Electricity from Wind Turbines

What does it cost to save a ton of CO2 with wind?

In 1888, the first large wind generator began producing power. It had 144 blades and powered the home of Charles Brush, an inventor who drew a crowd of thousands by illuminating a park in Cleveland with electric light shortly before Edison “invented” the light bulb. Today’s wind turbines produce 100 times more power with only three blades.

How important is wind generation?
Can wind power make much of a difference? The short answers are “No” for energy independence and “some but not much” for global warming. Wind generation mainly replaces coal-fired generation and the US has its own coal. That’s bad news for independence but good news for CO2 reduction, as coal is the worst source of CO2. Thirty years from now, wind power might be cutting global GHG emissions by 10%. But that cut in emissions is not from today’s level, it’s a cut from the future level, which would be much higher.

In 2006, wind power supplied 0.6% of US electricity but reduced CO2 emission from electricity production by a full 1%. This amounted to a 0.4% reduction in CO2 emissions from all fossil energy use, and a 0.36% reduction in total US GHG emissions. The wind industry is hoping to produce 20% of US electricity by 2030, which would result in a 13% reduction in CO2 relative to 2030 levels without wind. This would not be enough to hold CO2 emissions constant.

Wind generation grew 27% in 2006, but that is from a very low level. Its future growth rate will depend largely on the level of subsidies, since these are the primary drivers of wind investment.

Is wind power too expensive?
What really matters is the cost to society. With current subsidy methods, it costs around 3¢/kWh of subsidy to get wind turbines built [2011 update, I’m now hearing from insiders that more like a 5¢/kWh subsidy may be required]. This is because the up-front costs of wind turbines are huge and the payback takes twenty years. Investors require fast paybacks and this “costs” extra. But this is not a social cost. Much of that money is just a transfer to stock-holders. By evaluating a different subsidy method, a more accurate social cost can be found and it is only 1.2¢/kWh.

Although the amount of wind that could be installed this cheaply is limited, it is interesting to ask how much it would cost to solve the global warming problem if all GHG reductions could be accomplished so cheaply. The answer is they could be eliminated for a cost of $81 billion per year. That is 0.63% of GDP, and considerably cheaper than the Iraq war.

Subsidies for wind power
The most obvious subsidy is the production tax credit (PTC) which began at 1.5¢/kWh in 1992 and which increases at the rate of inflation. It is now about 2¢/kWh. Almost all wind generators have qualified for this and will receive it for 10 years.

The second subsidy is double declining 5-year depreciation. This allows investors to take a 40% tax deduction the first year and a 24% deduction the second year. At the end of five years the deduction is complete. Assuming the investor can use this against a 43% combined federal-state tax rate, it is worth about and additional half a cent/kWh.

The third subsidy is the most obscure and most unpredictable. About 20 states have adopted renewable portfolio standards (RPS), and it is no surprise that searching this term in Google brings up the Wind Energy Association first. An RPS requires retail electric providers to purchase a certain percentage of their power from “renewable” resources, and wind is often the cheapest alternative. To the extent wind power costs more than is covered by the first two subsidies, an RPS requirement will force the retailer to provide the necessary remaining subsidy.

How Expensive is Wind-Generated Electricity?
Once a wind-turbine is built and paid for, it generates electricity almost for free. Once your house is built and paid for, it provides housing almost for free. In each case the cost of the service is mainly a financing cost, but it is real nonetheless. Comparing wind generation cost with other generation costs will put the matter in perspective.

           
  One-Time
Cost
per kW
Capacity (usage) Factor Fixed
Cost
per kWh
Variable
Cost
per kWh
Total
Cost
per kWh
Gas Turbine $439 15% 5.2¢ 8.7¢ 13.9¢
Coal $1,338 90% 2.7¢ 1.9¢ 4.5¢
Nuclear $2,180 90% 4.3¢ 0.3¢ 4.6¢
Wind $1,254* 30% 7.5¢ 0.0¢ 7.5¢

The one-time, installed cost of wind seems to be up closer to $1,900 in 2011, compare with these estimates from about 2006.

Notice that wind power has the the lowest (zero) variable cost. Variable cost refers to fuel cost and maintenance costs that depend on power output. Unfortunately wind has the highest fixed costs in spite of costing less per MW of capacity than nuclear. This is because the same capacity nuclear plant generates three times more power than a wind turbine. Spreading the capital cost over one third the output results makes it very expensive per kWh generated.

Is wind power cheaper than gas-turbine power?
The cheapest power plant to build, per unit of output capacity, is a gas-turbine, a GT. This is basically a low-quality jet engine hooked to a generator. But power from GTs is expensive because gas is expensive and it’s expensive to let a plant sit idle 85% of the time. This results in wholesale power that typically costs more than retail power. How do they stay in business? They produce the most valuable power. They run during the 15% of the hours (or sometimes many fewer) when they are most needed and when the electricity price is highest.

Unfortunately, the wind blows when it wants to, and wind power is at most worth the average price of power. This is about the price paid to coal and nuclear units, which run almost all the time. Coal is wind’s real competition, and wind power costs about 3¢/kWh more than coal power. This cost difference is not terribly accurate, but it is base on the Department of Energy’s cost data and on financing assumptions used in major regulatory cases by two major electricity markets. Depending on where a project is located and proce fluctuations in the turbine market, the price difference might range from 2¢/kWh to 5¢/kWw.

Business Cost vs. Social Cost
The above calculation asks how much it would cost to induce investors to build wind turbines by subsidizing their electricity revenues. Because of taxes and investor risk premiums, this is an expensive method of inducing investment. 

