RENEWABLE ENERGY Not Cheap, Not “Green” (1997) – Part 2

August 27, 1997
by Robert L. Bradley Jr.

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 re-powered 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 under-utilization. That adds 0.5 cent per kWh, sometimes more and sometimes less, to the leveled 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.

A December 1996 report from the Northwest Energy System, a group of electricity stakeholders in the Pacific Northwest, including environmental groups, reconfirmed the severe economic plight of wind as well as other renewable energies.
Utility-scale solar, wind and geothermal technologies still are more expensive than gas-fired combustion turbines and current market prices. . . . Several renewable resource projects designed to confirm various technologies under Northwest conditions . . . are anticipated to produce electricity that is from one and one-half [wind] to four times [geothermal] more costly than gas-fired combustion turbines. [30]

That estimate for wind does not account for implicit costs, which would add approximately 1 cent per kWh to its price, making it double the cost of gas-fired generation and triple the cost of widely available economy energy in the Pacific Northwest.
Paul Gipe, in his treatise on wind power, estimates that the best technology (as of 1995) could deliver wind power for $1,050 per kW, or for between 7.5 and 8.3 cents per kWh. [31] This estimate, adding the incremental costs discussed earlier, again confirms the conclusion that as of the mid-1990s wind energy was double the cost of new gas-fired generation and triple the cost of surplus energy (called economy energy, which refers to the price of electricity on the spot market).

New gas-fired combined-cycle capacity in the same period, the early to mid-1990s, could generate electricity for between 3 and 5 cents per kWh, according to the Federal Energy Regulatory Commission (FERC). [32] San Diego Gas & Electric and the Sacramento Municipal Utility District estimated the cost of their gas-fired generation alternative at about 4 cents per kWh. [33] This is firm generation with the flexibility to be located near customer demand; thus it avoids the subtle costs that wind faces.

A gas-fired project can even lock in long-term gas prices to remove price risk for consumers and ensure a price saving over renewable-energy projects with relatively high capital costs. The advantage is imperviousness to short-run gas prices, even a near doubling of prices such as occurred last winter. Because of a “backwardation” curve, long-term prices became substantially below near-term prices, reflecting the long-term supply optimism of the market. [34] The result was that 10-year fixed gas prices and the resulting price of electricity were little changed. [35]

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