Module 5 Wind Economics

Overview

• Levelized Costs for New Generation

Sources
• Capital Costs for Installed Projects
• Wind Turbine Component Costs
• Global Trends in Turbine Costs
• Operation and Maintenance Costs
• Estimating Annual Energy
Production
• Calculating Unit Costs of Power
Production
 Levelized Cost of Electricity (LCOE)
LCOE is used to estimate the cost of the electricity that is produced over the life of a generating plant.

• LCOE = the average revenue per unit of electricity generated that would be required to recover
the costs of building and operating a generating plant.

• Key inputs include:

• Capital costs
• Fuel costs
• Fixed and variable operations and maintenance (O&M) costs
• Financing costs
• Anticipated utilization rate for each plant type

• For technologies with no fuel costs and relatively small variable O&M costs, such as solar and
wind electric generating technologies, LCOE changes nearly in proportion to the estimated
capital cost of the technology.
Levelized Cost of Electricity for Generation Resources (2023 in $/MWh)
Wind versus CCGT—Global Markets

Source: Lazard 2020.

Source: Lazard 2020.
 Wind and Solar LCOE: CER ER2020, Evolving scenario to 2050

*The Evolving Scenario considers the impact of continuing the historical trend of increasing global action on climate change
throughout the projection period.
Source: Canada Energy Regulator Energy Futures: Canada's Energy Future 2020 Classification: Pr
 Wind and Solar Capital Costs : Evolving scenario to 2050

Capital Costs for

Installed Projects

• Capital Costs include:

• Materials
• Equipment
• Labor
• Development costs
• Capital costs are, by
far, the most
expensive part of
building and running
solar and wind
projects
*The Evolving Scenario considers the impact of continuing the historical trend of increasing
global action on climate change throughout the projection period.
Source: Canada Energy Regulator: Canada's Energy Future 2020
 Wind and Solar LCOE to 2050, Evolving Scenario
80

70

60

50

40

30

20

10

Wind (Average) Solar (Average)

Wind and solar Capital Cost to 2050, CER ER2020

1600

1400

1200

1000

800

600

400

200

0
2015 2020 2025 2030 2035 2040 2045 2050 2055

Wind (Average)) Solar (Average))

 Global Trends in Turbine Costs

The costs in the figure represent the total capital

costs of a wind power plant assigned to four main
categories:
• Wind turbine cost (rotor blades, gearbox,
generator, power converter, nacelle, tower and
transformer)
• Civil works (construction works for site
preparation and foundations for tower)
• Grid connection costs (transformers,
substations and connection to the local
distribution or transmission network)
• Planning and project costs (development cost
and fees, licenses, financial closing costs,
feasibility and development studies, legal fees,
owners’ insurance, debt service reserve and
construction management) (IRENA, 2016a)

Source:based on IRENA, 2019c and future projections based on IRENA’s forthcoming report: Solar and wind cost reduction potential to 2030 in the G20 countries (IRENA, n.d.).
 Component % Share of Total Cost
Wind Farm Capital Costs Turbine (Tower, Nacelle, Rotors) 68 - 84
Grid Connection 2 - 10
Foundation (Concrete pour, mounting, 1-9
guy wires)
Electric Installation 1-9
Land Acquisition or Lease 1-5
Financial Costs 1-5
Road Construction 1-5
Source: European Wind Energy Association. Economics of Wind Energy, 2009
Classification: Protected A External Consulting 1
 Wind Operation and
Maintenance Costs

• Typically constitute 10-15 % of the LCOE in the first few years of operation.
• Typically constitute 20-35 % of the LCOE in the last few years of operation.
• O&M costs are related to a limited number of cost components, including:
• Insurance
• Regular maintenance
• Repair
• Spare parts
• Administration
• Blade erosion and repair remain a huge concern for offshore wind, causing
an estimated 5,000 days cumulative downtime globally and resulting in more
than $80 million (CAD) of direct repair costs and lost revenue.

Source: Wood Mackenzie. Offshore Wind Operations and Maintenance Trends (2019)
This Photo by Unknown Author is licensed under CC BY-S
 Why is the Levelized Cost of
Energy (LCOE) Important?
• The LCOE will determine if a project will break even or be profitable. If not,
then the firm will not go ahead with building the power-generating asset
and will look for an alternative. Using the LCOE to assess a project is one of
the first fundamental steps taken in analyzing projects of this nature.

• The LCOE is also an important calculation to allow financial analysts to

compare different energy-producing technologies, and assess life spans,
differing capital costs, size of the projects, and the differing risk associated
with each project.

• This is because the LCOE reflects a per-unit cost of electricity generated,

and the risk of each project is an implication of the specific discount rate
used for each power-generating asset.

Classification: Protected A
 How to Calculate the
LCOE?
The LCOE can be calculated by first taking the net present value of the total cost of
building and operating the power generating asset. This number is then divided by the
total electricity generation over its lifetime.
Total Costs include:
• The initial cost of investment (I)
• Maintenance and operations expenditures (M)
• Fuel expenditures (F) (not applicable for renewables)

Total output of the power-generating asset will include:

• The sum of all electricity generated (E)
• The last two important factors to be considered in the equation are:
• The discount rate of the project (r)
• The life of the system (n)
* Please note: The turbine’s power production is the single most important factor for the
cost per unit of power generated. The profitability of a turbine depends largely on whether
it is sited at a good wind location

Classification: Protected A
Renewable Project Financing
• They are either financed from companies
balance sheet or through traditional financing
routes
• Off-take agreements via Power Purchase Agreements
(PPA)
• Virtual Power Purchase Agreements (VPPA)

• Banks, private and public investors

• Public/Government Support Agreements or Contracts

• Provincial procurements such as RESA in Alberta
• Federal procurement such as Public Services and
Procurement Canada

• Merchant financing
Off-take Agreements: PPA and VPPA
 Typical AB Merit Order Curve: Pool Price determination

Classification: Protected A