USA - Comparing the costs of on- and offshore wind farms

Wind power generation costs have dropped to a point where they are competitive with conventional generation costs in some cases. Technology development is intended to reduce the cost of energy, but recent market drivers, including commodity price increases, create upward price pressures. These costs differ among countries, and comparison is difficult.

This task within the IEA Implementing Agreement for Co-operation in the Research, Development and Deployment of Wind Energy Systems (IEA Wind) has three primary purposes:
• Provide a common methodology for comparing cost of wind energy among participating countries as well as development of a tool that could be used by external entities to estimate wind generation costs.
• Synthesize future cost and performance projections for wind technology.
• Assess efforts to estimate the value of wind energy.
In November of 2005 the IEA Topical Expert Meeting Nº47 was held with a focus on methodologies for estimation of the cost of wind energy.

Wind power generation has come to a “historical” point where, just as installed costs were becoming competitive with other conventional technologies, the investment cost per MW has started increasing for new wind power projects. This is believed to be the result of increasing commodity prices (mainly raw material such as copper and steel, plus a bottleneck in certain sub-products) and the current tightness in the international market for wind turbines. Signals in the US market indicate a 27% increase in the installed cost of wind systems, from 2002 to 2007, up to approximately $1710/kW1. Other important markets for wind energy are also experiencing rising costs, although noticeable differences still exist among countries.

This is precisely the background that justifies the initiation of a new task. As wind is becoming an important source of electricity generation in many markets and competes with other technologies –notably natural gas and nuclear – in terms of new installed capacity, it is crucial that Governments and the wind research community are able to discuss the specific costs of wind systems on the basis of a sound methodology. Without a clear impartial voice regarding the costs of wind systems, organizations without a clear understanding of wind systems are left to determine and publicize the costs of wind systems, often in error. These issues are exacerbated by the diversity of the wind portfolio and variations in international project development cost assumptions. The work undertaken in this task should secondarily allow the comparison of the costs of wind energy with other electricity generating technology, by modifying, when necessary the underlying assumptions that are applied to the different technologies. This task should also form the basis for a more comprehensive analysis of the value of wind energy.

To enable the success of this enterprise two things should be made clear. Initially, the total cost of wind projects breaks down into several areas, some of which have a strong technical basis while others less so. For RD&D programs to be ultimately successful, all aspects of cost must be considered, even if only some are addressed by specific research activities. Understanding how financial costs, insurance, and development costs impact the life-cycle cost of a wind system is critical to truly understanding the actual cost of wind energy.

Secondly, although some of the objectives of this Task can be achieved without the involvement, participation, and assistance of the development and manufacturer community, it will be critical to engage these communities as much as possible for this activity to meet its stated aims.
Objectives and Expected Results

The objectives of this task are:
• To establish an international forum for exchange of knowledge and information related to the cost of wind energy.
• To identify the major drivers of wind energy costs, e.g. capital investment, installation, operation and maintenance, replacement, insurance, finance, and development costs, and to quantify the differences of these cost elements among participating countries.
• To develop an internationally accepted, transparent method for calculating the cost of wind energy that can be used by the International Energy Agency and other organizations.
• To derive wind energy cost and performance projections, or learning curves, which allow Governments and the research community to anticipate the future trends of wind generation costs.
• To compare the cost of wind energy with those of other electricity generation technologies, making sure that the underlying assumptions used are compatible and transparent.
• To survey various approaches to estimating the value of wind energy, e.g. carbon emission avoidance, fuel price stability.
Expected results include
• Identification of the primary wind energy cost drivers and the variation of these costs among participating countries
• Development of a generic cost of wind energy discounted cash flow model with explanation of primary deviations from characteristics specific to each participating country.
• Assessment of future wind technology cost and performance estimates
• Summary of approaches and estimates for valuing wind energy.

The Chinese Wind Energy Association reports that 50% to 60% of wind farm project costs are the cost of wind turbines, nearly 20% is transmission line cost, and the other costs (land expense, financing, and labor cost) represent 25% to 30%.

Typical wind farm project costs in Ireland include wind turbines (65%), grid connection (12%), onsite electrical (8%), civil engineering (8%), development (4%), and legal/financial (3%). In Italy, the overall wind power plant cost includes 10% to 20% for project development (wind surveys, wind farm design, permitting process with related environmental impact assessment etc.); 60% to 70% for wind turbines, including their transportation, erection and commissioning; and 20% to 25% for civil and electrical infrastructure, grid-connecting lines, and other facilities.