Costs vs. transfer payments. Economics distinguishes between payments that are used up and payments that simply transfer money from one person (usually the tax payer) to another. The first is type of payment is a cost, and the second type is a transfer payment. If the government spends $100 billion building fighter planes that don’t work, the country is poorer by $100 billion, but if it simply gives the money to Halliburton or to the unemployed, then some are poorer and some richer, but the country as a whole is no poorer.

Economists have a theory of the social discount rate which helps them find the true social cost in situations such as wind subsidies, but it is not especially accurate, and is completely opaque to the uninitiated. A market-based approach will somewhat over-estimate costs, but is more transparent, and still provides a far more accurate evaluation than the standard calculation shown above.

A lower-cost subsidy. Another approach to subsidizing wind will show that subsidies need not be so expensive. To get investors to build wind turbines instead of coal plants, a wind project could be subsidized and charged just enough to make its costs identical to those of coal. First, to replace 1 kW of coal generation, almost 3 kW of wind generation will be needed, because wind turbines run at 30% output on average as compared with about 88% for a new coal plant. This raises the initial cost to $4,013/kW compared with $1,338/kW for coal, which requires a subsidy of $2,676 to make up the difference. Next, the wind investor is required to pay the government exactly as much per kWh generated as the coal plant would pay for coal. This makes their “fuel costs” equal.

With this financial matching approach, the investor has the same capital costs and the same fuel costs whether building a coal plant or a wind turbine, and because the wind turbine has been scaled up, the investor will sell the same amount of power. The only difference is when the power is sold, but this is a very small difference becuase both projects spread their power production over peak and off-peak hours quite uniformly. Since the projects have the same costs and revenues, wind can be push ahead of coal with only a tiny extra payment.

The final step is to find what this subsidy has cost the government. As before, a 20-year project life is assumed. Suppose the government has financed the initial subsidy with 20-year Treasuries. The cost of paying off such a loan can be computed using a spreadsheet’s mortgage-payment formula and that cost is $203 per year for 20 years. This comes to 2.7¢/kWh of electricity generated, but the investor pays 1.9¢/kWh in “as if” coal payments. This leaves the government holding the bag for just 0.9¢/kWh, and that is the cost of this form of subsidy.

Why is this so much cheaper? Essentially, the government has borrowed the money for the subsidy from the public instead of from the investor. This transfers less money to investors, but it still covers all real costs. Also the money is borrowed at a market rate that reflects scociety’s valuation of future cost and savings. This caluclation values the future cost savings of wind power properly.

The bottom line on wind costs. Although turbine costs and financing costs are difficult to pin down, the initial calculation of 3¢/kWh is consistent with the fact that wind projects get 2¢/kWh in PTC subsidy, 0.5¢/kWh in accelerated depreciation, and often but not always, a bit more from RPS requirements. In fact, discussion with those close to the industry suggest, that wind turbines are actually being built with less than 3¢/kWh of subsidy. That indicates the DOE cost numbers presented above are realistic.

If a wind turbine costs $1,254/kW and has a 30% capacity factor, it will generate power for about 2.4¢/kWh–not counting future generation as less valuable. The only reason wind power seems expensive is because investors severely discount the value of future generation. Society also discounts future values, but its willingness to lend money at 5% to the Treasury proves that they discount its value much less. Using this  more far-sighted social rate of return, shows that the cost to society of wind power is only about 1¢/kWh more than conventional power costs. 

Wind energy policy
Current wind energy policy is not far off the mark on average. But some states subsidize is much more than others. This means we will buy expensive wind power in one state while passing up cheap wind power in another. But the larger problem is that other energy policies are far out of line with wind. To see this requirese a close look a wind subsidies and than at other energy subsidies.

Current wind energy policy is so murky that when asked for help on evaluating wind subsidies, they throw up there hands and say it’s impossible. A simple and transparent policy would work better and save money. Since coal is the direct competitor of wind and many other CO2 reducing alternatives, an unTax on coal, a charge refunded on a per-person basis, would be ideal. Until that becomes politically feasible, the federal production tax credit should be the sole subsidy and it should be stabilized. 

India and China are expanding their use of wind power.  The demand for wind turbines has particularly accelerated in India, where installations rose nearly 48
percent last year, and in China, where they rose 65 percent, although from a lower base. 

Global wind energy council
DOE’s Wind Information
Organizations with Semi-Sensible Energy Proposals 
   The Apollo Alliance
   NRDC’s Re-Energize America NASA’s Solar & Wind Data Just the Facts: The wind industry has set a target of 100 GW of installed capacity by 2020. This is about 100 nuclear plants worth of capacity. But, unlike nuclear plants, wind turbines don’t run full tilt all the time. The wind is not so steady. This much wind capacity will produce about as much electricity as 30 nuclear plants, and that will be a bit less than 5% of the country’s electricity. Compared to all fossil-fuel energy it will be just over 1%.
So wind is no panacea. But neither are other options. Corn ethanol could supply a bit more, but only at much greater cost. While it costs us over $7 extra to save the fossil energy in a gallon of gas by subsidizing ethanol, we can save the same amount of energy at a cost of only 25¢ by subsidizing wind generation. That’s over 28 times cheaper.
Ethanol from corn is quite expensive and not very ecological, so we probably do not want it to increase to the 1% level. That would require more corn acreage for cars than for feed and food.
That’s where eco-ethanol comes in. That’s ethanol made from cellulose, which is all the unused parts of plants. This is far more energy efficient and ecological because that is now wasted—well not quite. The unused parts of crop plants are usually returned to the soil to enrich it, or more accurately, to avoid impoverishing it. There is still a cost to using plant cellulose, but much less than from growing corn just to make gas for our cars.
 * A Quad is a quadrillion (15 zeros) Btu.