Introduction

Energy option selection for application

Technical feasibility
How efficient is system?
How much energy will it produce ?
Economic aspects
At what cost can we generate energy ?
Project optimized for lowest cost-per-kWh generation
Renewables have high generation cost (in general)
Wind energy is economically competitive with conventional
sources (Coal & Natural Gas)
Less expensive than all other renewables

Introduction
Electricity
Unit cost of electricity
Determined from capital investment & operating costs
Value of electricity more difficult to determine
Must be calculated for intelligent investment decisions

Introduction
Wind Turbine
Fuel free
Capital investment high
Investment for other requirements need to be accounted for
Land, transmission lines, power conditioning systems, etc.

Economic Studies Important

Intelligent Investment Decision
Asses net financial return from project for given energy profile
Value must exceed cost before WT purchase justified
Value-to-cost > alternative electricity sources for WT project

Introduction
Estimate Generation Costs & Benefits
Unit electricity cost - determined by capital investment & operating costs
Cost straightforward add fixed & variable costs
Benefits complex - wind electricity value influenced by factors related to
local energy industry
Value of wind generated electricity to utility determined by fuel savings
& capacity credit
When wind blowing - less oil & coal needed - savings to utility
If utility can delete or defer new conventional generation as a result
of adding WTs - additional savings

Introduction
Cost & Value of wind generated electricity determined by
standard economic models
Assume business as usual
Ample supplies of natural gas, oil, coal, & nuclear fuel
Credit available to build new generating plants
No significant political changes
Ignore hidden costs such as air pollution & nuclear waste disposal

Factors Affecting Economics

1. Load (Power) & Energy
Energy - Calculate by month or by day for small systems
2. Cost of energy from competing energy sources to
meet need
3. Initial Installed Cost
Purchase Price
Shipping Costs
Installation Costs (foundation, utility interface, labor, etc.)
Cost of Land (if needed)

Factors Affecting Economics

4.

Production of Energy
Type(s) and Size(s) of Wind Turbine(s)
Warranty
Company (reputation, past history, # of years in
business, future prospects)
Wind Resource
Variations within a year
Variations from year-to-year
Reliability, Availability

Factors Affecting Economics

5.

Selling Price of Energy Produced and/or Unit Worth

of Energy & Anticipated Energy Cost Changes
(Escalation) of Competing Sources

6.

Operation & Maintenance Costs

General Operation, Ease of Service
Emergency Services and Repairs
Insurance
Infrastructure (are service personnel available locally)

Factors Affecting Economics

7. Cost of Money (Interest Rate, fixed or variable)
8. Inflation (estimated for future years)
9. Legal Fees (Negotiation of Contracts, Titles,
Easements, Permits)
10. Depreciation if System is a Business Expense
11. Any Federal or State Incentive

General Comments
General uncertainty regarding future energy costs
Driving force for renewable sources - dependence on imported oil,
reduction of pollution & emissions, & availability
Prediction of energy cost escalation is hazardous as cost of energy
driven primarily by cost of oil
When demand exceeds production - sharp increase in oil price
Some experts predict world oil production peak in 2004 - 2009 while others
predict 2016 or to 2040

Most important factors - estimated total reserves & amount recoverable

As price increases - economic to recover more from existing reservoirs

General Comments
Should benefit from all incentives - mainly federal & state incentives
Governments promote use of renewable energy sources
Environmental credits often offered to wind energy utilities & WT mfgs
PTC (Production Tax Credit) frequently extended by US Congress
Land cost is real cost - even if use own land
Cost often obscured because it is unidentified lost income
WTs occupy space - reduce land available for farming or ranching
For wind farms - land taken out of production 3 to 10%
WT availability important in determining energy produced
Optimum return - WT in operation as much as possible
Availability for earlier machines very low - recent much higher
Distribution of energy throughout year affects energy value
Energy of more value If during time of increased demand on utility or
during time energy needed at site

