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Economics of wind power and comparisons with conventional thermal plant
Renewable Energy, Vol.5, Part L PP. 692-699, 1994
Pergamon ECONOMICS OF WIND POWER AND COMPARISONS WITH CONVENTIONAL THERMAL PLANT
Elsevier Science Ltd Printed in Great Britain 0960-1481/94 $7.00+0.00
David Milborrow Consultant, Horsham, West Sussex ABSTRACT Commercial deployment of renewables in the UK depends on their prices converging with those of the conventional sources of generation. Price comparisons, however, are distorted by institutional factors such as the very short contract periods for premium prices under the first two rounds of the Non-Fossil Fuel Obligation (NFFO). Prices are therefore put on a common basis and the prospects for wind energy up to the year 2000 are examined. Keywords: Energy economics, wind power costs, electricity costs 1 INTRODUCTION When he announced that a third renewable order would be made as part of the Non-Fossil Fuel Obligation, the Minister for Energy expressed the hope that "in the not too distant future the most promising renewables can compete without financial support". Current and future generation costs o f wind energy are therefore compared with those of the conventional thermal sources - gas, coal and nuclear. The implications of the proposed carbon tax are also examined. The apparent price o f wind energy in the UK has fluctuated considerably in the past few years. Changes in the institutional framework -following privatisation of the electricity industry - have swamped cost reductions due to improvements in the technology. This analysis examines the reasons for apparent variations in the price of wind energy and compares UK levels with those elsewhere. Forward projections of wind energy costs and energy prices are made, based on likely improvements in the technology. At present, the price o f wind energy tends to be compared with "pool price" and premium payments under the Non-Fossil Fuel Obligation (NFFO) are based on the difference between the NFFO "strike price" 11 p/kWh in the case o f wind - and pool price. However, since most renewable energy plant feed into the low voltage distribution network - avoiding high-voltage transmission charges - it is argued that wind energy has a higher value than that from centralised plant. 2 ENERGY
COST ESTIMATES
The calculation o f energy generation costs follows procedures which are reasonably standardised. Guidelines which have been issued by the International Energy Agency in the form of a "Recommend Practice" (1) for wind energy plant can also be applied to other renewables and to thermal plant. The IEA document advocates the use of "real", i.e. net o f inflation, interest rates - more accurately, test discount rates - to calculate levelised costs and this widely used technique is adopted in this paper The following items are included in the generation cost calculations:• • • • • • •
planning costs ) capital cost of plant ) Capital construction costs ) land costs (either as part of the capital or as annual leasing payments) fuel costs - zero for renewable energy plant operating costs (O & M) (fixed and variable) including labour, materials, rents, taxes and insurance decommissioning 692
693 When levelised costs are calculated, three parameters must be specified:* The base year used for the costings, as the effects of inflation are excluded. The base is January 1994 in this paper, except where noted * The period over which the capital investment is assumed to be recovered - this is not necessarily equal to the life time of the plant * The test discount rate The IEA document recommends that capital costs are amortised over the technical life of the plant and that a standard test discount rate of 6% (real) is used. While this may produce useful data for comparative purposes, actual interest rates and amortisation periods are controlled by regulatory or institutional frameworks. Each of these parameters needs, therefore to be considered in more detail. 2.1 Interest rates
Before privatisation the CEGB - in common with all the nationalised industries - assessed generation costs using a test discount rate recommended by the Treasury. The final figure was 8% (This figure is still used by Nuclear Electric). After privatisation, wind developers had to acquire capital at market rates. These vary and, in practice, most projects are funded using a mixture of loan and equity funding. A typical ratio is 80/20 and if the loan interest rate is, say 6%, and the equity return - both real - is 25%, then the equivalent test discount rate is 10%. It has been suggested that this is a minimum for private sector projects (2) and will be used in this paper - except where stated. 2.2 Contract Leneths
Before privatisation it was assumed that capital investments were repaid over the life of the plant. Broadly speaking this still holds for conventional thermal plant but energy prices of renewable projects have increased since the premium prices paid under the first two rounds of the NFFO will only be paid until the end of 1998. As a result, projects in the second round (NFFO2), completed in t993 at the earliest, were forced into a position where capital had to be repaid within about six years. The latest round of the Non-Fossil Fuel Obligation (NFFO3) allows for contract periods up to 15 years, However, as the technology is fairly new, bank loans are unlikely to be available for periods in excess of 10/12 years (3). Wind energy prices will therefore be lower than in the previous round, but higher than those which would prevail if the capital could be repaid over 15 years (which applies to gas turbine plant) or better still - over the life of the plant (as in the case of nuclear). The implications of these various changes are summarised in Table 1. This shows the price of wind energy pre-privatisation, under NFFO2 and NFFO3 using a common capital cost of £1070/kW and load factors of 38%. (The figures used by the CEGB in its evidence to the Hinkley Point 'C Public Inquiry - the load factor is a little high, which explains why the "NFFO2" price is lower than the 1 lp which was paid). Table 1 Effect of institutional changes on energy prices (in p/kWh)
Test discount rate, % Contract length, years
CEGB 8 25
NFFO2 10 6
NFFO3 10 15
NFFO3 10 10
GENERATION COST Capital charges O&M
3.0 0.5
7.6 1.3
4.3 1.1
5.2 1.1
TOTAL
3.5
89
5.4
6.3
These data confirm that institutional changes have affected energy prices more than technical advances.
