Select Committee on Environmental Audit Minutes of Evidence


Memorandum submitted by David Milborrow

BACKGROUND

  1.  I have been tracking and reporting on wind and thermal plant generation costs since about 1984 and was responsible for the "Economics" section of the first edition of the European Wind Energy Association's "Wind Energy—the Facts". I am an independent consultant who has been active in the energy and renewable energy fields for 13 years, prior to which I worked on the renewables programme of the Central Electricity Generating Board. I have no permanent affiliations, but act as technical adviser to the British Wind Energy Association and to the journal "Windpower Monthly". This submission, however, is my own.

  2.  This submission mainly addresses items B2 and B3 in the Committee's list—the financial costs of wind gas-fired generation; it concentrates on quantifying the generation costs of wind energy, but also includes an analysis of gas-fired generation costs and comments and comparisons between gas and wind.

WIND ENERGY GENERATION COSTS

Introduction

  3.  No single value can be assigned to the price of wind energy. Wind energy generation costs depend on wind speed, the cost of the plant, financing terms and operating costs. The term "Generation costs" is used in this submission, in line with conventional usage. Strictly speaking, they are "Generation prices".

  4.  In the UK at present, under the Renewables Obligation (RO), "prices" and "costs" have become almost totally decoupled, as prices for renewable electricity depend mainly on the structure of the RO, and the prevailing shortage of renewable electricity. The perceived price of wind energy, following the NFPA auction in August 2005, is now just over 9p/kWh, which is clearly inconsistent with the US Department of Energy's estimate of 2.7 p/kWh.[19] This gap has nothing to do with the characteristics of wind energy and is an institutional, rather than a technology related, issue that affects all renewables in the UK. As the issue has recently been explored by the National Audit Office, it is not discussed here.

  5.  Capital costs are primarily a function of the size of the installation (due to economies of scale), but location is also a factor. Wind speed depends solely on location, and financing terms depend on the institutional framework in the country where the plant is located. They may alter over time.

  6.  Financing costs in this submission are derived using procedures which are reasonably standardised across the power industry. "Real", ie net of inflation, interest rates (test discount rates) are used, and realistic capital repayment periods. They are therefore independent of any particular support mechanism.

Current capital costs—onshore wind

  7.  The author maintains a database of wind energy project costs, worldwide, drawn from various renewable energy newsletters, manufacturers' press releases, and journals such as "Windpower Monthly" and "Power UK". The database is used to compile an article comparing wind energy generation costs with those from thermal sources in the January issue of Wind Power Monthly.[20] In 2004, the overall average installed wind plant cost was

980/kW (£670/kW). An analysis of UK projects, only, suggests an average cost of £770/kW.

  8.  As UK project costs often include provision for operation and maintenance over the first few (typically three) years, this may account for the higher UK figure. Other possible reasons are the cost of securing planning consents and the extra costs of construction in remote hilltop locations. An appropriate range of capital costs, spanning the range one standard deviation either side of the mean, is £650/kW to £900/kW.

  9.  Other recent estimates from independent and authoritative sources of current costs include the Danish Energy Authority (£570/kW),[21] the US Department of Energy (£590/kW),[22] and the DTI (£600-800/kW).[23]

  10.  For the purpose of estimating interest during construction, a six-month build time has been assumed.

Operation and maintenance costs

  11.  Operation and maintenance costs are expressed in several ways. Some analyses express them all in £/kW/yr, and values between £15/kW and £28/kW found in the literature for the UK. Others express them as a percentage of the capital cost per year, and values between 2 and 5% are found. Values in £/MWh are less common, but still found. In this submission, a "low" value of £16/kW and a "high" value of £20/kW is used, plus, in each case, 1.5% of revenue, reflecting typical royalty payments to landowners. The references cited in paragraph 9 use £6/MWh, £15/kW and £25-30/kW, respectively. The author's estimates lie between the latter two figures.

Electricity production

  12.  Although wind turbines have differing performance characteristics, the variations are not that wide, and so it is possible to derive a "universal" characteristic that describes the variation of output with wind speed. The "capacity factor" (average power/rated power) is the conventional term used to quantify the output. It establishes a link between wind speed and energy productivity. The data presented here assumes that the capacity factor is 19% at sites with an annual mean wind speed of 6 m/s, rising to just under 40% at 9 m/s. Most UK wind farm sites have wind speeds within this range, although the resource at the upper end of the range may be limited. These capacity factors include allowances for availability, inter-machine array losses, and electrical losses within the wind farm.

