The business case for wind
Dr Gordon Edge, head of offshore at the British Wind Energy Association, sets out the arguments for wind power
The environmental case for wind power is clear: generating electricity from the wind displaces fossil fuels and thus reduces carbon dioxide and other emissions. But some are convinced that if not for this key advantage, wind power would never compete in an open market and can only impose continuing costs on electricity consumers and society at large. It is becoming clear, however, that wind power has features that allow a business case to be constructed for it – independent of its environmental credentials.
The first key feature is the capital-intensive nature of wind turbines. Normally this is seen as a disadvantage in liberalised power markets, where high fixed costs are regarded as risky. However, as part of a portfolio of generation options, wind can provide power companies with two services. Firstly, as the cost of wind power is substantially tied to the cost of capital, the price of wind generation is very stable. It can thus be a hedge against the effect of volatile fuel prices, particularly for gas.
As the UK imports increasing quantities of gas, the price for it will be higher and less stable than we have been used to. This should lead more companies to examine wind power as an alternative to signing expensive forward contracts for their gas supplies. The second service relates to interest rates. If a wind owner has a loan with interest rates tied to base rates; if rates fall, wind power becomes cheaper and vice versa. Rates will be cut if the economy is slow and needs a boost; but if a power company has wind in its mix, its costs will fall at the same time its customers are feeling the pinch.
When the economy is growing too fast and needs to be slowed, a rise in base rates will force up power costs when consumers are feeling richer. The cost of wind is thus in synch with the economic cycle, with no possibility of a price spike when it is least wanted. This further aids business planning for power utilities.
The other main benefit for power companies flows from the modular nature of wind generation. Wind farms can be developed in stages to suit the needs of utilities, whereas conventional power technologies come in large ‘chunks’ which must be swallowed whole, and may cause financial indigestion.
The time lag between capital expenditure and generation is short for wind power, improving cash flow. Also, if any single turbine breaks down, overall capacity is not significantly affected, so companies can be sure that if the wind blows they will have generation. Given the impact the unexpected outage of a large generating unit can have on company finances, this ought to be a material consideration.
At a macroeconomic level, reliance on an indigenous power source like wind can reduce imports and thus help the balance of payments, as well as being a counter-cyclic economic stimulus for the economy as a whole through the interest rate issue mentioned above. There are also wider economic benefits from the distribution of manufacturing operations so that they are close to where wind turbines are being demanded. Many regions of Spain have benefited from jobs and other economic development that have followed in the wake of wind power; as areas which are rich in wind are often otherwise poor, this has the effect of promoting fairer distribution of wealth around that country.
Because the UK is a latecomer to the burgeoning wind sector, much of the value that development of this resource could bring will be retained by companies from Denmark, Germany and Spain, which have been in the business for longer. Local manufacture will bring benefits to UK plc, however, and there are distinct opportunities in the offshore wind sector. This area is still very new, with only 600MW developed worldwide – with 120MW, the UK is the number two offshore generator. Given the UK’s track record in exploiting offshore energy resources plus its excellent offshore wind potential, this is an area where UK-based companies can do good business.
One argument that is often directed against wind power is that, because it is intermittent, it imposes high costs on power networks. While it is true that generation from the wind is dependent on an uncontrollable resource, the implications of this are often exaggerated by critics of wind.
Firstly, wind is not totally unpredictable – advances in weather forecasting mean that it is possible to predict to within 80-90% accuracy what power will be generated 24 hours ahead, which is the timescale required to plan the ramp-up of thermal generation to act as spinning reserve. It is also little realised that in the UK, peak wind production correlates well with peak power demands. While experience of this is limited, given time network controllers will have more confidence in the likely contribution that wind can make when demands are at their highest.
Secondly, the intermittency of wind is currently very small compared to the variation in demand and also the amount of reserve that has to be kept to cope with sudden outages of large generators. For both these reasons, a large amount of hot spinning reserve has to be available, and this can cope very well with the varying amount of power that wind generators send to the grid. What is less obvious is that even if you increase the amount of intermittent generation up to 10% of a system’s capacity, the existing system will still absorb most of the variation. Only a small amount of capacity – in the order of 500MW – needs to be added as reserve to cope with this penetration of wind power, of the order of 10,000MW. This will add only about 0.2p/kWh to the cost of wind power.
Costs start to mount after this, but they are not crippling, and wind does not threaten system stability: in Denmark and across northern Germany wind already provides 20% of generation, but has not resulted in massive cost implications for the network operators. Under present trends, the UK may achieve 10% of its electricity from wind by early next decade; to reach 20% would take until sometime in the 2020s. In this time, other renewable technologies will become viable and take their place alongside wind power. Some, like biomass, would be fully controllable, and could provide some of the backup that intermittent sources like wind provide.
Others, like wave power, while also intermittent, would generate at different times to wind and therefore renewables’ contribution as a whole would be smoothed. The amount of time required to build up wind’s contribution should also allow for the development of electricity storage technologies – though governments and companies need to put more research funds into this area if the products are to reach the market in enough time.
The other major expense that wind will incur is in the development of the grid infrastructure required to take the power from where it is generated to where it is used. Most windy places are sparsely populated, precisely because they are windy, and therefore large amounts of wind generation are unlikely to be used locally.
If wind is to play a significant part in the UK generation mix, there will have to be major investment in the network to transport power, particularly from northern Scotland and the three strategic areas for offshore wind development in the northern Irish Sea, the Thames Estuary and the Wash. This is a big strategic move which will bring benefits in terms of security of energy supply for the UK and justifies spreading the required investment across all users of the system, just as the original high-voltage transmission grid, which primarily transports coal-fired power from the north of England to the south and nuclear-generated electricity from remote locations to population centres, was built as a strategic resource under a nationalised system. As the grid is aging and requires replacement in any case, it is sensible to design in capacity to benefit the UK’s strategically important renewable energy resources.
Cheaper than nuclear
Due to the track record of large-scale wind power around the world for the past 20 years, it is close to direct competitiveness with conventional generation – onshore wind is already cheaper than new coal or nuclear, and if gas prices continue to rise it will overtake new gas capacity as well.
As the wind industry continues to expand and learn more about extracting energy from the wind, the cost will drop further – the cost of power from new turbines has been falling at a rate of about 3% per year. With the costs of intermittency and the grid clear, quantifiable and manageable – unlike the cost of global warming – the business case for wind power is strong.
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