General Comments
WTs produce electricity for
Consumption on or near site
Displaces electricity at retail rate
To sell to a utility
Both
No Such Thing as Single Price for Wind Energy
Price determined by electricity produced - determined by Vwind
Wind Energy is a Resource Extracting Technology
What is the average cost of crude oil?
In Kuwait may be $1/barrel, in North Seamay be $15/barrel
What is average cost of wind energy?
Answer may be similar

Economic Analysis
Economic analyses - both simple & complicated
provide guidelines
Simple calculations made first
Commonly calculated quantities
Simple payback
Cost of energy (COE)
Cash flow

WT economically feasible only if its overall earnings

exceed its overall costs within lifetime
Payback time - time at which earnings equals cost
Relatively large initial cost
Short payback preferred

Wind Energy Economics

Wind-Generated Electricity
Major Factors
Estimate Unit Cost

Wind Project Installed Costs

Wind Power Price ($/MWh) Vary by Region

High average costs in California low in Texas

Wind Energy Economics

Cost of Wind-Generated Electricity
25 c

84% in 25 years
5 c
2.6 c
05

48% in 15 years

Wind Energy Economics

Cost of Wind-Generated Electricity

WT Size

1980 - 85

Wind Energy Economics

Factors Affecting Economic Viability
Site
WT System
Market
Policy

Wind Energy Economics

Site Factors
Match WT & Site
Wind Spectra Strength
Typical Example

PWind

1
3
AT VWind
2

10% Vw 33% Pw

50% Cost

18%

7.7

10%

33.3% Vw

10

Wind Energy Economics

Site Factors
Land $
Foundation $
Dependent on soil & loads expected
Distance WT from existing grid (major concern)
Extending WT access to existing roads

Wind Energy Economics

WT Economic Life $
WT Life is 20 30 years
Design for longer life
Initial cost spread out more

WT life from 15 to 30 years

Annual cost of operation

Cost 25%

11

Wind Energy Economics

WT $ with size (scaling up)
Component $ do not scale at same
rate as WT size
Small & Larger WTs

Unit $ of Small Stand-Alone WTs

$ for safety, electronics

Dev manpower
Production $
Learning curves correlate
production rate & WT unit cost

18% $/kW

WT Costs Learning Curves

Learning Curves
Estimate cost of installed WT produced in large quantities
Cost of initial machines high
Later machines take advantage of higher volume production

Cost/Unit with in volume

Model-T Fords, aircraft, steel production, petroleum refining, &
electric power generation
Classic recent example - hand-held calculator & other integrated
circuit components

12

Cost Model
Decrease in cost - formalized by learning curves
Developed from math model
y = cost of object
x = cumulative volume
Normalized Incremental Cost = dy/y
Assumed related to normalized incremental volume = dx/x

dy
dx
m
y
x
where m = constant
- sign because cost while volume

Cost Model
dy
dx
m
y
x
Integrate from Cumulative Volume x to Volume x(2n)
Cost from y1 to y2
Cumulative Volume doubling n times

Cost y2 after n doublings of volume

x 2

ln y y2 m ln x x
y

y
ln 2 m ln 2n
y1
y2 y1e m ln 2

13

Cost Model
y2 y1e m ln 2

Slope s of cost curve

se

m ln 2

Cost y2 after n doublings of volume

y2 y1s n
Plot of y2 vs n - straight line on log-log paper

Cost Model
y2 y1s n

se

m ln 2

S = 0.95
0.9
0.85
0.8

Given cost of 1st unit & slope of learning curve s

Can estimate cost of 100th unit & intermediate values

14

Cost Model
Normally - Cumulative Production Volume x
Not number of volume doublings n

Need n - x relationship
Can show

n for volume from x1 to x2

x
ln 2
x1
n
ln 2

Cost Model
y2 y1s n
Choice of slope s critical to economics
Requires information
Learning curves from past
Estimates of future trend of manufacturing costs

s History
0.86 - Model-T Fords
0.8 - aircraft assembly
0.95 - electric power generation
0.79 - steel production
0.74 - hand-held calculators