694 3 CURRENT
COSTS
IN THE UK
The costs of wind projects completed under NFFO1 and NFFO2 varied between £850/kW and £1250/kW. The average was close to £1070/kW. Since NFFO2, the installed costs of windfarms seem set to fall, partly because wind turbine prices have fallen, partly due to a move towards larger machines. Several machines are now rated at 500 or 600 kW, whereas most of the machines installed under NFFO2 were rated at 400 kW or 450 kW. It follows that 20 or 16 machines will be needed for a 10 MW windfarm, instead of 25 400 kW machines and it is possible that costs in NFFO3 may fall to around £950/kW (4). 3.2 Operating costs
The author (4) suggested a figure of 1.3 p/kWh for NFFO2. A level of 1.1 p for NFFO3 represents a 15% reduction. A more detailed analysis of costs, with breakdowns for both capital and maintenance, has recently been given by the author (5) 3.3 Total generation costs
There is likely to be a much wider spread of generation costs in NFFO3 since the Orders now include Scotland and Northern Ireland and a much wider range of wind speeds may be anticipated. Typical energy prices, as a function ofwindspeed, have been derived using the following procedure:* Three sample combinations of test discount rate (tdr) and cost were used,- £950/kW and 12% tdr, (mid-range figures) - £900/kW and 10% tdr, a possible lower bound, with a cheaper grid connection and other savings - £1000/kW and 15% tdr, representing a possible upper bound • Links between wind speed and energy output were established using data from a number of wind turbine designs • An allowance of 10% was made to cover availability, array and electrical losses • Running costs account for 1.1 p/kWh • Capital is repaid over 10 years The data are shown in Figure 1, which indicates that prices could go as low as 5.5p/kWh, but this is unlikely. A 10% discount rate is regarded as a minimum and higher costs and/or risk may be associated with the higher windspeed sites. Similarly, the advantage to be gained from bank loans longer than 10 years may be small, as higher interest rates may be charged to offset the higher risk. 4 INTERNATIONAL
PRICE
COMPARISONS
International price comparisons must be made with care, as test discount rates, subsidies and energy tariffs vary widely and direct comparisons of energy prices can be misleading. Wind speeds also vary considerably. Table 2 draws together typical data (i.e. actual figures from specific windfarms, which are believed to be representative) from the UK, Denmark, the United States, Spain and Germany. The tabulated energy prices confirm the vital importance of institutional factors and show that low capital costs do not necessarily correspond to low energy prices. The price variations arise for a number of reasons:* United States - the windfarms are generally large and costs have come down due to economies of scale and mass production. O&M costs are low for the same reason • Denmark - windspeeds are lower than in the UK, but the terrain is generally fiat, which aids construction. Utility capital costs do not include bank fees. Despite the lower windspeeds, Danish energy prices are 35% lower, as the utilities apply a lower discount rate. • Spain - windspeeds are high in the extreme south; energy prices are estimated values, based on the known tariff (6) • Germany - there is a very complex system of subsidies, which reduce the effective cost of capital (6). Windspeeds approach UK levels in the north; elsewhere they are lower
695
Table 2 Wind Energy Cost Comparisons UK
USA
Denmark
Spain
Germany
Installed Cost, £/kW
950
780
800
810
1,200
Production, kWh/kW
2,700
1,750
2,190
2,755
2,200
Real interest rate,%
10
9
5.7
N.A.
3.3
Lifetime (years)
10
20
20
N.A.
