Wind Power is the fastest growing producer of electricity in the US. Over 40% of new electric production in 2008 was Wind; it produces about 1.5% of total U.S. Electric power at this time (1). We want to double this in 3 years and get 20% of electricity Wind produced by 2020. These are goals from the President and the Department of Energy (2).
I am trying to get a coherent top down idea of energy policy, and these diaries are my summaries. Talking about power generation we might as well start with the star. An energy source hasn't grown this fast since the days of oil in the automobile's introduction, I think. This is the least speculative alternative power source, as opposed to Coal, Natural Gas, Nuclear, and Hydro.
Takeaways
- Wind Power is very transparent, We can see most of the costs and output without murky models.
- Current Tax and Rate Policy with forced production levels of "Green" energy is working. The PDC is a tax cut which is actually doing what it purports to do.
- Even slight new incentives will keep the growth high enough to make a difference.
I want to look at Wind Power using the criteria for judging Energy Policy put forth earlier, namely
- Does wind power provide power cost effiectively and to a significant level.
- Does wind power reduce our greenhouse gas footprint or address climate change effects?
- Does wind power reduce dependence on foreign sources of energy?
- Does wind power have negative environmental or human effects that should count against it?
In this diary I am only going to look at the part of the first of these, and it is still going to be long! Looks like more Wind diaries to come.
Wind Power Capacity
The numbers are coming in from 2008(1) and they are showing massive growth for wind energy - except at the end of the year where two things caused a halt. The credit dry up meant money for new projects went away whether they were good or not. Second the taxes on wind were set to go up again. The government calls this a Producer Tax Credit (PTC) and similar things have been routinely given to coal and oil producers in various ways, but when applied to Wind, this is called a subsidy and is a year to year thing. With the PTC in place we see from the 2007 and 2008 figures that the current Tax and Rate regime encourages an exploding growth in Wind Power. There are several producers of turbines and blades domestically. There is also a mix of builders and operators.
Lets look at the 2006, 2007 and 2008 numbers (4)
Year | 2006 | 2007 | 2008 |
---|
New (GW) | 2454 | 5329 | 8358 |
---|
Total (GW) | 11492 | 16904 | 25170 |
---|
Billion-kWh | 26.6 | 36 | 54 |
---|
Note that the first two rows are talking about amounts of Capacity or power that could be produced at a point in time (in GigaWatts or billions of watts). The last row is actual energy or power produced over time (in Billion kiloWatt hours). The production for 2007 and 2008 I estimated using a linear deployment of the new installations uniformly across the year. I used the 2006 numbers to get a capacity use ratio (efficiency factor) of 0.29, again using linear interpolation on 2006, and applied that to the 2007 and 2008 generation numbers. This is reasonably close to the EIA numbers, except for their low estimates of deployment in 2007 and 2008. I have to do this estimation because of the fast growth. So much wind capacity is being deployed that everything is being skewed. It is nice to get a top down “efficiency factor” for wind that has availability and capacity all rolled up. It makes me feel confident using this.
That last paragraph babbling means that for the US for the year 2006, for every 100 kWh that could have been produced if the wind was perfect all the time and all turbines were running at their rated number the whole year, 29 were actually produced. This number includes all shutdowns because of maintenance or other things as well. This is better than I thought it would be. This number will go up as better turbine designs come into play, but go down because of things like incapable or non-existent distribution systems like we are already seeing in places like Texas.
So for 2006 Wind generated about 0.7% of the total electricity in the U.S. In 2008 it generated about 1.4% of the electricity using EIA numbers. So wind power doubled in the last 2 years. It will double again in 3 more if the current deployment rate is kept the same. If we keep the same deployment rate for the next 11 years about 9% of current electricity use would be wind. But 2008 deployments were only (well not ONLY but wow, great!) 42% of NEW electric power. Almost all of the rest being Natural Gas (1). Some coal and some other stuff happened as well but the majority of new Electricity in the U.S. Is coming from Wind and NG. The Department of Energy itself looked at a 20% use of wind for electric power by 2020 (2). That means we have to double our production per year and keep it that way for the 11 years to the target date. That is not an outrageous target at all. Distribution rather than capacity might be the limit.
Why do we still need subsidies?
