Wind Energy: a thorough Examination of Economic Viability



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Wind Energy: A Thorough Examination of Economic Viability

Energy and Energy Policy

University of Chicago, 2008
Tao Xie

Nikola Pejnovic

Andrew Fischer Lees

Eve Ewing

This paper will determine the economic viability of wind energy through examining recent developments in turbine technology, transmission technology, and the policy environment. Advances in turbine technology have the potential to increase the efficiency of wind-based electricity production. Similarly, the implementation of new transmission technologies, specifically those regarding High Voltage Direct Current, may have the power to bring wind-generated electricity to untapped markets. Finally, the policy environment is critical to shaping the terms upon which wind energy competes with traditional forms of electricity generation. A number of policy variables can have a strong effect on wind energy’s bottom line, whether through affecting the price of wind energy or through the development of innovative technologies that reduce cost. Using this knowledge, we then draw up an analysis of the average cost of wind-generated electricity under two scenarios: servicing local markets and transmitting electricity to distant markets via HVDC. We then consider whether wind-generated electricity would be competitive in various markets. We find that wind energy generated in the interior U.S. is competitive in the distant California energy market under all conditions. Further, we find that under certain conditions, wind energy is economically viable to service the local markets near to where wind resources are found.

The Policy Environment for Wind Energy

Overview of the Problems and Challenges

Wind Power Energy has become increasingly popular to investors, government officials, and the general public since its commercial advent in the 1970s. The awakening of significant investments in wind energy was caused by a growing realization of the need for energy security. However, there are numerous problems and challenges to developing wind energy, both in the short and the long term.

The U.S. Department of Energy identifies several key challenges in wind energy development: risk perception, the transmission and grid limits, the low competitiveness of wind energy, low-speed wind location usage, lack of infrastructure for transmission, regulatory policy, environmental policy, environmentalists, and general public opinion (DOE 2007, 8, 18). We will address each of these challenges in turn, with a specific focus on the policy problems that these challenges embody.

Risk perception is a challenge for any developing technology; however, this is particularly the case with wind energy, since it depends on the presence of an uncontrollable input: wind. Many industries operate in the presence of natural constraints; for example, globally agriculture too depends on weather (rain and sunny days). But while agriculture has a thousand-year history and large data sample from which to estimate the risk, wind energy is a relatively young technology with little acquired knowledge. Even though the technology for installing wind energy at better locations is cost efficient compared to other technologies, the market considers new technologies as very risky (DOE 2007, 8, 19).

From the investor point of view, wind energy itself is still perceived as too costly. The marginal cost of wind energy is competitive with the latest conventional1 technologies; nonetheless, the fixed costs of wind energy’s technical development is still too high (DOE 2007, 8, 19). Reduction of these costs will enable the wind energy to be used at an even more competitive rate. Policies such as the Renewable Electricity Producer Tax Credit have the potential to cut the cost of turbines through promoting innovation and creasing stable market demand.

As an additional setback, developments in wind energy must occur in tandem with investments in transmission technology: otherwise, there is no way to deliver wind-generated electricity to the market. Transmission channels operate under strict regulations and operational policies. These transmission restraints and the lack of knowledge of wind generated energy’s impact on the grid suspend wind energy development (DOE 2007, 8, 19). Therefore, developing wind energy without the development and research of transmission is inefficient.

We therefore conclude that wind energy and transmission development are closely related. The fall in cost of wind energy yields only a limited result if such energy may not reach its consumers cost-efficiently (DOE 2007, 44). Transmission development is encouraged by the growth in wind energy, which in turn cannot develop without cost-efficient transmission. Policy has the potential to influence these developments in two ways: 1) by fostering the development of new turbine technologies; and 2) by increasing the attractiveness of an investment in wind energy. Ultimately, developing domestic Energy production will ultimately help “secure [the US] energy economy” (DOE 2007, 22).
Governmental incentives and programs

There are multiple incentives, monetary and logistical, that government provides to foster growth of Wind Power Energy development: research, development, and deployment co-operation (RD&D), production tax-credit (PTC), Wind Energy Program (WEP), Wind Powering America (WPA), Distributed Wind Technologies (DWT), Energy Policy Act 2005 (EPA), Energy and Policy Conservation Act (EPCA), Federal Energy Management Program (FEMP), Renewable Portfolio Standards (RPS), Advanced Energy Initiative (AEI), Advanced Wind Turbine Program (AWTP), and Clean Renewable Energy Bonds (CREB).

The RD&D programs are fostered to develop new technologies in a manner that would help investors manage Wind Power farms that are economically feasible. This is achieved by conducting research that reduces the technology cost (DOE 2007, 22). In addition to funding private research, the Department of Energy also aims to conduct its own basic research in wind energy in order to make high-risk energy sources more attractive to investors in the long run (DOE 2007, 23). Some research requires significant upfront expenditures. For example, there are turbine testing projects that require such facilities and infrastructure (DOE 2007, 23). These programs help the government develop data to estimate national standard parameters while reducing the commercial risk for investors (DOE 2007, 23). Such projects are usually run either by federal agencies or in public-private partnerships (DOE 2007, 23). Since the projects have benefits for the government and significantly reduce risk for investors, the public-private testing projects are economically justified. These partnerships have the potential to unearth new innovations that may replace the prevailing turbine technology with something cheaper and more powerful.