10
Capital repayments
5.7
4.9
3.2
5.5
6.5
O & M cost
1.1
0.8
0.7
1.0
1.1
TOTAL
6.8
5.7
3.9
6.5
7.6
Energy costs (p/kWh)
5 FUTURE
COST TRENDS
There are a number of factors which are causing a steady fall in the cost of wind energy systems:* The trend towards larger wind turbines, which results in cheaper machines and infrastructure. • As the industry becomes established infrastructure costs will fall. • Reductions in the cost of raw materials In a previous analysis (4) the author drew on a number of projections of future costs and suggested that £750/kW was a reasonable estimate for the UK by the year 2000. Recent developments indicate that this price may be achieved earlier, based on the following assumptions, all of which are conservative:* Turbine costs fall to £500/kW (US Windpower expects to reach figure through volume production of its 300 kW machine - (7)) • "Balance of plant" costs fall by 5% • Foundation costs fall by £10/kW - towards Danish levels - but they remain higher, reflecting the difficult nature of many British windfarm sites • Civil, electrical and mechanical costs fall by 10%, as machine sizes increase (An ETSU-funded study (8) estimated that the potential cost reduction is about 15%) If, in * * •
addition, it is assumed that:Running costs fall to lp/kWh Improvements in machine performance yield a 3% increase in energy production Mechanisms are established to enable wind plant to benefit from 15 year loans
These improvements would reduce the cost of wind energy to 4p/kWh at an 8 m/s site. Figure 1 shows energy cost estimates for a range of windspeeds, using the 10% discount rate. Looking further ahead, projections beyond 2000 from a number of sources (9,7,10) are shown in Figure 2. All the authorities predict a continuing downward trend. 6 THE VALUE
OF WIND ENERGY
The value of wind energy - or any other product - is set by the value of the equivalent product which it displaces. Since wind energy is usually fed into the local distribution networks at low voltage, it has, it is argued, a higher value than centralised generation, which is usually transmitted some distance at high voltage before it reaches the consumer. This argument assumes that there is a local market for wind energy and that savings in the fixed and variable costs of transmission can be realised by "Distributed Generation". Initial studies by EPRI indicate that distributed generation may have a value higher than that of centralised
696 generation in the range 2.5-4p/kWh (11). A recent CEC study (9) values the output from distributed generation at around 25% above that from centralised plant. In the UK wind energy is fed into the distribution networks of the Regional Electricity Companies at 11, 33 or 132kV and its value will vary, depending on the connection voltage and precise location.. At present, however, renewable energy is simply valued at pool price - on a par with centralised generation. To determine the relevant range of values for England and Wales, it is necessary to track the cost of energy through the power system. The following data were inferred from REC and NGC Annual Reports, Use of System Charges and other published data and are average price levels, in p/kWh:Location Pool price (avoided cost) Generators' selling price NGC transmission costs REC costs - 132kV REC costs - 33 and 1 lkV
Increment 2.5 0.9 0.5 0.5 0.4
Total value 2.5 3.4 3.9 4.4 4.8
The fossil levy currently stands at 10%, which puts the value of electricity leaving the 132kV system at 4.8p/kWh and around 5.2p/kWh at exit from the 1 lkV system. The average selling price of electricity in 1992 was 5.9p/kWh. In practice, there will be large local variations in electricity value, as noted above, and the next step in the analysis is to partition the data and identify fixed and variable costs. The latter appear to account for between 66 and 75% of the total, assuming the various tariffs correctly reflect the balance. The analysis is conservative since no account has been taken of the fact that windfarms tend to be in rural areas, where REC charges (in the absence of large industrial loads) are higher than the overall average.
7 COMPARISONS
WITH OTHER FUELS
Although the exact price targets which the renewables are expected to achieve have not been specified, it is reasonable to assume that one reference point in any assessment will be the costs of generation from conventional thermal sources. There is no single price that can be assigned to any source of generation but "central estimates" can be compared, provided all are calculated on the same basis. 7.1 Gas
Capital costs for gas plant range from £380 to £560/kW, with a central value of £490/kW (12), In the early days of the "dash for gas" a few generators obtained supplies at below 16p/therm, but most obtained them at this level and this leads to a fuel cost of around 1.3p/kWh. The spread in construction prices is responsible for a range of current generation costs between 2.4 and 2.8 p/kWh Interest centres on the behaviour of gas prices between now and the end of the century. Demand in Europe is now increasing more rapidly than production and some observers predict a gap between supply and demand from about 1997. This could have the effect of pushing prices upwards. Estimates range between 186 p/GJ (7) and 261p/GJ. In the absence of a clear consensus, the mean of these, i.e. 233p/GJ has been taken as a central estimate. Assuming a modest decrease in the price of plant the estimated costs for gas generation in 2000 lie in the range from 2.5 to 3.2p/kWh.
