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Wind Compared to the Cost of Other Electricity Generation Options

Figure 1: Average Cumulative Wind and Wholesale Power Prices by Region

The chart shows average cumulative wind and wholesale power prices by region. Click on the graph to view a larger version.

View a larger version of the graph.

In terms of direct costs, larger wind farms in windier areas are now considered economically competitive with "conventional" fossil fuel power plants in many locations. In New England, direct costs for wind power at larger sites with strong winds are approaching the cost of alternatives, particularly given the recent high natural gas and oil prices. Figure 1 compares wind contract prices1 with wholesale electricity market prices in different U.S. regions for 2006. Although not directly comparable to wind prices due to wind's production timing and intermittence, the value of wind Renewable Energy Credits and carbon offsets, and the cost of wind integration and transmission, the average wholesale market energy price is a good indicator of the cost of alternative generation options. This graph demonstrates several points:

  • Wind is not a uniformly priced resource. Its costs vary widely depending on project scale, wind speed, region, and other factors.
  • The benchmark for comparison with wind also varies regionally.
  • The best wind sites appear to be competitive with market electricity prices in most U.S. regions (although such sites may be scarce in some regions).
  • Despite higher wholesale electric energy costs in the northeast, wind costs are also higher — meaning that at today's costs, in more cases, extra revenue is required to make a project viable. Such additional revenue is often in the form of Renewable Energy Credits used for compliance with renewable portfolio standards or purchased by customers seeking to support wind generation.

To compare the costs of wind power to other types of electricity generation on a truly apples-to-apples basis, it is important to consider both direct and indirect costs, as well as the value of the output.

Figure 2: Key Results from Major Wind Integration Studies Completed 2003-2006

This chart shows the key results from major wind integration studies completed between 2003 and 2006. Click on the chart to view a larger version.

View a larger version of the chart.

  • All generation sources impose indirect costs on society that are not paid for by generators and therefore not reflected in the direct costs of electricity. Comparing the true costs of wind power with the costs of other alternatives usually reveals that wind power is favorable. Costs that are usually not included in comparisons include the costs of air, water, and land pollution from generation as well as fuel extraction and transport; nuclear waste disposal; oil spill prevention and cleanup; exposure to physical or economic disruption of supply lines; and military intervention to ensure supply.
  • In New England, natural gas supplies 42% — and petroleum supplies 3% — of the energy used for electricity, according to the U.S. DOE's Energy Information Administration. Both of these fuels are largely imported into the New England region and are subject to price and supply fluctuations based either on the ability to transport sufficient supplies from the Gulf of Mexico to New England (New England is at the end of the natural gas and oil pipelines that supply the U.S. east coast, and prices for both fuels are even higher than in other parts of the east coast) or on changes in demand and the political climate worldwide. The cost of wind energy remains stable over time because the majority of costs are fixed up-front.
  • Wind energy has a key advantage over many other electricity generation sources due to its independence from changes in fossil fuel prices. This allows wind generators to offer long-term fixed-price guarantees once initial capital costs are known. As a result, wind power can provide an effective hedge against rising and volatile wholesale electricity prices that are tied to volatile fossil fuels (primarily natural gas in the Northeast) — both in wholesale power supply portfolios and for individual retail customers. While prices from fossil fuel generators can also be hedged, such hedges come at an additional cost, while the hedge is inherent in the cost of wind energy. In addition, wind energy is a natural hedge against the cost of future environmental regulations such as greenhouse gas caps.
  • As a variable resource, the value of wind's production differs from, and may be slightly less than, that of a baseload or dispatchable power plant. Wind generation production profiles differ based on when the wind blows hardest at the plant's location, and the market price of electric energy differs by season and time of day. Peak wind power production in New England may not be highly coincident with summer peak loads, but it is often well-synchronized with high-cost winter peaks. As a result, New England wind power's average energy value may not differ markedly from the energy output of a conventional baseload power plant on an annual basis. Because wind plants may not generate at full output during peak hours, wind plants have less capacity value to the system than most fossil fuel plants. Wind plants also do not contribute operating reserves or other ancillary services valued by the grid, which can be produced by some types of fossil fuel or hydroelectric resources. On the other hand, because of the comparatively small size of individual wind generators compared to the hundreds of megawatts for fossil or nuclear generators, the outage of a single wind turbine will impose far less of a reserve requirement on the electric system than imposed by larger power plants. For more information, see Selling Wind Power.
  • As a variable resource, wind also imposes some costs on the regional electric system. Responding to concerns about whether the electrical grid can accommodate significant new wind additions, and at what cost, the U.S. DOE's Annual Report on U.S. Wind Power Installation, Cost and Performance Trends: 2006 summarizes the results of the major wind integration studies completed between 2003 and 2006 (Figure 2). According to DOE, these studies found that wind integration costs are approximately $5/MWh or less, for a wind capacity penetration of up to about 15% of the regional peak load into which the wind power is delivered.

1. We note that the price of wind power contracts in the database underlying this figure take into account federal and state tax incentives, and do not universally include all the revenue streams, such as Renewable Energy Credits. Furthermore, these prices, which typically represent the busbar cost of energy, do not fully reflect integration or transmission costs, or the value of wind power in reducing carbon emissions and fuel price risk.

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