Wind Energy: a thorough Examination of Economic Viability

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Source: Energy Information Administration, Form EIA-861, "Annual Electric Power Industry Report." 2008.

The average price of electricity is very low in states where wind resources are sited. Thus, although these markets are nearby, wind energy faces stiff competition when competing in local markets (Wyoming, a state with abundant wind resources, had the third lowest average price of any state in 2006, at just 5.27 cents/kWh). However, a long-distance transmission line could carry wind-generated electricity to higher-price markets where it might prove more competitive. At 12.82 cents/kWh, the Californian electricity market looks particularly appealing. Such a project would require transmission beyond the 500 mile break-even point between HVAC and HVDC, leading policymakers to favor the use of an HVDC line.

In fact, proposals to build a long-distance HVDC transmission line are currently being heard. Western governors have formed a task group to research many transmission investments, including the Frontier Line, a high-voltage transmission line that would connect Wyoming energy supply to California loads. With energy demand increasing at 2% a year, California must add 1,000 MW of electric capacity every year to keep prices constant (WRTEP 2007). Apart from needing additional electricity, California also favors renewable energy. In 2002 the state established the Renewable Portfolio Standard Program, marking a commitment to achieve 20% of electricity from renewable sources by 2017. With just 10.9% of electricity coming from renewables (EIA 2007a), there is significant room for expansion to meet this commitment. California is therefore an eager market for Wyoming wind-generated electricity.
The Frontier Line would address the two major disadvantages of wind energy. For one, an HVDC line minimizes transmission costs, thus addressing the issue of wind resource availability. Secondly, the Frontier Line is well-positioned to weather wind resource variability due to it’s origin in Wyoming. Not only does Wyoming have abundant wind resources; it also houses the nation’s largest supply of coal. When the wind is not blowing, coal plants can generate electricity to keep the transmitted supply constant at 100% of line capacity. Thus, wind-based electricity generation can be backed up by coal-based generation, in much the same way that the Danish wind energy system decreases variability by relying on the German coal-fired grid. Therefore, the Frontier Line may avoid the two major pitfalls of wind energy, availability and variability of wind resources.
Cost Analysis
We turn now to considerations of cost. Through our cost analysis we will determine the economic viability of wind power under our two scenarios. The cost analysis is organized as follows: Section 1 will cover assumptions concerning wind farm costs and output. Section 2 addresses our assumptions about financing the transmission line in Scenarios A and B. Section 3 presents a Cost Spreadsheet using the previously-described assumptions. After analyzing the findings of this spreadsheet, we compare wind-generated electricity costs to market electricity costs for both scenarios, thus forming our initial conclusion of the economic viability of wind energy. In Sections 4 we consider variations in the policy environment, and the effect of such variations on our initial conclusion. Section 5 concludes.
Section 1: Wind Farm Assumptions
Our analysis requires many assumptions, with the justifications from authoritative sources. The next two sections provide the logic behind our assumptions.
PROJECT SIZE: We assume the creation of a wind farm with 3GW of generation capability. There are many sites in our data set with developable wind resources on this scale. Such a site would require 2,000 1.5MW Turbines, each requiring about 90 acres, for a total land requirement of 180,000 acres (or 730 km2) (source AWEA 2007).
PROJECT SITE: Project siting could occur at many locations in the interior US. However, Scenario B requires a site with adequate wind resources and nearby coal resources, to serve as back-up capacity for wind generation and so ensure that the Frontier Line remains at capacity. This leads us to choose the Hanna Basin in Carbon County, Wyoming as our wind farm location for Scenario B. To remain consistent, we use the same site for Scenario A.
