While the levellised cost of electricity from onshore wind power continues to fall, reaching grid parity with coal, gas and nuclear in some places, the same cannot be said of all wind farms everywhere.

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What is the real cost of renewable energy (part 4)


Gail Rajgor

Which energy technology really is the most economical, cost-effective solution for the long term? Gail Rajgor continues her foray into the real costs of renewable energy by looking at some case studies...

For part 1 of this series - is it possible to compare technologies on a truly like-for-like basis. And if so, what do we need to bear in mind?

For part 2 of this series - Renewable energy cost examples, LCOE and the importance of taking risk into account.

For part 3 of this series - Wind power.

Part 4 - Regional renewable energy cost variations

While the levellised cost of electricity from onshore wind power continues to fall, reaching grid parity with coal, gas and nuclear in some places, the same cannot be said of all wind farms everywhere.

As part one of this series on energy costs makes clear, there are different variables and metrics than can be considered when making cost calculations. So making comparisons with other technologies – or even between projects in the same country – is difficult, acknowledges Paul Schwabe of the National Renewable Energy Laboratory (NREL).

Schwabe is part of the International Energy Agency's (IEA) task force looking at wind energy costs and is working on developing a clearer levellised cost of energy (LCOE) model. This would be an internationally accepted, transparent method for calculating the cost of wind energy that can be used by the IEA and other organisations.

Importantly, it would, the IEA hopes, allow comparison of the cost of wind energy with those of other electricity generation technologies, making sure that the underlying assumptions used are compatible and transparent.

Schwabe says there are four basic parameters for making any cost calculation model: Capital cost, operating cost, finance parameters, and energy produced. These parameters are all project specific though and therefore there is, he says, “no single answer” or standardised method for calculating costs. Still, “with well-documented assumptions, data sources, and methodology, comparisons can be made”.

The work of the IEA's wind cost task force involves contributions from Denmark, Germany, Netherlands, Spain, Sweden, Switzerland, United States (which is acting as the Operating Agent) and the European Wind Energy Association (EWEA). The first stage of the task force's work – looking at wind levellised cost of energy by making a comparison of technical and financial input variables and producing a multi-national case study of the financial cost of wind energy based on 2008 figures – is now complete.

The IEA used a spreadsheet-based cash flow model developed by the Energy Research Centre of the Netherlands (ECN) to estimate LCOEs. However, it was customised to exclude country-specific wind energy incentives, resulting in unsubsidised LCOE estimates.

Country-specific onshore wind energy cost estimates, including investment costs, energy production, O&M and other variables, were then analysed. “The LCOE calculation was based on a predefined return on equity that was provided by each country representative along with other financial input parameters,” says Schwabe. The figures provided varied significantly and unsurprisingly the study therefore found that onshore wind LCOE's ranged from €61/MWh (US$85/MWh) in Denmark to €120/MWh (US$167/MWh) in Switzerland.

“The magnitude of the unsubsidised LCOE variation has been attributed to differences in country-specific energy production, investment cost, operations cost, and financing cost,” says the IEA in its final report, Multi-national Case Study of the Financial Cost of Wind Energy, on this first stage of the wind costs task. “As expected, the largest LCOE impact from country to country was the anticipated energy production component that could be due to the inherent wind regime, site selection, wind turbine design, or other factors.”

Market forces such as electricity market structuring or the perception of risk in a wind project investment also impacted the LCOE through large variations in both capital expenditures and financing costs. Costs attributed to the operations of a wind project ranged broadly across countries and had a “sizable LCOE impact” as well.

Cross comparisons - a UK case study

When it comes to energy generation, “there is a very large variation in costs between technologies, with almost an order of magnitude difference between least cost and most expensive options”, stresses a May 2011 report by Mott MacDonald's Costs of low-carbon generation technologies, produced for the UK Committee on Climate Change. This range largely reflects underlying costs, however “it is accentuated by the differentials in discount rates between perceived low and high risk technologies”, it says.

To conduct the analysis, Mott MacDonald drew upon the results of a parallel analysis by Oxera Consulting of the appropriate current and future discount rates for evaluating the levellised costs of low carbon technologies (Oxera’s analysis is published in the report, Discount rates for low carbon generation technologies).

It also developed a new modelling framework to handle the diversity of drivers and assumptions (including technology deployment scenarios). This resulted in a new technology capex model. The previous Mott MacDonald/DECC levellised cost model was then reformulated to draw upon the new capex results to provide estimates of opex costs and fully built-up levellised generation costs. Significantly, the resulting levellised costs for various technologies appears higher than some other studies suggest.

Least cost options

“The least cost options appear to be two biomass waste options, advanced AD [anaerobic digestion] sewage and pyrolysis of MSW/SRF [municipal solid waste/solid recovered fuels], which have levellised costs of £51/MWh and £73/MWh, respectively. Both assume no gate fee and full baseload operation,” says the Mott MacDonald report.

Other AD options require significant feedstock treatment/complicated handling and “so their costs range between £100/MWh (manure/slurry) and £170/MWh (energy crops)”. In all these cases gate fees for waste feedstocks are also assumed to be zero, but AD systems fed on energy crops include the biomass purchase cost.

