Legal Paper: “Cost, Price, and Risk Factors Associated with Wind Energy”
“Cost, Price, and Risk Factors associated with Wind Energy”
Cost Components Associated with Wind Energy
Cost components of wind projects are determined by development, construction, and operation of the project. Most of the time there are two main factors involved with the cost of wind energy projects: the complexity of the site such as location and topography. Also the likely extreme loads of the operation. Other important components such as wind resource assessment and site analysis expenses, repair, legal and consultation fees are also used. Project costs will depend on the financing arrangements, the size of your project, and taxes. A very windy site with high extreme loads will result in a more expensive civil infrastructure and a higher specification for turbines. These are all cost components involved in developing, constructing, and operating a large wind project.
Certain steps must be taken when developing a large wind farm. Determining the capacity of the wind resource will be a primary factor when calculating potential and future revenues for the project. A comprehensive wind resource assessment for project ranges from $15,000 - $50,000 depending on size of the project and level of detail banks require for study. Wind projects should always be sited in the windiest areas possible to maximize revenue from electricity sales and production incentives. This siting requires obtaining a lease for the land the project will be sited on as well as obtaining wind easements on adjacent land. This is to prevent other projects from being constructed too closely to the project, which would lower its production numbers drastically. The project will need to perform archeological, environmental impact, and other studies before permits to build are issued. The local or state permitting agency may also require other studies and fees. Common permits required are building, conditional, special use, FAA, and access road permits. The local and/or state zoning authority will be able to help you determine what permits the project will need to obtain. Interconnection studies for a project can cost anywhere from $5,000 -$150,000 or more, depending on the size of the project and where you propose to interconnect. Three-phase lines are required for large generators, but you cannot assume that any three-phase line can carry the power from your turbines. In other words you need to check whether the nearby power lines are full or not. Transmission lines are expensive to build and difficult to site. It is imperative to research the interconnection process early in the planning phase because the process can be very time consuming and the costs of interconnecting can be prohibitive for a project. The turbine and tower are the largest expenses associated with the development a project. Current commercial turbines range in price from $1.1 to $1.7 million per MW. Cost varies depending on the size of the project, turbine manufacturer and model, and the distance and method used to transport the turbine and tower to the site. This cost will normally include supervision from the manufacturer at the job site and final commissioning of the project. Today turbine availability is a significant hurdle since supply has fallen short of increasing demand.
The record of the wind industry in construction of wind farms is generally good. A wind farm may be a single machine or it may be a large number of machines. The design approach and the construction method will, however, be almost identical whatever the size of project envisaged. Installation costs are the expenses required to construct and get a turbine up and running once it arrives. Most owners hire experienced contractors to prepare the site and install the turbines. Connecting the turbine to the grid is often done through a team effort involving the contractor, reps from the turbine manufacturer, and engineers from the utility company that owns the power lines. Contractors who install turbines should be able to give a comprehensive cost estimate for a job that includes the following major items: access roads, foundations, wiring to the tower bases, and turbine erection. If required an access road typically is a 15 foot wide gravel road. Meaning you must budget for at least $25 per foot, plus additional money for road turnouts, culverts and a crane pad. These costs could add up to $20,000 or more for a quarter mile access road built over a farm field to the turbine location. The foundation cost depends on the height of your tower and weight of the generator assembly and rotor, plus soil conditions at the site. A turbine foundation is very large: 8-20 truckloads of concrete, with costs ranging from $100,000 to $250,000 including soil boring and engineering design. Wiring to turbine base includes installation of a pad mount transformer at the turbine base if required, underground wiring on the property, electric poles to carry the power to the utility line if required, and installation of all these components. The major cost in the construction and erection of process of a turbine is the rental of a crane. Should you have weather delays or other difficulties, the rental charge of the crane might add hundreds if not thousands of dollars per day to construction costs.
