The Current Actual Costs of Wind Power and the Benefits of Wind Power: Realistic Comparison to Fossil Fuels (Mainly Natural Gas)

The Current Actual Costs of Wind Power and the Benefits of Wind Power: Realistic Comparison to Fossil Fuels (Mainly Natural Gas) – by Kent C. Stewart, Oct. 2015

Introduction 

There seems to be much disagreement about the actual cost of wind power and how it really compares to fossil fuels. I have decided to make an attempt to get to the bottom of these discrepancies and try and analyze the issue from several angles while remaining unbiased. Issues such as capacity factors, intermittency management, installed capital costs, operating and maintenance expenses, federal production tax credit (PTC), necessary transmission additions and upgrades, baseload unit cycling of back-up power, state and local subsidies, levelized cost of energy (LCOE), environmental costs, energy subsidy comparisons, fuel cost variations, grid integration, electricity cost variations, state renewable energy mandates, and transmission costs will be discussed.

After initial study of the issue I note two important points: 1) Determining both the costs and benefits of wind power can be a complex issue. There are many variables. Studies have been conflicting, some misleading. Ideology and bias (pro and con) have tended to confuse the issue. Accounting for all factors, both pro and con, needs to be the focus in any accurate comparison. 2) There are different ways one can compare wind energy and natural gas. Environmental (pollution and climate) costs are notoriously difficult to determine. Some places, notably Europe, have carbon prices which favors renewables considerably. Natural gas prices vary quite a bit in different parts of the world. They are high in Europe which again favors renewables. Thus places where there is a carbon price, subsidies, and high natural gas prices will be the first to become more economical than fossil fuels. Another issue difficult to unravel, quantify, and compare is that of subsidies. There are tax credits, production credits, and other tax deferments. There are also grants in some places. One might want to compare wind and natural gas with and without the environmental costs, with and without the subsidization, etc. Jonathan Cook, in a report by the Energy Efficiency Center at UC Davis, noted that price comparisons between wind and fossil fuels are subject to great uncertainty and are nearly impossible to predict.

A clear problem in the reporting on the analyses that have been done is that they highlight and headline certain conclusions without providing the details. Some complain that carbon prices unfairly favor renewables in the market but that is the point of carbon pricing. Some complain that there are hidden costs not accounted for in conclusions, particularly for wind, but also in some cases for fossil fuels. Clearly at current commodity prices wind energy is not competitive with any of the fossil fuels without the incentives of direct subsidies and/or carbon pricing. Headlines often misleadingly suggest that it is competitive in a free market. However, energy markets are not free markets nor are they likely to be free markets in the future until renewables actually are truly competitive with fossil fuels. Renewable energy is strongly incentivized due to its environmental advantages at direct cost to consumers, utility rate payers, and tax payers. At the same time fossil fuels are disincentivized both by the incentives given its competitors and where applicable by carbon prices. Renewables will be incentivized until they attain parity with fossil fuels. That parity will occur through technology and efficiency enhancements of renewables and theoretically by higher prices for fossil fuels due to depletion of the most economic fossil fuel reserves. This is predicted to happen at some point but the timeline is unclear.

Wind energy costs vary according to region so comparisons also need to be regional. There are several other variables: capacity factors, state and local incentives, needed transmission upgrades, necessary grid upgrades to incorporate new wind projects, and needed base load cycling capacity. These may all vary according to project but reasonable averages can be predicted. Transmission upgrades depend on how far the wind generation is from to the market. Grid upgrades depend on how that new wind generation will affect the current grid configuration (whether new equipment will need to be added).