697 7.2 Nuclear
The costs of nuclear power are the subject of debate and the situation in Great Britain is complicated by the fact that no data are available for the costs from current construction. (The generation costs from Sizewell '13' are not regarded as representative since it is now a "one off" project) Current costs can deduced from the most recent Select Committee Enquiry (13). Updated for inflation and using a 10% test discount rate gives generation costs in the range 7.6 to 8.3p/kWh. Estimates of "mature" costs for a series of Pressurised Water Reactors were given by National Power to an earlier (1989/90) Select Committee Enquiry on nuclear costs (14). These data enable a levelised energy cost of 5.9p/kwh to be derived. Recent announcements by Nuclear Electric imply that this figure can be halved, but this claim appears to be based on the use of an 8% test discount rate. The use of a 10% rate moves the figure to 4.2p/kWh 7.3 Coal
No coal plant is currently being built in the UK. and an analysis of costs needs to take into account three complications:* The plant now owned by the two English generators (National Power and PowerGen) was sold at privatisation at a price (£85/kW) which reflected its age and the need to ensure a successful flotation of the industry. • The changes in contract prices between the generators and British Coal. Until March 1993 the BCC pit-head price was 186p/GJ; it then reduced to 151p/GJ and will fall in future years. • All future plant is likely to be fitted with flue gas desulphurisation plant Generation costs from the most efficient former CEGB plant are now about 2.5p/kWh but new plant would deliver electricity at about 4.5 p/kWh. Between now and 1997 BCC coal prices will fall to world levels (currently around 130p/GJ). Beyond 1997, there is a range of estimates for the year 2000. Whereas it is demand in industrialised Western Europe and United States which will influence the price of gas, it is the growing demand for coal from the third world especially India and China, which may raise the world coal price between now and the year 2000. Estimates for coal prices in 2000 range from 186p/GJ to 261p/GJ; coal may therefore deliver electricity at between 3.5 and 4.2p/kWh by the year 2000. 8 CARBON
TAX
The introduction of carbon tax, which is a way of reflecting the external costs of the various energy sources could have a dramatic effect on fuel price comparisons. The current European Commission proposals yield the following estimates for the final level of carbon tax - scheduled for 2000. (The proposals envisage it being introduced at 3/10ths of this level, rising in equal steps over 7 years). Coal .............. 1.2p/kWh Gas ............... 0.8p/kWh Nuclear ......... 0.5p/kWh It is difficult to forecast whether or not carbon tax will be introduced in the UK - at present it seems unlikely. An alternative procedure is to give renewables an "environmental credit". In the United States the effective level of this credit is about lp/kWh. If this procedure were adopted in the UK the value of wind energy would rise to around 6p/kWh and "convergence" between cost and value would be achieved.
698 9 OVERALL COMPARISONS Figure 3 compares the current cost estimates for electricity generated from gas, coal, wind and nuclear. Gas is the cheapest and wind the dearest. Figure 4 shows estimates for the year 2000, when the order becomes gas, wind coal and nuclear. Under most scenarios, gas remains the cheapest option, even with carbon tax. The cheapest estimates for coal and wind are roughly the same, but the higher estimate for coal is above that for wind. Nuclear is subject to some uncertainty, but seems likely to remain an expensive option.
10
CONCLUSIONS • Many of the discrepancies and variations in energy prices are apparent rather than real and most are due to differences in institutional frameworks. This accounts for much of the differences between British and American or European wind energy prices • The longer contract periods, plus reductions in the cost of plant and infrastructure are likely to lead to lower costs in NFFO3 than NFFO2, with bid prices probably in the range from 5.Sp/kWh upwards • The prospects for a reduction in installed costs to £750/kW seem good. Prices may be expected to fall towards 4p/kWh if loan periods can be extended to 15 years. • A preliminary study of the value of wind energy indicates that it is in the range 4.8 to 5.2p/kWh, possibly more • By the year 2000, wind energy costs are likely to fall to around 4p/kWh and it is possible that only gas will be able to offer cheaper energy prices
11 R E F E R E N C E S 1. Nitteberg, J (Ed), 1983. Estimation of cost of energy from wind energy conversion systems. Expert Group Study submitted to IEA WECS Executive 2. House of Commons Energy Committee, Second Report, Session 1991-92. Consequences of Electricity Privatisation. HMSO, London 3. Johns, J H, 1993. Financial structures for windfarms. Proc 15th BWEA Wind Energy Conf. MEP Ltd, London 4. Milborrow, D J, 1993. Energy Generation costs - now and for the year 2000. Proc 15th BWEA Wind Energy Conf. MEP Ltd, London 5. Milborrow, D.J., 1994. Windfarm Economics. Seminar on "Experience with windfarms", I.Mech.E, London 6. Mitchell, C, 1993. The financing of wind energy in the UK compared to other countries and its implications. Proc 15th BWEA Wind Energy Conf. MEP Ltd, London 7. American Wind Energy Association, 1992. Wind Energy for Sustainable Development 8. Craig, L. and Liebman, C., 1992. Wind farm balance of plant costs. ETSU report 6027 9. Commission of the European Communities, DG XVII, 1994. The European Renewable Energy Study 10.Solar Energy Research Institute, 1990. The potential of renewable energy 11.Anon, 1993. The vision of distributed generation. EPRI Journal, April 1993 12Haflow, I. Nuclear Power in the OECD: is there life after dearth? WEC Journal, July 1992 13House of Commons Energy Committee, Third Report, Session 1991-92. Information on nuclear costs. HMSO, London 14.House of Commons Energy Committee, Fourth Report, Session 1989-90. The cost of nuclear power. HMSO, London
699
i
Figure I Current cost estimates for wind energy
8
9
Windspeed m/s 5.5
I................. |
2 ?g~g0
1
Figure 2 Wind energy cost projections
0 Year 9-
JE
8-
575(34-
10-
Figure 3 Current energy cost comparisons between wind and thermal plant
Gas
Coal
Nuclear Wind
11 Low Estimate [ ] Range