Once the project is up in the air and spinning there are periodic and annual expenses that you will need to account for, these are the operating costs. Some of these expenses will happen every year such as preventative maintenance of the machines. Other expenses may happen less frequently or sporadically such as replacement of parts that have worn down. Operation and maintenance management is critical to successful ownership of a turbine. Owners can choose to do most of the O&M themselves, as long as they are trained by the company technicians who perform the turbine commissioning. Third party and turbine manufacturers also offer turbine O&M services that affect the O&M costs. O&M includes monitoring the turbine 24 hours a day, seven days a week. A machine warranty will typically run between $15,000 to $30,000 per year per turbine, depending upon the turbine manufacturer, size of the project, and turbine model. A typical warranty lasts for two years with an option to extend the warranty up to five years. Insurance costs range from $8,000 to $15,000 per year for each turbine. This cost will increase after the warranty on the machine is over and the likelihood of equipment failure increases in the later years of the project. Administrative and legal costs must be addressed as you plan a large wind project. At a minimum you need to hire an accountant to prepare the taxes, but will need other professional services to deal with contract issues, billing, insurance, settlements and whatever service issues arise to keep the project operational.
Every financial investment carries with it a certain amount of risk. There are certain levels and different types of risk. First off technology is a major risk involved with wind projects. Shortage in supply of wind turbines has introduced a number of new turbine manufacturers, which many are not financially strong and none of which have a substantial track record. Therefore, technology risk remains a concern for the banks. The old fashioned way of mitigating these risks, through extended warranties, is resisted forcefully by new and experienced manufacturers. Leasing your land, the least risky way to harvest the wind, is to let someone else put up the capital and operate the wind project. You receive payments for the use of your property while another party constructs and maintains the project. You should review lease agreements with your lawyer to determine whether the conditions and timeframe are fair. On the upside, you can share the risks of a wind energy project by investing with others. The advantage to this approach is that you can share responsibilities and costs. The most risky method is to install and maintain your own turbine. You assume all the costs and responsibilities, but you also reap all the profits.
Wind farm siting can sometimes be highly controversial; location and terrain are key factors in the amount of expenditure. Onshore turbine installations in hilly or mountainous regions tend to be on ridgelines generally three kilometers or more inland from the nearest shoreline. This is done to exploit the so-called topographic acceleration. The hill or ridge causes the wind to accelerate as it is forced over it. The additional wind speeds gained in this way make large differences to the amount of energy that is produced. Great attention must be paid to the exact position of the turbines; this is referred to as micro siting, because a difference of 25 meters can sometimes mean a doubling in output. Local winds are often monitored for a year or more with anemometers and detailed wind maps constructed before wind generators are installed. For smaller installations where such data collection is too expensive or time consuming, the normal way of prospecting for wind power sites is to directly look for trees and vegetation that are permanently cast or deformed by the prevailing winds. Another way is to use a wind-speed survey map although this is less reliable.
One of the main benefits of wind energy is economic gain, both for individuals and for communities. Individuals can save money on their energy bills, and even make money by generating wind power. Communities can diversify their economies and enjoy greater reliance on local resources when their members invest in wind. Of course, a wind project will provide these advantages only if the economics have been thought through in advance. Like any investment, wind energy projects require extensive research and a basic understanding of the risks, costs, and benefits involved in developing, constructing, and operating large wind projects.
Price of Wind Energy
As wind turbine technology Improves, costs are coming down. There are now longer and lighter wind turbine blades, improvements in turbine performance and increased power generation efficiency. Factors such as regional electricity markets, timing of energy production, competing resources, and type of energy sales all affect the price wind energy is sold for now and in the future.
The United States has many regional wholesale electricity markets. Evidence from the U.S. and some other countries indicates that organized wholesale markets for electrical energy and operating reserves do not provide adequate incentives to stimulate the proper quantity or mix of generating capacity consistent with mandatory reliability criteria. A large part of the problem can be associated with the failure of wholesale spot market prices for energy and operating reserves that raise to high enough levels during periods when generating capacity is fully utilized. Reforms to wholesale energy markets, the introduction of well-design forward capacity markets, and symmetrical treatment of demand response and generating capacity resources to respond to market and institutional imperfections are all key factors. This policy reform program is compatible with improving the efficiency of spot wholesale electricity markets, the continued evolution of competitive retail markets, and restores incentives for efficient investment in generating capacity consistent with operating reliability criteria applied by system operators. It also responds to investment disincentives that have been associated with volatility in wholesale energy prices.