Looking at this, people will (and do) ask, well, Wind is going strong, why do we need subsidies like the PTC? The PTC is a Production Tax Credit of about 2 cents per kWH for deployed wind for the first 10 years of deployment. A terminology thing here. This “subsidy” is a tax credit, i.e. it is basically changing the tax rate on income from wind energy. This looks like a good bipartisan issue. Without the PTC we basically increase the taxes on Wind electricity at the end of 2009. Several members of Congress are doing the right thing here. Both Republican and Democrat. There are many similar things we do for Coal and Natural Gas, a quick example, Virginia pays $3/ton “subsidy” for coal used for electric power generation. There are many more programs and depreciation schedules like that. Wind also gets local subsidies like reduced property tax rates, similar to other industrial development.
No matter, this level of taxation has allowed the explosion of Wind deployment we have seen. In fact it is hard to compare to say Natural Gas or Coal because of depreciation rates on deposits and mines. There are papers out there that give the details, but my point is that the current tax regime is good policy and we should keep it or improve it. In fact there are moves afoot to make this retroactive so that it is more like a real credit – you get it whether you make money this year or not and can apply it to other years income. These are worthy proposals to keep Wind projects moving now when most places won't have any profit to be taxed anyway due to the general economic times.
But Wind has a negative payback! No.
I have heard the argument more than once that Wind does not make back the cost of its deployment. This is given in two different ways, one foolish, the other important. The foolish way says that Wind Turbines don't create more energy than it takes to build them over their lifetime. This is unfounded and it has been shown that Wind Generators make more energy than it takes to create, run, and decommission them them within a year. This is faster payback than almost any other type of Electricity production. (3)
The more interesting and important question is really capital payback. We want to calculate a cost of production per kWh.
Given a lifetime length of 20 or 30 years, and a capacity factor we can calculate the total energy output of 1kW of installed capacity over that time. So we can take cost/kW * 1kW/lifetimekWh to get a Installation cost per kWh produced. We take that and add the local Operating costs per kWh and Grid Integration cost per kWh to get an ongoing cost per kWh. We can compare to earnings per kWh which are given by the price.
Ok if you glazed on that basically we are calculating the cost of Wind power per produced kWh and comparing it to other sources, and what the power companies pay for wind power wholesale.
The factors that change over time for a given installation are the operating costs of Maintenance, Rents and Taxes on one side and average Sale price on the other. This points up the importance of good markets. It doesn't matter if you have big capacity to produce power when no one really needs it or you can't get it to part of the grid where people would pay for it.
We can put numbers to many of these things because of nice University of California studies that are summarized by the Department of Energy in their Wind Energy Annual Report (4). The fact that we can get numbers for almost the entire lifecycle in a clear way benefits wind because it is predictable. Unpredictable wind has clear cost structure, hah. Well the numbers in it are ever changing of course. Let's also look at a specific example, WE Energies Blue Sky Wind development in Eastern Wisconsin to see if things jibe. Data for that project is just from We Energies press releases and filings.
Capital Costs
Capital costs (Materials and Construction) are dominated by turbine costs which are about 70% of the total. These have gone down in the past but recently have risen sharply. It looks like we are starting to pay for the capital needs of a larger wind industry. That is, the costs of the new factories that are built to make turbines are being included in the price. As of the end of 2007 the cost of deployment was about $2000 per kW of installed capacity. That seems to be rising with the price of turbines. There is a fair amount of variance here. The We Energies project that was just finished was about $2100 per kW. The bigger the deal the better the price. Let us take into account the increasing cost of turbines and use $2200 as current. We could get it lower with a big bid, but otherwise it is going to go higher for a while. We want to change this into a per kWh cost. To do that we need to assume a lifetime. Let us say 30 years just as a house and 20 years as a fallback. We also need to assume an efficiency factor. Well we have the actual 2006 number of 0.29 so we will use that as it is an overall number. Capacity factors have been rising over the last decade as newer technology is used in the turbines to get more energy from the same speed wind. Still this lets us calculate 20 or 30 years of energy production and divide out the Cost per kW over that number of hours.
We'll make a chart with some possible values of Capital cost, efficiency and lifetime and their cost per kWh.
