The cost efficiency of wind energy

Although wind energy is not yet being utilized to its full potential, the growth of this industry has led to a marked decrease in energy generation costs over the last couple of decades. While its cost effectiveness is increasing with maturity, it is still important to note that there has already been a substantial eighty to ninety percent reduction in the cost of installed wind power over the last twenty years. Innovation and growth in wind energy generation over the years will ensure continuity in the trend of falling costs. Even though it is still not considered a mainstream source of power, there has been an approximate increase in wind power capacity of more than 30% per capita, in the last five years in the United States alone. It is also important to note that by the end of 2008, the United States overtook Germany as the country with the most wind power capacity installed globally. Moreover, wind power was second only to natural gas in terms of new power capacity, amounting to about 42% of the total new power capacity added in the US in 2008. Nations around the world are now striving to develop and understand the full potential of wind energy, both economically and environmentally. The development of wind energy is not only proving to be a financially viable option, but also one that can be highly beneficial in windy areas as well as to self-reliant small scale farmers, ranch owners and the like. A growth in this industry will also help generate more employment opportunities.

A number of factors need to be taken into consideration, in order to understand what affects, contributes to, or detracts from the cost effectiveness of wind farming.

Financing and Ownership: One of the most important factors in determining the cost efficiency of wind power generation is finance. Since most wind farming projects tend to be owned by individual energy suppliers, financing could run higher than mainstream power sources. This is because utilities and investor owned set-ups obtain provisions for lower cost financing and interest rates. Therefore, when projects are utility owned they tend to be cheaper. Also, since wind energy generation is still not considered part of the norm by many, these stakeholders are not offered as many financial benefits by lenders, unless utility owned. To provide an idea of cost, a wind farm currently costs anywhere from 1.8 to 2.3 million dollars per installed megawatt (MW). While these costs are still higher than constructing a coal or natural gas fired generation facility, there are numerous incentives and long term benefits as explained further below.

Inflation: Wind power is one of the few energy sources that does not depend on oil or fuel for production. Therefore, the ups and downs that affect fuel prices do not affect this industry. Once the plant is built, and the costs are known and fixed, fuel prices that rise due to inflation do not affect the cost of energy. This makes wind power almost immune to inflation. Additionally, due to the huge savings from the non-dependence on fuel, the amount of capital employed and expenditures on new technology get adjusted over time.

The speed of wind at a given location: The speed of wind varies at different geographical locations. The energy harnessed at any given wind power site is dependent on the cube of the wind's speed; so when there is an increase in speed, there is an exponential increase in energy generation. Therefore, a wind turbine faced with a faster wind velocity would be more productive with the same infrastructure costs, making the operation considerably more cost effective.

Turbine design: The height of the turbine tower as well as the span of its rotor blades affect the output generated. The taller the tower and wider the area covered by the blades, the higher the productivity. Keeping these factors in mind, developments in blade design, electronic systems as well as other components have helped reduce costs. Also the bigger, newer turbines found today generate a lot more electricity as compared to older models, and at a reduced cost.

The scale of the project: Large scale wind farms are now being offered many incentives (such as grants, subsidies, loan guarantees etc.), which help lower energy costs. Also, transactions and management costs can be covered by the sheer number of kilowatts of power produced per hour as compared to those in a smaller wind farm project. Large scale wind farming puts this sector in the same competitive sphere as other power generation industries.

Policies: Various policies including tax and environmental policies have varied impacts on wind power generation. These policies do affect market access, transmission, incentives and the basic economics of wind farming. Since, it is not possible to give an accurate number of an hourly delivery of electricity due to wind variability; providers are sometimes penalized, irrespective of whether they actually affect the utilities costs of obtaining power. Also they are often faced with the lack of proper standardization or varied demands from utilities. However, a rebuilding of the electricity markets and extended power purchase agreements will continue to contribute to improving the cost efficiencies of wind power projects. The federal tax code also has provisions for a production tax credit for wind power. However, these policies and credit provisions need to be consistent and long-term to have any real positive impact on this industry.

Environmental benefits: Wind power compared to other conventional sources of power is extremely environmentally friendly. It does not depend on fossil fuels nor does it produce any harmful by-products. The economic and environmental costs incurred during the initial set-up period is somewhat nullified over a few months of operation. While producing the same amount of energy in a given period, fuel emits copious amounts of pollutants into the air creating a very dangerous carbon footprint. In turn, wind farming does not adversely affect the quality of life of people or wildlife, thanks to the lack of harmful wastes. Also, as mentioned earlier, since it does not depend on fuel or lack thereof, it will be a lot more cost friendly in the long run both ecologically and financially.

Wind Integration: In order for wind energy to become a major player in energy supply, there needs to be an efficient integration of wind power into the main power grid. Due to the variability of the wind, a small amount of additional energy needs to be generated and fed into the grid. These costs are generally low and can be curtailed with proper planning, interconnection and forecasting. Also, customers may enjoy a lower cost of energy, because there is no consumption of fossil fuels. Efficient market operations and transmission systems will help strengthen this industry and its affordability.

Vert Investment Group ("Vert") is a leading renewable energy investment advisory firm focused on small to medium-sized utility-scale wind energy projects in strong power markets. Vert utilizes its proven methodology, the Staged Progression Model, to guide development projects to construction ready and identify investment opportunities that generate out-sized returns.