CAPACITY FACTOR: The capacity factor of a wind farm refers to the percent of theoretical energy output that the wind farm in fact produces. This is dependent on a number of variables – turbine design, project siting, and weather – and so is difficult to predict with a great degree of certainty. We therefore follow the assumptions put out by Ryan Wiser and Mark Bolinger of Lawrence Berkeley National Laboratory, who calculated the average wind capacity in Mountain region wind farms to be 41% (Wiser and Bolinger 2007).
INSTALLED CAPITAL COSTS: Our assumption for initial costs of installed capital come from a recent large wind turbine deal. On May 15, 2008 Mesa Power LLP signed a $2 Billion with GE to produce 667 1.5 MW turbines. The proposed wind farm would therefore have a generating capacity of 1,000 MW, leading to a ratio of $2 Million/MW installed capacity. This ratio is higher than many estimates (Wiser and Bolinger 2007); we therefore consider it an upper-bound on installed capital costs. We do not anticipate economies of scale beyond 1,000MW, and therefore assume this ratio to hold for a 3,000 MW wind farm.
PROJECT FINANCING: We assume a 30-year mortgage agreement with annual payments and 7% interest.
LAND COSTS: We require 180,000 acres of Wyoming land to achieve a generation capacity of 3,000 MW. However, installed capital will only occupy a small portion of this land. Turbines, electrical facilities, and service roads average between 0.25 and 0.5 acres per turbine (NREL 2006). Taking the higher of these two estimates, we anticipate land needs of just 1,000 acres. We then calculate the costs of purchasing this land. This oversimplifies the land negotiations for a large wind farm project; however, because farmland in Carbon County, Wyoming sells at less than $200/acre, additional land expenditures will not significantly affect project viability. Property taxes are also negligible in the state of Wyoming.
GRID INTEGRATION COSTS: Due to its variable nature, wind places an extra burden on the grid. When the wind is not blowing (or is not blowing sufficiently strongly), other sources must generate additional electricity to ensure that demand for electricity does not outstrip supply. Therefore, extra electricity-generating capacity must be installed. In our case, the extra capacity will consist of mine-mouth coal plants that will share a high-voltage transmission line with the wind farm. The amount of extra capacity is determined by a number of factors – the capacity factor of the wind farm, the exposure of the destination market to wind power, the flexibility of the destination market, the presence of a smart grid, etc. We assume in our analysis that grid integration costs require an add-on of $0.0062/kWh, the upper-bound of recent estimates (VTT 2007).
OPERATION AND MANAGEMENT COSTS: Operation and Management Costs are relatively small for a wind farm. We use the inflation-adjusted estimates of Wiser and Kahn, amounting to an add-on of $0.0089/kWh (Wiser and Kahn 1996).
INSURANCE COSTS: We similarly use Wiser and Kahn’s estimates for property insurance, which are calculated as a percentage (0.0015%) of installed capital costs. This amounts to an add-on of less than nine-hundredths of a penny per kilowatt hour (Wiser and Kahn 1996).
INFLATION: To get cost estimates in 2008 dollars, we adjust many of our figures for inflation. For all figures older than 2006, we assume that inflation matched CPI growth. We adjust 2006 figures according to recent CPI information specific to the electricity industry. Electricity prices grew at a year-over-year rate of 5% in the 12 months prior to May 2008. Assuming that this trend held for the 17 months since December 2006, we adjust all 2006 figures with a 7.5% inflation rate.
Section 2: Transmission Line Assumptions
SCENARIO A: We first consider moving electricity from wind resource sites to the nearest major metropolitan area. From our project site at the Hanna Basin Mine in Carbon County, Wyoming the nearest demand site is Denver, just 150 miles away. This distance makes HVAC transmission optimal. To model the costs of this line, we utilize the assumptions of the Western Regional Transmission Expansion Partnership for a similar-length HVAC line between Mona, Utah and Northeastern Nevada. This line had an estimated cost of $1 Billion. Operation and Management fees are included in the initial estimate. Line losses are assumed to be 10% over the course of the line.
SCENARIO B: We next consider moving electricity from the Hanna Basin Mine in Carbon County, Wyoming to Los Angeles. This transmission line, spanning 960 miles, has been modeled by ABB Grid Systems. Station costs of $420 Million are added to transmission line costs of $1,800,000 per mile, leading to a project total of $2.1 Billion. Operation and Management fees are calculated as a percentage of the total one-time grid payment. Line losses are estimated at 8% over the course of the line (Bahrman 2006).

