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The economics of wind energy

Generating electricity from the wind makes economic as well as environmental sense, the wind is a free, clean and renewable fuel which will never run out. The wind energy industry - designing and making turbines, erecting and running them - is growing fast and is set to expand as the UK and the rest of the world look for cleaner and more sustainable ways to generate electricity. Turbines are becoming cheaper and more powerful, with larger blade lengths which can utilise more wind and therefore produce more electricity, bringing down the cost of renewable generation.

What are the different costs of making electricity from the wind?

Making and selling electricity from the wind is no different from any other business. To be economically viable the cost of making the electricity has to be less than its selling price.

A totally free market - where all methods of making electricity compete on the same level - does not exist anywhere. In every country the price of electricity depends not only on the cost of generating it, but also on the many different factors that affect the market, such as energy subsidies and taxes.

The cost of generating electricity comprises of

  • capital costs (the cost of building the power plant and connecting it to the grid)
  • running costs (such as buying fuel and operation and maintenance) and
  • the cost of financing (how the capital cost is repaid)

With wind energy, and many other renewables, the fuel is free. Therefore once the project has been paid for, the only costs are operation and maintenance and fixed costs, such as land rental. The capital cost is high, between 75% and 90% of the total for onshore projects.

The capital cost breakdown of a typical 5 MW onshore project is shown below.

Capital cost breakdown of new wind project

What influences the costs?

There are two main influences which affect the cost of electricity generated from the wind, and therefore its final price:

  • technical factors, such as wind speed and the nature of the turbines
  • the financial perspective of those that commission the projects, e.g. what rate of return is required on the capital, and the length of time over which the capital is repaid.

1) Technical factors

The more electricity the turbines produce the lower the cost of the electricity. This depends on:

  1. The windiness of the site
    The power available from the wind is a function of the cube of the wind speed. Therefore if the wind blows at twice the speed, its energy content will increase eight fold. In practice, turbines at a site where the wind speed averages eight metres per second will produce around 80% more electricity than those where the average wind speed is six metres per second. Figure below shows how generation cost varies with wind speed.
  2. Wind turbine availability
    This is the capability to operate when the wind is available. This is typically 98% or above for modern European machines.
  3. The way the turbines are arranged
    Turbines in wind farms must be arranged so that they do not shadow each other.

2) Financial perspective
The economics of grid connected wind power depend very much upon the perspective taken. How quickly investors want their loans repaid and what rate of returns they require can effect the feasibility of a wind project: a short repayment period and a high rate of return pushes up the price of electricity generated, as shown below.

How the cost of wind energy varies with wind speed and rate of return on capital
NB. The cost of wind energy has fallen since these figures were calculated, nevertheless the graph shows an indication of how wind speed and interest rates influence the cost.

Cost varies with wind speed and rate of capital return

Public authorities and energy planners tend to assess different energy sources on the basis of the levelised cost. These calculations do not depend upon variables such as inflation or taxation system. However, the perspective of private investors or utilities is different, and takes into account the variables introduced by government policy and shifts in financial and foreign exchange markets. These investors make decisions on project cash-flow and payback time.

Public authorities and energy planners require the capital to be paid off over the technical lifetime of the wind turbine, i.e. 20 years, whereas the private investor would have to recover the cost of the turbines during the length of the bank loan. The interest rates used by public authorities and energy planners would typically be lower than those used by private investors.

Why is the cost coming down?

Although the cost varies between different countries, the trend everywhere is the same - wind energy is getting cheaper. The cost is coming down for various reasons. The turbines themselves are getting cheaper as technology improves and the components can be made more economically. The productivity of these newer designs is also better, so more electricity is produced from more cost-effective turbines. There is also a trend towards larger machines. This reduces infrastructure costs, as fewer turbines are needed for the same output.

The cost of financing is also falling as lenders gain confidence in the technology. Wind power should become even more competitive as the cost of using conventional energy technologies rises.

The figure below shows how the cost of wind energy has fallen under the Non-Fossil Fuel Obligation (NFFO) contracts. The Renewables Obligation was introduced in 2002, which has masked underlying trends, as a shortage of all renewables, plus uncertainty in the market, has affected prices. However, the figure below is a good indication of how rapidly wind energy prices fell in the 1990's.

NB. The actual price paid for NFFO2 contracts was 11p/kWh. The cost shown for NFFO2 on the figure below is calculated on the basis of a 15 year contract, in order to make it comparable with the other renewables orders. For more information on costs see page on the history of the Government's renewables policy.

Falling cost of wind energy

How do prices compare with other technologies?

It is difficult to compare the cost of making electricity from different energy sources because many of the benefits of renewable energy (e.g. no pollution and never-ending supply) do not have a universally accepted price. However, it is important to try and compare 'like with like' when contrasting wind generation costs with those of the fossil fuel sources and so prices bid into the Non-Fossil Fuel Obligation, which offered 15-year contracts, are a good guide. In the last round of all, the third Scottish order, around 1000 MW of wind was bid at 2.8 pence per kilowatt hour (p/kWh) or less - 3.2 p/kWh at 2004 prices while the minimum bid was around 2.2 p/kWh at 2004 prices.

Nevertheless, even if some of these crucial benefits are ignored, the figure below shows that onshore wind energy is competitive with new coal fired plant, and cheaper than new nuclear power.

NB. The prices for fossil-fuelled generation used in the figure below have been drawn from recent government White Papers - except in the case of gas. In this instance, the recent price movements have been taking into account and, as a result, generation costs from new plant are likely to be close to 3p/kWh. In early autumn 2004, gas prices in the futures market were moving upwards, which could result in higher generation costs.

Offshore, the Department of Trade and Industry (DTI) has suggested that present-day generating costs are around 5.1 p/kWh. Although some early wind farms have reported higher capital costs than this, experience in Denmark suggests that the lower costs are also achievable and so a range of plus or minus 10% around the central value has been used.

What about the cost of pollution?

To determine the true cost of generating electricity, the cost of pollution and other 'external costs' should be included in the calculations. External costs are the costs to human health and the environment which are not reflected in the price of the electricity.

Society bears the cost of pollution in terms of poorer health (leading to higher health service costs funded by the taxpayer) and a degraded environment (which increases the cost of food and farm products). There is not yet a universally accepted method on how to determine the price of pollution, however, the European Union funded ExternE Project has quantified external costs of transport and electricity.

A bright future for wind energy

The economics of wind energy are already strong, despite the relative youth of the industry. The downward trend in costs is predicted to continue. The strongest influence will be exerted by the downward trend in wind turbine prices. As the world market in wind turbines continues to boom, wind turbine prices will continue to fall.

The global wind energy market is expanding rapidly, creating opportunities for employment through the export of wind energy goods and services. The global wind industry has an estimated annual turnover of £5.5 billion, 84% of which is based in Europe. In the UK, wind energy is the fastest growing energy sector creating jobs with every megawatt installed. To date, over 4,000 jobs are sustained by companies working in the wind sector, and this is projected to increase as the industry grows. The Department of Trade and Industry has estimated that Round Two of offshore wind developments alone could bring a further 20,000 jobs for Britain.

For more information on the UK wind industry, please see BWEA Briefing Sheets.