o Figure 4 Energy cost comparisons for 2000
==
uJ Gas
Coal
[ ~ Low Estimatecarbon Tax
Nuclear Wind B Range
Pergamon ECONOMICS OF WIND POWER AND COMPARISONS WITH CONVENTIONAL THERMAL PLANT
Elsevier Science Ltd Printed in Great Britain 0960-1481/94 $7.00+0.00
David Milborrow Consultant, Horsham, West Sussex ABSTRACT Commercial deployment of renewables in the UK depends on their prices converging with those of the conventional sources of generation. Price comparisons, however, are distorted by institutional factors such as the very short contract periods for premium prices under the first two rounds of the Non-Fossil Fuel Obligation (NFFO). Prices are therefore put on a common basis and the prospects for wind energy up to the year 2000 are examined. Keywords: Energy economics, wind power costs, electricity costs 1 INTRODUCTION When he announced that a third renewable order would be made as part of the Non-Fossil Fuel Obligation, the Minister for Energy expressed the hope that "in the not too distant future the most promising renewables can compete without financial support". Current and future generation costs o f wind energy are therefore compared with those of the conventional thermal sources - gas, coal and nuclear. The implications of the proposed carbon tax are also examined. The apparent price o f wind energy in the UK has fluctuated considerably in the past few years. Changes in the institutional framework -following privatisation of the electricity industry - have swamped cost reductions due to improvements in the technology. This analysis examines the reasons for apparent variations in the price of wind energy and compares UK levels with those elsewhere. Forward projections of wind energy costs and energy prices are made, based on likely improvements in the technology. At present, the price o f wind energy tends to be compared with "pool price" and premium payments under the Non-Fossil Fuel Obligation (NFFO) are based on the difference between the NFFO "strike price" 11 p/kWh in the case o f wind - and pool price. However, since most renewable energy plant feed into the low voltage distribution network - avoiding high-voltage transmission charges - it is argued that wind energy has a higher value than that from centralised plant. 2 ENERGY
COST ESTIMATES
The calculation o f energy generation costs follows procedures which are reasonably standardised. Guidelines which have been issued by the International Energy Agency in the form of a "Recommend Practice" (1) for wind energy plant can also be applied to other renewables and to thermal plant. The IEA document advocates the use of "real", i.e. net o f inflation, interest rates - more accurately, test discount rates - to calculate levelised costs and this widely used technique is adopted in this paper The following items are included in the generation cost calculations:• • • • • • •
planning costs ) capital cost of plant ) Capital construction costs ) land costs (either as part of the capital or as annual leasing payments) fuel costs - zero for renewable energy plant operating costs (O & M) (fixed and variable) including labour, materials, rents, taxes and insurance decommissioning 692
693 When levelised costs are calculated, three parameters must be specified:* The base year used for the costings, as the effects of inflation are excluded. The base is January 1994 in this paper, except where noted * The period over which the capital investment is assumed to be recovered - this is not necessarily equal to the life time of the plant * The test discount rate The IEA document recommends that capital costs are amortised over the technical life of the plant and that a standard test discount rate of 6% (real) is used. While this may produce useful data for comparative purposes, actual interest rates and amortisation periods are controlled by regulatory or institutional frameworks. Each of these parameters needs, therefore to be considered in more detail. 2.1 Interest rates
Before privatisation the CEGB - in common with all the nationalised industries - assessed generation costs using a test discount rate recommended by the Treasury. The final figure was 8% (This figure is still used by Nuclear Electric). After privatisation, wind developers had to acquire capital at market rates. These vary and, in practice, most projects are funded using a mixture of loan and equity funding. A typical ratio is 80/20 and if the loan interest rate is, say 6%, and the equity return - both real - is 25%, then the equivalent test discount rate is 10%. It has been suggested that this is a minimum for private sector projects (2) and will be used in this paper - except where stated. 2.2 Contract Leneths
Before privatisation it was assumed that capital investments were repaid over the life of the plant. Broadly speaking this still holds for conventional thermal plant but energy prices of renewable projects have increased since the premium prices paid under the first two rounds of the NFFO will only be paid until the end of 1998. As a result, projects in the second round (NFFO2), completed in t993 at the earliest, were forced into a position where capital had to be repaid within about six years. The latest round of the Non-Fossil Fuel Obligation (NFFO3) allows for contract periods up to 15 years, However, as the technology is fairly new, bank loans are unlikely to be available for periods in excess of 10/12 years (3). Wind energy prices will therefore be lower than in the previous round, but higher than those which would prevail if the capital could be repaid over 15 years (which applies to gas turbine plant) or better still - over the life of the plant (as in the case of nuclear). The implications of these various changes are summarised in Table 1. This shows the price of wind energy pre-privatisation, under NFFO2 and NFFO3 using a common capital cost of £1070/kW and load factors of 38%. (The figures used by the CEGB in its evidence to the Hinkley Point 'C Public Inquiry - the load factor is a little high, which explains why the "NFFO2" price is lower than the 1 lp which was paid). Table 1 Effect of institutional changes on energy prices (in p/kWh)
Test discount rate, % Contract length, years
CEGB 8 25
NFFO2 10 6
NFFO3 10 15
NFFO3 10 10
GENERATION COST Capital charges O&M
3.0 0.5
7.6 1.3
4.3 1.1
5.2 1.1
TOTAL
3.5
89
5.4
6.3
These data confirm that institutional changes have affected energy prices more than technical advances.