Section 3: Cost Analysis and Interpretation
Given the above assumptions, we are able to perform the calculations found on the following page. These calculations lead to an estimate of the average total cost per kWh for wind-generated electricity (the standard pricing unit in the electricity industry). We find that in Scenario A, where wind energy is used to service local electricity demand, the average total cost is $0.0745/kWh. In Scenario B, where wind-generated electricity is transported to distant loads, the average total cost is $0.0825/kWh.
Wind Farm Costs
Capital Costs
Turbine Costs: Dollars/kW Generation Capacity 2,000
Targeted Generation Capacity (kW) 3,000,000
Turbine Costs $6,000,000,000

Land Costs: Dollars/Acre 200

Acres needed 1000
Land Cost $200,000

One-Time Capital Costs $6,000,200,000

Annual Capital Payment, 30-year loan with 7% interest $483,534,538

Variable Costs
Operation and Management $88,224,062
Insurance $9,016,020
Grid Integration Costs $61,459,459

Total Variable Costs $158,699,542

Total Annual Generation Costs $642,234,080


Grid Costs
Distance (miles) 150 960

Cost of Transmission Line, $/mile Unavailable $1,800,000

Transmission Line Cost Unavailable $1,728,439,610

Total One-time Cost $1,000,000,000 $2,148,439,610

Annual Grid Payment $80,586,404 $173,135,021
Operation and Management, Yearly Unavailable $1,456,569
Yearly Grid Cost $80,586,404 $174,591,591

Annual Payments, All Fixed Costs $564,120,942 $658,126,129

Total Annual Costs $722,820,483 $816,825,671

Expected Electricity Generation
Generation Capacity (kW) 3,000,000 3,000,000
Capacity Factor 41% 41%
Line Losses 10% 8%

Total Electricity Generation (kWh/year) 9,697,320,000 9,912,816,000

Average Generation Cost ($/kWh) $0.0662 $0.0648

Average Transmission Cost ($/kWh) $0.0083 $0.0175
Average Total Cost ($/kWh) $0.0745 $0.0824

To draw conclusions about the competitiveness of wind energy under each scenario, we must compare the average total cost to market prices. However, we must include a delivery charge to calculate the average total cost of electricity service. The average national delivery charge in 2006 amounted to $0.0321/kWh (EIA 2007b), or $0.0345/kWh after adjusting for inflation. Adding this delivery cost to both outcomes, we find the average cost of electrical services to be $0.1091/kWh in Scenario A and $0.1169/kWh in Scenario B.