Base-Load Cycling Capacity

Base load cycling capacity is necessary as a backup for wind power and necessitates the need for additional contingency fuel reserves. Natural gas prices are variable. There is also more environmental impact due to the necessity of idling plants to be ready to provide backup. Natural gas offers the best backup due to ease and quickness of ramping up and down compared to coal and nuclear. It is also the most environmentally and climate friendly non-intermittent backup source.  Nearly all base load cycling capacity is or could be natural gas as it is by far best suited to the task. New gas turbines can be ramped up in ten minutes and to full capacity combined cycle in thirty minutes, thus reducing energy wastage. However, very recently some new developments in the feasibility of battery storage suggest that battery storage, necessary to store lost peak production from renewables, will replace gas peaker plants. This is expected to begin to happen soon in areas with high percentages of renewable energy like California. If batteries replace gas turbines for the "demand response" that peaker plants provide then it will improve the emissions portfolio of renewables and slightly reduce gas usage. Time-frame or detailed viability for such replacement is uncertain at present. The biggest hurdle to battery storage is cost and until costs decline there won't be significant increases in battery storage, although several utilities are incorporating it successfully currently in small scale projects. It is a feasible technology but a costly one. 

Levelized Cost of Energy (LCOE)

Levelized cost of energy (LCOE) assessments can be misleading say Gilberson and Simmons simply because they leave out certain costs, particularly in renewables. Recent LCOE analyses by Bloomberg New Energy Finance show LCOE with wind being very close to natural gas but detractors disagree. Simmons’ analysis basically doubles the LCOE of wind compared to the NREL and DOE assessments. Marston’s rebuttal of Simmon’s Newsweek article disputes some of his LCOE increases. LCOE for offshore wind is considerably higher than for onshore wind. LCOE for nuclear energy is very high, mainly due to waste and safety issues. Bloomberg New Energy Finance’s most recent analysis suggests that wind energy is cheaper than natural gas in Germany and the U.K. This is due to carbon pricing and the higher costs of natural gas there. However, it is unclear whether all factors were accounted for in that analysis.

  

Capital and Operating Costs

As I understand, it currently is about twice the cost to construct a wind farm that produces an equivalent amount of energy to a combined cycle natural gas power plant. The equivalent wind farm would require twice the initial capital investment but would have fairly predictable operating and maintenance costs. The gas plant would require continuous purchase of fuel at variable rates although rates could be hedged for certain periods of predictability. Thus, although capital costs are much higher for wind energy, operating costs are both cheaper and more predictable.

Capacity Factors

Nameplate capacity on a wind or solar facility can be quite misleading. The latest avg. capacity factor for wind is somewhere between 30% and 38%, Giberson put it at 31.1 to 33.5% in 2013. That means that a 100 MW wind farm is only capable of producing about 33 MW. EIA data gives monthly avg. capacity factors for various fossil fuel sources. So far average capacity factor for coal plants in 2015 is 56.5% with a monthly average range from 42.8% to 66.7%. Average capacity factor for combined cycle gas for 2015 is 51.4% with the range of monthly averages from 47.5% to 67.3%. In contrast, the latest Bloomberg New Energy Finance report shows coal capacity factor at 85% for all of 2015, natural gas capacity factor for 1^st half 2015 at 70% with a drop to 62% for 2^nd half of 2015, wind at 35% for 1^st half 2015 and 37% for 2^nd half 2015, and solar at 17% for 1^st half 2015 and 20% for 2^nd half 2015. It is uncertain to me at present why these numbers differ from the EIA numbers. Overall average capacity factors drop for fossil fuel plants in the winter due to the need for “peaker plants” to be running idle to be ready to accomodate high demand. NREL gave an avg. wind capacity factor of 38% with a range from 18% to 53%. The DOE notes that average capacity factors for wind have increased from 30% in 2000 to 33% in 2014. The latest Bloomberg New Energy Finance numbers suggest that avg. wind capacity factor increase from 35% to 37% from 1^st half 2015 to 2^nd half 2015 is due to more generation coming on in the wind-rich southwest as well as higher wind towers. They also state that the corresponding drop in natural gas capacity factor is due mostly to renewables, chiefly wind, lowering the usage of baseload plants. Actually, the disruption to efficiency of base-load cycling gas plants further complicates comparison of renewables to natural gas since the renewables are decreasing the efficiency of the gas plants. The questions arise: Should the necessary base load cycling gas plants providing back-up power for renewables be evaluated as part of the gas power generation system or part of the renewable power generation system and how should the accounting go?   