15

Example
New WT
1st WT costs $2,000,000
Estimate: Follow s = 0.83 learning curve

FIND

Cost of 100th unit

n for volume from x1 to x2

x
ln 2
x1
n
ln 2

ln 100
ln 2

1 6.64

y2 y1s n 2,000,000 0.83

6.64

$580,375
Cost of 100th unit

Wind Energy Economics

Energy Market
Energy Market decides Wind Energy Benefits
Personal WT
WT Advantage local electricity cost
Surplus Energy Sold to Local Utility
Rate << local retail selling price
Time of day Peak or Off-Peak load time

16

Wind Energy Economics

Policy Incentives & Exemptions
Coal & NG hidden subsidies
US - $35 B over 20 years Coal mine black lung treatment
Environmental Costs
Fossil Fuel Pollutants
Include environ costs - Coal-fired plants 50 100% more
expensive than today

Wind Energy Economics

Policy Incentives & Exemptions
Investment Incentives
e.g. Accel depreciation ( rate in early years)
U.S. Wind investors deduct fraction of capital from taxes
Denmark, Germany Direct $ grants

17

Wind Energy Economics

Policy Incentives & Exemptions
Production Incentives

Production Tax Credit (PTC) (US)

Credit for electricity produced & sold to utility in 1st 10
years of operation
Currently ~ 2.2 /kWh
Denmark, Germany Direct $ to investors based on kWh
produced

Wind Energy Economics

Policy Incentives & Exemptions
Policy Incentives
Local & national govt
Property tax completely or partially waived
Favorable Interest Rate
Iowa Alternate Energy Revolving Loan Program
project cost interest free loan up to 20 years
Other Countries
Environmental regs that favor wind
Emission taxes for polluting industries
Proportion to CO2 & SOx emitted

18

Wind Energy Economics

Present Worth Approach
Investment Motive $
Value of money varies with time
e.g. $100 in bank at 10% interest
1-year - $110
$110 in 1-year worth only $100 today

Wind Farms
20 30 years
$ in & $ out in all years
Economic value Consider $ & Benefits over life span

Present Worth Approach

Present Worth Approach
Assess Economics
Common Reference
$ flows in different years brought to reference year
Ref Project Start Year (Year 0)

19

Present Worth Approach

C = Investment Made Today
An Future Value

A2 C 1 i

A1 C 1 i

A3 C 1 i

... An C 1 i

i = interest rate or discount rate

PV(A) Present Value of receipt after n years

An - Future Value of
present value PV at
interest i

C PV A

An

1 i

PV(A) - Present Value

of single sum An paid at
Year-n with interest i

PV & An equivalent in economic sense

Present Worth Approach

Consider Uniform Annual Cash Flow for n years
Present Value of Payment A in different years (init Year 0)

PV A 1

PV A 2

1 i

A
1 i

PV A3

i = interest rate or discount rate

1 i

... PV An

1 i

20

Present Worth Approach

Accumulated Present Value of Payment A after n years
Year n

PV A n

1 i

Years 1 - n

1
1
1
1
PV A 1n A

...
n
1 i 1 i 2 1 i 3
1 i

PV A 1n

A
1
1
1

...
1

2
n 1
1 i 1 i 1 i
1 i

PV A 1n

1 n
1

A 1 i

1 i 1
1

1 i

Present Worth Approach

Accumulated Present Value of Payment A after n years

PV A 1n

1 n
1

A 1 i

1 i 1
1

1 i

PV A 1n

1 i n 1
A
n
i 1 i

21

Present Worth Approach

Example WT generates 1,576,800 kWh in each-year
which is sold to Purdue Energy @ 5/kWh each year
The discount (interest) rate is 5%
FIND Present Worth of electricity generated by WT
throughout its 20 year life
Yearly revenue

1,576,800 0.05 $78,840

20 year Cash Flow

Present Worth Approach

Example WT generates 1,576,800 kWh in each-year which is
sold to Purdue Energy @ 5/kWh each year. The discount
(interest) rate is 5%
Accumulated Present Value of Generated Electricity