We are now prepared to consider the economic viability of both scenarios. In Scenario A, wind-generated electricity would compete in the Denver electricity market. Because no city-level data is available, we assume that Denver prices match average electricity prices across Colorado. This price is $0.0818/kWh after adjusting for inflation (EIA 2007c). At $0.1091/kWh, wind-generated electricity is significantly more expensive. And while it is in the nature of averages to have some figures above and other figures below, a newly-installed electricity generating facility ought to be below the average cost, so that it can continue to compete as its technology becomes outdated. Therefore, wind-generated electricity is too costly to compete in the Denver electricity market, making Scenario A as economically infeasible.
In Scenario B, wind-generated electricity would compete in the Los Angeles electricity market. Again, assuming city-level prices to reflect state-level data, the observed market price for electricity is $0.1379/kWh (EIA 2007c). At $0.1169/kWh, wind-generated electricity is competitive in the far-away Los Angeles market. Due to variations in average electricity prices across states, wind energy in Wyoming is economically viable in distant Californian markets.
Section 4: Policy Variables
In this section we will consider the effect of policy variables on the economic viability of wind energy in local and distant markets. Specifically, we will consider the effect of the Producer Tax Credit within our model, and the potential effect of a cap-and-trade scheme for Carbon emissions.
The Producer Tax Credit
Our original model assumed a neutral policy stance with respect to wind energy. By using this approach, we observe that wind energy is viable in Scenario B even without the Producer Tax Credit (PTC). However, utilizing this credit might drive down the costs of wind-generated electricity, further increasing competitiveness and potentially opening up new markets. Therefore, we now consider the effect of the Producer Tax Credit.
The Renewable Electricity Producer Tax Credit (PTC) provides a 2 cents/kWh tax credit to all wind farm projects. Though still not as large as tax credits for coal, oil, and natural gas, the PTC could significantly boost the profitability of wind energy. Unfortunately, the PTC is largely inaccessible to wind energy producers. Because it is a tax credit rather than a direct subsidy, the PTC is only worthwhile when companies have tax liabilities that they wish to eliminate. Corporate tax liabilities would occur when companies are generating profits. However, due to the high capital costs of wind farms, producers are not profitable until after their 30-year loans are repaid. And because the PTC only lasts for 10 years, it cannot be accessed by wind energy producers. Thus, this policy is largely ineffectual at increasing the competitiveness of wind-generated electricity.
However, because these tax credits are so massive (over $180 million annually for our 3GW project), creative producers will find clever ways to capture them. The simplest (and perhaps most common) method of utilizing the PTC is for producers to apply the tax credits to separate sources of profit. For example, a large ranching firm might decide to build a wind farm on a portion of their land (turbines and cows coexist quite well). The firm can then use the tax credits acquired from selling wind energy and apply them to their ranching income, which unlike the wind farm presents taxable near-term profits. This arrangement has the potential to create some odd bedfellows in the wind energy industry.
Overall, the Producer Tax Credit is poorly designed to increase the competitiveness of wind-generated electricity. Tax credits in general are ineffective tools for bringing new technologies to market, because they presume that the technology is already in the market and earning a taxable profit. A number of reforms could replace the PTC with a federal incentive that did increase the competitiveness of wind-generated electricity, the simplest of which would be a direct subsidy. We will next consider an indirect route to increasing the competitiveness of wind energy: a cap-and trade policy for carbon emissions.
The current policy environment could not be more favorable to a cap-and-trade system for carbon emissions. With all three major Presidential candidates advocating a cap-and-trade policy, carbon emissions will likely pose a financial liability in the near future. Such an outcome is particularly favorable to non-emitting sources of energy, including wind energy. Because operation costs for its competitors will rise, wind-generated electricity may become economically viable in new markets.
To analyze the impact of a cap-and-trade system, we assume that the price of carbon in America will be $40/ton of carbon, a number derived from European prices (current as of June 1 2008). We then look at annual carbon emissions in California and Colorado, focusing on the largest electricity source.
In California, the largest electricity source is natural gas, with 41.5% of the market. Natural gas plants emit 51,620,000 metric tons of carbon annually. Multiplying this figure by the cost of carbon and dividing by industry output, we find that a cap-and-trade system would lead to a $0.02/kWh add-on to gas-generated electricity prices in California. Assuming that gas-generated electricity prices are equal to average electricity prices, we find the new average price of electricity to be $0.1579/kWh. At $0.1169/kWh, wind-generated electricity is significantly cheaper.
In Colorado, the largest electricity source is coal, with 71.5% market share. Colorado coal plants emit 36,269,425,000 tons of carbon every year – a startlingly-high figure. Under a cap-and-trade system, these emissions would be priced at $40/tonC, requiring $1.4 billion in credit purchases. Averaged over output, this leads to a $0.04/kWh increase in the cost of coal-generated electricity. This would raise the average price of electricity to $0.1218/kWh, well above the average cost of wind-generated electricity ($0.1091/kWh). Therefore, under a cap-and-trade scheme wind energy is economically viable in the Denver market. Scenario A, in which wind-generated electricity was transported to local demand sites, is viable in the presence of cap-and-trade.

Section 5: Conclusion

Our cost analysis shows that wind-generated electricity is competitive under a variety of scenarios. Under our current policy environment, we find that wind-generated electricity is not competitive in local markets, but is competitive when transmitted to distant markets to exploit regional price variations. If a cap-and-trade system were adopted, we predict that wind-generated electricity would be competitive in both near and distant markets.

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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

Appendix Explanation

During our research we have ran into many policies and examples of Wind Power and/or energy transmission obstacles. Since not all of these can be directly used in our research paper, the appendix is an additional source of information one may want to know about the subject.

Overview of the Problematic and Challenges

Wind Power Energy has become more and more popular to the investors, government, and general public since the 1970s. The awakening of higher investments in wind energy was caused by growing need for energy security. There are, however, numerous problems and challenges, both short and long term, with developing wind power generation.

The U.S. Department of Energy identifies several key challenges in wind power 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).