Environmental Costs

Environmental costs are not easy to account. The environmental costs of wind are obviously much lower than those of fossil fuels, particularly coal. They are significantly lower than natural gas in terms of pollution and greenhouse gases. Wind turbines utilize metals from mines, plastics from petroleum, and large amounts of cement from cement plants which are significant CO2 emitters. They also require back-up power supplied by a base load cycling plant that typically runs on natural gas. This is used during intermittent periods when the wind energy is not sufficient to keep the grid stable. The back-up source must be idling in order to be prepared to be utilized. Idling burns fuel. Another environmental benefit of wind vs. fossil fuels is that there is no need to use fresh water resources for cooling. This is mainly important in areas where water is scarce like the American southwest.

Opportunity Costs

This refers to what the money lost to subsidies could have bought in a free energy market. This is of course speculative but in an economic sense an opportunity to make more money in a better investment was lost. Of course this idea does not account for environmental costs so one could disregard the whole idea. Simmons and some others have seemingly complained that this is a hidden cost of renewables and in a sense it is but it is also a way of lowering environmental costs and that adds value as well. Simmons does not seem to get that environmental costs are real costs even though it is difficult to put an exact number value on them. Carbon costs in a carbon market are an estimation of environmental costs so estimates can be and are made. This is likely to be more common in the future, probably the reasonably near future.

  

Production Tax Credit (PTC)

Production Tax Credit (PTC) refers to the main federal direct subsidy for wind power which is currently at $23 per MWh. The PTC represents about 40% of overall subsidization for wind energy. Graphs of years where the PTC was not in effect show drastic cuts in wind projects as without it they lose their profitability. The PTC also allows wind energy producers to sell wind energy at below market value and still make a significant profit. While free energy market advocates have complained about this it is basically a reality that is not likely to go away until technology and other forms of subsidization like carbon pricing and state-level renewable portfolio standards (RPS) become more standard and ratchet up. 

Renewable Portfolio Standards (RPS)

Renewable portfolio standards (RPS) are basically state mandates for generating certain amounts of  energy from renewable sources. Not only states but also municipalities, businesses, and universities may develop their own renewable energy standards and goals. These mandates require buying a certain amount of renewable energy regardless of price. Since wind energy is more cost competitive than solar, it will be the main source by far. There are many other federal, state, and local incentives for renewable energy as well which vary by state and region, so all would have to be accounted for in any comparison with fossil fuels. This increases the complexity.

  

Wind Subsidization vs. Fossil Fuel Subsidization

There are many types of subsidization. There are direct subsidies like tax credits. The PTC is one example. There are tax abatements, tax deferments, property tax deferments, small operator subsidies, etc. These can get quite complex to evaluate in terms of their overall avg. value. Marston invoked historical subsidization in his Newsweek rebuttal to Simmons but this is problematic because comparisons need to be current and not cumulative. He notes that fossil fuels received 70% of subsidies between 1950 and 2010 while renewable energy only received 10% in that time period. Fossil fuel that was subsidized decades and years before wind became a viable technology should be considered irrelevant. Wind energy clearly receives considerably more direct subsidization currently than fossil fuels. Simmons complained that wind subsidization was not yielding results via power increases: he noted that in 2010 43% of direct subsidization for electricity sources went to wind, which at the time only made up 2% of electrical energy produced. In 2013 wind received 37% of direct subsidies and grew to 4% of electrical energy produced. Solar also has a high percentage of direct subsidization per its percentage of grid energy. Of course, these technologies are subsidized mostly for their environmental benefits and slow improvements in efficiency and output continue to increase their overall viability through time.

  

Transmission Additions and Upgrades

Another significant cost of wind power in the U.S. derives from the best wind sources in the Great Plains being remote to markets and requiring significant additional transmission and upgrades to current transmission. This cost is paid for by utility rate payers and by tax payers for state and federal contributions. The same is true to some extent for natural gas pipelines that supply power plants but currently much of the new natural gas supply is close to power markets, at least in the northeast U.S.

Recent Technology Advancements in Wind Energy

It should be noted that capacity factors for wind power are expected to increase in the future due to technology upgrades. Some recently deployed new technologies in wind energy include higher towers and long blades in some areas to capture more powerful winds higher up. Another new trend is the deployment of turbines with larger rotors designed to take advantage of lower wind speeds. Both of these new trends can increase capacity factors.