The larger wood fired biomass schemes offer costs of around £100/MWh and £125/MWh for the 150 MW and 40 MW electricity-only fluidised bed combustion (FBC) plants, the report continues. Of the other bioenergy applications, the smaller wood-based technologies tend to have comparatively higher costs with small bubbling FBCs (BFBCs) and advanced gasification both at around £155/MWh. Mott MacDonald notes though that for most biomass technologies “there can be very considerable levellised cost reductions if they can be configured as combined heat and power schemes, although this does require a captive heat load.”

Meantime, run-or-river hydropower is also estimated to have one of the lowest levellised costs at £69/MWh. “This reflects its established design and its comparatively low risk, assuming planning and local community stakeholders endorse the scheme,” says the report.

“Of the more widely applicable options, onshore wind has the lowest costs at £83-£90/MWh.” Translating to €99.48-107.89/MWh or US$130.05-141.00/MWh, Mott MacDonald’s figures are significantly up on those from Bloomberg and the Lawrence Berkeley National Laboratory (LBNL), highlighting how the use of different metrics and assumptions can affect cost calculations significantly.

Mott MacDonald says its calculations are based on typical sites available in the UK today but “lower costs would have been achievable on the better sites already developed”. The range reported reflects turbine size rather than wind resource, it adds.

As with other studies, offshore wind comes out more expensive, estimated at £169/MWh by Mott MacDonald for an early Round 3 scheme, which is about double the onshore costs. “A significant amount of this premium is due to the higher discount rate applied, which in turn reflects lenders/developers’ risk premium,” says the report. “There are lower cost offshore developments underway but these projects started development at least two years ago.”

Mini hydropower and onshore wind are projected to remain low cost in all the scenarios, with costs in 2040 of about £44-50/MWh and £51-60/MWh, respectively, continues the report. “Unlike for offshore wind, there is little prospect of scale benefits, and moderate scope for technology improvement, other than through rationalisation of production techniques and supply chain upgrades.”

Offshore wind is projected to see significant cost reduction over the next decades as the technology is scaled up, despite the move further offshore and into deeper waters. Levellised costs will fall to £92-122/MWh in 2020, then further down to £60-96/MWh in 2040, says the report. “Moving to larger wind farms based on 10 MW machines in 2020, versus 5 MW currently, would allow significant savings in the WTG [wind turbine generator] itself as well as in the foundations and electrical connection,” it says.

“With a further scale-up projected for 2040 (to 20 MW) there would be more savings on all the items. This assumes that the offshore equipment, installation contractors and service markets are not subject to serious congestion, as has been the case in recent years. It also assumes that by 2040 either new material technologies will allow the larger structures to be built (assuming the industry sticks with horizontal axis) or else new vertical axis designs will be deployed.” It has also assumed a jacket structure for 2040, however “it is likely that some form of floating platform will offer a comparable or lower cost solution by that time.”

Nuclear (£96/MWh), wood combustion (based on CFBC - £103/MWh) and gas carbon capture and storage (CCS) (£100-105/MWh) all currently provide a lower levellised cost than offshore wind. “But all three would probably need a large first of a kind contingency added to provide comfort for bankers.” Coal-CCS is also estimated to provide a lower levellised cost than offshore wind at about £146/MWh, which is a substantial premium (£35-40/MWh) over gas-CCS. “Much of this premium reflects the currently elevated prices of coal equipment versus CCGTs [combined cycle gas turbines].”

The report acknowledges that the nuclear cost estimate must be considered “highly uncertain given the limited and troublesome track record of the two reactor models currently being considered for the UK and the lack of recent experience in the UK among contractors and regulators.” Still, it goes on to suggest the levellised costs for nuclear will fall to £39-65/MWh. “The low end of this cost looks bullish, however it is worth pointing out that a couple of OECD jurisdictions (South Korea and Sweden) are already achieving close to this,” says the report. “Of course, this would require that the UK’s whole regulatory, planning, licensing and industrial relations environment was as benign as any elsewhere.”

Similarly, the firm stresses that its estimates for CCS “must be considered highly uncertain, given no utility scale demonstration has yet been commissioned.” It also suggests there will be little decrease in CCS levellised costs, “largely as carbon price increases offset capex and performance improvements.”

So what of solar PV? Well according to Mott MacDonald’s analysis, “solar PV is quite clearly very expensive at £343-378/MWh”. This reflects the early stage of this technology and the low annual capacity factors (~10%) achievable in a UK setting. The same cannot, of course, be said of solar PV in other countries where some projects are, like wind, already achieving grid parity with their fossil fuel counterparts.

The report goes on to say that solar PV “sees huge reduction in costs but only gets close to offshore wind and nuclear by 2040, reaching £55-74/MWh for the lowest cost applications”. This, it says, is despite huge reduction in capex to under £400/kW in the most aggressive scenarios by 2040, and reflects the low fixed cost dilution due to the <10% ACF.

About the author: Gail Rajgor is a writer working across the energy & environment sector. She is the former publisher of Sustainable Energy Developments magazine.
 

 

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Comments

ANUMAKONDA JAGADEESH said

12 June 2012
Excellent analysis on Renewable Energy costs.
Dr.A.Jagadeesh Nellore(AP),India
E-mail: anumakonda.jagadeesh@gmail.com

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