As businesses take up the challenge of operating in a carbon-constrained world, wind turbines will become an increasingly common feature of the industrial landscape. Wind turbines on industrial sites are marking the progress of the carbon revolution.
Wind turbines – even large ones – can be used for on-site generation if there is room to site them (Nordex)
While commonplace in continental Europe, the use of industrial areas for wind power generation has been slow to catch on in the UK. However this is now one of the fastest growing areas of the wind industry. Wind turbines up to 120 metres high are popping up on factory sites, office parks and distribution depots.
Early movers to on-site wind generation in the UK include Ford, Michelin, Nissan and supermarket chain Sainsbury’s. Supermarket and retail giant Asda Wal-Mart has also become active and has submitted planning applications for wind turbines on two of its distribution depots. With energy and carbon now both regularly on the boardroom agenda, others will follow.
THE BUSINESS CASE FOR ON-SITE WIND GENERATION
Businesses are getting up to speed on wind power economics and the physical and commercial options for integrating wind power into their sites. There are three pillars to the business case for on-site wind:
- project returns
- electricity price hedge/cost reduction
- carbon savings.
The economics of an on-site wind project depend on revenue generated (wind speed x turbine size x the value of the output produced) and capital and operational costs.
CAPEX and COPEX
‘Hard’ operational costs (COPEX) such as service and maintenance and insurance are minimal, and account for only about a third of the ‘cost of generation’ – the rest being finance costs. Capital costs (CAPEX) depend largely on the wind turbine price and the cost of the electrical connection.
However, project-specific construction issues can also have a significant impact. Turbine prices have increased by over 20% in the last two years due to global demand outstripping supply chain capacity as well as increases in steel and copper prices. Fortunately they now seem to be stabilizing.
Electrical connection costs are very site-specific, ranging from tens to hundreds of thousands of pounds per project. If technically feasible, connecting a turbine into a site’s existing electrical infrastructure is often cheaper than negotiating a new dedicated export connection.
For ‘back of an envelope’ economics, a starting point project capital cost would be around £1 million (E1.45 million) per megawatt capacity. However, wind project capital costs vary significantly according to site-specific issues and turbine supply terms. So expert advice should be sought early on.
Wind speed and turbine size
Wind regime is the key factor in project economics. The power available from the wind increases with the cube of wind speed, so small wind regime variations can have a large impact on production. Average wind speed figures can be misleading if skewed by short periods of very high wind speeds. Local topography and surrounding trees and buildings can also have a significant impact on a wind regime and can be a particular issue for on-site wind.
Computer-generated image of a proposed small turbine array near City Hall in London (Quiet Revolution)
On-site anemometry is useful, but it has time and cost implications and is not always needed. Wind projects in the UK have been built without anemometry on the basis of local meteorology station data and the national wind speed database. The key is to know what wind speed sensitivity tolerances are needed. Most of the UK has a commercially viable wind resource with the exception of locally sheltered areas.
The amount of energy a turbine can capture from the wind depends fundamentally on the swept area of the blades. Therefore, the bigger the turbine the more electricity it can generate. Modern 2-3 MW machines have rotor diameters of 80-90 metres. These are big bits of kit – the size of a jumbo jet on a stick. But they can b, and are, used for on-site generation.
A number of constraints limit where a turbine of this size can be located. Physical space is the first – the ‘shadow’ of the blades must fit within the site boundary or a ‘way leave’ would have to be negotiated. Proximity to housing is the main show-stopper with many on-site projects, but is less of an issue if background noise is high (from site operations or a main road).
Other constraints include radar and aviation, ecology, cultural heritage and telecoms links crossing the site. As part of the planning process, a range of statutory authorities must be consulted. Objections will be received; the key is to understand the basis and validity of these objections and, therefore, which are potential show-stoppers and which can be resolved.
In most countries where wind turbines have been built, there is some kind of revenue support for renewable energy generation. In the UK the value of the electricity generated from a wind turbine consists of:
- ROC (Renewables Obligation Certificate)
- LEC (Climate Change Levy Exemption Certificate).
The electricity can be used on-site (if an embedded connection is viable) or exported to the grid and ‘bought back’ by the site or throughout the company.
If the electricity can be used on-site, then the value is the avoided cost of purchasing power under the site’s normal arrangements. This can significantly improve the economics of a project compared to exporting the power to the grid (in which case distribution charges will have to be paid if the power is to be ‘bought back’).
The ROC can be sold separately from the electricity. The ROC price consists of two elements – the buy-out price and the recycle value.
