This part of the report focuses on the economics of wind power. The investment and cost structures of land-based and offshore wind turbines are discussed. The cost of electricity produced is also addressed, which takes into account the lifetime of turbines and O&M costs, and the past and future development of the costs of wind-generated power is analysed. In subsequent chapters, the importance of finance, support schemes and employment issues are discussed. Finally, the cost of wind generated electricity is compared to the cost of conventional fossil fuel-fired power plants.
Wind power is used in a number of different applications, including grid-connected and stand-alone electricity production and water pumping. This part analyses the economics of wind energy, primarily in relation to grid-connected wind turbines, which account for the vast bulk of the market value of installed turbines.
Cost of on-land wind power
Cost and investment structures
The main parameters governing wind power economics include:
* investment costs, such as auxiliary costs for foundation and grid connection;
* operation and maintenance costs;
* electricity production / average wind speed;
* turbine lifetime;
* discount rate.
The most important parameters are wind turbine electricity production and investment costs. As electricity production depends to a large extent on wind conditions, choosing the right turbine site is critical to achieving economic viability.
Trends influencing the costs of wind power
In recent years, three major trends have dominated the development of grid-connected wind turbines:
* Turbines have become larger and taller – the average size of wind turbines sold on the market has increased substantially.
* The efficiency of turbine production has increased steadily.
* In general, the investment costs per kW have decreased, although there has been a deviation from this trend in recent years.
It can be observed that the annual average size has increased significantly over the last 10-15 years, from approximately 200 kW in 1990 to 2 MW in 2007 in the UK, with Germany, Spain and USA not far behind.
As shown, there is a significant difference between some countries: in India, the average installed size in 2007 was around 1 MW, considerably lower than levels in the UK and Germany (2,049 kW and 1,879 kW, respectively). The unstable picture for Denmark in recent years is due to the low level of turbine installations.
In 2007, turbines of the MW-class (with a capacity of over 1 MW) had a market share of more than 95%, leaving less than 5% for the smaller machines. Within the MW-segment, turbines with capacities of 2.5 MW and upwards are becoming increasingly important, even for on-land sites. In 2007, the market share of these large turbines was 6%, compared to only 0.3% at the end of 2003.
The wind regime at the chosen site, the turbine hub height and the efficiency of production determine power production from the turbines. So, just by increasing the height of turbines has resulted in higher power production. Similarly, the methods for measuring and evaluating the wind speed at a given site have improved substantially in recent years and thus improved the site selection for new turbines. In spite of this, the fast development of wind power capacity in countries such as Germany and Denmark implies that, by now, the best wind sites in these countries have been taken and that new on-land turbine capacity will have to be erected at sites with a marginally lower average wind speed. The replacement of older and smaller turbines with modern versions is also becoming increasingly important, especially in countries which have been involved in wind power development for a long time, as is the case for Germany and Denmark.
The development of electricity production efficiency, owing to better equipment design, measured as annual energy production per square metre of swept rotor area (kWh/m2) at a specific reference site, has correspondingly improved significantly in recent years.
Taking into account the issues of improved equipment efficiency, improved turbine siting and higher hub height, the overall production efficiency has increased by 2-3% annually over the last 15 years.
The data reflects turbines installed in the particular year shown (all costs are converted to 2006 prices) and all costs on the right axis are calculated per square metre of swept rotor area, while those on the left axis are calculated per kW of rated capacity.
The number of square metres covered by the turbine’s rotor – the swept rotor area – is a good indicator of the turbine’s power production, so this measure is a relevant index for the development in costs per kWh. There was a substantial decline in costs per unit of swept rotor area in the period under consideration, except during 2006. So from the late 1990s until 2004, overall investments per unit of swept rotor area declined by more than 2% per annum, corresponding to a total reduction in cost of almost 30% over these 15 years. But this trend was broken in 2006, when total investment costs rose by approximately 20% compared to 2004, mainly due to a significant increase in demand for wind turbines, combined with rising commodity prices and supply constraints.