  13.  Published data on the performance of numerous wind UK farms suggest that the capacity factor estimates described in the previous paragraph are realistic.

Financial parameters

  14.  The two key financial parameters are the test discount rate and the capital recovery period. In line with recent most analyses of UK onshore wind plant, a 15-year capital recovery period is used, coupled with an 8% "real" test discount rate.

Onshore generating costs summary

  15.  Table 1 summarises the range of cost estimates derived from this analysis. As the more expensive wind farms tend to be those on high wind speeds sites, the "low cost/high wind" and high cost/low wind" entries have been omitted. Although these figures are higher than the US DoE estimate cited in paragraph 4, they are consistent. US DoE used a lower capital cost and high wind speed.

Table 1:

ONSHORE WIND: CURRENT ESTIMATES OF GENERATING COSTS (£/MWh)



Wind speed, m/s 7

8

9


Low cost, £650/kW
41.632.9
High cost, £900/kW 44.837.0


Future costs

  16.  There have been numerous estimates of the future costs of onshore wind. The US Department of Energy suggests a comparatively modest decline by 2010—but its baseline figure (£600/kW) is lower than assumed here. Although recent increases in the prices of steel and copper may retard the downward trend that has been evident over the past 20 years, three factors are still likely to cause the trend to continue. Manufacturers are continuing to improve production techniques, machines are getting larger, and wind farms are getting larger. Given the wealth of experience that exists in Denmark, the estimate from the Danish Energy Authority (3) carries some weight. They suggest a capital cost range of £420-500/kW will be realised in the period 2010-15. Making a conservative assumption that there will be a modest reduction in operating costs by that time, this suggests generating costs will be in the region £22/MWh (9 m/s), to £34/MWh (7 m/s).

Offshore wind

  17.  Although there is less experience with offshore wind, generation costs are relatively easy to compute, as the range of capital costs and wind speeds is narrower. The UK wind farms at North Hoyle and Kentish Flats, and the Danish wind farm at Nysted, were all completed at around £1200/kW. Wind speeds close to the east and west coasts are around 8 m/s, increasing with distance from the shore. Operation and maintenance costs are subject to uncertainty, as "settled down" estimates are not available; for present-day estimates a value of £34/kW/yr is used.[24]

  18.  As offshore wind is not yet regarded as a mature technology, a test discount rate of 10% is generally used to calculate generation costs.

  19.  As with onshore wind, offshore wind costs are likely to fall. One additional factor will be the accumulation of offshore experience. Again, there is a wide range of estimates in the literature, but the Danish Energy Authority Estimate for 2010/2015 can be used as a guide, as for onshore wind. Their "upper bound" estimate is £890/kW, which is reasonably consistent with an estimate from consultants Garrad Hassan for 2010.[25]

  20.  Assuming that installed costs by 2015 fall to £900/kW and that offshore wind is regarded as a mature technology by that time, so that an 8% test discount rate can be used, this enables generation costs to be calculated. The estimates are compared with present-day values in table 2.

Table 2:

PRESENT AND FUTURE OFFSHORE WIND GENERATING COSTS, £/MWh


  Wind speed, m/s


Scenario
8 9
Present, £1,200/kW, 10% interest68.8 57.0
approx 2015, £900/kW, 8% interest 46.538.5

GENERATION COSTS OF GAS-FIRED PLANT

  21.  The generation costs of combined cycle gas turbines tend to be the yardstick against which other technologies are compared. The principal uncertainty in determining these is the future cost of gas, as fuel accounts for about two-thirds of the total generation cost.

  22.  Recent reports of completed UK CCGT contracts suggests that the average installed cost is a little under £500/kW, which is in line with an earlier estimate of £455/kW.[26] A value of £475/kW has been used here. Estimates of operation and maintenance costs are mostly in the range £24-30/kW/yr, and this submission uses £25/kW, plus £1/MWh.

  23.  In August 2005, the average "beach" price for gas was about 32p/therm. The UK power generators pay about 11% more than this price, on average, based on past experience. Assuming a build time of two years, thermal efficiency of 55%, and availability of 85%, this enables generation costs to be derived, as a function of the UK gas price. The estimates are set out in table 3.