The timing of energy production plays an important role in the price of wind energy. According to the 2011 Wind Technologies Market Report, the United States remained one of the worlds largest and fastest growing wind markets in 2011, with wind power representing a major 32 percent of all new electric capacity additions in the United States last year and accounting for $14 billion in new investment. According to the report, the percentage of wind equipment made in America also increased dramatically. Nearly 70 percent of the equipment installed at U.S. wind farms last year – including wind turbines and components like towers, blades, gears, and generators - is now from domestic manufacturers, doubling from 35 percent in 2005. President Obama has made clear that clean, renewable wind energy is a critical part of an all-of-the-above energy strategy that aims to develop more secure, domestic energy sources, while strengthening American manufacturing. “This report shows that America can lead the world in the global race to manufacture and deploy clean energy technologies,” said Energy Secretary Steven Chu. “The wind industry employs tens of thousands of American workers and has played a key role in helping to more than double wind power over the last four years. To ensure that this industry continues to stay competitive, President Obama has called on Congress to extend the successful clean energy tax credits, which are benefitting businesses and manufacturers nationwide.” The report finds that in 2011, roughly 6,800 MW of new wind power capacity was added to the U.S. grid, a 31 percent increase from 2010 installations. The United States’ wind power capacity reached 47,000 MW by the end of 2011 and has since grown to 50,000 MW, enough electricity to power 13 million homes annually or as many as in Nevada, Colorado, Wisconsin, Virginia, Alabama, and Connecticut combined. The country’s cumulative installed wind energy capacity grew 16 percent from 2010, and has increased more than 18-fold since 2000. The report also finds that six states now meet more than 10 percent of their total electricity needs with wind power. The growth in the industry has also led directly to more American jobs throughout a number of sectors and at factories across the country. According to industry estimates, the wind sector employs 75,000 American workers, including workers at manufacturing facilities up and down the supply chain, as well as engineers and construction workers who build and operate the wind farms. Technical innovation allowing for larger wind turbines with longer, lighter blades has steadily improved wind turbine performance and increased the efficiency of power generation from wind energy. At the same time, wind project capital and maintenance costs continue to decline, driving U.S. manufacturing competitiveness on the global market. For new wind projects deployed last year, the price of wind under long-term power purchase contracts with utilities averaged 40 percent lower than in 2010 and about 50 percent lower than in 2009, making wind competitive with a range of wholesale power prices seen in 2011. Despite these recent technical and infrastructure improvements and continued growth in 2012, the report finds that 2013 may see a dramatic slowing of domestic wind energy deployment due in part to the possible expiration of federal renewable energy tax incentives. The Production Tax Credit (PTC), which provides an important tax credit to wind producers in the United States and has helped drive the industry’s growth, is set to expire at the end of this year. The wind industry projects that 37,000 jobs could be lost if the PTC expires. Working in tandem with the PTC, the Advanced Energy Manufacturing Tax Credit provides a 30 percent investment credit to manufacturers who invest in capital equipment to make components for clean energy projects in the United States. President Obama has called for an extension of these successful tax credits to ensure America leads the world in manufacturing the clean energy technologies of the future.
