Wind Energy FAQs: Cost vs. Alternatives

Wind Cost vs. Competitors

In this post we demonstrate that on- and off-shore wind energy is cost competitive with all other forms of generation. We show that costs continue to fall with growing installation volumes, subsequent economies of scale and technological advances. For the offshore industry we have had to use European data. We believe this is justified since, even though there is limited experience in the U.S., numerous companies are, even now, rapidly transferring the low-cost European experience to a number of North American projects that are now under development.

Choosing the metric. It can be tricky to compare different forms of energy generation as they have different construction, fuel, and operating costs as well as different operating life-spans. This problem is addressed by ‘Levelised Costs’ and so the Levelised Cost of Electricity (LCOE) is often cited as a convenient summary measure of the overall competitiveness of different generating technologies. This is because it represents the per-kilowatt hour cost (in real dollars) of building and operating a generating plant over an assumed financial life and duty cycle.

Numerous entities use this metric but – in the interests of brevity – we refer to only two of them. They are both credible and widely referenced: one government and one private sector.

U.S. ENERGY INFORMATION ADMINISTRATION. The EIA annually produces an LCOE analysis for all the main generation types. The following graph is drawn from their 2017 ‘Levelized Cost and Levelized Avoided Cost of New Generation Resources’.

  1. This chart does not include the tax incentives which are available to wind. Those incentives are assumed by EIA to be worth $11.6/MWh and so, if they are included, reduce the LCOE of wind to $52.2/MWh
  2. The data shows a weighted average of wind costs which range from $43.4 in higher wind regions to $75.6 in lower wind areas.
  3. The offshore wind cost ($157.4) seems high and we explain why in the ‘Offshore Wind’ section below.

LAZARD is a financial advisory and asset management firm that engages in investment banking, asset management, and other financial services primarily with institutional clients. Its principal executive offices are in New York City, Paris and London. It was founded in 1848 and operates from 42 cities across 27 countries in North America, Europe, Asia, Australia, Central and South America. Lazard’s Levelized Cost of Energy Analysis has been published annually since 2008 and over that time has become widely referenced as an impartial source of information on the relative cost of different types of generators.

Lazard’s released its most recent LCOE Analysis in November 2017. The following is taken from it;

A few points of note;

  1. The data exclude any tax incentives. If they are included wind’s LCOE range is between $14 and $52/MWh
  2. The wind LCOE range is in good agreement with that from EIA ($43.4-$75.6)
  3. Wind (and solar) are directly competitive with gas and significantly cheaper than coal and nuclear
  4. Neither wind (nor solar) has any fuel price volatility risk: a significant advantage when compared with gas.

EUROPE AND OFFSHORE WIND

As noted, EIA estimates an offshore wind cost of $157.4/MWh. We believe this is on the high side for a number of reasons.

a) Maryland: US Wind, an Italian firm, earlier this year won a Maryland tender to build America’s first commercial-scale wind farm. The tender was awarded at a price of $131.93/MWh and US Wind is planning construction start in 2019 with commissioning in 2020.

b) Massachusetts: In December 2017, Ørsted submitted its 400-800 MW offshore proposal to Massachusetts. No specific price information was publicly released; however Ørsted’s press release revealed that the proposal would “Deliver $300 million in savings per year in lower winter power costs“. That hardly sounds like something which has a generation cost of $157.4/MWh.

c) United Kingdom: In September 2017, Ørsted (then called DONG Energy) won a U.K. contract to build the world’s largest offshore wind farm – of 1,386 MW – at a price of GBP 57.50/MWh or $77.34 at current exchange rates. It is expected to be operational in 2022.

d) Other Europe: offshore wind contracts have seen sharp falls in the last few years and just this year have started to be offered on a merchant (i.e. zero-subsidy) basis. In April 2017 Ørsted (then DONG Energy) was awarded two zero-subsidy offshore wind contracts – each of 240 MW – in the German North Sea. They will be commissioned in 2024. In December; Shell, Statoil, Vattenfall Group and others were among companies which submitted zero-subsidy bids to build a 700 MW wind project offshore Holland by 2022.

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