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resources Cost
What are the Factors in the Cost of Electricity from Wind Turbines? The cost of electricity from utility-scale wind systems has dropped by more than 80% over the last 20 years. In the early 1980's, when the first utility-scale wind turbines were installed, wind-generated electricity cost as much as 30 cents per kilowatt-hour. Now, state-of-the-art wind power plants at excellent sites are generating electricity at less than 5 cents/kWh. Costs are continuing to decline as more and larger plants are built and advanced technology is introduced. Aside from actual cost, wind energy offers other economic benefits which make it even more competitive in the long term:
Selection of a suitable site is key to the economics of wind energy. The power available from the wind is a function of the CUBE of the wind speed, which means that, all other things being equal, a turbine at a site with 5 meters/second (m/s) winds will produce nearly twice as much power as a turbine at a location where the wind averages 4 m/s. In the electric power business, where technology options often hinge on very small economic differences, good wind resource assessment and siting is critical. In general, winds exceeding 5 m/s (11 mph) are required for cost-effective application of small grid-connected wind machines, while windfarms require wind speeds of 6 m/s (13 mph). For applications that are not grid-connected, of course, these requirements may vary, depending on the other power alternatives available and their costs. Financing is also a critical issue for wind plants. The following story from the American Wind Energy Association's Wind Energy Weekly will make this clear. Wind Power Costs Depend on Ownership, Financing [From Wind Energy Weekly #709, 12 August 1996] Wind energy costs can be cut substantially if a wind project is owned by a utility, and could also be sharply reduced if wind developers could obtain the same financing terms as gas power plant developers, according to a new study by two federal laboratory researchers. In "Alternative Windpower Ownership Structures: Financing Terms and Project Costs," Ryan Wiser and Edward Kahn of Lawrence Berkeley Laboratory's Energy and Environment Division estimate that a typical 50-MW wind plant, which would deliver power at just under 5 cents/kWh if financed by a wind developer, could generate at 3.5 cents/kWh--a nearly 30% reduction--if an investor-owned utility (IOU) owned and financed the facility instead. Using typical gas project financing terms instead, the cost also drops even if the developer owns the project, to 3.69 cents/kWh. Costs in all cases assumed use of the federal production tax credit. Wiser and Kahn set out to examine the proposition, long advanced by members of the wind industry, that wind projects would be cheaper if they could take advantage of the lower-cost financing available to large electric utilities. In general, they said, that appears to be true, although they caution that utility investment analysis methods may not be completely accurate and may overstate the savings that could be attained. Their comparison is based on a 50-MW wind farm with an installed cost of $1,000/kW, a 30% capacity factor, and operations and maintenance (O&M) expenses of 0.65 cents/kWh. The two actually examined six ownership and financing scenarios. In addition to a wind plant owned by a private developer selling power to a utility under a power purchase agreement (PPA) and to a plant owned by the IOU, they also looked at four scenarios involving public utility ownership. "Assuming that the installed and general O&M costs are equal in all ownership scenarios . . . we conclude that utility ownership of windpower facilities results in a significantly lower estimated levelized cost of energy. Compared to the private ownership, project-finance structure, IOU ownership reduces apparent levelized costs by approximately 30% (1.4 cents/kWh). "Internally-financed public utility ownership is estimated to reduce overall costs by approximately 10-40%, depending on whether [Renewable Energy Production Incentive (REPI)] costs are included in the analysis." The REPI is a payment to public utilities to compensate for the fact that since they are not subject to federal taxes, they cannot qualify for the Production Tax Credit (PTC). However, since REPI is not a tax deduction, money must be appropriated for it each year by Congress, and thus it is viewed by the financial community as subject to considerable risk. Utility ownership of wind plants is cheaper, Wiser and Kahn write, due to lower cost debt (interest rate of 7.5% compared to 9.5% for a developer), longer debt payment periods (20 years compared to 12 for a developer), and the absence of a "debt service coverage ratio" (DSCR) requirement. The DSCR is a mechanism by which a lender reduces risk of default on a loan by requiring that a wind project generate enough cash each year to exceed loan payments. Typically, this results in a smaller loan than would be most advantageous for the developer. Regarding the comparison to gas-fired power plants, the two write, "Due to the real and perceived risks associated with wind turbine technology and wind resources, privately-owned wind projects typically receive financing that is both more costly and restrictive than is available to more traditional gas-fired generation sources . . . If wind developers received similar financing terms and costs as gas-fired NUGs [non-utility generators], the nominal levelized cost of windpower might decrease by 25% (1.2 cents/kWh) . . . "As wind turbine technology matures, resource evaluation becomes more accepted, and information becomes readily available to the financial community, debt and equity costs and terms may become less restrictive and costly for project-financed windpower facilities." The most important variable, according to Wiser and Kahn, is the relatively low return on equity (12%) that is required by investors in gas projects, compared to 18% for wind projects. If a similar return is required for wind projects, the cost drops from 4.95 cents/kWh to 4.05 cents/kWh, a reduction of 18%. Wiser and Kahn note that policy options exist that could help overcome some of the disparity between gas and wind: "The creation of long-term contracts and a stable and predictable U.S. wind market would indirectly reduce finance costs by decreasing the market risks of windpower development. More direct mechanisms, such as direct low-cost government loans, loan guarantee programs, interest-rate buy-downs, and government- facilitated project-aggregation mechanisms could also be implemented at the state or federal levels to promote investment and reduce financing costs." Overall, Wiser and Kahn estimate wind power costs, depending on ownership and financing method, as follows:
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