Wind Costs: Connecting Some Dots

by Kent Hawkins, MasterResource

There has not been much published on wind costs, except, generally speaking to give the impression that they are reasonable and manageable. Unfortunately, at the level of wind implementation being contemplated, particularly in the Western world, the costs are an unsupportable amount of national wealth.

On the other hand, there has been a considerable amount published on the impact of introducing large amounts of wind into electricity systems, most of it again claiming manageable considerations. Those that cite Denmark should review this series of posts. I am not aware of any conclusive analyses supporting wind integration, as most are superficial at worst, or limited in some considerable way at best.

I expect in time, based on a proper analysis, or through further real, and unhappy, experience, that none of the claims for wind will be confirmed. I expect that such will show that wind is much more problematic, and risky to our supply of electricity than is generally believed. It also represents a substantial risk to our financial systems.

In particular, any analyses to date on the impact of reductions in CO2 emissions is suspect, due to the questionability of published information on these for electricity systems. Having looked at the documentation surrounding the measurement and reporting of electricity generation CO2 emissions by the U.S. EPA and the U.S. Energy Information Administration, I am left with the impression that the likely systemic error in these processes renders any evaluations based on them very questionable.

In other countries the reported amounts may be even more suspect as shown by the Sustainable Energy Authority of Ireland report in Appendix 1. This government organization may not be providing the official emissions, but this is indicative of the issues involved. Here is a quote from Appendix 1:

“The limitations and caveats associated with this methodology include that it ignores any plant used to meet the associated reserve requirements of renewables. These open cycle plants will typically have lower efficiency and generate increased CO2 and NOx emissions compared with CCGT and these emissions should be incorporated into the analysis. The purpose of presenting a simplified analysis here is to provide initial insights into the amount of fossil fuels that are displaced by renewables and the amount of emissions thereby avoided.”

The official source for Irish electricity CO2 emissions is EirGrid and it describes the approach as follows:

“EirGrid with the support of the Sustainable Energy Authority of Ireland, has together developed the following methodology for calculating CO2 emissions. The rate of carbon emissions is calculated in real time by using the generators MW output, the individual heat rate curves for each power station and the calorific values for each type of fuel used. The heat rate curves are used to determine the efficiency at which a generator burns fuel at any given time. The fuel calorific values are then used to calculate the rate of carbon emissions for the fuel being burned by the generator.”

In spite of the reasonable sounding wording, what this says is that the CO2 emissions are not actually measured but are calculated using algorithms based on assumptions. I do not mean to single out Ireland. However, it does provide these descriptions, which are likely typical. Therefore anyone using such reported emissions for analyses should be aware of likely inherent biases.

Having said all that, whatever the results of any analysis, the cost of wind is extraordinarily high, and an unsupportable CO2 mitigation means in these terms. In short, there are better solutions. The problem is the better solutions are not “quick fixes”, as wind is claimed or thought to be. This is a major discussion in itself. Those wanting some insights can refer to:

  • The Swiss 2,000 Watt Society concept here and here for some concepts, including timing considerations.
  • The work of international energy expert Vaclav Smil, and in particular his book, Energy in Nature and Society.[1]
  • The thinking of Dieter Helm, the Chairman of the Ad Hoc Advisory Group that the European Commission has established to provide expert advice. See his views on current European energy policies and on better approaches in this article under “Good News”. In considering his comments on renewables, one should consider that, in the time frame he sees, I suggest the likely solution will be solar technologies, not wind. This committee is reported to be preparing a paper this summer on future energy scenarios.
  • The analysis provided by David MacKay, Chief Scientific Officer for the UK Department of Energy and Climate Change, in his online book Sustainable Energy: Without the Hot Air.
  • The warnings of Hugh Sharman, the owner and managing director of Denmark-based energy consulting firm Incoteco, about the dangers of the UK energy policies in his European Energy Review article “The coming UK energy meltdown”.

I emphasize that you do not have to agree with everything that someone says to appreciate their approach. The issues are too challenging to expect that any one person will get everything right. Staying on our current sets of trajectories in many aspects of our human endeavours, and apparent “quick fixes” of any sort, are not the answer. My own, more limited, efforts in this can be seen at The United States Association for Energy Economics Dialogue.

Cost Overview of Planned Wind Implementation

My estimate of the cost of implementation of industrial-scale wind plants in the US and EU is in the $trillions on an order of magnitude basis. This includes the capital costs of the wind plants and the necessary grid changes to accommodate wind’s volatility and unreliability. As we will see there is also the additional cost of duplicate capacity required to compensate for wind’s unreliable and erratic behaviour.

Such grid changes include the infrastructure to collect the highly dispersed electrical energy produced by wind plants and subsequently to transport this over large distances to demand centers via grid backbones. These backbones have to be designed to carry the high levels of wind production that may occur from time to time, but not often. On average less than one-third the capacity will be used, which represents a considerable over-build of capacity.

In addition the final distribution portion of the grid will be changed, in part, with the introduction of smart meters, which are largely needed (1) in the short to medium term to increase electricity rates to consumers to provide the funding to cover the high incremental, and unnecessary, costs of the wind plants and grid infrastructure, and (2) in the intermediate term to provide a basis for “rationing” electricity when needed as a result of the presence of extensive wind plants.

