Tuesday, 7 February 2012

Wind Energy Costs


Following the recent attack on wind farms by MPS, I wanted to look at the cost of wind energy in fairly broad terms.  The latest attack on wind farm development is by a list of over 100 hundred Members of Parliament from across the political spectrum (I counted 2 Labour, 2 Lib-dems, one DUP, with the remainder being conservative) who wrote an open letter to the Prime Minister calling for a ban on any subsidies and tightening planning controls to make it easier for people to block developments. This coming from a government that wants to reform planning to include "presumption in favour of sustainable development".  They appear to rate wind farms as unsustainable while new housing on greenbelt is perfectly sustainable; we have so much green space that we can build on it now without limiting future generations ability to build on it too!


Construction Costs

Since the fuel which drives wind turbines, i.e. the wind, is free, the largest cost of wind energy is the upfront costs - the cost of constructing and commissioning the turbines.  This varies from site to site depending on numerous factors, which for onshore wind farms include:

  • Wind profile - mean wind speed of the site and the range of wind speeds determines the size of the turbine for a given energy output, i.e. how tall it needs to be and the diameter of the rotor. 
  • Grid Connection - the proximity of a suitable connection to the national grid - in some cases, this may involve laying cables or erecting pylons for several miles.
  • Accessibility of site - turbine blades and tower sections can be nearly 50m long therefore delivery of components may require works to widen bends or smooth gradients on approach roads. 
  • Site terrain - decent roads must be built on site to get these components to their final position and lift them into place and this can be difficult on hilly terrain or boggy ground. 
  • Ground conditions - the type of soil or rock on the site determine the type of foundations that are required and poor ground can lead to more expensive piled foundations.

These factors result in a range of costs of between £1m and £1.5m per MW from figures I have seen in the press, e.g. Whitelee Wind Farm reported to cost £300m for 322MW and Clyde Wind Farm reported to cost £500m for 350MW.  A separate assessment by Garrad Hassan gives a similar range in costs.

Part of the upfront cost usually involves a bond that will allow the site to be restored to its original condition following decommissioning of the wind farm, an obligation not imposed on nuclear and fossil fuel fired power stations.

Revenue

As with costs, there are a range of factors which affect revenue including how much the wind blows and how much you can sell the electricity for.  Wind farms typically generate an average of between a quarter and a third of their rated capacity.  Lets assume that our 1MW installation generates a quarter of its rated capacity over a year, that is:

0.25 x 1MW x 365 days x 24 hours = 2190MWh (Mega-watt hours)
Now consider that the retail cost per unit of electricity is around 13p per kWh (excluding standing charges) this would generate a total revenue of:
2190 x 1000 x £0.13 = £284,700 per annum
This is about a fifth of the construction cost.

There is more to it than this as the electricity is traded between generator, the grid and the retailer with each taking their share to cover operational costs of the wind farm (£50,000 MW/year), the distribution network, billing and marketing and profit, some of which are covered by either a standing charge or higher unit rates paid by customers.

If the wind farm construction cost was at the high end of the cost range and half of the revenue was spent on operational costs and profits, the return on investment would still be 10% per annum, or a ten year pay back period depending on how you view it.

Conclusion

One could conclude from this simplistic analysis that wind farms can stand financially on their own merits without subsidy but unfortunately the electricity market is more complicated than this. The unit price paid to electricity generators varies depending on actual and projected demand over very short time periods, meaning that revenue is lower at night when demand drops and his higher at peak times. For the large integrated energy companies like Scottish Power and Scottish & Southern Energy that generate electricity, operate the grid over their own area and sell the electricity to the end user this is less of a problem because the relative prices between the wholesale and retail side are smoothed out: if the generation side yields less revenue, the retail side will make up the difference. Smaller independent wind farm operators, such as community schemes, must factor this variability in to their business plan along with longer term changes in energy prices and policies.

Smaller organisations also face higher borrowing costs which further reduces revenue (although the banks do very nicely out of it). Perhaps therefore, subsidies should be limited to smaller wind farm developers to encourage competition in the market and encourage community involvement. I can understand anger at the large energy companies milking the subsidies to add to their profits when they already run a "virtual cartel" on the retail side according to one commentator.

The recent cold snap in Europe has caused UK gas prices to increase by 24% from Friday the 3rd to Monday the 6th of February 2012. The price is likely to drop as quickly when temperatures rise again but out illustrates how we are at the end of the pipeline through Europe and are at the mercy of demand across the continent. This is reason enough to invest in renewable energy, regardless of climate change, man made or otherwise.

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