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. Costs continue to fall with growing installation volumes, subsequent economies of scale and technological advances.

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 means of ‘Levelised Cost’ of generation which represents the cost (in real dollars) of building and operating a generating plant over an assumed financial life and duty cycle. By compiling this cost estimate, and then dividing it by the amount of electricity generated, it is possible to calculate the Levelised Cost of Electricity (LCOE). This is often used as a convenient summary measure of the overall competitiveness of different generating technologies and we use it here.

Numerous entities use the LCOE however we include reference to only two – which seem to be the most widely used.

Lazard is an investment bank and annually produces an LCOE analysis for all the main generation types. Their most recent version (V13) dates from November 2019 and the following is from it,

  1. This chart does NOT include the tax incentives which are available to wind or solar. If they are included, the LCOE of wind drops to $11 and solar to  $31.
  2. (Unsubsidized) Wind costs vary significantly from $28 in high wind areas to $54 in lower wind regions.
  3. The offshore wind cost (the gold diamond included next to the onshore LCOE on slide 2) is estimated at $89/MWh.
  4. Of particular note (Slide 6) is that the full LCOE of wind and solar is now starting to beat the MARGINAL cost of nuclear and coal. To translate that from economics-speak: the full life cycle cost of the cheapest wind and solar is now competing head to head with only the variable costs (mainly fuel, operations and maintenance, of coal and nuclear). That’s quite something and was unimaginable only a few years ago.

The US Energy Information Administration (EIA) annually produces the ‘Annual Energy Outlook’ which contains a forward looking LCOE of different generator types. The following summary is taken from page 7 of their April 2019 analysis.

A few points of note;

  1. The data exclude any tax incentives.
  2. The wind, solar and gas prices shown are capacity-weighted averages i.e. they are average levelized cost per technology, weighted by the new capacity coming online in each region.
  3. EIA quotes coal costs including 90% Carbon Capture and Sequestration (CCS) since they assume coal in the US can no longer be built without it
  4. Quoted prices for nuclear do not include the cost of waste processing or end-of-life plant decomissioning
  5. Neither wind (nor solar) has any fuel or carbon price volatility risk: a significant advantage when compared with gas without CCS.

OFFSHORE WIND: US and European Prices

The US EIA’s 2020 LCOE analysis of new generation resources, estimates an offshore wind cost of $115/MWh for projects entering service in 2025. We believe this is on the high side for a number of reasons.

a) Maryland: In 2017, Deepwater Wind (now part of Ørsted) and US Wind, an Italian firm, 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 Ørsted expects to commission their project in 2023.

b) Massachusetts: In December 2017, Massachusetts awarded a contract to Vineyard Wind (a CIP-Avangrid JV) to build an 800 MW offshore wind project at a price of $69.5/MWh. This figure is competitive with new gas and substantially cheaper than new coal and nuclear. In their August 2018 release announcing the PPA price, the Massachusetts Department of Energy Resources stated “Over the life of the contract, the 800 MW Vineyard Wind Project is projected to provide an average 1.4 cents/KWh of direct savings to ratepayers” and ” the total direct and indirect benefits to Massachusetts ratepayers from the long-term contracts with Vineyard Wind are expected to be 3.5 cents/kWh, or $35.29/ megawatt-hour (“MWh”) on average over the term of the contract, with total net benefits of approximately $1.4 billion“. Vineyard originally expected commissioning in 2021 but, following permitting delays, is now targeting 2022.

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 of that year; 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.

e) UK. In 2019, mega-projects offshore UK achieved a new record low of £39.65 ($51.05) per MWh

f) US. Through 2019, a number of offshore wind projects were awarded in the US. Not all the prices are public, but of those that are, New York‘s split award of 1,700 MW to Ørsted and Equinor came in at an impressive $86.36/MWh. Although this price is significantly higher than those in Europe, this is due to the lack of a developed US supply chain and is something which the nascent US offshore wind industry is working hard to address by creating jobs and manufacturing in the US. Also of note in late 2019, was Mayflower’s 804 MW win in Massachusetts – which was awarded at an undisclosed price but one which is less than $84.23. This was followed by Vineyard’s win of a further 804 MW in Connecticut in December which the proponents claimed “would be at a price lower than any other publicly announced  offshore wind project in North America“.

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