Looking at the cost per rated capacity (per kW), the same decline is found in the period 1989 to 2004, with the exception of the 1,000 kW machine in 2001. The cause is related to the size of this specific turbine; with higher hub heights and larger rotor diameters, the turbine is equipped with a slightly smaller generator, although it produces more electricity. This fact is particularly important when analysing turbines built specifically for low and medium wind areas, where the rotor diameter is considerably larger in comparison to the rated capacity. The cost per kW installed also rose by 20% in 2006 compared to 2004.
In addition, the share of other costs as a percentage of total costs has generally decreased. In 1989, almost 29% of total investment costs were related to costs other than the turbine itself. By 1997, this share had declined to approximately 20%. The trend towards lower auxiliary costs continues for the last turbine model shown (2000 kW), where other costs amount to approximately 18% of total costs. But from 2004 to 2006 other costs rose almost in parallel with the cost of the turbine itself.
The recent increase in turbine prices is a global phenomenon, which stems mainly from a strong and increasing demand for wind power in many countries, as well as constraints on the supply side (not only related to turbine manufac¬turers but also resulting from a deficit in sub-supplier production capacity of wind turbine components). The general price increases for newly installed wind turbines in a number of selected countries. There are significant differences between individual countries, with price increases ranging from almost none to a rise of more than 40% in the US and Canada.
Operation and maintenance costs of wind generated power
Operation and maintenance (O&M) costs constitute a sizeable share of the total annual costs of a wind turbine. For a new turbine, O&M costs may easily make up 20-25% of the total levelised cost per kWh produced over the lifetime of the turbine. If the turbine is fairly new, the share may only be 10-15%, increasing to at least 20-35% by the end of the turbine’s lifetime. As a result, O&M costs are attracting greater attention, as manufacturers attempt to lower these costs significantly, by developing new turbine designs that require fewer regular service visits and less turbine downtime.
O&M costs are related to a limited number of cost components, and include:
* regular maintenance;
* spare parts, and
Some of these cost components can be estimated relatively easily. For insurance and regular maintenance, it is possible to obtain standard contracts covering a considerable share of the wind turbine’s total lifetime. Conversely, costs for repair and related spare parts are much more difficult to predict. And although all cost components tend to increase as the turbine gets older, costs for repair and spare parts are particularly influenced by turbine age; starting low and increasing over time.
Due to the relative infancy of the wind energy industry, there are only a few turbines that have reached their life expectancy of 20 years. These turbines are much smaller than those currently available on the market and, to a certain extent, the design standards were more conservative, though less stringent than they are today. Estimates of O&M costs are still highly unpredictable, especially around the end of a turbine’s lifetime; nevertheless a certain amount of experience can be drawn from existing, older turbines.
Based on experiences in Germany, Spain, the UK and Denmark, O&M costs are generally estimated to be around 1.2 to 1.5 eurocents (c€) per kWh of wind power produced, over the total lifetime of a turbine. Spanish data indicates that less than 60% of this amount goes strictly to the O&M of the turbine and installations, with the rest equally distributed between labour costs and spare parts. The remaining 40% is split equally between insurance, land rental and overheads.
Expenses pertaining to buying power from the grid and land rental (as in Spain) are included in the O&M costs calculated for Germany. For the first two years of its lifetime, a turbine is usually covered by the manufacturer’s warranty, so in the German study O&M costs made up a small percentage (2-3%) of total investment costs for these two years, corresponding to approximately 0.3-0.4 c€ /kWh. After six years, the total O&M costs increased, constituting slightly less than 5% of total investment costs, which is equivalent to around 0.6-0.7 c€/kWh. These figures are fairly similar to the O&M costs calculated for newer Danish wind turbines.
So, for a three year old 600 kW machine, which was fairly well represented in the study , approximately 35% of total O&M costs covered insurance, 28% regular servicing, 11% administration, 12% repairs and spare parts, and 14% for other purposes. In general, the study revealed that expenses for insurance, regular servicing and administration were fairly stable over time, while the costs for repairs and spare parts fluctuated considerably. In most cases, other costs were of minor importance.
For a three year old turbine, the O&M costs decreased from around 3.5 c€/kWh; for the old 55 kW turbines, to less than 1 c€/kWh for the newer 600 kW machines. The figures for the 150 kW turbines are similar to the O&M costs identified in the three countries mentioned above. Moreover, O&M costs increase with the age of the turbine.