Although the cost of renewable energy may someday be competitive with conventional sources of power, that generally isn 't the case today and likely won’t be for years to come due to other competing resources. In June 2011, the Electric Power Research Institute (EPRI), an independent science and research organization, released a report on technology innovation in electricity generation. The report examined fossil- and nuclear-based technologies, as well as four renewable technologies. EPRI found that burning natural gas was, by far, the cheapest way to generate electricity, and it predicted that gas would continue to provide the lowest-cost option through 2025. In 2015, generating a megawatt-hour of electricity with natural gas will cost between $49 and $79, according to EPRI estimates. That same quantity of energy produced from onshore wind will cost between $75 and $138, while generating it with solar photovoltaic will cost at least $242 and as much as $455. By 2025, very little will have changed, EPRI says: gas-fired electricity production will have gone down a few dollars, to between $47 and $74 per megawatt-hour, leaving it comfortably ahead of onshore wind generation, down only marginally as well, to a range of $73 to $134 per megawatt-hour. The latest cost estimates from the EIA are similar to those made by EPRI. By 2016, the EIA expects that electricity from onshore wind turbines will cost $97 per megawatt-hour. That 's about 50 percent more than the same amount of electricity generated by natural gas, which the EIA estimates will cost $63. Offshore wind will be even more expensive, coming in at $243 per megawatt hour. The least expensive form of solar-generated electricity—the type generated by photovoltaic panels—will cost $210, or more than triple the cost of gas-generated electricity. Contrary to the claims of many environmental groups, the cost of new wind-energy installations has actually been rising. In November 2010, the EIA estimated that installing a megawatt of wind-generation capacity on land would cost $2.43 million. That 's a major increase over the estimate of $1.7 million per megawatt used by the National Renewable Energy Laboratory in a report that it issued in 2008. The rising cost of wind energy installations provides a stark contrast to what is occurring in the natural gas market, where prices have fallen precipitously. Over the six-year period from 2003 to 2008, (the period just before the beginning of the shale revolution), domestic natural gas prices averaged about $7 per thousand cubic feet. In mid-February 2012, the spot price for natural gas was about $2.50. If we assume the price reduction is $4 per thousand cubic feet, the savings for consumers is at least $263 million per day. That low-cost gas is directly competing with renewable sources in general and wind energy in particular. In early 2011, Dallas-based energy investor T. Boone Pickens said that it was difficult to obtain financing for a wind project "unless you have $6 gas." In February 2012, Pickens again cited the $6 price floor for natural gas as being essential to the economics of wind-energy projects. Cheap natural gas is also displacing coal, a fuel that has long been among the cheapest options for electricity production. In December 2011, Exxon Mobil Corp. predicted that natural gas will overtake coal as the primary fuel in the domestic electricity market by 2025. Furthermore, the surfeit of low-cost gas is helping reduce electricity costs. A January 2012 report by Standard & Poor 's Financial Services LLC found that in some regions of the country, wholesale electricity prices had declined by more than 50 percent since 2008 due to cheap supplies of gas
While many factors are contributing to rising electricity prices, the evidence shows that renewable-energy mandates are a key contributor to the upward price pressure. Given the fragility of the U.S. economy as well as the large number of Americans who are living in poverty or are unemployed or underemployed, Policymakers at the state and federal level should do a thorough financial assessment of the impact that renewable-energy mandates have had and will have on electricity price, also the need to perform cost-benefit analyses on renewable-energy mandates and, in doing so; provide an estimate of their per-ton cost of carbon-dioxide reduction, and where necessary, suspend or eliminate renewable energy mandates to ensure that electricity is affordable.
Wind energy provides a clean, non-pollutant, economical source of renewable energy as an alternative to fossil fuels like coal, oil and natural gas. In order to control that energy, wind farms are springing up all over the world, made up of several wind turbines grouped together to generate electricity. For all its benefits, however, emerging research highlights some concerns surrounding risk factors involved with the projects. These risks can range from revenue, capitol, and operating costs to construction and commissioning as well as wildlife and worker deaths. However, the main risk factors which I will be discussing are the turbine availability, transmission curtailment, and the market price of electricity, which are the most important factors regarding wind energy projects. Risk management has to be an ongoing task along with project management for success.
Turbine availability defines the expected average turbine availability of the wind farm over the life of the project. It represents, as a percentage, the factor which needs to be applied to the gross energy to account for the loss of energy associated with the amount of time the turbines are unavailable to produce electricity. Similar factors are needed for the ‘Balance of Plant’ availability, which relates to the electrical infrastructure of the site and ‘Grid Availability’, which relates to the availability of the grid over which power can be exported. Turbine cost is about 70% of the total project cost, so there is a tendency to seek lower cost turbines. The failure of a gearbox is a risk involved as well as direct drive turbines because power conversion units are the biggest source of failure. In spite of the lack of turbine efficiency, wind turbine manufacturers and their suppliers continued to localize production domestically in 2011. As a result, a growing percentage of the equipment used in U.S. wind power projects is being sourced domestically. However, behind these positive headline statements and numbers, the domestic wind industry supply chain is currently facing severe pressure, due to uncertain prospects after 2012. Profit margins have been declining and concerns about manufacturing overcapacity have deepened, potentially setting the stage for significant layoffs if demand for turbines does not pick up. In turn falling wind turbine prices have begun to push installed project costs lower. Turbine prices have fallen 20 to 30 % from their highs back in 2008, but this decline has been slow to show up. Looking ahead, projections are for continued strong growth this year, followed by dramatically lower but uncertain additions in 2013. With key federal incentives for wind energy currently slated to expire at the end of the year, new capacity additions are anticipated to substantially exceed previous levels. At the same time, the possible expiration of these incentives at the end of the year, in concert with continued low natural gas prices, modest electricity demand growth, and existing state policies that are not sufficient to support continued capacity additions at the levels witnessed in recent years, threatens to dramatically slow new builds in 2013 and beyond, despite recent improvements in the cost, performance, and availability of wind turbines.
