUR3,400/kW. Load factors (the ratio of average output power to rated output) are generally 9-16% in Europe and the northern US, rising to around 20% further south.
The lowest generation cost, derived by combining the minimum installation cost with a maximum load factor of 21%, is EUR144/kWh, which appears rather optimistic. The IPCC suggests the range should centre on EUR220/kWh. At the upper end, combining high installed cost with a load factor of 11% and higher operation and maintenance costs, suggests a generation cost of EUR427/MWh.
Current feed-in tariffs range from EUR162/MWh in Hawaii to EUR590/MWh in Switzerland, according to wind-energy tariffs expert Paul Gipe.
The shale effect
The exploitation of shale gas has accelerated over the past few years and is seen by some as one answer to energy security. Shale gas is trapped in rock fissures and can be released by fracturing the rocks using water at high pressure. It has gradually developed in the US and now accounts for around 15% of total gas needs.
Gas prices fell in the US after 2010, probably due to the rise of shale gas use. Extraction costs in the US are now roughly similar to those from conventional gas wells and shale's contribution is expected to increase.
There are also reserves in Europe, although they may be expensive to exploit. Test drillings in the UK are thought to have been a possible cause of minor earth tremors in spring 2011 in north-west England. There are other environmental concerns, notably possible pollution of underground water supplies. A UK parliamentary committee concluded that shale gas was unlikely to have a large impact on security of supply due to the limited extent of the resource.
Energy markets illustrate this forecast. Gas prices in the US seem set to rise modestly but steadily, although they are still below oil prices by a factor of about four; the two were roughly similar throughout the 1990s. European gas price trajectories are on an upward trend and there is no sign of their levelling off in anticipation of large-scale exploitation of shale gas.
As far as wind costs are concerned, analyses anticipate a marked fall in onshore costs, provided commodity prices remain stable, as improving turbine design and strong competition on prices from Chinese turbines make their mark.
Offshore cost trends are difficult to predict, as the industry has developed fairly slowly so far. Aggressive growth plans are in place, however, driven by ambitious renewable-energy targets in Europe and efforts elsewhere to develop a competitive global industry.
At a European offshore wind event in Amsterdam last month, industry players agreed that the focus on turbine prices was misplaced and more attention should be paid to installation costs, where the potential for improvement was the greatest. Georg Friedrichs, CEO of Vattenfall Europe Windkraft, said that expectations of lower costs for offshore wind had been confounded by reality and that the industry needed to act fast to improve its record. "Standardisation and shared know-how will lower costs," he said.
It would be hard to overestimate how important this is. Even a 20% drop in offshore wind installed costs, as predicted by some analysts, will bring the cost of power generated by offshore wind farms more in line with that produced by thermal sources, especially if fuel prices continue to rise.
A MATTER OF INTEREST HOW INTEREST RATES ARE LINKED TO GENERATION COSTS
A wide range of interest rates and amortisation periods (the time taken to pay off a loan and its interest) is used when presenting generation costs. Interest rates, or the "weighted average cost of capital", normally range between 5% and 10%, with a risk premium applied to technologies that are not well established.
In this analysis, an interest rate of 8% has been used for all technologies except nuclear, where a 10% rate has been applied. The high nuclear generation cost estimate has been derived using a 12% rate, which includes a 2% risk premium.
As some financing institutions perceive offshore wind to be risky, a 10% interest rate has been used to estimate the high generation cost.
An amortisation period of 20 years has been used throughout. In practice, some financing institutions may require loans to be repaid within a shorter period, say 15 years.
Some nuclear generation cost estimates are based on a 40-year amortisation period, which takes into account the life of the plant, but capital repayment periods are unlikely to be extended that far. Increasing the depreciation period for nuclear from 20 to 60 years brings down the generation cost by about EUR10/MWh.
Any changes in the interest rate have a more dramatic effect on the generation costs of wind and nuclear power than they do on coal and gas since a high proportion of these costs can be attributed to capital repayments. If the interest rate for wind projects is 5% instead of 8%, this will result in a reduction in generation costs for onshore wind of around EUR10-14/MWh.