694 3 CURRENT
COSTS
IN THE UK
The costs of wind projects completed under NFFO1 and NFFO2 varied between £850/kW and £1250/kW. The average was close to £1070/kW. Since NFFO2, the installed costs of windfarms seem set to fall, partly because wind turbine prices have fallen, partly due to a move towards larger machines. Several machines are now rated at 500 or 600 kW, whereas most of the machines installed under NFFO2 were rated at 400 kW or 450 kW. It follows that 20 or 16 machines will be needed for a 10 MW windfarm, instead of 25 400 kW machines and it is possible that costs in NFFO3 may fall to around £950/kW (4). 3.2 Operating costs
The author (4) suggested a figure of 1.3 p/kWh for NFFO2. A level of 1.1 p for NFFO3 represents a 15% reduction. A more detailed analysis of costs, with breakdowns for both capital and maintenance, has recently been given by the author (5) 3.3 Total generation costs
There is likely to be a much wider spread of generation costs in NFFO3 since the Orders now include Scotland and Northern Ireland and a much wider range of wind speeds may be anticipated. Typical energy prices, as a function ofwindspeed, have been derived using the following procedure:* Three sample combinations of test discount rate (tdr) and cost were used,- £950/kW and 12% tdr, (mid-range figures) - £900/kW and 10% tdr, a possible lower bound, with a cheaper grid connection and other savings - £1000/kW and 15% tdr, representing a possible upper bound • Links between wind speed and energy output were established using data from a number of wind turbine designs • An allowance of 10% was made to cover availability, array and electrical losses • Running costs account for 1.1 p/kWh • Capital is repaid over 10 years The data are shown in Figure 1, which indicates that prices could go as low as 5.5p/kWh, but this is unlikely. A 10% discount rate is regarded as a minimum and higher costs and/or risk may be associated with the higher windspeed sites. Similarly, the advantage to be gained from bank loans longer than 10 years may be small, as higher interest rates may be charged to offset the higher risk. 4 INTERNATIONAL
PRICE
COMPARISONS
International price comparisons must be made with care, as test discount rates, subsidies and energy tariffs vary widely and direct comparisons of energy prices can be misleading. Wind speeds also vary considerably. Table 2 draws together typical data (i.e. actual figures from specific windfarms, which are believed to be representative) from the UK, Denmark, the United States, Spain and Germany. The tabulated energy prices confirm the vital importance of institutional factors and show that low capital costs do not necessarily correspond to low energy prices. The price variations arise for a number of reasons:* United States - the windfarms are generally large and costs have come down due to economies of scale and mass production. O&M costs are low for the same reason • Denmark - windspeeds are lower than in the UK, but the terrain is generally fiat, which aids construction. Utility capital costs do not include bank fees. Despite the lower windspeeds, Danish energy prices are 35% lower, as the utilities apply a lower discount rate. • Spain - windspeeds are high in the extreme south; energy prices are estimated values, based on the known tariff (6) • Germany - there is a very complex system of subsidies, which reduce the effective cost of capital (6). Windspeeds approach UK levels in the north; elsewhere they are lower
695
Table 2 Wind Energy Cost Comparisons UK
USA
Denmark
Spain
Germany
Installed Cost, £/kW
950
780
800
810
1,200
Production, kWh/kW
2,700
1,750
2,190
2,755
2,200
Real interest rate,%
10
9
5.7
N.A.
3.3
Lifetime (years)
10
20
20
N.A.