Capital $/kW | Lifetime yrs | Efficiency | Cost($)/kWh |
---|
2200 | 30 | .29 | 0.029 |
2200 | 20 | .29 | 0.043 |
2200 | 30 | .35 | 0.024 |
2200 | 20 | .35 | 0.036 |
Comparing this to the actual estimates from the Blue Sky project shows that these are in the ballpark. We Energies says that the project cost about $300 million for 145 MW of capacity and has an efficiency factor of .26 (328 Million kWh / yr estimated), Dividing this out it comes to 3 cents/kWh for 30 year life and 4.5 cents/kWh for 20 year life for capital cost, which falls nicely in the chart above. Kind of bad efficiency but wind speeds aren't that great there.
Operating Costs
Operating Maintenance, Rent and Taxes are hard to get since much of the installed base is relatively new. U. of California tried to get numbers by looking at old and new generators at the same time in their life and extrapolating, but the new ones are better. Still as these things age the Maintenance cost must rise. It is currently something like $0.015 per kWh based on the the current installed base, but let us increase it by 25% to 2 cents a kWh assuming age issues. This number needs work and time to be understood better. Personally being somewhat a cynic, we better look at doubling this (at least) over time. However here we'll stay with the actual values from real life. Interest costs are buried in this number also.
There is a grid integration cost which is born by the utility for integrating Wind into the supply. This is where the overhead of the wind variability shows up in, for example, load following cost for the other power generators. This amount is relatively small when Wind Power percentage is less than 20% of total electrical power. About $0.005 per kWH. We Energies here actually falls under the average with about $0.003 per kWh. They happen to be split out in the NREL table. So this is again in the ballpark. This number is pushed up as Wind percentage grows beyond 30% and pushed down as wind farms become larger and more interconnected and wind speeds become more short term predictable. It has a high variance looking at the regional tables. The fact that we even have numbers based on real deployments for this shows how far along Wind is in terms of maturity. And really it is in its infancy.
So the total Cost per kWh is something like 0.043 + 0.015 + 0.005 = 0.062 $/kWh using the highest capital cost given, 20 year lifetime and 25% over current maintenance. Both of which to me are not really high but are perhaps middle of the road as time goes forward.
Well, what has wind power been selling for? Now you can see where lifetime, efficiency and operating cost really matter. Depending on your estimates you can sell for a different price. The 2007 weighted average price for wind was $0.04/kWh (given as $40 Mwh (4)). This is slightly below the average range for base wholesale Megawatt-hour block sales which is around $50/MWh or $0.05/kWh. How can Wind Generation owners do this? Well the $0.02/kWh PTC basically. They are also using a longer lifetime for their capital cost calculation than 20 years I expect and using the real current Operating cost which gives a half cent a kWH advantage also. What this means though is that the PTC does make a difference in making wind competitive (i.e. profitable) now, but that difference is small, and as electric power costs in general go up (as they are for all sources) Wind becomes even more of a competitor. It generated well over $2 billion in revenue in the U.S. In 2008. So
$0.062/kWh - $0.02/kWh PDC gives $0.042
as a selling price with no profit or with a slightly longer estimated lifetime, with a decent profit.
The thing with these numbers that is so encouraging to me is that with the installed base is getting big enough to have some confidence in planning, new projects are in the ballpark for current pricing structure and they are very transparent cost wise, not a lot of shenanigans as cross checking things works (although we will look closer to see). A relatively small incentive by the government ( Perhaps 1/50th of the tax money given as bonuses to Financial executives ... ) has had big effects and will continue to do so. The inertia of Power Companies and their reluctance to do new things is legendary, so this big change helped by Tax credits and forced by mandatory Renewable Energy Contracts by States does seem to be working. We ought to start hearing the normal complaints about operating costs and maintenance fees from Power Companies any time now, if they aren't there already. That to me will be a sign of maturity for Wind Energy.
But these are initial numbers from relatively new installations. How will things evolve over time? Next time I will look at the efficiency, lifetime, operating cost and Grid cost in more detail and see if there are any shenanigans...
Notes
(1) AWEA - Wind Energy Growth 2008
(2) 20percentwind.org
(3) Wind FAQ or pointer to an actual Study
(4) National Renewable Energy Lab Annual Report on Wind