My first post looked at the economics of wind from a system perspective, however here I’ll look at the economics of wind from a wind producer’s perspective. As far as I know, wind producers just get the System Marginal Price (SMP). So looking at that should give a good indication of the returns a wind producer gets. To do this, I gathered all the (ex-post 2) SMP data available from the SEMO website. This data starts in February 2008 and goes up to May 2010.
Figure 1 plots the half hourly SMPs between those two dates (as a geeky aside, Figure 1 contains 38,000 data points; Excel 2010 for 64-bit computers allows unlimited data points versus previous Excels’ limit of 32,000).
Each vertical line is approximately a month. As you can see from this, although there are some data points above €150/MWh (675 points, or 2% of the time), the majority are below.
Figure 2 zooms in on where the majority of data points lie. Also overlaid is the black line (which is the 5 day moving average of the SMP), the dashed red lines (which represent the levelized cost of electricity (LCOE) of wind for €1.4m/MW, €1.2m/MW and €1.0/MW respectively), and the dashed orange lines which represent the annual average SMPs from 2008, 2009 & 2010. The dashed red lines come from the Eirgrid study referenced in my previous article, which calculated the LCOE based on the respective capital costs and O&M to reach breakeven figures of €62.3/MWh, €51.3/MWh and €42.7/MWh (the assumed capacity factor was 34.5%). You might have to press (Ctrl and +) to enlarge.
Working on the assumption that wind costs €1.2m/MW, if, when wind produced, it received the average SMP, it would be making a profit of €30/MWh for 2008. This assumption that wind gets the average SMP might be altered by the fact that when the wind is blowing strongly, it tends to depress the SMP. It could also be affected by wind’s greater output in the winter months, when average prices could be expected to be higher (not much evidence in Figure 2 to support that, but it could be lost in the noise of natural gas price movements). But using this average SMP assumption, the returns for 2008 should have been €90,000/MW (0.345*8760*30). For 2009, the difference between the middle red line and lower orange line is about €10/MWh, meaning wind would have lost €30k/MW. The average SMP for 2010 thus far has been €48/MWh, so wind for this year will be down just a few thousand. Overall, though, in the current SEM, wind turbines set up in 2008 will have made a profit.
The volatility is a concern. If we briefly entertain the notion that banks lend on merit; I can’t imagine they would want to take this natural gas price risk onto their balance sheets (for 15 years, the assumed life of a wind turbine). So for independent developers (with no other assets), they will be faced with either higher interest rates or lack of finance. Utilities can secure finance based on using other assets for collateral.
The other interesting point to note is the difference between Eirgrid’s figures for system costs versus what wind generators receive. For example, taking the bottom red line (€1.0m/MW) and comparing it to the 2010 average SMP (rightmost orange line), wind developers would make a profit if wind turbines were this cheap. However, looking at Figure 2 of my other blog (Eirgrid’s system cost calculations), at current natural gas prices and exchange rates, extra system costs of €65m would be incurred at current wind levels.
This raises the issue of whether wind developers should be obliged to pay for the extra system costs. The argument could be made that this implicit subsidy is justified by the other two pillars of energy policy (sustainability and energy security). If that is to be the policy, then the sustainability & energy security benefits should be quantified and compared against potential other measures of achieving the same (e.g. more natural gas and oil storage, greater interconnection, carbon offsets etc).