The Economics of Wind Power -

Status and Perspectives

Photos: DONGEnergy A/S

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Risø DTU, Technical University of Denmark

Professor Poul Erik Morthorst Risø Poul DTU Erik Morthorst

15/3/2009

The main Socio-economic Parameters

The main parameters governing wind power economics include the following: •Investment costs, including auxiliary costs for foundation, grid-connection, and so on. •Operation and maintenance costs •Electricity production / average wind speed •Turbine lifetime •Discount rate

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Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Investments in a 1 MW turbine

Turbine (ex works) Foundation Electric installation Grid-connection Control systems Consultancy Land Financial costs Road Total

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Risø DTU, Technical University of Denmark

Investment (1000 €/MW) 928 80 18 109 4 15 48 15 11 1227

Share (%) 75.6 6.5 1.5 8.9 0.3 1.2 3.9 1.2 0.9 100

Poul Erik Morthorst

15/3/2009

Turbine Investment Cost in different Countries 2006 1600 1400 1000€/ MW

1200 1000 800 600 400 200

wa y

N or

U S

U he K r la nd Po s rt u G ga l er m an y Ja pa n G re ec e Sp ai Ca n na De da nm ar k

N et

It a

ly

0

4

Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Development of Turbine Size in different Countries 2500 2000

Germany Spain Denmark

1000

USA UK

500

India

kW

1500

5

Risø DTU, Technical University of Denmark

20 04 20 06

19 98 20 00 20 02

19 92 19 94 19 96

19 90

0

Poul Erik Morthorst

15/3/2009

Operation and Maintenance •O&M costs: Approx. 1.5 c€/kWh O&M components Land rent 18%

•Insurance •Regular maintenance •Repair •Spare parts •Administration 6

Risø DTU, Technical University of Denmark

Administration 21% Power from the grid 5%

Insurance 13% Service and spare parts 26% Miscellaneous 17%

Poul Erik Morthorst

15/3/2009

Operation and Maintenance •O&M costs: Approx. 1.5 c€0.35 /kWh 55 kW

0.3

Kr/kWh

O&M 0.25 components

150 kW 225 kW

0.2

0.15 •Insurance 0.1 •Regular maintenance 0.05 •Repair 0 •Spare 1parts 3 5 7 9 11 År i produktion Years in •Administration

300 kW 500 kW 600 kW 660 kW 750 kW

13

15

17

19

Operation

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Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Cash flow for Wind Power plant

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Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Cash flow for Wind Power plant

15-20% of total costs

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Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Cash flow for Wind Power plant

NPC = I/(1+i)0 + C1/(1+i)1 + C2/(1+i)2 + … + C20/(1+i)20

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Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Cash flow for Wind Power plant

NPV = I/(1+i)0 + C1/(1+i)1 + C2/(1+i)2 + … + C20/(1+i)20 Average cost over the lifetime = Levellised cost (PMT) 11

Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Calculation of Unit Cost

4.000 3.500

Number of full load hours:

3.000

sr u 2.500 o h d a 2.000 o ll l 1.500 u F

The number of hours the turbine has to run at maximum capacity to produce the total annual production

1.000 500 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year

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Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Calculation of Unit Cost

4.000 3.500

Number of full load hours:

3.000

sr u 2.500 o h d a 2.000 o ll l 1.500 u F

The number of hours the turbine has to run at maximum capacity to produce the total annual production

1.000 500 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year

Unit cost = Levellised costs / Average Annual Production = 13

c€/kWh (approx. 6-7 c€/kWh)

Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Production costs

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Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Importance of discount rate

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Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Socio-Economics vs. Business Economics Basic conditions Socio-Economics Prices

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Discount rate

Real terms (no inflation) Socio determined Real terms (6% p.a. in5-8% Denmark) Typically p.a.

Revenues

Normally only costs

Conditions

Excluding taxes etc.

Lifetime

Technical lifetime (20 years)

Risø DTU, Technical University of Denmark

Business Economics Nominal prices (including inflation) Market determined Nominal terms Including risk premium Payment schedules important Including taxes, depreciation rules etc. Economic lifetime (< 20 years) Poul Erik Morthorst

15/3/2009

A real Socio-Economic analysis also includes… Socio-Economics Adjustment factor Externalities

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Investment is substituting alternative use Issues not included in prices and costs

Risø DTU, Technical University of Denmark

Business Economics Not considered Not considered

Poul Erik Morthorst

15/3/2009

Development of Unit Cost

12

10

c€/kWh

8 Coastal site Inland site

6

4

2

0 1985

18

1987

1990

Risø DTU, Technical University of Denmark

1993

1996

1999

2001

2004

2006

Poul Erik Morthorst

15/3/2009

Increase in Turbine Price in different Countries 1600 1400 1200 1000 2006

800

2004

600 400 200

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Risø DTU, Technical University of Denmark

an Ca y na da

er m

UK G

ly Ja pa No n rw ay S pa in

I ta

l rtu ga

US

Po

D en m

ar G k re N e et h e ce rla nd s

0

Poul Erik Morthorst

15/3/2009

Experience Curve for Wind Power Unit Cost

12

Inland site 10

Coastal area c€/kWh

8

6

4

2

0 1985 1987 1990 1993 1996 1999 2001 2004 2006

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Risø DTU, Technical University of Denmark

2010

2015

Poul Erik Morthorst

15/3/2009

Experience Curve for Wind Power Unit Cost

Learning rate of 10% estimated:

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Inland site 10

c€/kWh

8

•Each time global capacity doubles unit cost is expectedly Coastal area decreased by 10%

6

4

2

0 1985 1987 1990 1993 1996 1999 2001 2004 2006

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Risø DTU, Technical University of Denmark

2010

2015

Poul Erik Morthorst

15/3/2009

Wind Power Unit Cost by 2015

12

10

Global Capacity: Inland site •Doubled in three years time •Doubled in five years time

4.3 –5.0 c€/kWh 4.8 –5.5 c€/kWh

Coastal area c€/kWh

8

6

4

2

0 1985 1987 1990 1993 1996 1999 2001 2004 2006

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Risø DTU, Technical University of Denmark

2010

2015

Poul Erik Morthorst

15/3/2009

Wind Power compared to Conventional Plants Displaced or partly displaced cost components: •Fuel costs •Cost of CO2-emissions (as given by the European Trading System for CO 2, ETS) •Operation and maintenance costs •Capital cost, including planning and site work

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Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Wind Power Compared to Natural Gas Power Plant –changing fuel costs

100 90 80 70 h 60 W 50 M / 40 € 30 20 10 0

Regulation costs CO2 - 25€/t Basic

Natural gas Natural gas Natural gas Wind Wind (40$/bbl) (60$/bbl) (120$/bbl) Power Power coastal site inland site

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Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009

Wind Power Compared to Coal Fired Power Plant –changing costs of CO2 80 70 60 h 50 W40 M / € 30 20

Regulation costs

10

CO2

0

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Risø DTU, Technical University of Denmark

Basic

Poul Erik Morthorst

15/3/2009

Conclusions •Wind Power Economics are fairly simple with only a few important parameters –The annual wind-generated power production is tantamount

•Operation and Maintenance Costs are getting increasingly important

–Improved reliability of turbine and fewer service visits

•Wind power has experienced a learning rate of 10% p.a. – Disrupted in 2004 by a price increase of more than 20% •Increasing fuel prices needed to make wind power economic competitive to conventional plants

–The European Emission Trading scheme on CO2 will not do the job alone

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Risø DTU, Technical University of Denmark

Poul Erik Morthorst

15/3/2009