The author
The low cost of natural gas gets frequent mention in reports and releases because the fuel brings a new low price to the production of electricity. Bloomberg Energy (Bloomberg.com/energy/) tracks the cost for fuels, and on May 2, posted a price of about $2.28/million Btus. What are the implications of this cheap competitive fuel for the wind industry? Let’s look.
Start with an online unit converter says there are 3,412 Btus/kWh. Hence:
$2.28/ million Btus x 3,412 Btus/kWh = $0.00777/kWh. That’s about 8/10 of one cent for a kWh with 100% burn efficiency. Assuming a utility could burn such gas to produce electric power with about 30% efficiency, then:
$0.00777/kWh x 10/3 = $0.0259/kWh, about 2.6 ¢/kWh. This is about the cost to the utility and thus why natural gas looks so good to the electric industry.
Let’s go further. At a recent conference, a gentleman who negotiates power-purchase agreements revealed that utilities contract to buy power from wind farms at 2 to 4 ¢/kWh. A recent electric bill reports a residential rate of 6.39 ¢/kWh. (We’re ignoring transmission costs of about 6 ¢/kWh, which are unaffected by fuel costs). The difference (between 6.39 and 2 to 4 ¢/kWh) is profit to the utility that goes to maintain and upgrade their assets, and pay employees.
To be profitable without the PTC (a tax credit of 2.2¢ /kWh) a wind farm has to produce and sell power at about the 2.6¢ rate. The higher the rate, the better.
To further highlight the cost challenge, let’s go another step. Suppose a 1-MW turbine has a capacity factor of 30%. In one year, its production P will be:
P = 0.30 x 1,000 kW x 365 days x 24 hours/day
= 2,628,000 kWh
At 2.6 ¢/ kWh this turbine earns:
E = 2,628,000 kWh/yr x $0.026/kWh
= $68,328/yr
Now, if the turbine costs $2 million, the payback period, Tp , would be
Tp = $2,000,000 / 68,328/yr
= 29 years.
Ouch.
The PTC would effectively make the selling price of wind generated power at (2.6+2.2¢) = 4.8 ¢/kWh. Repeating the last two calculations would give an annual production of $126,144/year and a payback of more reasonable yet long 16 years.
The good news, one might say, is that just a couple weeks ago, natural gas was $2/million Btus. So its price trend is up, but admittedly, two points do not make a trend line.
Still, the numbers are not encouraging if natural gas prices say low. However, other approaches to the problem include negotiating with the OEMs for a lower-cost turbine, or installing a larger unit for the same cost, or building a taller tower to raise the capacity factor. In any case, it is clear that something has to give if the PTC is not renewed.
The 29-year payback makes wind a poor business venture. The best tactic may be to cut turbine and installation costs further, and boost production by proving and adapting new technology in the pipeline as fast as reasonably possible. Turbine OEMs say great progress has been made along these lines in just the last 18 months, so the next 18 months may be as fruitful. Watch the news section in Windpower Engineering & Development for reports on those new ideas.
To encourage OEMs, what would you suggest to trim the cost of wind power?
–Paul Dvorak
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