Although not universally required, a PPA or power purchase agreement will provide better security for the lender and better revenues for the project owner if it shifts the risk of transmission curtailment to the output purchaser. This is done by providing that during periods of transmission curtailment, the output purchaser will be obligated to pay for the power that would have been produced and delivered (based on wind conditions during the curtailment period) had the curtailment not prevented the plant from operating. The electrical transmission efficiency includes the electrical losses encountered when the wind farm is operational and which will be manifested as a reduction in the energy measured by an export meter at the point of connection. This is presented as an overall electrical efficiency, and is based on the long-term average expected production pattern of the wind farm. There will be electrical losses experienced between the low voltage terminals of each of the wind turbines and the wind farm point of connection, usually located within a wind farm switching station. It is also necessary to consider the power that the wind farm consumes when the wind farm is not operational.
Most of the United States and Canada are divided into four primary North American Electric Reliability Council (NERC) “interconnections”. Called the Eastern, Western, ERCOT, and Quebec interconnections, each one of these four areas is essentially electrically separated from the other regions. Within an interconnection, all electric companies and all electric generators operate on a synchronized frequency. In the U.S. and Canada, electric systems are designed to operate at a frequency of 60 Hertz (Hz), or 60 cycles per second. Within given electricity regions or markets, the average price as well as the marginal price of electricity will be impacted by the mix of generation resources within that region. Some regions may have a higher percentage of coal generation, others a higher percentage of nuclear capacity, and others such as the U.S. Northwest may have large amounts of hydropower. The Electric Reliability Council of Texas market, or ERCOT, makes up the majority of the state and accounts for about 85% of the state’s electricity usage. Due to the volatility of natural gas prices, electricity prices within ERCOT can also be volatile. In periods when natural gas prices are high, the demand for cheaper wind energy increases, which is one of the reasons that Texas leads the nation in installed wind capacity. Diversification of generation resources is generally beneficial, just as it is considered beneficial to diversity one’s investment portfolio. Resource diversity can stabilize the fuel cost component of electricity prices, and when renewable energy sources are used to add diversity, this can serve as a hedge against the potential state or federal imposition of a carbon tax or additional restrictions on emissions from the burning of fossil fuels.
The risks related with the development of wind energy projects are diverse and wide-ranging, possessing influencers at the global, regional, and local level, as well as in terms of commercial, environmental and social impacts. Wind energy developers should attempt to develop documented risk management plans and strategies for individual project developments focusing on the key risks associated with each wind energy project.
Discussion of Presidential Candidates on Energy Policy
President Obama’s goal to generate 80 percent of our electricity from clean energy sources by 2035; this is an ambitious upgrade from the 25 percent by 2025 goal mentioned in the 2008 party platform. Obama wants to cut $40 billion over 10 years in tax breaks for oil and gas companies, but maintain tax incentives for renewables.
Romney’s energy policy has no goals for the contribution of renewables; in fact, it scarcely mentions them at all. The word “renewable” appears just once in a favorable context, in a bland statement about its all-of-the-above strategy, while “solar” and “wind” mostly appear in negative contexts. Romney would do just the opposite of Obama, rolling back tax credits for renewables while keeping the incentives for oil and gas intact, inexplicably claiming that this would create a “level playing field.”
The two key incentives for renewables are the 2.2 cents per kilowatt-hour production tax credit, which has been responsible for the growth of the domestic wind industry, and the 30 percent investment tax credit for clean energy equipment, which has encouraged the growth of the solar industry. Both are set to expire at the end of this year. Romney is against both and would let them expire, while Obama has called on Congress to renew them.