PV A 1n

1 i n 1
A
n
i 1 i

PV A 120

1 0.05 20 1
78,840
20
0.05 1 0.05

$982,521

Total Payments = 20 x $78,840 = $1,576,800

22

Present Worth Approach

Example $10,000 borrowed for 10 years at discount
(interest) rate of 7% invested in WT Farm
Find the uniform annual payments
Accumulated Present Value
PV A 1n

1 i n 1
A
n
i 1 i

i 1 i n
A PV A 1n

n
1 i 1
0.07 1 0.07 10
A 10,000

10
1 0.07 1

10

A A $1,
?424

A $1, 424

Present Worth Approach

Preceding - Present Value of Uniform Payment A
PV A 1n

1 i n 1
A
n
i 1 i

Neglects Inflation

Not appropriate during times of inflation

Inflation
Price with time

CPI (Consumer Price Index)

Gauge of rate of inflation

Need Present Value of Annual Payments which each year

depends on
General inflation - inflation rate r
Change in cost of item relative to general inflation escalation e

23

Present Worth Approach

Inflation incorporate by
Treat Inflation r & nominal interest rate i separately
Adjusted Discount (interest) Rate I
Combine inflation r & Interest rates i (& escalation e)

Discount (interest) rate i adjusted for inflation r

termed
REAL DISCOUNT (INTEREST) RATE - I

Present Worth Approach

I REAL DISCOUNT (INTEREST) RATE
Adjusted Discount Rate
Combes inflation & interest rates

I = Difference between nominal interest rate i & inflation rate r

1 I

1 i
1 r

1 i 1
1 r

r = rate of inflation
i = interest (discount) rate

Real Discount Rate

24

Present Worth Approach

Cost of Electricity may at rate > inflation
Fuel scarcity, international market pressure, politics or policy
changes
During Gulf War (& now) oil prices increased rapidly which in
turn was reflected as the rise in electricity tariff

e Escalation
Cost Increase as compared with general inflation

Present Worth Approach

e Escalation
Cost Increase compared with general inflation

ea Apparent Escalation Rate

Escalation e & Inflation Rate i Combined

1 ea 1 e 1 r

ea 1 e 1 r 1

e = escalation rate
r = inflation rate

NOTE: REAL DISCOUNT RATE I - accounts for all/any

I Real Discount (interest ) Rate adjusted for both inflation &
- inflation
escalation rate r - interest rate i escalation rate e
I

1 i 1
1 r

Inflation only

1 i
1 inflation & escalation
1 ea

i = interest or discount rate

r = inflation rate

25

Present Worth Approach

EXAMPLE $10,000 borrowed for n = 10 years at discount
rate i = 7% invested in WT Farm (Previous Example)
FIND Amount of uniform annual payments
if inflation rate r = 3%
I Real Discount (Interest) Rate adjusted for inflation r & escalation e
(e = 0)
1 i

1 ea

ea 1 e 1 r 1
ea 1 0 1 0.03 1 0.03

Real Discount (interest) Rate

1 0.07
1
1 0.03

0.039

Present Worth Approach

I Real Discount (interest) Rate adjusted for Inflation

1 0.07
1 0.039
1 0.03

Annual Payment A

i 1 i n
A PV A 1n

n
1 i 1

Use I - Real Discount

(interest) Rate

0.039 1 0.039 10
A 10,000
$1, 227
10
1 0.039 1
No Inflation - Annual Payment = $1, 424

Previous
example

When effect of inflation included - annual

payment reduced to $1,227

26

Wind Energy Cost

Wind Energy Cost expressed 3 ways
1. Cost / WT rated power (PT-R)
2. Cost / unit rotor size (AT)
3. Cost / kWh electricity generated

Wind Energy Cost

Wind Energy Cost
CPR Cost / WT rated power (easiest way to express WE cost)

CPR

CT
PT R

CT Cost of WT with rated power PT R

Simplest method
Compare market rates of systems with similar PT-R
BUT mfg quote rates differently
Turbine only
Turbine + Accessories

