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Determining Factors Influencing Wind Economics in New England

Figure 1: Installed Wind Project Costs by Region: 2003 through 2006 Projects Only

New England's high land values, smaller land parcels, varied terrain, and more moderate wind speeds make for projects of smaller scale and higher unit cost than those likely to be built in Texas or the Great Plains states. Click on the graph to view a larger version.

New England's high land values, smaller land parcels, varied terrain, and more moderate wind speeds make for projects of smaller scale and higher unit cost than those likely to be built in Texas or the Great Plains states. View a larger version of the graph.

Figure 2: 2006 Project Capacity Factors by Region: 2002 through 2005 Projects Only

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

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

The cost of energy produced by an individual wind project is extremely site-specific (Figure 1). A number of factors conspire to make wind power somewhat more costly in New England.

Wind Resource

Since the cost of wind power is mostly capital in nature, the greater the energy production, the more units of production over which to spread fixed costs. Wind energy production is a function of the wind speed at the site. Since various turbine models produce different quantities of kilowatt-hours under the same wind conditions, the industry compares project performance using a metric called capacity factor — which is the ratio of actual (or expected) production to the theoretical maximum production. See Figure 2 for a comparison of average capacity factors by region. Wind speed is critical in the overall economics of a project, as the energy generation (and revenue) is proportional to the cube of the wind speed. (Every doubling of the wind speed results in eight times the amount of energy from the wind turbine.) The strongest winds in New England, Class 5 and above, are typically at mountain ridges and shorelines that are either highly valued for other uses, challenging to access, or densely populated. As a result, much of New England's wind power development potential will be limited to a less windy (Class 3 and 4) subset of locations where the land use is most compatible and where other siting considerations are met. Developers will need to ensure that the wind resource is appropriate at their site in order to meet the financial requirements before advancing a project, and they will typically monitor wind on site for at least one year.

Financing and Ownership Structure

This graph demonstrates the sensitivity of the cost of energy from wind plants to project scale economies, financing and ownership structure of the project, and the availability of Federal incentives. Click on the graph to view a larger version.

Figure 3: This graph demonstrates the sensitivity of the cost of energy from wind plants to project scale economies, financing and ownership structure of the project, and the availability of Federal incentives. View a larger version of the graph.

The manner in which a project is financed greatly influences the cost of energy from a given project. Wind projects may be publicly owned or privately owned, may be financed on a project or portfolio basis, and may have varying degrees of debt leverage. There are tradeoffs between project scale and access to certain types of financing with minimum scale requirements. The many community-scale projects under development in New England are unlikely to be able to access the most cost-effective sources of financing typically used for larger projects. There are also tradeoffs between the lower cost of capital for publicly-owned generation and potential tax advantages of private ownership (to take advantage of tax credits and accelerated deprecation, a tax liability is required). For more information, see "A Comparative Analysis of Community Wind Power Development Options in Oregon" (PDF 492 KB) Download Adobe Reader. (July 2004).

Availability of Tax and Policy Incentives and Subsidies

Subsidies specific to wind and renewable energy can help improve the economics of a project and reduce the cost of wind energy to a point at which it is more competitive with conventional sources of electricity. Privately owned projects whose owners have sufficient tax appetite receive a substantial financial benefit from the Federal Production Tax Credit (PTC). The current value of the PTC is 2.0 cents per kilowatt-hour. Projects commencing commercial operation on or before December 31, 2008 are eligible to collect the PTC for the first 10 years after the project's commercial operation date. Renewable Energy Funds in several New England states offer other forms of support to wind projects, ranging from pre-development grants to capital grants, production incentives, or low-cost financing. Many states have sales or property tax incentives for wind power as well. See the policy section of this Web site for more information.

Plant Size

Economies of scale play an important role in the overall cost-effectiveness of a commercial-scale wind project. The costs of developing and permitting, equipment, installation, interconnection, and operation and maintenance are not a strong function of plant size, as many of the costs are either relatively fixed regardless of plant size or increase only moderately as additional turbines are added. For example, the set-up costs associated with obtaining specialized cranes tend to be the same regardless of project size. As a result, wind developers will usually seek out sites that have the potential for many turbines to spread out the fixed costs over multiple turbine units. Because the expansive sites typical of the midwest United States are generally not available in New England, the overall size of New England projects is limited and therefore unable to tap many economies of scale.

