Wind Power Costs in U.S. Are Six Times Higher Than Claimed
The following article was written by S. Michael Holly, the Chairman of Sorgo Fuels & Chemicals, Inc. Sorgo has developed technology for the production of ethanol, electricity and protein from sweet sorghum. Mike was formerly an alternative energy engineer and business analyst with the Minnesota Department of Energy and Economic Development. He holds masters degrees in chemical engineering and business administration from the University of Minnesota.
Many U.S. special interests are misrepresenting wind power costs, including the wind industry, environmental groups, utility monopolies, independent system operators, educational and research institutions, and even federal and state governments. On September 24, Bill Ritter, the current director of the Center for the New Energy Economy at Colorado State University and former Governor of Colorado, wrote in the Wall Street Journal that “Long-term contracts for wind energy are being signed by utilities in several states in the range of 3 cents per kWh over 20 years” (1). Xcel Energy, the nation’s leading wind-generating electric utility, declares “wind power is simply the cheapest resource” (2).
Before the overproduction of turbines led to recent dumping, developers were offering utilities (in the lowest-cost wind areas of the U.S.) bid prices of about four cents (3). But the price of electricity from windmills outside the U.S. has been about 10 cents (in the form of feed-in tariffs), with capital costs accounting for about 93 percent of total costs. The six cent difference in the U.S. can be explained by tax write-offs targeted to big companies and the rich that cover half to two-thirds of the capital costs of windmills, according to the wind developer web site Windustry (4). Michael Mendelsohn of the National Renewable Energy Laboratory explains that the federal production tax credit (PTC) and federal accelerated depreciation (MACRS) are worth about 30 percent and 20 to 25 percent of the capital costs of windmills, respectively.
The PTC is worth 2.2 cents after taxes or 3.7 cents before taxes at a 40 percent marginal tax rate (5). After compensating investors with a financing charge worth about 0.7 cents, the tax credit is worth about three cents to developers. A few years ago, wind developers were allowed to replace the PTC with an equivalent Investment Tax Credit (ITC) that directly reimbursed 30 percent of windmill costs over the first couple years. Many states also offer accelerated depreciation that mirrors MACRS. Since Bolinger found combined federal and state accelerated depreciation provided tax savings over six years comparable to the PTC for 10 years (6), accelerated depreciation can also be considered to be worth about three cents or 30 percent of windmill costs.
Even though wind power has been subsidized from 10 to three or four cents, electricity rates have been increasing significantly in regions with the highest wind penetration levels (five to 10 percent), due to extra transmission and integration costs (that have often not been accurately reported by utilities).
The Lawrence Berkeley National Laboratory has found capital costs for transmission lines are triple those of other generation sources due to the lower capacity factors of wind at about 30 percent compared to about 90 percent for base-load plants (7). Transmission costs are also driven higher by the need to locate windmills further from load centers. Typically, ratepayers must pay extra transmission costs of about two cents more for wind power (e.g., three cents compared to one cent or even less for base-load generation).
Moreover, states have misrepresented the extra indirect costs of integrating the intermittent output from wind into the grid. For example, the 2006 Minnesota Wind Integration Study, which has served as a basis for state policies mandating the addition of wind power to 25 percent of generation, claimed the costs of integration are only about 0.3 cents. But they made the false assumption that they would be the only state adding wind power into the entire market of the MISO, which is over 10 times as large as the Minnesota market, and thus actually determining the costs of integrating only 2 percent wind power.
At low levels of wind penetration, the variability can be regulated by reserve capacity already used for load fluctuations and allowance for failure of other generation. Wind can also be used to displace a few inefficient generators still on the system even if it is not an efficient long-term solution. The state’s new transmission and integration study for 40 percent wind and solar appears to be playing the same game.
Utility monopolies have violated state laws and rules by misrepresenting integration costs while petitioning regulators for their purchase of wind power. Their economic models can’t even calculate the costs of intermittent resources. Utilities should be using programs (like Promod) that can account for hourly variations of wind and report on hourly generation for each generator. Utilities are not reporting the mix of generation that is most economical for load following of wind (e.g. single cycle, combined cycle, etc.)