27

Wind Energy Cost

CPR Cost / WT rated power
C
CPR T
PT R

CT Cost of WT with rated power PT R

BUT PT-R depends on Vw

2 WTs Same AT but Rated Vw different
Example WT-1 12 ms

&

WT-2 15 m/s

PT-R-2 ~ 2 x PT-R-1 ( Vw3 - 1728 - 3375)

WT-2 Bigger gen But CT-1 ~ CT-2

CPR 2 CPR 1
But if Vw spectra low WT-1 may gen more power (matches Vw)

Wind Energy Cost

CA Wind Energy Cost
Better way to express cost of system - in terms of unit rotor size

CA Cost / unit rotor size

CA

CT
AT

CT Cost of WT with area AT

2 WTs Same AT but different Rated Vw

In region with stronger winds ( Vw )
WT with PT-R delivers more power & has economic
advantage over other

28

Wind Energy Cost

Wind Energy Cost
Often concerned with cost of generating kWh of electricity

Vw critical in determining cost of wind generated electricity

CE Unit Cost / kWh wind generated-electricity

CE

CA
EI

C A WT cost of operation (annual basis)

EI kWh generated (annual basis)

CE
24

CA
CA

EI
8760 CF PT R

hrs
day
hrs
365
8760

day
year
year

CF Capacity Factor

Wind Energy Cost

Fixed Costs
Costs whether generate power or not
WT initial investment

Variable Costs
Costs vary in proportion to power generated
WT op & maintenance

29

Wind Energy Cost

CA Total Annual Cost of Operation
C A FC VC
FC - Fixed annual costs
Costs incurred due to existence of project
Costs met irrespective of whether project
functioning or how much power being
generated
WT Initial Investment

VC - Variable annual costs

Vary in proportion to project output
WT Operation & Maintenance of system

Turbine Installation Costs

Foundation (reinforced concrete), road construction (move WT & tower
sections to site), transformer (convert low voltage (e.g., 475 V) current
from WT to, e.g., 10-30 kV current for local electrical grid, telephone
connection for WT remote control & surveillance, & cabling costs, i.e.,
cable from WT to local 10-30 kV power line

Installation Costs Differ

Cost of roads & foundations depends on soil conditions
Distance to nearest highway
Cost of getting a mobile crane to site
Distance to power line suited to handle WT power
Cost of cabling can be significant
Matters if wind farm next to an existing, e.g., voltage power line (9 - 30 kV)

Transportation costs of WT components important

Internet connection & remote control center - cost usually low

30

Economies of Scale
Connecting many turbines in same location offers cost advantages
Electric grid limits amount of power
Grid may need to be reinforced, e.g., high voltage electrical grid
extended
Numerous parties involved in grid modification which is location
(state) dependent
Besides economy of size of individual turbines, wind farm economy
of scale is important
Benefits from maintenance, administration, etc.
Particularly true for rotor blades & gearboxes that may be
overhauled in batches rather than individually
Price of new rotor blades, gearbox, or generator may be
~ 15 - 20 % of turbine cost

Operation & Maintenance Costs for WTs

Wind turbines designed to operate for 120,000 + hours
over design lifetime of 20 -25 + years
Designing components to last longer might be waste
Designed lifetime, e.g., 20 - 25 years, impacts individual system
& component design/selection
Actual WT lifetime - depends both on turbine quality & local
climatic conditions, e.g., turbulence at site

Data - maintenance cost typically low for new turbines &

increases as turbines age
Terms of maintenance contacts vary, from fixed annual
cost to cost per service performed

31

Availability Factor
WTs undergo scheduled & unscheduled maintenance
Modern Wind Turbines achieve availability factors above
98%, i.e., WTs ready to run > 98% of time
Total energy output generally affected < 2% as WTs
seldom undergo scheduled maintenance during high winds
Availability factor usually ignored in economic analysis

