SEAI recently published a new update on ‘Renewable Energy in Ireland‘. While Ireland continues to fall behind on our RES-T and RES-H targets, in 2009 we exceeded the interim EU RES-E target of 13.2%. The provisional estimate for 2009 was that renewable electricity provided 14.4% of electrical energy. Figure 1 shows the remarkable growth in wind:
Given the current, unexpectedly low natural gas prices, it’s worth revisiting the economics of wind.
The most accessible document that does this is Eirgrid’s “Wind Power Generation: An analytical framework to assess generation cost implications”. Published in 2007, they take 3 different installed levels of wind, three different wind capital costs and 3 different gas prices to compare system wide generation costs.
The key assumptions were:
- 7.32% hurdle rate
- 6500MW system peak, and annual demand of 38.5TWh
- 15 year lifetime
The results are in Figure 2:
If you look at the first entry (1500MW wind, €1.0m/MW capital cost), you can see that if natural gas is prices at €33cent per therm, additional system costs of €104m are incurred. However if gas is priced at €75cent per therm, system costs are reduced by €13m. Using linear interpolation, this suggests a breakeven at €70.3cent per therm.
Working out the breakeven points for each in turn, I attempted to construct breakeven lines. The 1500MW and 2500MW breakeven lines were identical. The 3500MW installed wind breakeven line diverged more, due to the saturation of capacity credit. Figure 3 shows the results.
I couldn’t get a current price for Irish wind turbines, so I assumed €1.2m/MW. The current natural gas price is £37pence/therm, I added on 3 pence for transport costs. I used the current euro pound exchange rate of 0.849 to calibrate the top x axis.
This is just one study, but at present we appear to be outside the break even zone. Is that a fair assessment? At current wind levels, each box represents about €30m, so going horizontally across from the current price, we might be paying €100m extra at present for our current approximately 1500MW of wind. That’s probably only a few % of total generation costs. This is of course just short term, whether wind delivers overall benefits will depend on the 15 year weighted average of gas prices and wind turbine costs.
One of the factors which affects the calculation is the Euro Pound exchange rate. Going forward, if the euro further weakens, then that is beneficial for wind and vice versa. Figure 4 shows the history of the exchange rate since 2000. The current weakness of the euro is reflected in Figure 3.
The last year or so of gas prices is shown in Figure 5. It’s clear that they’ve been volatile, and if you look at 2008 prices, we would have been in the breakeven zone. Natural gas prices have gone as low as 9.8pence in April 1998 to 117pence in November 2005.
The history [EWEA Pure Power pdf] of EU wind turbine capital costs is shown in Figure 6. The unexpected spike up from the middle of the decade was because demand got ahead of supply, and possibly due to high commodity prices. The costs shown are for the typical EU wind turbine. I recall last summer a wind developer saying Irish wind turbines were structurally higher cost because reinforcement is required for our stronger wind regime. Is that correct? At any rate, EWEA reckon there’s scope for cost reductions, which will increase wind’s competitiveness.
If Figure 3 is representative, then for wind to continue to grow from the current 1500MW to perhaps 5000MW by 2020, wind turbine costs must reduce and/or natural gas prices must increase.