With regard to the future development of O&M costs, care must be taken in interpreting the results, as wind turbines exhibit economies of scale in terms of declining investment costs per kW with increasing turbine capacity, similar economies of scale may exist for O&M costs. This means that a decrease in O&M costs will be related, to a certain extent, to turbine up-scaling. Secondly, the newer and larger turbines are better aligned with dimensioning criteria than older models, implying reduced lifetime O&M requirements. However, this may also have the adverse effect that these newer turbines will not stand up as effectively to unexpected events.
The cost of energy generated by wind power
The total cost per kWh produced (unit cost) is calculated by discounting and levelising investment and O&M costs over the lifetime of the turbine, and then dividing them by the annual electricity production. The unit cost of generation is thus calculated as an average cost over the turbine’s lifetime. In reality, actual costs will be lower than the calculated average at the beginning of the turbine’s life, due to low O&M costs, and will increase over the period of turbine use.
The turbine’s power production is the single most important factor for the cost per unit of power generated. The profitability of a turbine depends largely on whether it is sited at a good wind location. In this section, the cost of energy produced by wind power will be calculated according to a number of basic assumptions. Due to the importance of the turbine’s power production, the sensitivity analysis will be applied to this parameter. Other assumptions include the following:
* Calculations relate to new land-based, medium-sized turbines (1.5-2 MW) that could be erected today.
* Investment costs reflect the range given in Section 2 – that is, a cost per kW of 1,100-1,400 €/kW, with an average of 1,225 €/kW. These costs are based on data from IEA and stated in 2006 prices.
* Operation and maintenance costs are assumed to be 1.45 c€/kWh as an average over the lifetime of the turbine.
* The lifetime of the turbine is set at 20 years, in accordance with most technical design criteria.
* The discount rate is assumed to range from 5-10% per annum. In the basic calculations, a discount rate of 7.5% per annum is used, although a sensitivity analysis of the importance of this interest range is also performed.
* Economic analyses are carried out on a simple national economic basis. Taxes, depreciation and risk premiums are not taken into account and all calculations are based on fixed 2006 prices.
As illustrated, the costs range from approximately 7-10 c€/kWh at sites with low average wind speeds, to approximately 5-6.5 c€/kWh at windy coastal sites, with an average of approximately 7c€/kWh at a wind site with average wind speeds.
In Europe, the good coastal positions are located mainly on the coasts of the UK, Ireland, France, Denmark and Norway. Medium wind areas are mostly found inland in mid and southern Europe – Germany, France, Spain, Holland and Italy; and also in Northern Europe in Sweden, Finland and Denmark. In many cases, local conditions significantly influence the average wind speeds at a specific site, so significant fluctuations in the wind regime are to be expected even for neighbouring areas.
Approximately 75-80% of total power production costs for a wind turbine are related to capital costs – that is, the costs of the turbine, foundation, electrical equipment and grid connection. Thus, a wind turbine is capital intensive compared with conventional fossil fuel-fired technologies, such as natural gas power plants, where as much as 40-60% of total costs are related to fuel and operation and maintenance costs. For this reason, the costs of capital (discount or interest rate) are an important factor for the cost of wind generated power; a factor which varies considerably between the EU member countries.
As illustrated, the costs ranges between around 6 and 8 c€/kWh at medium wind positions, indicating that a doubling of the interest rate induces an increase in production costs of 2 c€/kWh. In low wind areas, the costs are significantly higher, at around 8-11 c€/kWh, while the production costs range between 5 and 7 c€/kWh in coastal areas.
Development of the cost of wind-generated power
The rapid European and global development of wind power capacity has had a strong influence on the cost of wind power over the last 20 years. To illustrate the trend towards lower production costs of wind-generated power, a case that shows the production costs for different sizes and models of turbines is presented below. Due to limited data, the trend curve has only been constructed for Denmark, although a similar trend (at a slightly slower pace) was observed in Germany.