The Organization for Economic Co-operation and Development has estimated grid-level system costs are at least 1.6 and 1.9 cents for wind penetration levels of 10 and 30 percent respectively, compared to only 0.05 cents for natural gas generation (8). Grid-level system costs include the costs of various grid infrastructures, short-term balancing, intermittent electricity access, network congestion and instability. However, the study didn’t include plant-level costs imposed on base-load plants that are increasing with wind penetration levels, including idled capacity and even an inability to make debt payments.
A 2012 study by the National Energy Technology Laboratory (financed by the U.S. Department of Energy) reports utilities are also becoming aware that requiring base load power plants to ramp up and down and operate at sub-optimal levels (while following the load of the intermittent wind output) increases maintenance costs and reduces fuel efficiency (9). Another problem related to fuel efficiency has been wasted duplication of generation when base-load plants are unable to respond rapidly or drop output enough. An April 18 Reuters article reporting on the study claims that as wind is added “Relatively inefficient single cycle gas turbines are likely to be the only practical option for load-following on the grid” (10).
In the future, grid operators can be expected to reduce the excessive need for backup with single cycle gas turbines by curtailing the five to 10 percent of wind energy greater than 60 percent of peak output at a loss to ratepayers of about 0.5 cents to one cent (or 0.2 to 0.4 cents after tax write-offs). After curtailment, wind power can be expected to supply about half of base load generation (which is 80 percent of total generation). Since single cycle gas turbines also cost about 12 cents, wind backed by these peaking plants doubles total electricity costs compared to just using combined cycle turbines fueled by natural gas at about six cents for base load power (11). The extra six cents must be assigned to wind power as backup costs.
Even wind backed by peaking plants will have additional grid-level system costs. General Electric representatives explained the problem while trying to sell their single cycle system for balancing wind: “The variability of power generation from wind farms presents an operational challenge for power systems with significant penetration of wind generation….integration of wind generation into a power system will require the ability to dispatch, or control, power output…..technology for fast, flexible, economic, modular deployment has been lacking” (12).
Moreover, wind backed by peaking (that is at most 30 percent efficient when trying to back up wind) uses as much natural gas and emits as much carbon dioxide and other pollutants as just using combined cycle at 60 percent efficiency (without wind power).
The industry is grasping for alternatives like new combined cycle natural gas base-load plants designed for fast-ramping (13), but integration costs would be even higher, largely due to a tripling of capital costs compared to conventional combined cycle (14). The country is also trying to develop storage and so-called smart grid technologies but costs are also high. The response has been the building of expensive transmission lines for export from high- to low-wind areas, but the potential is limited.
The U.S. has hidden from the public the additional costs to taxpayers for tax write-offs on windmills of about six cents, and to ratepayers for extra transmission of about two cents and backup of at least six cents, which drive total costs for wind power from bid prices of 4 cents to total costs over 18 cents. Despite the high costs and low environmental benefits, the U.S. has been mandating, subsidizing and misrepresenting an incredible $30 billion of windmills per year to meet 45 percent of U.S. capacity additions (with natural gas second at 40 percent).
Meanwhile, the U.S. is allowing utility monopolies to use misrepresentation (that they can get wind power at only three or four cents) to reject the purchase of other lower-cost renewable energies. The International Energy Agency has noted the “well-established competitiveness of hydropower, geothermal and bioenergy” (15). At the April 9, 2013 Biomass Conference in Minneapolis, the President of the U.S. Biomass Power Association Bob Cleaves mused that biomass couldn’t use the “wind” tax write-offs very well. The US is blocking hydropower, geothermal and cogeneration fueled by captive biomass wastes that could actually solve economic and environmental problems by reducing greenhouse gases at a cost of only six to eight cents without mandates or much (if any) subsidies.