Turbine Size, Model, and Tower Height

Larger turbines are more cost-effective per unit of output. Higher towers are able to access winds at a higher speed with less turbulence and shear. Some wind turbines are more efficient at converting energy in the wind to electric energy at certain wind speeds than others.

Green Field or Site Expansion

Adding additional turbines to an existing wind farm is less costly than developing a new "Greenfield" wind farm of comparable scale due to many factors, including greater amortization of already sunk fixed costs, lower thresholds for permitting and consumer acceptance, and shared common facilities.

Inclusions: Land, Transmission, Ancillary Services

In some cases, wind projects must bear the cost of leasing the land on which they are built, paying for interconnection and/or transmission expansion or substations, or purchase ancillary services (such as VAR control). In other situations, wind projects are not required to foot some of these costs. The costs applicable to a specific wind project will depend on the interconnecting utility or wholesale power market tariffs, the interconnection voltage, the need for dedicated step-up transformers or substations, the ability to share common land or facilities with other uses, and the specific characteristics of the physical site and electric grid in the area.

Royalty Payments

Royalty payments to landowners may vary in scale and structure among wind projects for a variety of reasons. High royalty payments might result from competition among incompatible alternative uses of the land or where the landowner has substantial leverage due to possession of a uniquely attractive site.

Wholesale Power Markets

The market rules of the Independent System Operator, ISO-New England, influence the cost of getting wind power to market. In general, the market rules are more accommodating to wind power in New England than in several electric markets in the west or south, but nonetheless still impose some additional costs on wind project operations.

Additional Factors Create Upward Pressure on Wind Costs in New England

New England's unique circumstances often increase typical wind industry cost factors for New England projects.

Construction Costs

Many wind farms outside of the Northeast have been developed on open, flat agricultural land with relatively good road access and terrain. In New England, gaining access to high wind resource areas on mountain ridges can create site access challenges if existing roads are not in place or are unimproved, resulting in higher construction costs. In addition, labor costs tend to be higher in New England than the national average.

Prospecting Costs

The costs of negotiating leases with landowners is a function of the number of different land parcels that must be patched together to support a wind farm. Land ownership is far more balkanized throughout most of New England than is the case in the Midwest and Western United States.

Permitting Costs

New England also has certain permitting challenges that other regions of the country may not experience. Greater proximity of residential communities to wind sites, regional or local wildlife issues unique to the Northeast, and conflicts with historical, cultural, or recreational sites will add to the cost of permitting and developing a wind project. These factors also make finding a developable site more challenging.

Availability of Power Purchase Agreements and Regulatory Risk

Most of the population in New England is served by electric distribution utilities that have undergone industry restructuring in the late 1990s that entailed opening up access to the wires for retail competition, functional separation of the generation and delivery functions of formerly integrated utilities, and in most cases, generation divestiture by those utilities. As a result, wind generators do not face a stable market environment as is the case in many other parts of the country where wind power development has taken off. The resulting market structure is largely devoid of credit-worthy entities with a long-term obligation or interest in purchasing wind power. While regional Renewable Portfolio Standards drive demand for wind power, few of the obligated entities have stable load that justifies entering the long-term purchase power agreements typically used to guarantee sufficient revenues to attract commercial financing.

Impact of Icing

In New England, sites at higher mountain ridge elevations can be susceptible to icing, resulting in lost production hours that directly increase the per-kilowatt-hour cost of production.

Off-Shore Projects

New England has the potential for significant off-shore wind energy development. Stronger winds with less turbulence than on land, combined with the opportunity to serve attractive energy markets near load centers, are the lure to this vast but untapped potential energy source. The planning, construction, and operation of an off-shore wind project are more expensive than a comparable on-shore wind project due to numerous factors. These include an increased number of state and federal agencies involved in the permitting process, foundation and tower design, overall design requirement to meet wave loading and salt air environment, construction logistics, submersible cabling, and operations/maintenance challenges associated with a remote and harsh marine environment. To date, the limited experience with off-shore wind suggests that the higher up-front and operating costs are not fully offset by greater yields due to stronger winds. However, the development potential exceeds that of land-based wind in New England, and the prospects of greater experience and scale economies reducing costs in the future are luring wind developers to New England's coastal waters.

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