A 20-year lifetime is assumed for all turbines in the analysis and a real discount rate of 7.5% per annum is used. All costs are converted into constant 2006 prices. Turbine electricity production is estimated for two wind regimes – a coastal and an inland medium wind position.
The starting point for the analysis is the 95 kW machine, which was installed mainly in Denmark during the mid 1980s. This is followed by successively newer turbines (150 kW, 225 kW), ending with the 2000 kW turbine, which was typically installed from around 2003 onwards. It should be noted that wind turbine manufacturers generally expect the production cost of wind power to decline by 3-5% for each new turbine generation they add to their product portfolio. The calculations are performed for the total lifetime (20 years) of s turbine, which means that calculations for the old turbines are based on track records of more than 15 years (average figures), while newer turbines may have a track record of only a few years; so, the newer the turbine, the less accurate the calculations.
For a coastal position, for example, the average cost has decreased from around 9.2 c€ /kWh for the 95 kW turbine (mainly installed in the mid 1980s), to around 5.3 c€ /kWh for a fairly new 2,000 kW machine, an improvement of more than 40% over 20 years (constant 2006 prices).
Future evolution of the costs of wind-generated power
In this section, the future development of the economics of wind power is illustrated by the use of the experience curve methodology. The experience curve approach was developed in the 1970s by the Boston Consulting Group, and it relates the cumulative quantitative development of a product to the development of the specific costs (Johnson, 1984). Thus, if the cumulative sale of a product doubles, the estimated learning rate gives the achieved reduction in specific product costs.
The experience curve is not a forecasting tool based on estimated relationships. It merely shows that if the existing trends continue in the future, the proposed development may be seen. It converts the effect of mass production into an effect upon production costs, without taking other causal relationships into account. Thus, changes in market development and/or technological breakthroughs within the field may change the picture considerably, as would fluctuations in commodity prices such as those for steel and copper.
Different experience curves have been estimated for a number of projects (see i.e Neij, 1997, Neij, 2003 or Milborrow, 2003). Unfortunately, different specifications were used, which means that not all of these projects can be directly compared. To obtain the full value of the experiences gained, the reduction in price of the turbine (€/KW-specification) should be taken into account, as well as improvements in the efficiency of the turbine’s production (which requires the use of an energy specification (€/kWh), as done by Neij in 2003). Thus, using the specific costs of energy as a basis (costs per kWh produced), the estimated progress ratios range from 0.83 to 0.91, corresponding to learning rates of 0.17 to 0.09. So when the total installed capacity of wind power doubles, the costs per kWh produced for new turbines goes down by between 9 and 17%. In this way, both the efficiency improvements and embodied and disembodied cost reductions are taken into account in the analysis.
Wind power capacity has developed very rapidly in recent years, on average by 25-30% per year over the last ten years. So, at present the total wind power capacity doubles approximately every three to four years.
* The present price-relation should be retained until 2010; the reason why no price reductions are foreseen in this period is due to a persistently high demand for new wind turbine capacity, and sub-supplier constraints in the delivery of turbine components.
* From 2010 until 2015, a learning rate of 10% is assumed, implying that each time the total installed capacity doubles, the costs per kWh of wind generated power decreases by 10%.
* The growth rate of installed capacity is assumed to double cumulative installations every three years.
* The curve illustrates cost development in Denmark, which is a fairly cheap wind power country. Thus, the starting point for the development is a cost of wind power of around 6.1 c€/kWh for an average 2 MW turbine, sited at a medium wind regime area (average wind speed of 6.3 m/s at a hub height of 50 m). The development for a coastal position is also shown.
At present, the production costs for a 2 MW wind turbine installed in an area with a medium wind speed (inland position) are around 6.1 c€ per kWh of wind-produced power. If sited at a coastal position, the current costs are around 5.3 c€/kWh. If a doubling time of total installed capacity of three years is assumed, in 2015 the cost interval would be approximately 4.3 to 5.0 c€/kWh for a coastal and inland site, respectively. A doubling time of five years would imply a cost interval, in 2015, of 4.8 to 5.5 c€/kWh. As mentioned, Denmark is a fairly cheap wind power country, so for more expensive countries the cost of wind power produced would increase by 1- 2 c€/kWh.