Wind Farms Economics

Approximately 75% of the total cost of energy for a wind turbine is related to upfront costs such as the cost of the turbine, foundation, electrical equipment, grid-connection and so on. Obviously, fluctuating fuel costs have no impact on power generation costs. Thus a wind turbine is capital-intensive compared to conventional fossil fuel i red technologies such as a natural gas power plant, where as much as 40-70% of costs are related to fuel and O&M.

Operation and maintenance (O&M) costs for onshore wind energy are generally estimated to be around 1.2 to 1.5 c€ per kWh of wind power produced over the total lifetime of a turbine. Spanish data indicates that less than 60% of this amount goes strictly to the O&M of the turbine and installations, with the rest equally distributed between labour costs and spare parts. The remaining 40% is split equally between insurance, land rental and overheads.

The costs per kWh of wind-generated power, calculated as a function of the wind regime at the chosen sites, range from approximately 7-10 c€/kWh at sites with low average wind speeds, to approximately 5-6.5 c€/kWh at windy coastal sites, with an average of approximately 7c€/kWh at a wind site with average wind speeds.

Using the specific costs of energy as a basis (costs per kWh produced), the estimated progress ratios range from 0.83 to 0.91, corresponding to learning rates of 0.17 to 0.09. That means that when the total installed capacity of wind power doubles, the costs per kWh produced for new turbines goes down by between 9 and 17%.

Offshore wind currently accounts for a small amount of the total installed wind power capacity in the world – approximately 1%. The development of offshore wind has mainly been in northern European counties, around the North Sea and the Baltic Sea, where about 20 projects have been implemented. At the end of 2008, 1,471 MW of capacity was located offshore.

Offshore wind capacity is still around 50% more expensive than onshore wind. However, due to the expected benefits of higher wind speeds and the lower visual impact of the larger turbines, several countries – predominantly in European Union Member States – have very ambitious goals concerning offshore wind.

The price of wind energy is different from the cost of wind energy described above. The price depends very much on the institutional setting in which wind energy is delivered. This is a key element to include in any debate about the price or cost of wind energy, and it is essential in order to allow for a proper comparison of costs and prices with other forms of power generation.

Wind power may be sold on long-term contracts with a contract term (duration) of 15-25 years, depending on the preferences of buyers and sellers. Generally speaking, wind turbine owners prefer long-term contracts, since this minimises their investment risks, given that most of their costs are fixed costs, which are known at the time of the commissioning of the wind turbines.

Compared to traditional fossil-fuel i red thermal power plant, generation from wind (or hydro) plants gives buyers a unique opportunity to sign long-term power purchasing contracts with fixed or largely predictable, general price level indexed prices. This benefit of wind power may or may not be taken into account by the actors on the electrical power market, depending on institutional circumstances in the jurisdiction.

Governments around the world regulate electricity markets heavily, either directly or through nominally independent energy regulators, which interpret more general energy laws. This is true whether we consider jurisdictions with classical electricity monopolies or newer market structures with ‘unbundling’ of transmission and distribution grids from wholesale and retail electricity sales, allowing (some) competition in power generation and in retail sales of electricity. These newer market structures are often somewhat inaccurately referred to as ‘deregulated’ markets, but public regulation is necessary for more than just controlling monopolies (such as the natural monopolies of power transmission and distribution grids) and preventing them from exploiting their market position. Regulation is also necessary to create efficient market mechanisms, e.g. markets for balancing and regulating power. Hence, liberalised or deregulated markets are no less regulated (and should be no less regulated) than classical monopolies, just as stock markets are (and should be) strongly regulated.

As a new and capital-intensive technology, wind energy faces a double challenge in this situation of regulatory flux. Firstly, existing market rules and technical regulations were made to accommodate conventional generating technologies. Secondly, regulatory certainty and stability are economically more important for capital-intensive technologies with a long lifespan than for conventional fuel-intensive generating technologies.

Unregulated markets will not automatically ensure that goods or services are produced or distributed efficiently or that goods are of a socially acceptable quality. Likewise, unregulated markets do not ensure that production occurs in socially and environmentally acceptable ways. Market regulation is therefore present in all markets and is a cornerstone of public policy. Anti-fraud laws, radio frequency band allocation, network safety standards, universal service requirements, product safety, occupational safety and environmental regulations are just a few examples of market regulations, which are essential parts of present-day economics and civilisation. As mentioned, in many cases market regulation is essential because of so-called external effects, or spill-over effects, which are costs or benefits that are not traded or included in the price of a product, since they accrue to third parties which are not involved in the transaction.

In regulatory price-driven mechanisms, generators of renewable energy receive financial support in terms of a subsidy per kW of capacity installed, a payment per kWh produced and sold or a fixed premium above the market price.

In quantity-based market schemes, green certificate models (found in the UK, Sweden and Belgium, for example) or renewable portfolio standard models (used in several US states) are based on a mechanism whereby governments require that an increasing share of the electricity supply be based on renewable energy sources.