Financial Issues
How much does it cost to build wind farms compared to other energy sources?
The capital cost of building wind farms has fallen dramatically over the past 25 years. According to a database compiled by the U.S. Department of Energy’s Lawrence Berkeley Laboratory, the average installed cost of wind projects (turbines, foundations, electrical systems and installation costs) fell from over $4,000 per kilowatt in the early 1980s to about $1,260/kW in 2005. This figure rose to $1,480/kW in 2006 and may rise further due to several factors, including a decline in the value of the U.S. dollar and rising costs for inputs like steel and oil. (However, rising materials costs and a weak dollar are also driving up capital costs for other energy sources, such as coal- and gas-fired power plants.) Click here1 to read a Lawrence Berkeley Laboratory report on wind energy installation, cost, and performance trends through 2006.
How do the costs of offshore wind projects compare to land-based wind farms?
Currently offshore wind projects cost more to build than land-based wind farms because the turbine towers and foundations must be designed to withstand the physical stresses of a marine environment, and because operation and maintenance costs are higher for wind farms at sea than on land. However, winds blow faster and more steadily offshore than on land, and there is less turbulence at sea so turbines are subject to less wear and tear than on land. These advantages are expected to make electricity from offshore wind farms very attractive as offshore technologies mature.
How much does electricity from wind farms cost compared to power from other sources?
Since 1980 the average cost of electricity from wind in the United States has decreased from over 30 cents per kilowatt-hour to less than 5 cents/kWh. Costs vary depending on wind conditions, technologies, and other factors at each site. Electricity from most Northeast wind projects costs more than the national average, partly because projects in this region tend to be small and realize fewer economies of scale.
At 4 to 6 cents/kWh, electricity from new wind farms is cost-competitive with power from natural gas-fired plants and from new coal-burning power plants. And if the United States adopts national policies that place a price on carbon emissions, wind energy will become more cost-competitive with fossil fuel. Click here2 to see a November 2007 update on wind energy capacity and cost trends from the National Renewable Energy Laboratory (NREL).
Why do wind farms receive tax credits and other government support?
All types of energy receive various government subsidies, from risk insurance for building advanced nuclear reactors to tax breaks for deepwater oil and gas drilling. Fossil fuels have received the great majority of U.S. energy subsidies since World War II, followed by nuclear power. Government support for these industries dwarfs subsidies for renewable energy. Click here3 for an overview of U.S. energy subsides published by Earth Track, a research institute that analyzes government interventions in energy markets.
The federal government and many states, including Massachusetts, have adopted policies to expand use of renewable energy and help renewable fuels become more cost-competitive with more established sources. These measures include a federal production tax credit for projects in their first ten years of operation (currently 2.0 cents/kilowatt-hour for wind), accelerated depreciation, and state renewable portfolio standards that require certain fractions of electricity to come from renewable sources. Click here4 to access a database of federal, state, local, and utility incentives that promote energy efficiency and renewable energy.
Governments support renewable energy for two central reasons. First, renewable energy provides public benefits that are not economically rewarded in energy markets. For example, using renewable energy can reduce illnesses from air pollution and slow global warming, and it also dampens the impact of swings in fossil fuel prices and hedges against global supply interruptions. Second, renewable energy technologies are less mature than fossil or nuclear power, so renewable energy is only now being deployed on a large scale. Tax credits, government research, and other forms of support seek to expand renewable energy use so that producers can realize some of the same economies of scale that have benefited conventional fuels for the past 50 to 100 years.
Would Cape Wind pay royalties in return for using space in Nantucket Sound to generate energy?
If Cape Wind is approved, the developer would lease submerged lands on Horseshoe Shoal from the Interior Department’s Minerals Management Service and pay royalties to the Federal government on income from electricity generation. MMS awards leases and other forms of access to the Outer Continental Shelf for offshore oil and gas production and collects royalties from energy companies that hold these leases. The agency was authorized under the Energy Policy Act of 2005 to grant similar access for alternative energy production from sources such as wind power.
MMS has not yet set financial terms for any form of alternative energy production, but is establishing a comprehensive program for doing so.5 The MMS review of Cape Wind used an economic model to compare the proposed project site and alternative locations. This model assumed a rental rate of $7.50 per acre prior to the generation of electricity and a royalty rate of 12.5% on income from electricity and the sale of renewable energy certificates (RECs) generated by the wind farm. These figures were illustrative and do not necessarily represent future lease and royalty terms for Cape Wind. However, the report assumed that MMS “would provide payment rates for a wind energy lease that are similar to payment rates for an oil and gas lease.”
1http://www1.eere.energy.gov/windandhydro/pdfs/41435.pdf
2http://www.eere.energy.gov/windandhydro/windpoweringamerica
/pdfs/wpa/wpa_update.pdf
3http://www.earthtrack.net/earthtrack/library/SubsidyReformOptions.pdf
5Federal Register, January 10, 2008, pp. 1894-1895