Energy Industry Entrepreneurs

Economics of Wind Energy

Written by Gautam Patil for Gaebler Ventures

Despite having a much higher potential -- both theoretical and otherwise -- solar power still lags far behind wind power in electricity generation. The reason lies primarily in the economics of these sources. While wind power may maintain the lead in the near future, but increasing research in other areas could pose a potential threat. Also, its variability and high site dependence continue to hinder its full fledged deployment.

Wind power is typically characterized by high capital costs related to the rotor, generator and mechanical support structures.

Other costs include ground support facilities, cables, controls, and survey and consultancy fees. The recurring costs are mainly the operation and maintenance costs and possibly even site rentals. Cost of installed capacities typically range from USD $1.5-$1.8 million per MW though this may also vary significantly depending on size of turbine, site selection (offshore capacities are more expensive than onshore) etc.

In computing the average cost per unit of wind power, assumptions need to be made regarding the life of the turbine and other costs incurred during the life of operation.

This cost has been found to be on par with that from other sources like gas or coal-fired power plants (around 4-8 cents per KWhr for wind power against 3-6 cents per KWhr for other sources). In fact, on internalizing all the indirect costs of producing electricity from conventional sources, wind power emerges as the most financially sound option. However, there are no efforts currently in this direction.

The factors that determine economic viability of a wind turbine are usually site selection and capacity utilization factor (CUF).

• Site Selection. Sites with high wind speeds, easier access, proximity to a utility grid (or point of consumption for captive production) and lower rentals are favorable. However, some factors present an inherent trade off. For instance, though offshore sites offer higher wind speeds, but they increase costs related to construction of mechanical support structures and ground support, cables etc. Remote areas may offer higher wind speeds due to lack of any man-made obstructions but they increase grid connection costs.
• Capacity Utilization Factor (CUF). CUF is the ratio of the actual electricity generated over a year to the rated capacity of the turbine. CUF is usually dictated by turbine size and wind characteristics. Higher CUF (resulting from high speed and uniform wind) improve the economics of the wind turbine because it indicates that the turbine is generating close to the rated capacity. It is possible to obtain a higher CUF by using turbines with a lower rated capacity but that affects the net power output as well. A thorough analysis is required to determine the optimal rated power of the turbine.

There has been a trend towards larger wind turbines as they reduce operation and maintenance costs per unit of electricity produced.

This might not be a good strategy in the face of decreasing CUF (typically turbines of higher rated capacities have lower CUF) but due to high impetus on research, the efficiency of the turbines themselves has been increasing steadily.

With increasing turbine size, the average cost per KW of installed capacity has also been decreasing steadily, thus increasing the rate of return on the capital investment. Other factors which are likely to bring down equipment cost in the future include scale related benefits from increased demand and scaling of the 'learning curve' by established manufacturers.

Gautam Patil is a recent MBA graduate from the Indian Institute of Management, Bangalore. In addition to serving as a contributing writer for Gaebler.com, he will join the consulting firm Oliver Wyman at their London office.

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