RENEWABLE ENERGY: Not Cheap, Not “Green” – Part 1

August 27, 1997

by Robert L. Bradley Jr.

Problems of Wind Power
Of immediate concern to eco-energy planning is wind power, beloved as a renewable resource with no air pollutants and considered worthy of regulatory preference and open-ended taxpayer and ratepayer subsidies. Despite decades of liberal subsidies, however, the cost of generating electricity from wind remains stubbornly uneconomical in an increasingly competitive electricity market. Many leading wind-power providers have encountered financial difficulty, and capacity retirements appear as likely as new projects in the United States without major new government subsidy. [6]

On the environmental side, wind power is noisy, land- intensive, materials-intensive (concrete and steel, in particular), a visual blight, and a hazard to birds. The first four environmental problems could be ignored, but the indiscriminate killing of thousands of birds–including endangered species protected by federal law–has created controversy and confusion within the mainstream environmental community.

Unfavorable Economics
Relative prices tell us that wind power is more scarce than its primary fossil-fuel competitor for electricity generation–natural gas, used in modern, state-of-the-art facilities (known in the industry as combined-cycle plants). [7] That is because wind power’s high up-front capital costs and erratic opportunity to convert wind to electricity (referred to as a low capacity factor in the trade) more than cancel out the fact that there is no energy cost for naturally blowing wind. [8]

Low capacity factors, and still lower dependable on- peak capacity factors, are a source of wind power’s cost problem. In California, for instance, where some 30 percent of the world’s capacity and more than 90 percent of U.S. wind capacity is located, wind power operated at only 23 percent realized average capacity in 1994. [9] That compares with nuclear plants, with about a 75 percent average capacity factor; coal plants, with a 75 to 85 percent design capacity factor; and gas-fired combined-cycle plants, with a 95 percent average design capacity factor. [10] All those plants produce power around the clock. Wind does not blow around the clock to generate electricity, much less at peak speeds.

Peak demand for electricity and peak wind speeds do not always coincide. [11] A study by San Diego Gas & Electric in August 1992 concluded that wind‘s dependable on-peak capacity was only 7.5 megawatts per 50 MW of nameplate capacity (a 15 percent factor). [12] The CEC consequently has recalculated the state’s 1994 wind capacity from 1,812 MW to 333 MW, an 18 percent dependable capacity ratio. [13]

The cost of wind power declined from around 25 cents per kilowatt-hour in the early 1980s to around 5-7 cents (constant dollars) in prime wind farm areas a decade later. [14] By the mid-1990s, wind advocates reported that a new generation of wind turbines had brought the cost down below 5 cents per kWh and even toward 4 cents per kWh in constant dollars. [15] A DOE estimate was 4.5 cents per kWh at ideal sites. [16] However, even at the low end of the cost estimate, the total cost of wind power was really around 6-7 cents per kWh when the production tax credit and other more subtle cost items were factored in, as discussed later. The all-inclusive price in the mid-1990s was approximately double the cost of new gas-fired electricity generation–and triple the cost of existing underused generation.

The total cost of wind power is higher than the advertised estimates for several reasons.

1. Wind receives a 1.5 cent per kWh federal tax credit, escalating with inflation, which is approximately one-third of its (as-delivered) selling price. Accelerated depreciation is also given to wind-powered facilities, further lowering their tax rate. Gas-fired electricity generation does not have a tax credit or an option of accelerated depreciation, and natural gas extraction has a total deduction (primarily a scaled-back percentage depletion allowance) of less than 2 percent of its wellhead price. [17] State severance taxes, which totaled $45 billion for oil and gas extraction between 1985 and 1994, swamp the wellhead deduction. [18] Thus wind power’s entire tax credit should be added back in for an apples-to-apples comparison with gas-fired alternatives. Local tax incentives for wind, such as in California, would increase the add-back.

2. Low-cost wind depends on select sites with strong, regular wind currents (Class 4 and above wind speeds), whereas other power generation facilities can be built in larger increments in far more places, or converted or repowered in existing locations. Remote wind sites [19] often result in additional transmission line construction, estimated to cost as much as $300,000 to $1 million per mile, [20] in comparison with locally sited gas-fired electricity. The economics of transmission are poor because, although the line must be sized at peak output, wind power’s low capacity factor ensures significant underutilization. That adds 0.5 cent per kWh, sometimes more and sometimes less, to the levelized cost of wind. [21]

3. Because wind is an intermittent (unpredictable) generation source, [22] it has less economic value than fuel sources that can deliver a steady, predictable source of electricity. Utilities obligated to provide firm service must either “firm up” the intermittent power at a premium (estimated by power traders to be around 0.5 cent per kWh) [23] or penalize the provider of interruptible supply. Output uncertainty also increases financing costs of outside lenders compared with more predictable, proven power generation. [24] Therefore, a premium has to be added to the interruptible wind rate to compare it with firm generation alternatives such as gas-fired combined-cycle plants.

4. Wind power becomes more expensive if any account is taken of negative environmental externalities as mainstream environmentalists do for fossil-fuel plants (full-cost pricing). Whereas coal and gas plants have incurred higher costs for emission reductions pursuant to Clean Air Act mandates (and in some cases have been penalized in resource planning decisions where state regulators add “externality adders” to plant costs), no penalty has been imposed for the environmental problems of wind farms–noise, land disruption, visual blight, avian mortality, and air emissions associated with the incremental materials required in wind turbine construction. [25] Neither has there been an allowance for the substantial social cost of taxpayer subsidies. [26]

All-inclusive wind prices, factoring in the hidden incremental costs mentioned, are quite different from the advertised price of new wind capacity. [27] Complained San Diego Gas and Electric about its “winning” wind-power bids of about 8 cents per kWh in a 1993 auction,

SDG&E observes that the resulting price to wind developers of 6-6.5 cents per kilowatt-hour when added to the 1.8 cent [federal and state] tax credit is so far above the five cents/kilowatt- hour revenue wind developers have reportedly claimed they require as to indicate that the BRPU auction would result in unfair costs to consumers. Before the [California Public Utilities] Commission commits to such high prices, wind developers should be asked to explain why the price customers must pay to them is so much higher than what they claim they need. [28]

San Diego Gas & Electric’s bid experience was approximately the same as the calculated cost of a proposed (but more recently canceled) 45 MW wind project in northern California that would have sold power to the Sacramento Municipal Utility District. [29] A new 35-MW wind-power project in West Texas, where the winds are better, has a 25-year fixed-price contract for 4.7 cents per kWh. Adding in the federal tax credit, 0.5 cent per kWh for incremental transmission expenses for the 400-mile trip to Austin, and 0.5 cent for nonfirm delivery, however, the cost is around 7 cents per kWh from the get-go–not including the implicit costs due to the incidence of off-peak production and higher financing costs.


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