ROCs have an end value to UK electricity suppliers who need them to demonstrate their compliance with the UK Renewables Obligation targets. The buy-out price is the value of the fine that suppliers must pay if they cannot generate or purchase sufficient ROCs to meet their obligation. Therefore a ROC will always have the value of the buy-out price so long as the supply of ROCs in the market is shorter than the Renewables Obligation target. The target increases year on year and will ensure that the ROC market will remain short until at least 2020.
Buy-out penalty payments go into a fund which is re-distributed amongst suppliers in accordance to the number of ROCs they present each year. Therefore suppliers will pay more than the buy-out price in anticipation of these payments.
Currently, high prices are being paid for ROCs because of the shortfall on the target. A range of buyers will take ROCs from traders to the suppliers themselves. ROCs can be sold under long-term contracts to secure revenue certainty, or on the open market to gain the highest price.
As wind-generated electricity is exempt from the CCL (Climate Change Levy), an internal transfer can be made to the project to reflect this value. Alternatively, if exporting to the grid, the LECs can be sold into the turbine’s power purchase agreement or even traded separately. LECs qualify the ‘greenness’ of the electricity so, once separated from the electricity, the electricity becomes ‘brown’.
The liberalized nature of the UK electricity market allows many commercial strategies to be adopted to fit the turbine into a company’s electricity contracting arrangements and meet risk reward requirements.
Project returns obviously vary according to a number of dynamics including wind speed, project CAPEX and power purchase/consumption strategy. However, on-site wind projects can be highly attractive investments, generating returns that can meet or even beat corporate hurdle rate requirements.
Wind turbines have a life of 20 years plus. A single 2-3 MW turbine on a reasonably windy site in the UK might generate IRRs of around 12% or a pay-back of seven years. Using the power on-site (and avoiding distribution charges) could significantly improve that. Project finance can also be used to lever returns on investment. Either or both of the above could reduce paybacks to five years.
ELECTRICITY PRICE HEDGE/COST REDUCTION
Wind ‘cost of generation’ = ‘hard’ operating costs + finance costs (which are fixed) ÷ MWh generated (which is dependent on wind speed). The ‘hard’ operational costs are typically less than £20 (E29) per MWh and are known for the lifetime of the project. Finance costs clearly depend on where the money is coming from and how it is accounted for, but will drop to zero once the equity and any debt in the project has been paid off.
Moreover, if the revenue earned from ROCs is subtracted from the ‘gross’ cost of generation, the resulting ‘net’ cost of generation is very low or even negative.
To put it in simple terms, on-site wind power can deliver electricity at a known and competitive cost for 20 years.
Carbon is an increasingly important risk for businesses to manage – both in terms of direct costs such as carbon taxation and regulation, and in terms of less tangible factors such as shareholder, customer and employee perceptions.
As yet there is no universally adopted methodology to account for the carbon benefit of an on-site wind turbine. There are a number of ways of looking at the carbon offset value of electricity that would otherwise have been consumed:
- the carbon emissions per MWh of the national average electricity supply mix
- the carbon emissions per MWh specific to the site or company’s electricity supplier
- some other company – or industry-specific carbon accounting principle.
In all cases the carbon benefit of the wind turbine is proportional to the amount of electricity it generates. As already stated, the turbine will ‘pay back’ the carbon equivalent to the carbon emitted in building it in six to nine months. Thereafter, wind power is zero carbon.
Using an emissions offset value accepted for wind generation in the UK by the Advertising Standards Agency, a 3 MW turbine on a reasonably windy site will save around 6000 tonnes/CO2 equivalent per year.
PHYSICAL AND COMMERCIAL OPTIONS FOR INTEGRATING WIND POWER INTO A SITE
There are two basic physical options for connecting a turbine:
- 1. The turbine is ‘embedded’ within a site’s electrical infra structure. Electricity generated may be used on-site or exported to the grid through the site’s connection if an export capacity charge is paid.
- 2. The turbine is located on-site but has its own dedicated export connection. In this case the electricity can be export ed to the grid but distribution charges must be paid if it is to be ‘bought back’.
Under both scenarios, ROCs can be earned on the electricity generated. A grid connection agreement will clearly have to be negotiated for option 2 but option 1 may still have implications on a site’s existing grid connection agreement and the grid operator must be consulted. To assist in negotiations with the grid operator, expert technical knowledge of both the turbine and the distribution system is a great advantage.
There are two basic commercial routes for developing an on-site wind project. The starting point for both is to have a good understanding of the economics, development risk and development process of installing a wind turbine(s) on your site.
Once you have this, you can make an informed decision over whether your company wishes to assign development rights to a wind developer or to invest money in the project and take development risk. Most of the ‘early movers’ in the UK such as Ford, Sainsbury’s and Michelin have taken the first route.