Effects of Wind Energy on the Power Grid

Intermittency can destabilize the grid to some extent and the threat of it requires base load capacity cycling to varying extents. Wind is most powerful and reliable at night and before dawn at times of low power demand. Solar power, in contrast, is most powerful and reliable during peak demand hours during the day. Thus solar power can better aid demand response than wind power. Surges of wind power during non-peak demand times can take grid energy supply and demand out of balance and require some base load to be taken off line then put back on line, both of which require energy usage and wear and tear on the base load plant. Better supply and demand management through energy forecasting, planning for new supply, better battery storage, and smart grid technologies may help. However, recent studies indicate that wind energy can be beneficial to the grid via ‘active power control’ (APC) which can support system reliability at fast timescales. This is also called ‘automatic generation control (AGC) when it refers to grid stabilization in the seconds to minutes scale. APC/AGC of various types can scale up or scale down wind turbines based on grid load, increasing or decreasing output to meet the constantly fluctuating load demand. This is typically done by automation with the assistance of a human operator. Basically, this means that wind can be used to some extent as back-up power for other wind generation and renewable sources to reduce the need for base load cycling capacity. Experimenters testing wind APC were worried about the effects on the turbines of scaling up and down frequently on very short time scales but have thus far concluded that the effect on the turbines is negligible. However, Giberson notes that multiple wind power projects in an area can be vulnerable to “large-scale wind events” where within 30 minutes there may be a change from maximum wind power to no wind power or vice versa.

  

In a recent article by Tom Randall for Bloomberg Business it was stated that wind and to a much lesser extent solar, were disrupting the choices for grid power by making base load fossil fuel plants less utilizable, thus decreasing their capacity factors. He suggested that a natural gas plant might actually only be using 70% of its capability due to seasonal demand and maintenance factors. That, he says, is being lowered further by utilizing wind (or solar) when available instead of gas because it is cheaper due to no fuel costs. This, he says, creates a self-reinforcing cycle that favors renewables. He seems to be referring here to base load gas as back-up for renewables. If so, this is a bit misleading as the only reason those plants are utilized is to back up renewables or with the “peaker plants” used in situations of very high demand. He notes that as more renewables hit the grid this will happen more often thus favoring more and more renewables. This is still unclear to me. If that is the case, then gas plants are becoming more expensive and their capacity factors dropping because of more grid accommodation of renewables. The articles has gas plant capacity factors reduced from 70% in 1^st half of 2015 to 62% in 2^nd half of 2015. It is unclear if that takes into consideration that the bulk of new gas plants are the more efficient and higher capacity factor combined cycle plants. Of course, if APC was provided by wind energy rather than fossil fuel peaker plants then the expensive peaker plants would not have to be built or utilized at all. This, however, would put more of a strain on wind turbines, forcing them to produce at a lower capacity factor just as the peaker plants were forced to do and thus change the comparison dynamics. BNEF analyst Jacqueline Lilinshtein stated that most of the drop in natural gas plant capacity factors is due to “base-load plants that are being turned on less because of renewables.” Thus it seems like accommodating renewables to the grid while trying to optimize base load natural gas plants is somewhat of a juggling act within the overall process of balancing energy supply and demand on different time scales.
   

The Future of Wind Power in the U.S.

Wind power has a certain future in the U.S. and throughout the world as a source of renewable energy. Currently, the U.S. produces 4.5% of its electricity with wind. Goals have that percentage rising to 10% by 2020 and 20% by 2030. Obama’s Clean Power Plan and the eventuality of carbon pricing will further favor wind energy over other sources. This new capacity for wind will mainly replace coal but will also become increasingly competitive with natural gas as time goes on. If Bloomberg is right about the self-reinforcing cycle of wind energy aiding its own competitiveness by lower capacity factors for base load gas and if the PTC stays in place then percentage of wind on the grid may rise a little faster.

