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(Used with permission of the American Wind Energy Association)

The economics of wind energy have changed dramatically over the past 20 years, as the cost of wind power generation has fallen approximately 90% during that time. Despite that progress, the wind industry is still somewhat immature, with production volumes that pale in comparison to what they will be two decades from now. Thus, the factors affecting the cost of wind energy are still rapidly changing and wind energy’s costs will continue to decline as the wind industry grows and matures.

A number of factors determine the economics of utility-scale wind energy and its competitiveness in the energy marketplace.

The cost of wind energy varies widely depending upon the wind speed at a given project site. The energy that can be tapped from the wind is proportional to the cube of the wind speed, so a slight increase in wind speed results in a large increase in electricity generation. Consider two sites, one with an average wind speed of 14 miles per hour (mph) and the other with average winds of 16 mph. All other things being equal, a wind turbine at the second site will generate nearly 50% more electricity than it would at the first location.

Improvements in turbine design bring down costs
The taller the turbine tower and the larger the area swept by the blades, the more powerful and productive the turbine. The swept area of a turbine rotor (a circle) is a function of the square of the blade length (the circle’s radius).

Therefore, a fivefold increase in rotor diameter (from 10 meters on a 25-kW turbine like those built in the 1980s to 50 meters on a 750-kW turbine common today) yields a 55-fold increase in yearly electricity output, partly because the swept area is 25 times larger and partly because the tower height has increased substantially and wind speeds increase with distance from the ground.

Advances in electronic monitoring and controls, blade design and other features have also contributed to a drop in cost.

The following table shows how a modern 1.65-MW turbine generates 120 times the electricity at one-sixth the cost of an older 25-kW turbine:

A large wind energy project is more economical than a small one
Assuming the same average wind speed of 18 mph and identical wind turbine sizes, a 3-MW wind project delivers electricity at a cost of $0.059 per kWh and a 51-MW project delivers electricity at $0.036 per kWh – a drop in costs of $0.023 or nearly 40%.

Any project has transactions costs that can be spread over more kilowatt-hours with a larger project. Similarly, a larger project has lower operation and maintenance costs per kilowatt-hour because of the efficiencies of managing a larger wind power project.

Optimal configuration of the wind turbines to take the best advantage of micro-features on the project site will also impact a project’s productivity.

The cost of financing affects the cost of wind energy production
Wind energy is capital-intensive, so the cost of financing constitutes a large variable in wind energy project economics. For a variety of reasons, financing for wind projects remains more expensive than for mainstream forms of electricity generation.

Project ownership affects of cost of financing and the economics of a wind power project. Independent ownership – that is, financing projects by private power producers on a stand-along basis, which is how the vast majority of US wind power projects are financed – is more expensive than utility-owned financing.

According to a study by Lawrence Berkley national Laboratory, “utility ownership of a wind facility results in a significantly lower estimated levelized cost of energy, because lower-cost financing available to large electric utilities (IOUs or investor-owned utilities) is not available for non-IOU wind projects. IOU ownership reduces levelized costs by approximately 30%, the study found.

In addition, although wind turbine technology has steadily progressed to a point where its reliability is today comparable to that of other energy technologies, it is still regarded as “novel” and “risky” by many members of the US financial community (most US project are still financed by European-based lenders). Lenders therefore offer less favorable financing terms and demand a higher return on investment than for more “conventional” energy sources.

The economics of a 50-MW wind turbine farm at a wind site with average wind speed of 13-17 mph (Class 4). Figures are indicative only.

The Lawrence Berkley Laboratory study found that a 50-MW wind farm delivering power at just fewer than 5 cents per kWh would, if using typical natural gas project financial terms, generate electricity for 3.69 cents per kWh.

Transmission, tax, environmental and other policies also affect the economics of wind.
Transmission and market access constraints can significantly affect the cost of wind energy. Since win speeds vary, wind plant operators cannot perfectly predict the amount of electricity they will be delivering to transmission lines in a given hour. Deviations from schedule are often penalized without regard to whether they increase or decrease system costs. Interconnection procedures are not standardized and utilities have on occasion imposed such difficult and burdensome requirements on wind plants for connection to transmission lines that win companies have chosen to build their own lines instead. (See “Fair Transmission Access for Wind” at http://www.awea.org/policy/documents/transmisson.PDF).

As electricity markets are restructured and long-term power purchase agreements give way to trading on power exchanges, transmission and market access conditions will play an increasingly important role in the economics of a wind project.

The federal tax code, which provides a variety of permanent and temporary incentives for conventional forms of energy, also includes a production tax credit (PTC) for wind energy and a 5-year accelerated depreciation schedule for wind turbines. The 1.5 cent-per-kWh PTC is adjusted for inflation (currently stands at 1.8 cents/kWh) and support electricity generated from utility-scale wind turbines for the first ten years of their operation. The PTC, first adopted in 1992, was extended in 1999 again, throughout 2003 after its expiration in 2001, and most recently through December 21, 2005 after its expiration in 2004.

The PTC, a key incentive, helps level the economic playing field for wind projects in energy markets where other forms of energy are also subsidized. It must be noted, however that the current “on-again, off-again” status of the credit is hobbling project development and the industry as a whole.

Uncertainty also affects relationships with vendors and substantially increases costs as orders are rushed to meet PTC deadlines or as planning grinds to a halt and income is lost while the wind industry awaits an extension. One major US wind developer stated that a five-year extension of the PTC would provide enough long-term certainty to squeeze an additional 25% out of vendor costs. The wind energy industry is currently seeking a long-term extension of the credit.

Stricter environmental regulations enhance win energy’s competitiveness. Wind power’s environmental impact per unit of electricity generated is much lower than that of mainstream forms of electricity generation as wind energy neither emits pollutants, wastes or greenhouse gases, nor damages the environment through resource extraction. The higher air quality and other environmental standards adopted in a country, the more competitive wind energy therefore becomes in the marketplace. Conversely, a relaxation of standards or failure to internalize environmental costs through pollution charges or other processes makes polluting forms of electricity generation appear deceptively cheap. This is an important economic issue, because the hidden “subsidy” that governments and markets give to polluting energy sources by partially or fully ignoring their health and environmental costs is typically much larger than direct subsidies to such energy sources.

Wind energy provides ancillary economic benefits:
Less dependence on fossil fuels, which can be subject to rapid price fluctuations and supply problems (by end of 2006, AWEA estimates wind energy use will save over 0.5 billion cubic feet (Bcf) of natural gas each day). Steady income for the communities in which wind energy projects are located.

For information on the costs of wind energy and that of other electricity sources, see http://www.awea.org/pubs/factsheets/Cost2001.PDF.

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