Risk perception is a challenge since wind energy is perceived risky since it depends on the presence of wind. For example, globally agriculture too depends on whether (rain and sunny days), but for agriculture we have a long history and large data sample from which to estimate the risk. Even though the technology for installing wind energy at better locations is cost efficient compared to other technologies, the market has a high risk perception of the availability of new technologies (DOE 2007, 8, 19).

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.

The wind energy itself is still costly. The cost of wind energy is competitive to the latest conventional7 technologies; nonetheless, the system cost 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.

The low speed wind locations are economically not as risk-safe as high speed wind locations due to perception of higher wind location yielding more energy than lower wind location. Nonetheless, they too are a resource and while the excellent wind locations are being used and attached to grids there is a need to prepare cost-effective access to low wind generating areas (DOE 2007, 8, 19).

The existing transmission network is limited (DOE 2007, 8, 19). The network needs to be expanded to reach out to the distant locations at which often renewable energy resources are located.

The regulatory agency has set up regulations previously adjusted to non-renewable energy resources and now they need to be adjusted for the renewable energy sources. The regulatory energy approvals are confound to unclear predispositions; even more so, the separate regulatory procedures exist across local, state, and federal levels increasing costs of wind energy farm installation(DOE 2007, 8, 19).

One can 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 Wind Power Energy growth which cannot develop without cost-efficient transmission. 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). The Department of Energy aims to also conduct basic research in high-risk energy sources in order to long term make them more attractive to investors (DOE 2007, 23). Therefore what would be fixed preliminary costs in research for Wind Power investors is now conducted by the governmental agency, resulting in lower cost of research; more so, companies can now re-allocate research money for more concrete research. Any such governmental research is the public access of that information, reduces competitive advantage of investors in Wind Power.

Some research requires high risk heavy capital investment where in current government needs to step in the market economy. There are turbine testing projects that require such facilities and infrastructure (DOE 2007, 23). The program helps 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 the Federal agencies or in public-private partnerships (DOE 2007, 23). Since the project has benefits for the government and significantly reduces risk of sink cost in preliminary research for investors, the public-private testing projects may be economically justified.

WEP is part of the Wind and Hydropower Technologies Program, and concentrates on research that would develop the reliability of Wind technology, cost-efficiency of Wind Production, and small-scale wind technology to ultimately show the feasibility of investing in wind (DOE 2007, 11). Aware of importance of the grid to Wind energy distribution, WEP also concentrates on researching the challenges behind the integration of the power grid, transmission and technological compatibility with energy from Wind production farms (DOE 2007, 12). There are four main sub programs of WEP. One program is a technological Viability research of large-scale wind turbines: Large Wind Technologies (LWT) (DOE 2007, 33). Second program addresses the research of “smaller distributed wind technology” (33). Third program conducts technology application research addressing the research in transmission and system integration (SI) (33). Fourth program is technology acceptance seeks the outreach activities with different groups such as state-based organizations, environmental studies, and utility partnerships (33). Ultimately WEP explores solutions to natural variability of Wind energy production, the interconnection of such volatile energy source with the grid, and transmission of the energy to appropriate load centers (31).

The LWT in addition to mentioned activities specifically works on low wind speed technologies as well as the off-shore wind turbines (34). The strong wind areas are becoming more interesting, yet the low wind speed areas are actually also usable yet more research needs to be conducted. DWT also examines low speed areas but that is because the research in DWT examines possibilities of local usage of Wind Turbines that would release burden on the grid (69). By local one means schools, farms, factories, and general public and private facilities (69). Also DWT can help some secluded, isolated, remote, and/or rural areas (35, 51, 69). The research of energy supply in remote areas on small scale can save huge costs of developing a power line to the national transmission grid. On the other hand, developing small scale remote wind power generators can have immense costs; after all, 1MW turbine has an approximate cost of 1 million dollars. System integration part of WEP serves mostly the government through collecting data from wind farms, analyses the grid operations, develops grid regulations, and plans transmission and grids (34). Through SI, researches are encouraging transmission industries to have more wind power clean energy passing through the power lines to final consumer, the federal and states’ officials to implement more policies favoring this action by transmission firms (86). A mentioned previously the perception of high risk is a ‘red light’ in wind energy, and SI works on educating the energy industry of real state of development of wind energy.