1) Wiser R, Bollinger M. Annual Report on U.S. Wind Power Installation, Cost, and Performance Trends: 2007. U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy: Washington, DC, 2008.
2) Wind Maps on NREL 's Dynamic Maps and GIS Data website (http://www.nrel.gov/gis/wind_maps.html)
3) Wind Powering America
6) U.S. Environmental Protection Agency; Frequently Asked Questions about Global Warming and Climate Change: Back to Basics.
7) Global Climate Change Impacts in the United States Executive Summary.
8) U.S. Environmental Protection Agency; Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2009.
9) U.S. EIA Information on Greenhouse Gases.
10) U.S. Climate Change Science Program (March 2009) Climate Literacy: The Essential Principles of Climate Science; U.S. Global Change Research Program.
11) Lisa Chavarria, “The Severance of Wind Rights in Texas”, white paper, Texas Wind Institute, Austin, TX (January 12-22, 2009).
12) Rights in Wind
Ernest Smith, Wind Energy: Siting Controversies and Rights in Wind, 1 Environmental & Energy L. & Policies J. 281 (2007)
13) Sitting Issues
Gonzalo Gamboaa and Giuseppe Munda, “The Problem of Wind Farm Location: A Social Multi-Criteria Evaluation Criteria,” Energy Policy 35 (2007) 1564–1583. 14) Felicity Barringer, “Environmentalists in a Clash of Goals,” The New York Times (March 24, 2009)
15) Ernest Smith, Wind Energy: Siting Controversies and Rights in Wind, 1 Environmental & Energy L. & Policies’ J. 281 (2007) (article also in 3.0).
16) Victoria Sutton & Nicole Tomich, “Harnessing Wind is Not (by Nature) Environmentally Friendly,” 22 Pace Environmental L.Rev. 91 (2005).
17) Darrell Blakeway and Carol Brotman White, Tapping the Power of Wind: FERC Initiatives to Facilitate Transmission of Wind Power, 26 Energy L.J. 393 (2005).
18) Matthew L. Wald, “Cost Works Against Alternative and Renewable Energy Sources in Time of Recession,” The New York Times (March 29, 2009).
19) Nina Pierpoint, MD, PhD, Wind Turbine Syndrome: Noise, Shadow
Flicker and health, comments on a DEIS for wind farm proposal in NY,
Aug. 1, 2006. (White paper-9 pages)
20) In a Nutshell, Energy Law (2004)
In a Nutshell, Oil and Gas Law (2002)
In a Nutshell, Environmental Law (2000)
References: 1) Wiser R, Bollinger M. Annual Report on U.S. Wind Power Installation, Cost, and Performance Trends: 2007. U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy: Washington, DC, 2008. 10) U.S. Climate Change Science Program (March 2009) Climate Literacy: The Essential Principles of Climate Science; U.S. Global Change Research Program. 11) Lisa Chavarria, “The Severance of Wind Rights in Texas”, white paper, Texas Wind Institute, Austin, TX (January 12-22, 2009). 13) Sitting Issues Gonzalo Gamboaa and Giuseppe Munda, “The Problem of Wind Farm Location: A Social Multi-Criteria Evaluation Criteria,” Energy Policy 35 (2007) 1564–1583. 14) Felicity Barringer, “Environmentalists in a Clash of Goals,” The New York Times (March 24, 2009) 15) Ernest Smith, Wind Energy: Siting Controversies and Rights in Wind, 1 Environmental & Energy L. & Policies’ J. 281 (2007) (article also in 3.0). 17) Darrell Blakeway and Carol Brotman White, Tapping the Power of Wind: FERC Initiatives to Facilitate Transmission of Wind Power, 26 Energy L.J. 393 (2005). 18) Matthew L. Wald, “Cost Works Against Alternative and Renewable Energy Sources in Time of Recession,” The New York Times (March 29, 2009). 19) Nina Pierpoint, MD, PhD, Wind Turbine Syndrome: Noise, Shadow 20) In a Nutshell, Energy Law (2004) In a Nutshell, Oil and Gas Law (2002) In a Nutshell, Environmental Law (2000)