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Cost Trends

Figure 1: Cost of Energy and Cumulative Domestic Capacity

This graph shows how the cumulative domestic wind capacity (MW) has increased since 1980, while the cost of energy from wind power has declined by a factor of approximately 20 times during the same period but has increased slightly since 2001. Click on the image to view a larger version.

This graph shows how the cumulative domestic wind capacity (MW) has increased since 1980, while the cost of energy from wind power has declined by a factor of approximately 20 times during the same period but has increased slightly since 2001. View a larger version of the graph.

Overall, the wind industry is experiencing long-term decreases in the cost to produce wind-generated electricity (Figure 1), despite recent short-term increases in upfront equipment costs. Even in the short term, however, the effect of increases in up-front capital costs on the cost of energy from wind power projects has been dampened by improvements in energy capture from the wind and decreases in operating and maintenance costs.

The cost of energy from wind generators comes primarily from paying for the up-front fixed costs of installation over time, the cost of operating and maintaining the generator on an on going basis, and the expenses associated with local taxes and royalties to sponsoring landowners. Recently, the need to establish decommissioning funds (to pay for turbine dismantling and removal at the end of its useful life) has increased. Historically, it was assumed that the salvage value of the equipment would be sufficient to fund the decommissioning process. While this historic assumption may prove to be true, the increasing requirement to establish decommissioning reserve funds will nonetheless create an encumbrance of operating revenues — which may or may not develop into a true cost — that will impact the project's total cost of energy.

This page will discuss these long-term cost trends that impact wind power's cost of energy.

Fixed Costs

Figure 2: Reported U.S. Wind-Turbine Transaction Prices Over Time

This graph displays the cost of wind turbine generators only, per kW, by project size from January 1997-January 2007.  The price for wind turbines decreased from January 1997 through the middle of 2000 but has been increasing steadily since then due to a range of factors including increased steel and copper prices, disadvantageous foreign exchange rates, and demand that consistently outpaces supply. Source: Annual Report on U.S. Wind Power Installation, Cost and Performance Trends: 2006. Click on the image to view a larger version.

This graph displays the cost of wind turbine generators only, per kW, by project size from January 1997-January 2007. The price for wind turbines decreased from January 1997 through the middle of 2000 but has been increasing steadily since then due to a range of factors including increased steel and copper prices, disadvantageous foreign exchange rates, and demand that consistently outpaces supply. Source: Annual Report on U.S. Wind Power Installation, Cost and Performance Trends: 2006. View a larger version of the graph.

Figure 3: Installed Wind Project Costs Over Time

This graph displays the installed project cost of individual projects from 1982-2006.  The cost of wind energy generation has decreased over time, but has been increasing slightly since 2001. Source: Annual Report on U.S. Wind Power Installation, Cost and Performance Trends: 2006. Click on the image to view a larger version.

This graph displays the installed project cost of individual projects from 1982-2006. The cost of wind energy generation has decreased over time, but has been increasing slightly since 2001. Source: Annual Report on U.S. Wind Power Installation, Cost and Performance Trends: 2006. View a larger version of the graph.

The majority of the cost of energy from a wind project is based on the up-front purchase cost associated with the turbine components, as well as their delivery, installation, and interconnection to the electric grid. In addition, developers incur pre-construction development expenses related to securing land leases, permits, studies, engineering, contracting, and community outreach. In New England, due to the high population density, environmental sensitivity, or conflicting uses in the windiest areas, permitting costs are higher than in many parts of the country. During the risky development stage, out-of-pocket costs for site studies, wind assessment, and permitting are often financed by the developer's capital or by equity investment in the project company. During construction, short-term bridge financing is typically used, unless the developer also intends to be the long-term owner and has the financial capacity to finance the project on its balance sheet. In the project finance scenario, development costs and construction financing interest are typically rolled into the project's permanent financing along with developer fees and equipment costs.

The majority of the cost of energy from a wind project is based on the up-front purchase cost associated with the turbine components, as well as their delivery, installation, and interconnection to the electric grid.

Since the first major installations of commercial-scale wind turbines in the 1980s, the cost of energy from wind power projects decreased by a factor of almost 20 times through 2002 due to larger turbine generators, towers, and rotor lengths; scale economies associated with larger projects; improvements in manufacturing efficiency; and technological advances in turbine generator and blade design. These technological advances have allowed for higher generating capacities per turbine and more efficient capture of wind, especially at lower wind speeds.

Though the cost of wind power has decreased dramatically over the long term, a series of factors unrelated to the advances that have characterized this long-term trend have caused the cost of wind power generation to increase somewhat over the past six years (Figures 2 and 3). According to the U.S.Department of Energy's Annual Report on U.S. Wind Power Installation, Cost and Performance Trends: 2006 (PDF 2.5 MB) Download Adobe Reader, wind turbine prices have increased by approximately $400/kW on average over this period, accounting for nearly all of the increase in total installed project cost. The primary drivers of these recent cost increases have been substantial increases in raw materials prices (e.g., steel and copper); shifts in foreign exchange rates (many components are manufactured outside of the United States); rising transportation costs, and a global shortage in turbine supply due to rapidly increasing demand.

Figure 4: Annual U.S. Market Share of Wind Turbine Manufacturers by MW, 2005 and 2006

These two charts compare wind turbines sales in the United States by manufacturer for 2005 and 2006. Click on the image to view a larger version.

These two charts compare wind turbines sales in the United States by manufacturer for 2005 and 2006. View a larger version of the graph.

