Energy source blowing in the wind

Mining Chronicle
June, 2007 Page: 114
By Dr Rovel Shackleford, Optec Pty Ltd

Wind energy in many jurisdictions receives some financial or other support to encourage its development. A key issue is the comparison to other forms of energy production, and their total cost. Two main points of discussion arise: direct subsidies and externalities for various sources of electricity, including wind. Wind energy benefits from subsidies of various kinds in many jurisdictions, either to increase its attractiveness, or to compensate for subsidies received by other forms of production or which have significant negative externalities.

Most forms of energy production create some form of negative externality: costs that are not paid by the producer or consumer of the goods. For electric production, the most significant externality is pollution, which imposes costs on society in the form of increased health expenses, reduced agricultural productivity, and other problems. Other significant externalities can include national security expenditures to ensure access to fossil fuels, remediation of polluted sites, destruction of wild habitat, loss of scenery/tourism, and so on.

Wind energy supporters argue that, once external costs and subsidies to other forms of electrical production are accounted for, wind energy is among the most cost-effective forms of electrical production. Critics may debate the level of subsidies required or existing, the "cost" of pollution externalities, and the uncertain financial returns to wind projects that is, the all-in cost of wind energy compared to other technologies.

Conventional and nuclear power plants receive substantial direct and indirect governmental subsidies. If a comparison is made on total production costs (including subsidies), wind energy may be competitive compared to many other sources. If the full costs (environmental, health, and so on) are taken into account, wind energy would be competitive in many more cases.

Furthermore, wind energy costs have generally decreased due to technology development and scale enlargement. However, the cost of other capital intensive generation technologies, such as nuclear and fossil fuelled plants, is also subject to cost reductions due to economies of scale and technological improvements. To compete with traditional sources of energy, wind energy often receives financial incentives. In the US, wind energy receives a tax credit for each kilowatt-hour produced; at 1.9 cents per kilowatt-hour in 2006, the credit has a yearly inflationary adjustment. Another tax benefit is accelerated depreciation.

Many American states also provide incentives, such as exemption from property tax, mandated purchases, and additional markets for "green credits." Countries such as Canada and Germany also provide other incentives for wind turbine construction, such as tax credits or minimum purchase prices for wind generation, with assured grid access (sometimes referred to as feed-in tariffs). These feed-in tariffs are typically set well above average electricity prices. Many potential sites for wind farms are far from demand centres, requiring substantially more money to construct new transmission lines and substations.

Since the primary cost of producing wind energy is construction and there are no fuel costs, the average cost of wind energy per unit of production is dependent on a few key assumptions, such as the cost of capital and years of assumed service. The marginal cost of wind energy once a plant is constructed is close to zero. The cost of wind energy production has fallen rapidly since the early 1980s, primarily due to technological improvements, although the cost of construction materials (particularly metals) and the increased demand for turbine components caused price increases in 2005-06.

Many expect further reductions in the cost of wind energy through improved technology, better forecasting, and increased scale. Since the cost of capital plays a large part in projected cost, risk (as perceived by investors) will affect projected costs per unit of electricity. Apart from regulatory issues and externalities, decisions to invest in wind energy will also depend on the cost of alternative sources of energy. Natural gas, oil and coal prices, the main production technologies with significant fuel costs, will therefore also be a determinant in the choice of the level of wind energy.

The commercial viability of wind energy also depends on the pricing regime for power producers. Electricity prices are highly regulated worldwide, and in many locations may not reflect the full cost of production, let alone indirect subsidies or negative externalities. Certain jurisdictions or customers may enter into long-term pricing contracts for wind to reduce the risk of future pricing changes, thereby ensuring more stable returns for projects at the development stage.