Wind turbine for the Ford Motor Company in Dagenham, London (Ecotricity)
However, as the business case for on-site wind is becoming increasingly established, more companies (including Nissan and Asda Wal-Mart) are seeing the benefit of investing in and owning their own wind projects. Both options are explored below.
Assign development rights
Under this option you will assign development rights to a wind project on your land to a wind developer. The developer will fund the project and take the development risk, and you will receive a land lease (probably based on a small percentage of project revenue) and/or a power purchase agreement for the electricity generated by the turbine.
The advantage of is that you do not have to commit any capital to the project and that you may be able to negotiate a deal to purchase the green power generated under a long-term arrangement. The risk is that you are locked into a long-term lease and power purchase arrangement with a third party on your land. The downside is that the majority of the economic benefit of the project is captured by the developer.
Take development risk
With a good understanding of the business case and development processes and risks, a good case can be made for taking development risk and ownership in your own project.
For companies that already have on-site power generation, this may be a much easier decision to take than those that do not. Much of the business case will already be understood. The challenge is to get to grips with the technology and development issues specific to wind power.
The investment required and risk taken must be broken into the various stages of project development. The key risk is in obtaining planning permission and a grid connection agreement for the site. From the point of commencing pre-planning works this is an 8-12 month process and costs are typically up to £50,000 (E87,000) per megawatt installed. Risk can be reduced by designing the development process to identify any potentially show-stoppers as soon as possible to minimize investment lost.
Once planning permission and a grid connection have been obtained, the project has a value of significantly more than the money invested. Indeed, at this point you could sell the project to a developer to construct and operate (as above) and make a ‘developer profit’ on exit.
The subsequent procurement phase for the turbine supply contract, the civil and electrical works contracts and all the other contracts required for project operations can take a further six months or more, and can also incur significant spend on legal fees.
Prior to construction, you need to decide whether you wish to finance and own 100% of the project, introduce a joint venture partner to share the costs and benefit, or bring in external project finance to reduce capital investment and lever returns.
A wind turbine foundation under construction (Cornwall Light and Power)
The key thing to understand is that retaining a full or controlling share in a project does not necessarily require £1 million/megawatt of capital investment, and that there a number of ways of maximizing the efficiency of capital deployed.
The advantage of this option is that you maintain control of the project and capture the significant potential economic benefit. The key risks are in planning, electrical connection and turbine procurement. These must be managed and expert advice is essential. The downside is that your company must invest capital, but clear exit strategies exist once planning and grid connection have been obtained.
A BIG STATEMENT PLUS INVESTMENT RETURNS
Megawatt-scale on-site wind turbines make a big statement and can deliver material benefits in terms of investment returns, power strategy and carbon savings. The business case is clear but getting there requires expert knowledge and experience at each stage.
Jake Burnyeat is the Business Development Manager at Green Peninsula Co Ltd, a specialist wind power development and advisory company, based in the UK.
Exploding some myths
Before looking at the business case in more detail, let’s start with a few basic facts to dismiss some commonly raised concerns with wind power.
Isn’t this a new technology?
Hardly. By the end of 2006, 75,000 MW of wind power generation capacity had been installed worldwide – some 95,000 large-scale machines. Megawatt-scale machines are produced by a relatively small number of ‘big balance sheet’ producers including Vestas, GE and Siemens. Wind power generation is a mature, proven technology.
Yes, but just how long does it take to ‘pay back’ the energy used in manufacturing and construction?
A wind turbine takes 6-9 months to ‘pay back’ manufacturing energy. Thereafter, electricity generated from the wind is zero carbon. A 3 MW turbine on a reasonably windy site can generate over 6000 MWh per year. Up to 20% of the UK’s power could be generated from wind power before additional backup generation plant would have to be built to cover low wind periods. This level of wind ‘penetration’ has been achieved in Denmark.
But they don’t always work do they?
Electrical output is clearly dependent on wind speed but a turbine will be producing power for 75%-80% of the time. Wind turbine capacity factors depend on wind regime but are around 30% on reasonably windy UK sites.
Some people claim they are noisy …
It is quite possible to have a normal conversation while standing under a wind turbine. The evolution of wind turbine technology over the past decade has rendered mechanical noise from turbines almost undetectable, with the main sound being the aerodynamic swoosh of the blades passing the tower. A turbine can be programmed to reduce noise output by slowing the blades at noise-sensitive wind speed and direction.
What about public acceptance?
Moreover, local support for a wind project tends to increase once the project is built. For companies wanting to demonstrate material ‘green performance’, a large wind turbine on their land makes a clear statement.