The Renewable Electricity Production Tax Credit (PTC), meant to incentivize investments in wind energy, has often had just the opposite effect. Founded as a part of the Energy Policy Act of 1992, the PTC supports energy generated through renewable energy sources by allocating a 2 cents/kWh tax credit (2007) for the first 10 years of operation (28). The program has been highly successful at stimulating investments in wind-generated electricity. The DOE estimates that PTC stimulated the production of nearly 12GW of wind power (20). However, the PTC has received sporadic support since its inception, causing large demand shocks in the turbine market. The figure below illustrates the fluctuations in demand attributable to the PTC.



Source: Wiser et. al 2007

The swings in wind power growth have made the demand for turbines very volatile, driving some turbine firms into bankruptcy. Turbine production was largely outsourced to European firms (20), an event which may have prompted a significant loss of human capital in the U.S. turbine industry. In addition, the variability in tax credit policy may have the effect of driving up the price of turbines once the credit is reinstated, as pent-up demand outstrips the small supply of turbine manufacturers able to weather the storm. The shortage of turbine production capacity leads firms to raise their prices for turbines, thus negatively impacting the overall competitiveness of wind-generated electricity. Finally, the uncertainty associated with the PTC may discourage potential investors, who must include the risk of policy change in their rate-of-return calculations. By decreasing the policy uncertainty surrounding the PTC, the market for turbines will become more stable, with the effect of lowering prices, increasing orders, and attracting technical talent to the turbine industry, thereby increasing the rate of technological innovation.
Transmission

Transmission policies will also have a large effect on the economic viability of wind-generated electricity. As we have seen, wind power markets are quite dependent on that availability of high voltage transmission lines, without which they will not be able to transport large amounts of electricity any sizeable distance. Due to this dependence on transmission lines, wind energy is particularly sensitive to the cost of transmission. Furthermore, once the transmission line is built there is the possibility of under-utilization due to low wind yield (27). So for companies that have to develop their own transmission network, the wind energy itself might be extracted cost-efficiently yet the transportation may raise the costs to a prohibitively-high level. One way measure DOE suggests is to reduce current average distance between 50 national load centers from 500 miles to 100 miles, reducing the transmission cost upper bracket and lowering the risk of transmission blockage of next generation wind development (51). Another proposal involves the use of High Voltage Direct Current, rather than High Voltage Alternating Current, to span the vast distances between wind resources and the utilities that receive them. We will investigate this later proposal in the upcoming section.

Another policy proposal would force transmission lines to be able to direct energy from different energy producers to specific consumers. This is true in Sweden where consumers have the possibility of choosing their electricity provider based on whether or not the provider’s electricity has some “green”2 or all “green” energy (Ek, 181). In the case of electricity from “green” providers there was a premium consumers had to pay (181). Such measures may be effective in areas where the public has a strong positive attitude towards renewable energy, but previous research shows that one cannot expect the number of those willing to pay more for “green” to be high (183). Treating “green” energy as a different product with a different price would allow wind energy to compete with other forms of renewable energy in a luxury energy market. In such a market, wind would excel. Policies that served to separate renewable and traditional electricity transmissions therefore have the possible effect of making wind energy more economically viable. Austin Energy, a public-owned utility in Texas, has created such a market when it launched its GreenChoice program in 2000. The program has been very successful, and has the potential to take hold elsewhere, with significantly positive effects for wind energy.
Wind energy technology basics
The importance of wind speed

Kinetic energy in wind can be captured by wind turbines and converted to mechanical energy. Generators produce electricity from the mechanical energy. Simply, wind turbines work like a fan operating backwards. Instead of electricity making the blades turn to blow wind from a fan, wind turns the blades in a turbine to create electricity.


Wind turbines range in size from a few hundred watts to as large as several megawatts. The amount of power produced from a wind turbine depends on the length of the blades (or the term of swept area) and the speed of the wind. The power in the wind is proportional to the cube of the wind speed; the general formula for power in the wind is:
P = 1/2 * ρ * A * V 3
where P is the power available in watts, ρ is the density of air (which is approximately 1.2kg/m3 at sea level), A is the cross-section (or swept area of a windmill rotor) of air flow of interest and V is the instantaneous free-stream wind velocity.
Because of this cubic relationship, the power availability is extremely sensitive to wind speed. A doubling the wind speed increases the power availability by a factor of eight. Even a small variation in wind speed converts to a substantial difference in power output. The same turbine on a site with an average wind speed of 8 m/s will produce twice as much as electricity as an on a site with 6 m/s (ODPM, 2004.)
The usual cut in speed is 5 m/s and full-load attained above 12 m/s, while the usual cut out speed is 25 m/s3. Thus developers expend considerable effort to identify and secure the sites which are most consistently in the optimum range. NREL divides wind speeds into wind power classes designated Class 1 (lowest) through Class 7 (highest) (Table 1). Class 2 and above wind speeds can provide sufficient energy to drive a small wind turbine. Utility sized turbines usually need at least Class 3 wind conditions to operate.


Table 1 Wind power classes at 10 m and 50 m elevation

Power class

10 m

50 m

Wind speed (m/s)

Power Density (W/m2)

Wind speed (m/s)

Power Density (W/m2)

1

0-4.4

0-100

1-5.6

0-200

2

4.4-5.1

100-150

5.6-6.4

200-300

3

5.1-5.6

150-200

6.4-7.0

300-400

4

5.6-6.0

200-250

7.0-7.5

400-500

5

6.0-6.4

250-300

7.5-8.0

500-600

6

6.4-7.0

300-400

8.0-8.8

600-800

7

7.0-9.4

400-1,000

8.8-11.9

800-2,000
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