Conclusions

It is clear that it is indeed quite complicated to compare overall wind and natural gas costs but certain educated assumptions can be made. The complicated nature of comparison will likely continue to generate misleading headlines touted by both advocates and detractors of wind energy. Wind is clearly not yet on par with any fossil fuels economically without direct subsidization. Wind has had some improvements in capacity factors, ability to integrate with the grid and possibly to help back-up the grid in the future, and in some situations it can lower gas capacity factors (thus beating down its main competitor). On this last point the two energy sources really should be considered more complementary than competitive but the self-reinforcing cycle mentioned above would have to be properly balanced by the grid/utility management to optimize their own power investments. It is clear that with the PTC and other subsidies remaining in place wind will continue to ramp up and increase its presence on the grid, possibly even meeting the goal of 20% by 2030. Generally speaking, even though the output of wind energy is intermittent and variable its capital and operating costs are fairly constant and predictable, and it has no fuel costs and little environmental impact compared to fossil fuels. As advantages are maximized and disadvantages minimized by technology and energy balance planning and adjustment, the overall advantages of wind are likely to improve even more. 

References

Assessing Wind Power Cost Estimates – by Michael Giberson, PhD – Center for Energy Commerce, Texas Tech University, October 2013

The True Cost of Energy: Wind Power – Final Report 2015 – by Randy T. Simmons, PhD, Utah State University, Ryan M. Yonk, PhD, Utah State University, and Megan E. Hansen, Strata Policy

True Costs of Wind Electricity – by Planning Engineer and Rud Istvan – posted on Climate Etc. website

The Hidden Costs of Wind Power – report posted on Institute for Energy Research (instituteforenergyresearch.org), Jan 4, 2013

What’s the True Cost of Wind Power? - by Randy Simmons - in Newsweek, April 11, 2015

The True Benefits of Wind Power – by James D. Marston, director of Texas office of Environmental Defense Fund – in Newsweek, April 21, 2015

Wind Energy Blown Away by Natural Gas – by Kimball Rasmussen – in Power: Official publication of Electric Power, 08/01/2012

Fact Check: Wind’s Integration Costs are Lower Than Those for Other Energy Sources – by Michael Goggin – in Into the Wind, the American Wind Energy Association (AWEA) blog, July 25, 2014

Cost-Causation and Integration Cost Analysis for Variable Generation – by Michael Milligan, Erik Ela, Bri-Mathias Hodge, Brendan Kirby (Consultant), and Debra Lew – National Renewable Energy Laboratory – and Charlton Clark, Jennifer DeCesaro, and Kevin Lynn – U.S. Dept. of Energy – Technical Report NRL/TP-5500-51860 June 2011

Wind and Solar Boost Cost-Competitiveness Versus Fossil Fuels – Bloomberg New Energy Finance press release, Oct. 5, 2015

Onshore Wind Is “Fully Competitive” Versus Fossil Fuels in Some Parts of the World – by Melissa C. Lott in Scientific American blog, Oct. 6, 2015

60 Years of Energy Incentives: Analysis of Federal Expenditures for Energy Development – by Management Information Services – prepared for The Nuclear Energy Institute – Oct. 2011

The Future of Electricity Prices in California: Understanding Market Drivers and Forecasting Prices to 2040 – ucdavis.edu

2014 Wind Technologies Market Report – U.S. Dept. of Energy, Office of Energy Efficiency and Renewable Energy, Aug. 2015

Wind Vision: A New Era for Wind Power in the United States – U.S. Dept. of Energy, Office of Energy Efficiency and Renewable Energy,

Solar and Wind Just Passed Another Big Turning Point – by Tom Randall for Bloomberg Business – www.bloomberg.com – Oct. 6, 2015

NREL Report Redefines Wind as a Grid Stabilizer, Not a Liability – summary of report from National Renewable Energy Laboratory (NREL)

Energy Information Administration (EIA) – Electric Power Monthly – Capacity Factors for Utility Scale Generators Primarily Using Fossil Fuels, January 2013 – July 2015

ESNA 2015: Why Energy Storage is Key to a Future with 'No More Gas Turbines' by Gavin Blade, in Utility Dive News, October 15, 2015