The WPA project that started in 1999 concentrated on the ‘America’ aspect: the project encouraged a higher federal involvement to encourage national not just regional development (17). Prior to the program California and Minnesota were most advanced wind power developers due to state initiatives (17). This information from DOE does not however back-up WPA’s direct impact on the development of wind power.

There are programs that DOE claims to have had significant impact in attracting wind power capacity expansion. Renewable Portfolio Standards (RPS) are state-based initiatives helping the development of wind energy (22). The percentage of wind power capacity built in 1999 was around 55% for that to rise to 75% by 2007 (DOE Annual 2007, 28). The data shows that states without state-based policies dropped their percentage from 45% to 25%. However, the information does not take into account that states have significantly different levels of maximum possible wind power capacity and that in between 1999 and 2007 more states might have started RPS policies. Nevertheless, a jump from 55% to 75% is a sign that more wind power capacity facilities have been built. Knowing that wind energy growth is so recent that we have risk of perception problems due to lack of data, the growth could have been impacted by other policies.

The Production Tax Credit (PTC) on the other hand has left behind some interesting effects that show how after its first implementation it had significant impact of wind power capacity growth. The PTC was founded in 1992 and since had a few modifications; PTC supports energy generated through renewable energy sources by allocating a 2 cents per kWh (2007) for first 10 years of operation (28). The program was not active every year and was suspended in years 2000, 2002, and 2004. The years the PTC was not enacted there was a significantly strong drop in wind capacity growth, while all the other years 1999, 2001, 2003, 2005, and 2006 there was a much higher capacity growth (DOE 20). Therefore the PTC is highly stimulating federal incentive. The DOE estimates that PTC stimulated the production of nearly 12GW of wind power (20).

The PTC data gave much encouraging data to officials but resulted in a disaster for the turbine industry. The swings in wind power growth have made the demand for turbines very volatile, which then resulted in higher costs and shift of consumption of turbines to foreign based companies (20). What is interesting is that this negative effect could have been predicted. In the 1986s in California there was a cut of tax credits and other incentives resulting in bankruptcies of turbine manufacturers (14). The negative effects the tax credit incentive can cause are thus very dangerous. The effort tax credit allocates to increase the growth of wind energy capacity can be economically diminished by the risk of wind infrastructure productivity drops.

In the aftermath of the bankruptcies in the turbine manufacturing industry, Advanced Wind Turbine Program (AWTP) was launched in 1990. The program induced the corporations to have their wind turbine designs include newer technologies that the program recognizes as necessary for maintaining competitiveness on the market (15). In the second phase, the program provided logistics in testing turbines for Class 4 wind which targeted the gap sector in turbine development: between earlier and future-new-generation turbines (16). The AWT efforts might be able to be a good way of encouraging domestic industry to develop innovations without directly affecting their cash flow with direct financial incentives.
Local, State, Regional, Federal organization and regulation

The administration however in some situations causes problems, challenges, and disruption to the incentives producing a counter effect. One regulatory problem is that incentives may not be same across state borders. While some states are favorable to RPS other states have no advanced initiative towards wind power generation; meanwhile, in all states the PTC is available. What is worse, certain areas of the country may be underdeveloped in terms of technology and logistics in planning and helping transmission companies that help the distant wind power plants transmit wind power generated electricity to other states.

The DOE realizes that a federal support is necessary in encouraging developing the wind technologies across states (24) (DOC 2007, 82). So state-by-state expands to be region-by-region, according to SI, aware that each region in US has different grid networks with different expectations, regulations, scheduling, reserves, and line voltage (79, 87). In recent years the problem was approached both on regional and national level. Energy Policy Act of 2005 (EPA) assigned Federal Energy Regulatory Commission (FERC) to “approve proposed new transmission facilities in [corridors reported by the National Electric Transmission Compression Report (NETCR)] if the states fail to do so within one year” (DOE Annual 2007, 27). These corridors are the Southwest Area National Interest Electric Transmission Corridor and the Mid-Atlantic Area National Interest Electric Transmission Corridor.