Table 3:

GAS-FIRED GENERATION COSTS, £/MWh



    UK gas price, p/therm


25 304050
CCGT generation cost29.1 32.539.245.9


  24.  Future gas-fired generation costs are extremely uncertain, simply because of the uncertainties in the price of gas. Modest reductions in the installed costs will make very little difference to the estimates in Table 3. The time-weighted average prices on the futures market for 2006 and 2007 are over 55p/therm, and have been moving upwards for some time. These prices could fall as more LNG terminals are commissioned, but US Department of Energy forecasts show a dip in prices around 2008, which reflects this, followed by a continuing upward trend.

  25.  An alternative approach to modelling future electricity prices from fossil fuels, advocated in a number of papers by Awerbuch,[27] is to use a different discount rate to work out the Net Present Value of fuel costs over the life of power stations. This has a significant impact on the price of gas-fired generation, pushing it to levels that are higher than those quoted in Table 3, depending on the precise approach and the discount rates which are adopted. Awerbuch suggests using discount rates between 2.1% and 6%, and his "central case" uses 3.5%.

COMPARISONS BETWEEN WIND AND GAS

  26.   First order comparisons: Although there is some uncertainty over future wind plant costs, the uncertainty over future gas prices is much greater. In the short term, if gas prices reach 40p/therm, then onshore wind becomes the cheaper generation option. Taking into account likely generation costs from onshore wind by 2010, then the "crossover" gas price is about 35p/therm. The "crossover" gas price for parity with offshore wind in 2010 is about 50p/therm.

  27.  The comparisons in the preceding paragraph do not take account of the "price of carbon", which will influence gas-fired generation costs by 2010. This is also somewhat uncertain, but if CO2 is trading at £10/tonne by 2010, this moves the crossover gas prices down by about 4p/therm.

  28.  With modest amounts of wind energy on an electricity network, the only "extras" that need to be taken into account are those for extra balancing. (This pays for the extra reserves needed by the System Operator to cope with the additional uncertainty in matching supply and demand). The extra cost amounts to about £1.5/MWh with 5% wind, rising to £2.4/MWh with 10% wind.

  29.  At higher wind penetrations (above about 8%), additional monetary corrections need to be made to allow for the decreasing contribution of wind energy towards plant capacity needs. This issue, together with estimates of the additional transmission costs, was explored in a paper in 2003 that was updated by the author in 2005 to make allowances for the increased price of gas. It was concluded that the extra cost of the electricity consumer was about 0.18p/kWh for 20% wind (in 2020), or 0.06p/kWh for 7.5% wind (2010). These figures apply with gas at 30p/therm; at 40p/therm, and with an allowance for the price of carbon, the electricity consumer would make savings in each case.

  30.  It may be concluded from this analysis that wind energy generation costs, although presently dearer than those of gas, are likely to fall. Although there is some uncertainty over future prices, the uncertainty over future generation costs from gas is much greater. It is very likely that wind energy will be the cheaper option by 2010, and more likely by 2020, so delivering savings to the electricity consumer.

5 September 2005

28 Dale, L, Milborrow, D, Slark, R and Strbac, G, 2003. A shift to wind is not unfeasible. Power UK, issue 109.

29 Milborrow, D, 2005. Wind and gas—the gap narrows. Power UK, issue 134.



19   Gruenspecht, H, 2005. Statement before the Subcommittee on Select Revenue Measures Committee Ways and Means, US House of Representatives, May 24. Back

20   Milborrow, D J, 2005. Goodbye gas and squaring up to coal. Windpower Monthly, 21, 1, 31-35. Back

21   Danish Energy Authority, 2005. Technology Data for Electricity and Heat and Generating Plants. Back

22   Energy Information Administration, US Department of Energy, 2005. Assumptions to the Annual Energy Outlook. Back

23   Department for Trade and Industry and the Carbon Trust, 2004. Renewables Innovation Review. Back

24   24 Ofgem, 2005. Assessment of the benefits from large-scale deployment of certain renewable technologies. Report by Cambridge Economic Policy Associates and Climate Change Capital. Back

25   Garrad Hassan and Partners, 2003. Offshore wind: economies of scale, engineering resource and load factors. DTI/Carbon Trust. Back

26   Ilex Energy, 2003. Implications of the EU ETS for the power sector. Report to DTI, DEFRA and Ofgem. Back

27   27 Awerbuch, S and Berger, M, 2003. Applying portfolio theory to EU electricity planning and policy-making. IEA report EET/2003-03. Back


 
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