10
Capital repayments
5.7
4.9
3.2
5.5
6.5
O & M cost
1.1
0.8
0.7
1.0
1.1
TOTAL
6.8
5.7
3.9
6.5
7.6
Energy costs (p/kWh)
5 FUTURE
COST TRENDS
There are a number of factors which are causing a steady fall in the cost of wind energy systems:* The trend towards larger wind turbines, which results in cheaper machines and infrastructure. • As the industry becomes established infrastructure costs will fall. • Reductions in the cost of raw materials In a previous analysis (4) the author drew on a number of projections of future costs and suggested that £750/kW was a reasonable estimate for the UK by the year 2000. Recent developments indicate that this price may be achieved earlier, based on the following assumptions, all of which are conservative:* Turbine costs fall to £500/kW (US Windpower expects to reach figure through volume production of its 300 kW machine - (7)) • "Balance of plant" costs fall by 5% • Foundation costs fall by £10/kW - towards Danish levels - but they remain higher, reflecting the difficult nature of many British windfarm sites • Civil, electrical and mechanical costs fall by 10%, as machine sizes increase (An ETSU-funded study (8) estimated that the potential cost reduction is about 15%) If, in * * •
addition, it is assumed that:Running costs fall to lp/kWh Improvements in machine performance yield a 3% increase in energy production Mechanisms are established to enable wind plant to benefit from 15 year loans
These improvements would reduce the cost of wind energy to 4p/kWh at an 8 m/s site. Figure 1 shows energy cost estimates for a range of windspeeds, using the 10% discount rate. Looking further ahead, projections beyond 2000 from a number of sources (9,7,10) are shown in Figure 2. All the authorities predict a continuing downward trend. 6 THE VALUE
OF WIND ENERGY
The value of wind energy - or any other product - is set by the value of the equivalent product which it displaces. Since wind energy is usually fed into the local distribution networks at low voltage, it has, it is argued, a higher value than centralised generation, which is usually transmitted some distance at high voltage before it reaches the consumer. This argument assumes that there is a local market for wind energy and that savings in the fixed and variable costs of transmission can be realised by "Distributed Generation". Initial studies by EPRI indicate that distributed generation may have a value higher than that of centralised
696 generation in the range 2.5-4p/kWh (11). A recent CEC study (9) values the output from distributed generation at around 25% above that from centralised plant. In the UK wind energy is fed into the distribution networks of the Regional Electricity Companies at 11, 33 or 132kV and its value will vary, depending on the connection voltage and precise location.. At present, however, renewable energy is simply valued at pool price - on a par with centralised generation. To determine the relevant range of values for England and Wales, it is necessary to track the cost of energy through the power system. The following data were inferred from REC and NGC Annual Reports, Use of System Charges and other published data and are average price levels, in p/kWh:Location Pool price (avoided cost) Generators' selling price NGC transmission costs REC costs - 132kV REC costs - 33 and 1 lkV
Increment 2.5 0.9 0.5 0.5 0.4
Total value 2.5 3.4 3.9 4.4 4.8
The fossil levy currently stands at 10%, which puts the value of electricity leaving the 132kV system at 4.8p/kWh and around 5.2p/kWh at exit from the 1 lkV system. The average selling price of electricity in 1992 was 5.9p/kWh. In practice, there will be large local variations in electricity value, as noted above, and the next step in the analysis is to partition the data and identify fixed and variable costs. The latter appear to account for between 66 and 75% of the total, assuming the various tariffs correctly reflect the balance. The analysis is conservative since no account has been taken of the fact that windfarms tend to be in rural areas, where REC charges (in the absence of large industrial loads) are higher than the overall average.
7 COMPARISONS
WITH OTHER FUELS
Although the exact price targets which the renewables are expected to achieve have not been specified, it is reasonable to assume that one reference point in any assessment will be the costs of generation from conventional thermal sources. There is no single price that can be assigned to any source of generation but "central estimates" can be compared, provided all are calculated on the same basis. 7.1 Gas
Capital costs for gas plant range from £380 to £560/kW, with a central value of £490/kW (12), In the early days of the "dash for gas" a few generators obtained supplies at below 16p/therm, but most obtained them at this level and this leads to a fuel cost of around 1.3p/kWh. The spread in construction prices is responsible for a range of current generation costs between 2.4 and 2.8 p/kWh Interest centres on the behaviour of gas prices between now and the end of the century. Demand in Europe is now increasing more rapidly than production and some observers predict a gap between supply and demand from about 1997. This could have the effect of pushing prices upwards. Estimates range between 186 p/GJ (7) and 261p/GJ. In the absence of a clear consensus, the mean of these, i.e. 233p/GJ has been taken as a central estimate. Assuming a modest decrease in the price of plant the estimated costs for gas generation in 2000 lie in the range from 2.5 to 3.2p/kWh.
