Wind Power & Avoided Energy Costs

By Paul Homewood  

 

 

 

I looked at the real cost of wind power last week. The exercise was based on the latest energy outlook, published by the US Energy Information Administration. 

The outlook included an analysis of the levelized cost of electricity for new build units. Although the EIA analysis, as well as the Bloomberg report released a couple of weeks ago, showed that onshore wind was now becoming competitive with coal and gas, I showed that when the cost of providing new back up capacity was allowed for, wind was actually much more  expensive.

As both the EIA and Bloomberg specifically compared the relative costs of new build wind, CCGT etc, my analysis stuck to the same approach. 

 

In a comment, Tobi K noted:

The calculations above make the assumption that for every MW of wind power installed you need a MW of *additional* dispatchable (controllable, e.g. gas) capacity.
This is absolutely not the case. Even if we assume that wind provides no “firm capacity”, i.e. it can suddenly drop to zero, that would merely mean that you still need to keep all your existing coal/gas power stations on standby and then ramp them up whenever wind output goes down.

Of course he is exactly right. We do have existing capacity (if rapidly disappearing!), and therefore there is no need to spend money building more.

However, under this logic there is no need to waste money building wind farms for which there is no need.

Let me use an analogy.

If you owned a car that was perfectly reliable, would you buy another one, which you could only use two days a week, simply because it did not need filling up with petrol?

You would, of course, still need the old car for the other five days a week. The only justification would be if the saving on petrol for two days a week was enough to cover the cost of buying the new vehicle and other associated costs.

 

Indeed, the US EIA recommend that we look at electricity costs in precisely this way, as Wiki state:

 

The US Energy Information Administration has recommended that levelized costs of non-dispatchable sources such as wind or solar may be better compared to the avoided energy cost rather than to the LCOE of dispatchable sources such as fossil fuels or geothermal. This is because introduction of fluctuating power sources may or may not avoid capital and maintenance costs of backup dispatchable sources. Levelized Avoided Cost of Energy (LACE) is the avoided costs from other sources divided by the annual yearly output of the non-dispatchable source. However, the avoided cost is much harder to calculate accurately.

 

The cost calculation is indeed a complex affair, when the whole electricity mix is looked at. However, it is a very simple calculation, in theory, when just looking at one energy source, say onshore wind.

 

 

We start with the levelized costs, produced by the EIA:

 

 

http://www.eia.gov/forecasts/aeo/electricity_generation.cfm

 

 

In my earlier post, I worked out the total cost of onshore wind, based on a capacity factor of 26%, which is all that is being achieved in the UK according to DECC.

 

Onshore Wind	$
1 MW @26% = 2277 MWh/yr
Capital+Fixed Costs/yr	222328
Capital+Fixed Costs/MWh	97.64
Variable Costs/MWh	–
Total Cost/MWh	97.64

 

 

For every MWh produced by onshore wind, there is an avoided cost of not having to generate by another source. For this scenario, let us assume it is gas fired generation which is avoided. (If we compare to coal or nuclear, the avoided costs are much lower still).

The saving from this will be the variable cost of $57.80/MWh. (This does not take account of the likelihood of extra costs incurred from switching the gas turbines on and off).

In other words, we have to pay $97.64/MWh for wind output, but only save $57.80. Clearly, in any sane world, this would be regarded as a no brainer.