Comparison to the Sub-Prime Mortgage Schemes

Before a closer examination of wind costs, consider the financial system risk. This was suggested in a 2008 Harpers article, which described the next major “bubble” as follows:

“Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.” (emphasis added)

The article identifies alternative energy and infrastructure upgrades as the likely candidate. What is identified as alternative energy is fairly complicated but, by any measure, wind is being positioned to play a leading role.

The sub-prime mortgage crisis was characterized by:

  • The substantial use of debt to finance an asset which was assumed to be secure because of presumed inherent value. It was assumed that the real estate market would not be affected by unduly expanding the mortgage market with teaser rates, and low equity positions to those that would not normally have the necessary credit rating.
  • It was promoted by, perhaps well-meaning, government policies to expand the availability of home ownership to more citizens. In effect it appeared that the US government was standing behind the financial viability of the program, in part through the auspices of Fannie Mae and Freddie Mac.
  • This was followed by considerable financial engineering to better ensure against the risk of failure and synthetic financial instruments were created consisting of tranches of debt obligations to seemingly offset the risk of default by some. The problem was too many defaulted.
  • In effect financial institutions in the US and elsewhere did not understand the structure of the financial engineering and the inadequate insurance against default that was built at a rapid rate.
  • In effect the collapse of this “house of cards” nearly caused the failure of the world’s financial systems, and required substantial “bail-outs” of financial institutions, particularly by Western world governments.
  • The US sub-prime mortgage market was about $2 trillion.

The main question is: have we learned from this and put the necessary elements in place to avoid such in the future? Not likely!

Now let us turn to wind policy. It can be characterized as:

  • The substantial use of debt to finance an asset which is assumed to be secure because of presumed inherent value. It assumes that supposedly “green” wind plants will reduce emissions and use of fossil fuels, provide energy independence and provide sustainable economic growth. There is no conclusive proof of these claims commensurate with the size of the undertaking and associated risk.
  • It was promoted by, perhaps well-meaning, government policies to revolutionize the electricity systems from an environmental point of view. In effect it appears that Western governments are standing behind the financial viability of the programs, for example, by providing long term contracts (Power Purchasing Agreements) at premium rates with escalators to wind plant developers.
  • The need by financial institutions to reduce the risk associated with the large debt assets they are holding, giving rise to looking again to some form of “financial engineering”. This will be exacerbated with increasing questioning of the over-inflated value of the underlying wind assets. Also, there is likelihood that equity markets will also be further involved with considerable direct investment in energy companies by individuals, pension funds and institutions. Market values of other industry segments will also be affected, in part, because of their dependence on an adequate supply of economic and reliable electricity.
  • The size of the national wealth being invested in the US and EU alone is each about the same size as the sub-prime mortgage market.

Do we think that we can avoid the same result if we continue on the path of extensive implementation of wind? Will the world’s financial systems this time survive the larger resulting financial bubble?

Costs of Wind

Here is the basis for the costs referred to above.

First of all, I reviewed these as part of this larger article, which included details about the lack of real cost information. I calculated that the grid costs alone over about the next 20 years in the US due to wind would be at least $900 billion. The period of analysis of electricity investment was 30 years, but it is reasonable to suggest that grid aspects would have to be front-loaded, especially for wind implementations.

The argument that these grid upgrades, with some packaging as smart grid enhancements, are needed anyway is not valid, as I have previously described. The grid needs to evolve and improve over many decades to meet our medium to longer term electricity infrastructure and electrical energy conversions needs, and we simply do not know enough about this yet to warrant significant up-front commitments. This represents one component of the questionable value of the investment.

Another component, the investment in wind plants themselves will be $720 billion for 300GW of wind at $2,400 million per GW, giving a total of at least about $1.6 trillion.

Some estimates put the European grid investment alone at $1.6 trillion.

It has recently been reported that the cost of wind plant and associated grid implementation in the UK over the next 10 years will be about $226 billion (£140 billion). As the UK represents about 14% of the EU in economic terms this translates into a potential investment in the EU of $1.6 trillion. Compare this to the above level for the US, and both to the sub-prime mortgage market of $2 trillion.

Notably, the same report for the UK shows a further $161 billion (£100 billion) would be required for additional gas plant generation to shadow the unreliable and volatile wind plant production, or using the same ratio, an additional $1.1 trillion for the EU. This is a consideration not included in the above estimates. Should there be any doubt about the need for capacity in addition to requirements without wind see the presentation, slide 13, for Germany by Martin Hoppe-Kilpper, Managing Director of deENet, a consortium of 100 companies and research institutes.

Some wind proponents liken the rapid deployment of new renewables, particularly wind, to “green” our electricity systems to that of Kennedy’s challenge to put a man on the moon. The difference is that Kennedy did not presume the means to achieve the goal. The analogy is properly focussed on investing the necessary national wealth in the challenge of properly developing the type of electricity system (and other energy conversions and uses), consistent with the necessary attendant evolution in lifestyle changes, that best meets our societal goals.

We must avoid the double calamities of electricity shortages and financial system failure. The results of which could produce a post-industrial society that, in unintended and undesirable ways, would achieve the environmental imperatives of the “greens”.

We have enough problems as it is without adding to them. We have the ingenuity to do better, and we must use it. We are not doing so now.

[1] Smil, Vaclav (2008). Energy in Nature and Society: General Energetics of Complex Systems, MIT Press

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