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 |
41.6 | 32.9 | |
| High cost, £900/kW | |
44.8 | 37.0 |
| |
| |
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% interest | 68.8
| 57.0 |
| approx 2015, £900/kW, 8% interest |
46.5 | 38.5 |
| |
|
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 |
30 | 40 | 50 |
| CCGT generation cost | 29.1
| 32.5 | 39.2 | 45.9
|
| |
| | |
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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