Land Lease
Treating compensation to land owners as a cost of wind
energy is misleading
Only a minor share of compensation is a cost - namely loss of
crop on area that can not be farmed + possible nuisance
compensation if farmer has to make extra turns when plowing
underneath WTs
Not a cost to society - but is transfer of income (profits) from
WT owner to land owner

Economists - such profit transfer called a land lease

Lease payment does not transfer actual resources from one
use to another
Example fee: $4,000/year/turbine

32

Wind Energy Cost

Op & Maintenance Cost
CI initial investment

Conventional Power Plants

Fuel major part
WT
Fuel Free
Insurance & Tax annual
Land Rental Cost
Staff costs
Maintenance Wear gear box & transmission parts
Rotor Fatigue
$ (& frequency)

m % of Capital Cost (m = 1-3% for annual maintenance )

Proportional to hours of WT operation (%)

Wind Energy Cost

Annual Cost Present Value
WT Farm Annual Costs over n years

COM - Op & Maintenance Cost

COM m CI
CI initial investment
m%

33

Wind Energy Cost

Discount Op & Maint Cost for n years to initial year
PV A 1n

PV COM 1n

1 i n 1
A
n
i 1 i

1 I n 1
m CI
n
I 1 I

I Real Discount Rate (adjusted for inflation & escalation)

COM - Op & Maintenance Cost
CI = Initial Investment

Wind Energy Cost

Discount Op & Maint Cost for n years to initial year

PV COM 1n

1 I n 1
m CI
n
I 1 I

Accumulated Net Present Value of All Costs

Including Initial Investment CI

NPV C A 1n

1 I n 1
CI 1 m
n
I 1 I

CA Total Annual Cost of Operation

I

Real Discount Rate (adjusted for inflation & escalation)

34

Wind Energy Cost

Accumulated Net Present Value of All Costs
With Initial Investment CI

NPV C A 1n

1 I n 1
CI 1 m
n

I
1
I

Yearly Cost of Operation

NPV C A

NPV C A 1n
n

C
I
n

1 I n 1
1 m
n

I 1 I

CA Total Annual Cost of Operation

CI Initial Investment

Wind Energy Cost

Energy Generated per Year

24

hrs
day
hrs
365
8760
day
year
year

EI PT R CF 8760
PT R WT rated power

Cost of 1 kWh electricity c

NPV C A
EI

CF capacity factor

Cost of 1 kWh electricity

1 I n 1

CI
1

1 m
n
8760 n PT R CF
1
I
I

CA Total Annual Cost of Operation

I Real Discount Rate

CI Initial Investment

35

Wind Energy Cost

EXAMPLE 600 kW WT costs $550,000 with 20 year life
Initial Costs (including install & grid integ) 30% WT cost
Annual OP & Maint m = 3.5% WT cost

FIND: Cost of electricity @ site with capacity factor CF =

0.25 & real discount rate I = 5%
Total Investment
WT Cost $ 550,000
Initial (instl & grid integ) Cost = 0.30 WT = $ 165,000
TOTAL Investment Cost CI = $ 715,000

Wind Energy Cost

Example 600 kW WT costs $550,000 with 20 year life
Initial Costs (including install & grid integ) 30% WT $
Annual OP & Maint m = 3% WT $

TOTAL Investment Cost CI = $ 715,000

Cost of 1 kWh electricity c

1 I n 1

CI
1
c

1 m
n
8760 n PT R CF
1
I
I

715,000
1
c

8760 20 600 0.25

1 0.05 20 1

$0.039
1 0.035
20
kWh
0.05 1 0.05

36

Wind Energy Cost

EXAMPLE

Capacity Factor CF Effect

FIND Break-even capacity factor CF if utility wants to

pay $ 0.03/kWh
c

1 I n 1

CI
1
1

n
8760 n PT R CF
I 1 I

715,000
1

8760 20 600 CF

1 0.05 20 1

1 0.035
20

0.05 1 0.05

Wind Energy Cost

c

715,000
1

8760 20 600 CF

1 0.05 20 1

1
0.035

20
0.05 1 0.05

Break-even CF = 0.33

37