On the other hand regulation charges across states is different where in some states the wind power operator needs to pay the regulation charges in some states and regions “[regulation is a service provided] by the power system or regional transmission organization (RTO)…with costs paid by the load-serving entities” (DOC 2007, 83). Therefore creating a corridor does not mean that wind operators or load-services can feasibly build these networks when regulation and policy changes state-by-state.

Another regulation that is wind power specific is height limit. Some counties and/or local authorities limit the height of the turbine (73). The technological development resulted in greater energy yield in new wind turbines that are higher, and therefore more economically feasible than the older lower turbines. Therefore, wind energy faces legislation that blocks the possibility of technological development in such areas, slowing down the competitiveness to conventional and other renewable energy generators.


FERC also adjusted the Order 888 penalties to costs for energy imbalance that was a burden for wind energy (DOC Annual, 27) (DOC 2007, 82). The transmission companies too are affected by the same, 890, FERC order. Transmission companies are required to undergo “open transmission planning” with regional and local authorities; furthermore, if a firm tries to use point-to-point transmission and that service cannot be provided by the transmission company, the transmission company needs to examine alternative transmission possibilities (DOC Annual, 27). The ‘examine’ definition does not imply an ‘obligation.’ The FERC order might downturn the possibility of investment in transmission due to uncertainty the transmission companies of costs in alternative transmission requirement in case of lack of extra capacity.

The transmission lines have to be capable of directing 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”8 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 slightly different product with a different price may be justified yet such action does not help the wind power energy becoming more cost-effective. People are free to choose their providers in such markets and can therefore shift back to lower-cost energy providers in hardship; such price policy makes “green” power more of a luxury good.


Some governmental institutions have a problem with turbines being set up in their neighborhood. One difficulty is that turbines may inflict with the radar systems (DOC 2007, 99-100). As a result of an Interim Policy by the Department of Defense and the Department Homeland Security there were hundreds of projects that had to be stopped (100). These events are important as they send negative signals to investors that there are policies that might be implemented on a trial-error basis. Meaning, there are now higher variable future costs that companies might use in calculating the cost of investment that might turn down their interest in wind energy. The DOE mentions that there is a “lack of understanding of wind turbine technology, dynamics, available resources” resulting in lack of information for both the public and investors (100). Lack of information for investors increases risk, and higher risk results in less investors.

The environmentalists too are concerned in turbines affecting the nature in the nearby areas. Nonetheless, the lack of concrete knowledge of the environmental impacts complicates additionally the approval of projects due to incapability of the authorities to predict the environmental effects (100). These uncertainties increase time and expenses so that firms cannot predict well the economic feasibility of the projects they want to invest in. Moreover, the local and state officials to lose data with which to justify their support in wind energy development support in areas where the public might be reluctant towards wind power generation (100).

The wind power does however generate zero-emissions that can encourage the states to encourage the development of wind power energy generation in order to lower the air pollution levels (NREL, 1) (NREL Wind, 9). The states have to comply to federal limitations on nitrogen oxide (4). The NOx cap encourages investment in wind power as investors do not have to incur present and future possible taxations, fees and cap policies for air pollution.

There are Supplemental Environmental Projects that let companies redirect their penalty for air pollution into investment of renewable energy development, future pollution prevention and/or community environmental projects. 910 The policy does not affect the cost-efficiency of specific wind power companies, yet promotes clean air power generation.

The uncertainties may be the explanation why no top Fortune 100 companies invest in wind energy, while there are companies in solar energy generation field. The DOE goes further and uses this information to state that lack of Fortune 100 companies is why wind does not get as much publicity necessary to raise public awareness (DOC 2007, 72). Such a conclusion does not have any more significant statistical backup.

The Market

Wind Power market also depends on the transmission market. Therefore the transmission development and cost-efficiency also comes afloat. The time needed for an investor to develop the wind farm is often shorter than the lengthier time necessary for new transmission lines to be set-up (DOE Annual 27). One to three million USD is the DOE estimate of one mile of new transmission line for wind power generated electricity (83). Furthermore, once the transmission line is built there is a possibility of not reaching optimal capacity usage 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 increase the costs to a non efficient level. Similarly, the more cost efficient the wind capacity the greater the space for the cost of transmission in maintaining the cost-efficiency (51). 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). These problems are addressed in EPA where there DOE is in charge of developing a dialogue among all levels of elected authority (local through Federal) and other groups that will result in consensus decision on development of transmission infrastructure (81).

