Peter C. Brun, Vestas Wind Systems A/S, Denmark
If prices of energy from conventional and sustainable sources are to be compared on equal terms, it is essential to examine all aspects of the calculation, including, for example, the environmental costs attributable to carbon dioxide (CO2) emissions.
According to an analysis by Emerging Energy Research (EER), an independent American analysis institute, the inclusion of CO2 quota prices would show energy from land-based wind power plants to be relatively cheaper than energy from plants fired by oil, coal and natural gas.
Vestas’ vision states: “Wind, Oil and Gas”. This expression summarizes Vestas’ aim to make wind power an energy source on a par with fossil fuels, such as oil and gas. A new analysis reveals that a significant part of this objective has already been achieved, in that today, wind power is already financially competitive if the environmental costs linked to CO2 emissions are included in the calculation.
The analysis, which was commissioned by Vestas and performed by EER, concludes that wind power is an equal partner in the overall energy portfolio, when all derivative costs and risks are taken into account.
Wind power is already a heavyweight player in the climate and energy strategies that are currently being presented at both national and international level. This applies for example to the European Union’s (EU) new and binding objective of ensuring that 20 per cent of total energy consumption within the EU is to be covered by energy from sustainable sources by 2020.
As a clean and efficient form of energy, wind power provides a number of obvious benefits. In fact, during its service life, a single Vestas V90-3 MW offshore turbine can save the environment from the emission of 220 000 tonnes of CO2 as compared with a modern coal fired power station generating the same amount of energy. The same turbine has the capacity to cover the annual electricity requirements of 3600 European households.
However, the environmental benefit is in relation to fossil fuels. The wind is also a free and inexhaustible source of energy, and exploiting as little as ten per cent of the technical potential of the global wind resources would make it possible to cover global electricity requirements many times over1. At the same time, the installation of wind power plants constitutes one of the fastest ways of establishing appreciable production capacity. The wind is both limitless and local, and can therefore contribute to making countries more self-sufficient and less dependent on imports of fossil energy.
Wind power: does it pay?
But how about the financial aspect – does it, from a purely commercial perspective, pay to invest in wind power when new capacity is to be established? Calculations from EER indicate that it does, under certain conditions. The analysis concludes that wind power is financially competitive with conventional forms of energy when the derivative costs linked to emissions of CO2 are taken into account. The institute’s calculations are confirmed by other similar analyses. For example, in its Renewable Road Map from January 2006, the European Commission performed a calculation, which demonstrates that wind power is competitive with fossil fuels when a CO2 price of €25 per tonne is included2.
These analyses provide even better grounds for initiating an open and informed debate on the environment and energy. With the EER analysis, Vestas wished to stimulate the debate about the real costs of electricity production, and to ensure that the debate is held on unbiased grounds. Much of the production capacity used in Europe today is more than 20 years old, and therefore fully depreciated. As such, the EER analysis is also interesting because it performs an equal comparison – between newly established wind power plants and newly established conventional power plants.
Wind is increasingly competitive when the real costs of energy are included in calculations
The analysis builds on recognised environmental-financial methods for allocating value to derivative costs and benefits. The use of a sustainable energy technology such as wind energy will provide society with environmental benefits in the form of reduced environmental costs in relation to conventional fossil energy technologies. The full energy price should thus contain what are known as “externalities” – the costs attributable to pollution, for example. The inclusion of such costs in the calculation provides a more complete image of the actual socio-economic costs and benefits. Even though accurately valuing environmental costs can be difficult and uncertain, there is increasing political recognition of the fact that it should be done when planning future oriented energy policy.
Firmly establishing the price of CO2 emissions is one way to put a price tag on these externalities. An important part of the cost of generating one kilowatt hour of electricity is therefore the price of the convertible CO2 quotas (pollution permits) which, from 2008 through 2012, are to be used by companies in the energy sector and energy-intensive industries in order to be allowed to emit CO2. The companies involved in the 2008-2012 quota system will initially be allocated a number of free quotas to cover a part of their total emission of CO2. They can then purchase additional quotas on the market whose forerunner was established within the EU in 2005-2007 under the banner of the “European Trading System” (ETS). Alternatively, the companies can choose to improve energy production efficiency so as to reduce their emissions of CO2. As the total number of quotas allocated in 2008-2012 will be lower than the total number emitted, the price for failing to make an effort will rise, and the EU ETS thus plays a central role in the application of the Kyoto Protocol.
The higher the prices of oil, coal and CO2 become, the more competitive wind power will be. In its calculations, the EER analysis takes as its starting point a quota price of €30 per tonne of CO2. On the conditions applied, the analysis concludes that land-based wind power is the cheapest of all the energy forms studied, followed by electricity from a natural gas fired power station, while the cost price of electricity from coal fired power stations and offshore wind farms is the same. If the CO2 factor is ignored, fossil power stations are cheapest from a narrow perspective, while gas and wind are at almost the same level.
Support still required
The fact that wind energy can now begin to compete with traditional energy technologies is attributable in particular to the closely targeted development work that has made wind turbines the advanced, hi-tech wind power systems they are today – highly efficient systems with comprehensive options for control and monitoring that transform independent wind turbines into a unified wind power plant. In step with the giant technological strides made by the industry every year, the price per megawatt hour generated has dropped dramatically. This is the reason why today, wind power is a much more competitive form of energy than it was previously.
This competitiveness is being further reinforced, partly by the currently high prices of fossil fuels, and partly by the impending requirement to take a “pollution price” into account in energy production. In the long term, wind power is set to become fully competitive if energy prices remain at their present high levels, and if a CO2 price in the form of quota value is included in calculations.
Until then, and to assure cost-related investment profitability, wind energy still needs an “equalization premium”. What is new, however, is the fact that wind energy – with energy prices at their current high level and the likelihood of an internalised CO2 price – will move a step closer to becoming designated an equal and competitive energy technology when all costs are viewed from a broader socio-economic perspective.
1. World Energy Council: 2004 Survey of Energy Resources
2. Communication from the Commission to the Council and the European Parliament