697 7.2 Nuclear
The costs of nuclear power are the subject of debate and the situation in Great Britain is complicated by the fact that no data are available for the costs from current construction. (The generation costs from Sizewell '13' are not regarded as representative since it is now a "one off" project) Current costs can deduced from the most recent Select Committee Enquiry (13). Updated for inflation and using a 10% test discount rate gives generation costs in the range 7.6 to 8.3p/kWh. Estimates of "mature" costs for a series of Pressurised Water Reactors were given by National Power to an earlier (1989/90) Select Committee Enquiry on nuclear costs (14). These data enable a levelised energy cost of 5.9p/kwh to be derived. Recent announcements by Nuclear Electric imply that this figure can be halved, but this claim appears to be based on the use of an 8% test discount rate. The use of a 10% rate moves the figure to 4.2p/kWh 7.3 Coal
No coal plant is currently being built in the UK. and an analysis of costs needs to take into account three complications:* The plant now owned by the two English generators (National Power and PowerGen) was sold at privatisation at a price (£85/kW) which reflected its age and the need to ensure a successful flotation of the industry. • The changes in contract prices between the generators and British Coal. Until March 1993 the BCC pit-head price was 186p/GJ; it then reduced to 151p/GJ and will fall in future years. • All future plant is likely to be fitted with flue gas desulphurisation plant Generation costs from the most efficient former CEGB plant are now about 2.5p/kWh but new plant would deliver electricity at about 4.5 p/kWh. Between now and 1997 BCC coal prices will fall to world levels (currently around 130p/GJ). Beyond 1997, there is a range of estimates for the year 2000. Whereas it is demand in industrialised Western Europe and United States which will influence the price of gas, it is the growing demand for coal from the third world especially India and China, which may raise the world coal price between now and the year 2000. Estimates for coal prices in 2000 range from 186p/GJ to 261p/GJ; coal may therefore deliver electricity at between 3.5 and 4.2p/kWh by the year 2000. 8 CARBON
TAX
The introduction of carbon tax, which is a way of reflecting the external costs of the various energy sources could have a dramatic effect on fuel price comparisons. The current European Commission proposals yield the following estimates for the final level of carbon tax - scheduled for 2000. (The proposals envisage it being introduced at 3/10ths of this level, rising in equal steps over 7 years). Coal .............. 1.2p/kWh Gas ............... 0.8p/kWh Nuclear ......... 0.5p/kWh It is difficult to forecast whether or not carbon tax will be introduced in the UK - at present it seems unlikely. An alternative procedure is to give renewables an "environmental credit". In the United States the effective level of this credit is about lp/kWh. If this procedure were adopted in the UK the value of wind energy would rise to around 6p/kWh and "convergence" between cost and value would be achieved.
698 9 OVERALL COMPARISONS Figure 3 compares the current cost estimates for electricity generated from gas, coal, wind and nuclear. Gas is the cheapest and wind the dearest. Figure 4 shows estimates for the year 2000, when the order becomes gas, wind coal and nuclear. Under most scenarios, gas remains the cheapest option, even with carbon tax. The cheapest estimates for coal and wind are roughly the same, but the higher estimate for coal is above that for wind. Nuclear is subject to some uncertainty, but seems likely to remain an expensive option.
10
CONCLUSIONS • Many of the discrepancies and variations in energy prices are apparent rather than real and most are due to differences in institutional frameworks. This accounts for much of the differences between British and American or European wind energy prices • The longer contract periods, plus reductions in the cost of plant and infrastructure are likely to lead to lower costs in NFFO3 than NFFO2, with bid prices probably in the range from 5.Sp/kWh upwards • The prospects for a reduction in installed costs to £750/kW seem good. Prices may be expected to fall towards 4p/kWh if loan periods can be extended to 15 years. • A preliminary study of the value of wind energy indicates that it is in the range 4.8 to 5.2p/kWh, possibly more • By the year 2000, wind energy costs are likely to fall to around 4p/kWh and it is possible that only gas will be able to offer cheaper energy prices
11 R E F E R E N C E S 1. Nitteberg, J (Ed), 1983. Estimation of cost of energy from wind energy conversion systems. Expert Group Study submitted to IEA WECS Executive 2. House of Commons Energy Committee, Second Report, Session 1991-92. Consequences of Electricity Privatisation. HMSO, London 3. Johns, J H, 1993. Financial structures for windfarms. Proc 15th BWEA Wind Energy Conf. MEP Ltd, London 4. Milborrow, D J, 1993. Energy Generation costs - now and for the year 2000. Proc 15th BWEA Wind Energy Conf. MEP Ltd, London 5. Milborrow, D.J., 1994. Windfarm Economics. Seminar on "Experience with windfarms", I.Mech.E, London 6. Mitchell, C, 1993. The financing of wind energy in the UK compared to other countries and its implications. Proc 15th BWEA Wind Energy Conf. MEP Ltd, London 7. American Wind Energy Association, 1992. Wind Energy for Sustainable Development 8. Craig, L. and Liebman, C., 1992. Wind farm balance of plant costs. ETSU report 6027 9. Commission of the European Communities, DG XVII, 1994. The European Renewable Energy Study 10.Solar Energy Research Institute, 1990. The potential of renewable energy 11.Anon, 1993. The vision of distributed generation. EPRI Journal, April 1993 12Haflow, I. Nuclear Power in the OECD: is there life after dearth? WEC Journal, July 1992 13House of Commons Energy Committee, Third Report, Session 1991-92. Information on nuclear costs. HMSO, London 14.House of Commons Energy Committee, Fourth Report, Session 1989-90. The cost of nuclear power. HMSO, London
699
i
Figure I Current cost estimates for wind energy
8
9
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Figure 2 Wind energy cost projections
0 Year 9-
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Figure 3 Current energy cost comparisons between wind and thermal plant
Gas
Coal
Nuclear Wind
11 Low Estimate [ ] Range
o Figure 4 Energy cost comparisons for 2000
==
uJ Gas
Coal
[ ~ Low Estimatecarbon Tax
Nuclear Wind B Range