HC 517 The Economics of Wind Power

Memorandum submitted by Vestas Wind Systems (WIND 86)

What do cost benefit analyses tell us about onshore and offshore wind compared with other measures to cut carbon?

Cost benefit analysis can explore the relative benefits derived from wind compared to other forms of power. A cost benefit analysis looking at the whole system cost for wind would need to include the following costs capital costs, operating costs and any back up costs required over existing levels. An analysis would also need to include the following benefits; output of electricity, contribution towards energy independence and security, social cost of carbon avoided, community benefits generated, value of reduced long term power price volatility, value of avoided health impacts. Some costs such as the cost of developing new transmission lines would need to take account of the comparative benefit that existing capacity has realised from the historic design of the transmission system. Analyses looking at total economy impacts would also need to include the benefits of job creation and investment and the impact this has on local communities.

What do the latest assessments tell us about the costs of generating electricity from wind power compared to other methods of generating electricity?

There are various assessments of the financial cost of generating electricity from wind compared to other methods. The costs of onshore wind are relatively clear and transparent. There are databases that track published project costs of various onshore wind projects, for example Bloomberg gathers such evidence. There is also substantial potential for the cost of offshore wind to fall, and the industry is working together to ensure that cost reductions are realised. The Cost Reduction Task Force and Crown Estate’s Cost Reduction Pathways reports provide useful analysis of how costs can fall going forward.

It is extremely difficult to accurately assess the financial cost of new nuclear stations due to the huge uncertainty over their capital costs, construction time and operating, insurance and decommissioning costs. It is also very difficult to accurately predict future costs of gas generation. Whilst the cost of new gas stations is relatively clear the operating costs are much more difficult to predict. There is significant uncertainty over imported gas prices and future carbon prices both of which impact the levelised cost of gas generation.

How do the costs of onshore wind compare to offshore wind?

The cost of onshore wind is considerably lower than the current cost of offshore wind. There is, however, good reason to believe that the cost difference will fall in future.

Arup estimated the cost of onshore wind to be between £72-105/MWh; Vestas broadly agrees with this. The primary factors in the cost are the wind speed, the blade span, hub height and the MW rating of the turbine used. In general the greater the wind speed, the higher the hub height, the larger the turbine and the longer the blades, the lower the cost would tend to be. Other cost factors include the cost of community benefits, the ease of transporting turbines to the site and land rents.

In the UK it is often not possible to install the largest turbines available on the market due to planning restrictions.  Vestas’ V112 is a 3MW machine with 112 metre blade span with a typical tip height of 140 metres.  There are rare examples of planning consents that allow for 145 metre tip heights which would allow such a turbine to be used.  In general the UK market is limited to the V90-3.0MW machines with a tip height of 125 metres.  The smaller blade length and lower hub height reduce the output from a site, this increases the cost compared to a larger, taller turbine.

Arup estimated the cost of offshore wind projects contracting today to be between £131-£167/MWh. Vestas considers that costs would typically be towards the lower end of that range. Arup assumed the lower range of operating costs to be £117,000/MW/pa. We consider that operating costs are likely to be below this level for most projects.  The cost of offshore is again determined by the wind speed of the site. It is also determined by the distance from shore. In general offshore wind has higher balance of plant costs (non-turbine costs) than onshore wind. Costs such as construction, foundation and cabling costs are greater offshore. It also has substantially higher operation costs.

There are a number of significantly larger machines under development, including the V164 which Vestas is developing. The V164 is a 7MW turbine with a blade span of 164 metres. Larger turbines mean fewer are needed for a given capacity wind farm. Fewer turbines require fewer foundations and less cabling between the turbines, which also help to reduce costs. The V164 will have an output voltage of 66kV, whereas most turbines have a 33kV output. This enables more turbines to be connected on each string. This can reduce the length of the inter-array cabling by around a third.

When looking to reduce costs it is important, particularly offshore, to look at operational costs as well as capital costs. The cost of operating and maintaining an offshore wind turbine is a much higher proportion of levelised cost, compared to onshore. When developing the 7MW turbine Vestas has focussed as much on minimising operational cost as capital costs.

Based on the large scale deployment of turbines such as the V164, Vestas considers that it would be possible for the cost of offshore wind to fall to below £100/MWh for projects contracting in 2020. This is consistent with the findings of the Offshore Cost Reduction Taskforce.

How much support does wind power receive compared with other forms of renewable energy?

The level of support under the Renewables Obligation is currently under review. The proposed level of support for onshore wind of 0.9 Renewable Obligation Certificates (ROC)/MWh would see onshore remain in the middle of the range of support levels. Offshore wind currently receives 2ROC/MWh but projects commissioning after March 2015 will receive 1.9ROCs and those commissioning after March 2016 will receive 1.8ROC/MWh. Hydro is proposed to be supported by 0.5ROC/MWh and the support for the various types of biomass generation is due to be altered. Support for landfill gas is being reduced to zero. Support for co-firing is due to remain at 0.5ROC/MWh for most stations and increase from 0.5 to 1ROC/MWh for enhanced conversion. It is proposed marine technologies will receive 5ROC/MWh up to project caps. All renewable power receives a Climate Change Levy Exemption certificate (LEC) which is potentially worth £5.09/MWh.

Is it possible to estimate how much consumers pay towards supporting wind power in the UK? (i.e. separating out from other renewables)

In 2010/11 7,678,727 ROC were issued for onshore generation and 5,016,832 ROCs were issued for offshore wind generation. Each ROC cost the consumer £51.34. This means the total cost to the consumer of RO support is around £394m for onshore and £258m for offshore wind. Domestic consumers do not pay the Climate Change Levy so do not bear the cost of the LEC support.

What lessons can be learned from other countries?

Ireland is a very good example of how increased use of wind power can reduce consumers’ bills. Wind meets around 17% of Ireland’s annual electricity demand. It has a mandatory pool market. Every MWh of power must be traded through the market. The half hourly price is derived from the bids that every single generator submits into the market every half hour. Put simply, a half hourly ‘merit order’ is created, whereby every MWh is stacked up from cheapest to most expensive. The half hourly price is the bid from the most expensive MWh needed to meet demand. In some hours, when wind output is high, wind can set the wholesale price. This called the ‘merit order effect’. A Redpoint study in 2011 found that the merit order effect was greater than the cost of the REFIT, the feed in tariff for wind in Ireland. Wind is therefore already saving consumers in Ireland over €5 per year and that the savings could increase to €38 by 2020.

What methods could be used to make onshore wind more acceptable to communities that host them?

The majority of people in host communities already find wind farms acceptable. There are, however, often highly vocal groups of local residents that opposed wind farm proposals. Early engagement can help communities become more accepting of projects. Similarly if communities are able to have genuine input to the project it can greatly increase acceptance. First-hand experience from those already living near operating wind farms can greatly help allay the fear of the unknown that can often drive people’s concern. Greater demonstration of direct and relevant benefit to the host community could also help public acceptance.

In other countries such as Denmark and Germany members of the local community are often investors in wind projects. Having a direct financial link to a wind farm can make local people more accepting of new developments.

June 2012

Prepared 10th July 2012