The German Wind Energy Association mentions investment costs for offshore wind power far from the coast as 4.3 million euro/MW (5.8 million USD/ MW) compared to 1.4 million euro/MW (1.9 million USD/MW) onshore. The KPMG 2010 Market Report calculated costs of 3.7 million euro/MW (5 million USD/MW) for a typical future German offshore wind farm.

On the positive side, the German offshore test platform data show that offshore wind farms can produce electricity at their maximum capacity during about double the average annual full-load hours for onshore wind farms. A study of the wholesale Irish electricity market concluded that the growing levels of wind power generation are not adding to the wholesale price of electricity.

The issue of how to calculate the cost of electricity from wind power is being explored in IEA Wind Task 26 Cost of Wind Energy, and a state-of-the-art report was published in 2010. Eventually, a consistent methodology developed through that work will be used to report costs.

The lifetime cost of wind energy is comprised of a number of components including the investment cost, operation and maintenance costs, financing costs, and annual energy production. Accurate representation of these cost streams is critical in estimating a wind plant’s cost of energy. Some of these cost streams will vary over the life of a given project. From the outset of project development, investors in wind energy have relatively certain knowledge of the plant’s lifetime cost of wind energy. This is because a wind energy project’s installed costs and mean wind speed are known early on, and wind generation generally has low variable operation and maintenance costs, zero fuel cost, and no carbon emissions cost. Despite these inherent characteristics, there are wide variations in the cost of wind energy internationally, which is the focus of this report.

Using a multi-national case-study approach, this work seeks to understand the sources of wind energy cost differences among seven countries under International Energy Agency (IEA) Wind Task 26 – Cost of Wind Energy. The participating countries in this study include Denmark, Germany, the Netherlands, Spain, Sweden, Switzerland, and the United States. Due to data availability, onshore wind energy is the primary focus of this study, though a small sample of reported offshore cost data is also included.

This report consists of two principal components. First, an overview and cross-country comparative analysis of the cost of wind energy is presented. The report then proceeds with a series of country-specific case studies that describe the unique cost elements of a typical wind energy facility in each of the represented countries.

For this analysis, we considered the levelized cost of energy (LCOE) as the primary metric for describing and comparing wind energy costs from country to country. The LCOE represents the sum of all costs over the lifetime of a given wind project, discounted to present time, and levelized based on annual energy production. The LCOE does not include any residual costs or benefits incurred beyond the project’s assumed operational life.

The levelized cost of energy may be calculated using several methods. This report summarizes two perspectives and approaches: a high level scenario planning approach and a sophisticated financial cash flow analysis approach. The majority of the analysis in this report, however, focuses on the financial cash flow analysis approach; thus, it represents the perspective of a private investor in a wind energy project in each of the participating countries.

This analysis used a spreadsheet-based cash flow model developed by the Energy Research Centre of the Netherlands (ECN) to estimate the LCOE. The ECN model is a detailed discounted cash flow model used to represent the various cost structures in each of the participating countries from the perspective of a domestic financial investor in a wind energy project. The ECN model has been customized in this analysis to exclude country-specific wind energy incentives, resulting in unsubsidized LCOE estimates.

Results of the analysis indicate that the unsubsidized LCOE varies considerably among countries represented in this study. As shown in Table ES-1, the country-specific LCOEs range from €61/MWh ($85/MWh) in Denmark to €120/MWh ($167/MWh) in Switzerland.

The magnitude of the unsubsidized LCOE variation has been attributed to differences in countryspecific energy production, investment cost, operations cost, and financing cost. As expected, the largest LCOE impact from country to country was the anticipated energy production component that could be due to the inherent wind regime, site selection, wind turbine design, or other factors. Market forces such as electricity market structuring or the perception of risk in a wind project investment also impacted the LCOE through large variations in both capital expenditures and financing costs. Costs attributed to the operations of a wind project ranged broadly across countries and had a sizable LCOE impact as well, though caution with the reported data for operations and maintenance costs were common. The unique factors contributing to the variations in LCOE across countries are explored further in the comparative analysis and country-specific wind energy chapters of the report.

Lastly, an alternative approach to calculating LCOE is also briefly explored. For example, highlevel planning scenarios may eschew a sophisticated discounted cash flow approach in favor of a simplified method to estimate LCOE. Under this simplified approach, assumptions for explicit financing terms and time-varying cash flows are not made, but instead a general discount rate is selected to represent all of the characteristics of the finance instrument. This more simplistic, high-level planning scenario approach minimizes the number of input parameters and the level of detail can facilitate LCOE comparisons among many different electric generation types. Therefore, the various methods in calculating LCOE require precise attention as to how, and from what perspective, the calculation is made, and comparisons should be made and interpreted carefully.

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