WindPower Profitability and Break Even Point Calculations

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I have become increasingly tired of finding comments and discussion around the web, where random people make even more random claims concerning the numbers/money aspects of WindPower Generation. Due to this annoyance, I have researched and provided links for every piece of data you will find in this article. All data provided is backed up by a national/government resource and can be substantiated.

According to EIA (Electricity Information Administration) the average wholesale cost of electricity for 2007 was 5.72 cents per kilowatt hour (2007 is their most recent data). However, according to PacifiCorp annual reports (a Mid-American Subsidiary) the average revenue per kilowatt hour is 7.2 cents, this is the information necessary for calculation not the wholesale value. This statistic however is not constant. It varies by region, state, regulated vs non-regulated, and a number of other things. Some areas of the country have an average cost as high as 25 cents per kilowatt hour. However, for this calculation I will only use 7.2 because first off, this is in a regulated (conservative side of the numbers) area of the country. Secondly because I know these numbers to be factual, not estimated (look up PacifiCorp’s Annual reports for verification).

Calculations

This all being said, let’s get into the calculations.

According to NREL (National Renewable Energy Labratories) the formula for calculating profitability of a
wind turbine/farm is as follows:

Where:

FCR is equal to fixed charge rate

ICC is equal to initial capital cost (cost of turbines, installation, balance of station)

LRC is equal to levelized replacement cost (yearly sinking fund for overhauls and replacements)

O&M is equal to operations and maintenance cost (annual turbine maintenance)

LLC is equal to land lease cost

AEP is equal to net annual energy production in kWh.

This formula will return a net profit, not revenue, not expenses, but total net profit

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FCR So, lets assume we are a utility company who is building a 1 MW wind powered plant rather than building another coal powered plant. Since we are a utility company we expect our revenue per kilowatt hour (kWh) to be 7.2 cents as per above (not the wholesale price).

ICC Initial cost of capital is the total cost of the entire installation which according to AWEA (American Wind Energy Association) is $1.3 million dollars per MW or 1000 kW.

AEP From here we get our annual energy production (multiply 1000 kW by the number of hours the energy is produced (9.3 hrs/day * 365 days/yr)3,394,500 kWh’s. This is our estimted annual kwh’s produced or AEP. (9.3 hours per day stat found here)

LRC Next is the Replacement cost, well that is simple enough, if your turbine has a life of 20 years and a cost of $1.3 million. Divide $1,300,000 by 20 years to get your annual levelized replacement cost of $65,000 LRC.

O & M Operations and Maintenance cost simply run 8% of annual gross revenue (AEP * average revenue/kWh) $244,404 * 8% = $19,552

LLC Land lease cost of course is a variable as well but according to our AWEA statistics they run 5% of annual revenue = 12,220

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Results

Now that we have actual numbers, not variables, lets calculate

= $0.05608 or 5.6 cents per kilowatt hour.

The next step we should take is to multiply this cost/kwh X total kWh’s produced or AEP

=.05608 * 3,394,500
= $190,363.56

This is the your total annual expenses. From here subtract expenses from Gross Income of (.072 * 3,394,500) 244,404

This is your annual profit.

Now that we know how much we make each year, we need to plug that into a formula to find our ROI (Return on Investment)

If your turbine cost $1.3 million and you are getting a return of $54,041 that gives you an ROI = .04157 or 4.15 %. This is a fairly low number for ROI. Generally companies will require an ROI of 8% or higher if they are to invest in an idea/product.

Another very important figure is the Break Even Point or how long until your investment is paid for.

To figure this, we need the annual profits found above of $54,041 and the total cost found above of $1.3 million.

Therefore, the Break Even Point in our example is 24.05 years. As you can see here, when you have a product life of 20 years, your product will have paid for itself after 24.05 years.

Summary

What do we learn from this? Well at the current costs of turbines, turbine installation, and maintainance, along with the current price of 7.2 cents per kWh, WindPower is not the best financial decision a power company could make. This explains the exuberant amounts of federal grants and stimulus money being pumped into the renewables market. This being said, I still believe that WindPower is the future of energy production around the world, it just takes some time to integrate new ideas into the market place and for prices to become competitive. It is very rare to find a new product/technology that competes economically with an existing product/technology. If we do not start building and expanding now, when it becomes necessary to do so, we will not have the resources and/or infrastructure to make the necessary changes.