Wind as a renewable energy source that constantly becomes more and more can be effected not only by policies concerning the wind and/or other renewable energy resources but also by policies in conventional energy resources. The fact that the wind energy is not a constant source of electricity, being open to variability levels, supports wind energy facing different challenges than other energy sources (52). Federal plans for future energy development allot 50% of the 10 billion budget to coal and 20% to nuclear energy industry alone (22). These industries have a competitive advantage of being close to the utility grid and have the ability to comply with current market rules (80). What DOE refers to is the fact that most wind power farms are distant from load centers and final users and have to develop whole networks of transmission. The current market rules have costs for instable supply of electricity. The wind energy produces very unstable quantities of electricity while the conventional energy resources supply a stable level of electricity. Regulation exists, as mentioned, where stability of supply is essential or else the operator has to pay charges.

Nonetheless, some of these problems can be avoided or worked around. The offshore turbines yield at the right locations the most wind power electricity. The offshore wind power farms are often close to the mainland and the load centers, shortening the costs of transmission (30). Offshore turbines may be greater in diameter and yield comparatively more energy than mainland turbines at same wind speeds. Due to high initial expenses in the offshore projects, the US might have to wait another decade for this project to develop (30). However, experience in Europe has shown that the ‘shallow-water’ projects cost 1.3 to 1.5 times as much due to maritime environmental costs; not to mention, the accessibility of land and turbines themselves at the sea is more expensive than mainland construction and operations (52).

In order to receive a permit to build a wind turbine one needs to conduct preliminary work and higher whole staff that will develop a proper application. The offshore sites in the USA have a greater chance of being refused than mainland sites (54). The risk of applying to offshore becomes an economical problem for the companies will prefer to apply to less energy yielding energy generating power farm locations in order to avoid sunk costs from an offshore turbine project rejection.

Wind power energy generation has significantly risen since 1999, and lacks historical development conventional energy generators had experienced. Lack of data causes low reliability of turbines; nonetheless, being a young energy industry, wind power lacks maintenance and logistical support (74). In addition to previous gaps in information, the risk level was such that the investors willing to invest in wind energy are the ones that in 2007 have been affected by the credit crisis (DOE Annual, 14)


One proposal DOE exemplifies might solve quite some problems. There is a possibility of cooperation between the wind power and hydroelectric power plants. The two could be united into one group where when wind would generate electricity the hydropower plant could fill the reservoir and then when wind power is not generating enough electricity, the hydro power could fill in the gap (DOE 2007, 89). Such a project could help the investor make a more reliable estimate of daily electricity production, enabling him/her to make a clearer estimate of income for kWh supplied. Nonetheless, there is real possibility that the now the hydropower plant would not operate at its optimal level. Also, hydropower plants are very demanding and heavy fix cost power plants requiring much space and water resources.

1 Conventional refers to all non-renewable energy resources, primarily: Coal, Natural Gas, and Nuclear

2 “Green” refers to electricity generated from a renewable energy source.

3 Cut-in Speed is the minimum wind speed needed to turn a wind turbine and produce electricity. Cut-out Speed is the maximum wind speed that a turbine can handle. Turbines automatically stop spinning at winds speeds greater than the cut-out speed to prevent damage to the turbine.

4 NREL, see for further information.

5 Many companies use the jargon ‘AEO’ (annual energy output.)

6 A subset of a Weibull distribution with a shape factor of 2; See for methodology information.

7 Conventional refers to all non-renewable energy resources, primarily: Coal, Natural Gas, and Nuclear

8 “Green” refers to electricity generated from a renewable energy source.

9 United States Environmental Protection Agency, “Supplemental Environmental Projects,”, 2002

10 National Renewable Energy Laboratory, “Supplemental Environmental Projects Using Renewable Energy: A New Approach to Addressing Air Quality Violation Penalties, “, 2001

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