Turbine manufacturers are largely based outside of the United States, so the cost of U.S. wind projects can be subject to changes in foreign exchange rates and the cost of turbine components and materials, which are also largely manufactured outside of the United States. The main suppliers of wind turbines to the U.S. market are G.E. Wind, followed by Siemens, Vestas, Mitsubishi, Suzlon, and Gamesa (Figure 4). In addition, U.S.-based Clipper Wind has entered the market and is expanding. G.E. Wind maintains the largest market share, with 60% in 2005 and 47% in 2006. Siemens is new to the U.S. market and rose from a marginal percentage of the U.S. market to 23% in 2006. Few wind turbine manufacturers are based in the United States, due in part to a relatively less stable policy environment history, in comparison to countries with a strong wind-sector manufacturing base. However, the growing U.S. market for wind has encouraged foreign turbine and component companies to build manufacturing plants in the United States. For example, Suzlon and Gamesa have opened facilities in Minnesota and Pennsylvania, respectively.

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Performance

Figure 5: Project Capacity Factors by Commercial Operation Date

The chart depicts project capacity factors by commercial operation date and demonstrates a consistent and uninterrupted increase in wind turbine efficiency. Click on the image to view a larger version.

The chart depicts project capacity factors by commercial operation date and demonstrates a consistent and uninterrupted increase in wind turbine efficiency. View a larger version of the graph.

Since wind power projects consume no fuel, the more these fixed costs can be spread over more units of production, the lower the per-unit cost of energy. The higher the capacity factor - the ratio of actual energy production to the theoretical maximum if a plant were operating at maximum output at all times - the lower the cost of energy. Capacity factor is a function of wind availability, equipment availability, and the efficiency at which the equipment can convert available energy in the wind into electricity.

Figure 6: Project Capacity Factors by Region: 2002 through 2005 Projects Only

The chart depicts project capacity factor by region. Click on the image to view a larger version.

The chart depicts project capacity factor by region. View a larger version of the graph.

Wind turbine performance has improved over time due to a number of factors, mitigating to some degree the recent increases in turbine cost. Capacity factors have increased at a modest rate over the past several years due to higher turbine hub heights (accessing stronger winds at higher elevations), improved siting, technological advancements (in blade design, for example), and improved operating practices. Project capacity factors also differ by region — with Texas and the Great Plains states demonstrating the most consistently strong wind resources. As a result, the effect of capacity factor on cost of electricity varies depending on the location of each wind project. Figures 5 and 6 demonstrate these concepts.

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Operations and Maintenance

Figure 7: Average O&M Costs for Available Date Years from 2000-2006 by Last Year of Equipment Installation

The figure shows the operation and maintenance costs for wind projects completed between 2000 and 2006.  The O&M costs follow a downward trend over the six years even though turbine prices have increased during that same time period.  Lower O&M costs may result from a number of factors, including improved reliability, design, assembly and installation techniques, scale economies at larger projects, as well as increased operation and maintenance experience in working with wind projects. Click on the image to view a larger version.

The figure shows the operation and maintenance costs for wind projects completed between 2000 and 2006. The O&M costs follow a downward trend over the six years even though turbine prices have increased during that same time period. Lower O&M costs may result from a number of factors, including improved reliability, design, assembly and installation techniques, scale economies at larger projects, as well as increased operation and maintenance experience in working with wind projects. View a larger version of the graph.

Once a project is completed, its owners incur operations and maintenance expenses. Unlike fossil fuel plants, wind turbines do not require fuel purchase. Day-to-day expenses consist primarily of staffing of technicians, general maintenance, indirect expenses such as taxes and insurance, and royalty payments to landowners (when the host does not own the project).

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Tax and Other Incentives

The presence or absence of tax or other incentives can have a material impact on wind power's cost of energy.

The most influential tax incentive is the Federal Production Tax Credit (PTC). For project owners with sufficient federal income tax liability, the PTC contributed 2.0 cents/kWh to wind project economics in 2007, although it is currently slated to expire for projects not reaching commercial operation prior to December 31, 2008. While the PTC helps wind energy compete by providing support similar to that received by other technologies, the PTC has a history of being renewed close to, or even after, its expiration date. This "on again, off again" nature prevents wind project developers from entering into longer-term supply agreements with turbine manufacturers. This, in turn, limits turbine manufacturers' willingness to expand domestic manufacturing facilities and make long-term commitments with the limited number of global foundries capable of producing the large cast iron components used in modern wind turbines. These events cause the turbine manufacturing chain to slow toward the end of the PTC period. Manufacturing resumes its feverish pace after the PTC is extended, but not without creating a backlog of demand. This supply shortage increases the cost of turbines, and therefore the installed cost of a new wind project. Further analysis of the impact of the PTC on the U.S. wind power market can be found in the Lawrence Berkeley National Laboratory report, "Using the Federal Production Tax Credit to Build a Durable Market for Wind Power in the United States" (PDF 77 KB) Download Adobe Reader.

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Financing

The manner of financing and its cost are also important determinants of the cost of energy from a wind project. Scale economies are important here as well, as larger projects have broader appeal to a wide range of financing sources, can access more standardized financial approaches, and spread fixed costs of arranging financing over more units of production. A variety of capital structures are used to finance wind projects in the United States, ranging from 100% equity transactions to projects leveraged by debt at the project or corporate level. At the opposite extreme, some government entities finance wind generators entirely with debt. Where project debt is used, it can be expected to cover approximately half of total project costs — although the range of actual debt leverage varies. The term of debt borrowing is typically tied to the length of the power purchase agreement. Where no power purchase agreement exists, the term may be in the range of 10 to 12 years.

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More Information

For more information regarding how each of these factors impacts the economics of wind power projects in New England, see Determining Factors Influencing Wind Economics in New England.

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