I am a bit confused on the business practices of onshore wind farms and, well green energy in general. Wind energy is cheaper to produce than conventional ways, yet the sale price for it appears to be absurdly low? Below, I outline this in more details and a very basic cost run-through for a wind farm:
WARNING, large volume of text and calculations, TL;DR, skip to the bottom.
For this example, lets take a wind farm with 10 MW capacity using 5 2 MW turbines in the US, state can be anywhere but I will focus most of the information on PA.
Turbine Cost (Vestas): $960,000 per MW * 10 = $9,600,000
Turbine Cost (GE): $1,700 per kW * 1000 MW/kW * 10 = $17,000,000
Installation Cost: $1,500,000 per turbine * 5 turbines = $7,500,000
Land Lease: $5,000 per turbine * 5 turbines = $25,000 per year
Total Initial Costs: $17,125,000 (Vestas); $24,525,000 (GE)
Neglect O&M costs, grid connection costs, employees, taxes, and saving for decommission. Lifespan of 20 years per turbine. Turbine power generation factor = 0.26-0.41, avg 0.33.
Max Capacity: 10 MW
Worst Case AEP = 2.6 MW; Typical AEP = 3.3 MW; Best Case AEP = 4.1 MW
Penelec Price: $122 Per MWh
Average Wind Power Price: $0.018 kWh * 1000 MWh/kWh = $18 Per MWh
Here, we can see the cost for wind power is SUBSTANTIALLY lower than the rate of electricity under the current Penelec contract. But, let's continue the analysis.
8760 Hours Per Year
Revenue and Profits at Average Wind Power Price & Payback:
Worst Case Revenue: 2.6 MW * 8760 Hours * $18 = $409,968/Year; Profit = $384,968/Year
Typical Revenue: 3.3 MW * 8760 Hours * $18 = $520,344/Year; Profit = $495,344/Year
Best Case Revenue: 4.1 MW * 8760 Hours * $18 = $646,488/Year; Profit = $621,488/Year
Assume no interest on loans; use Vestas wind turbines
Worst Case Payback: $17,125,000 / $384,968 = 44.48 Years, ~24 years past the lifetime
Typical Payback: $17,125,000 / $495,344 = 34.57 Years, ~15 years past lifetime
Best Case Payback: $17,125,000 / $621,488 = 27.55 Years, ~8 years past lifetime
Not profitable at average wind power price even with generous assumptions. Lets take a look now at the price Penelec has instead. Since I have done the calculations above, I will skip to the answers.
Worst Case Profit = $2,753,672/Year; Payback = 6.22 Years
Typical Profit = $3,501,776/Year; Payback = 4.89 Years
Best Case Profit = $4,356,752/Year; Payback = 3.93 Years
As we can see here, at the standard rate of electricity, wind turbines are immensely profitable under generous assumptions. Even in the worst case scenario, the payback period is well above half the expected lifetime of the turbine, which is ideal. However, green energy (at least for wind), does not appear capable of turning a profit at severely discounted rates.
Yet the industry average for a wind power contract agreement is at the very low rate of ~$18/MWh. Why? Why is this the case? Shouldn't this industry operate like any other? Where the wind farm could offer their electricity at $100/MWh and it would be pretty much guaranteed to be bought by the utility company (Penelec for this case) since it is a price that other power plants can't compete with? So, then why are wind farms expected to sell their electricity so low that it makes them unprofitable?
Now, it is entirely possible I could be missing something that explains it. But I seriously doubt that any wind farm that wasn't completely paid for by the government could charge that low of a rate.
What do you guys think? Is there anything stopping a wind farm from demanding rates more in-line with the standard going rate? Do keep in mind, there are A LOT more expenditures for a wind farm then I listed, particularly decommission and replacing the turbines every ~20 years, so you are looking at more money than the total initial costs, so it is critical to turn a hefty profit out in 20 years to be able to pay for that massive expense.
EDIT: As pointed out in the comments, I neglected to take into consideration PTC's which have been renewed as part of the Inflation Reduction Act which sets a deadline for construction January 1st 2025. Below will be another section of calculations. Some key points in the Act:
The Act creates a new clean electricity tax credit (ITC and PTC) that replaces the existing ITC and PTC once they phase out at the end of 2024. The successor ITC/PTC is technology neutral. Any project producing electricity can qualify for the tax credit if its greenhouse gas emissions rate is not greater than zero. The successor ITC is 30% and the PTC is 1.5c/kWh, escalated annually with inflation. The Clean Energy ITC/PTC will phase out the later of 2032 or when emission targets are achieved (i.e., the electric power sector emits 75% less carbon than 2022 levels). Once the target is reached, facilities will be able to claim a credit at 100% value in the first year, then 75%, then 50%, and then 0%.
PTC Full rate = $0.026/kWh; PTC Partial rate = $0.003/kWh; use Full rate
PTC Full rate: $0.026/kWh * 1000 MWh/kWh = $26 Per MWh
New Sale Price: $18 Per MWh + $26 Per MWh = $44 Per MWh for 2 years (2024)
Worst Case Profit = $977,144; Year 1,2
Typical Profit = $1,246,952; Year 1,2
Best Case Profit = $1,555,304; Year 1,2
New Sale Price After Year 2 = $33 Per MWh for Year 3 to 10
Worst Case Profit = $726,608; Year 3-10
Typical Profit = $928,964; Year 3-10
Best Case Profit = $1,160,228; Year 3-10
Sale Price After Year 10 = $18 Per MWh; Profits same as before the edit
Worst Case Payback = ~35 Years
Typical Payback = ~25 Years
Best Case Payback = ~18 Years
With PTC's included, the finances comes out a bit better but ultimately only the best case scenario do you payback the costs with 2 years to spare with the assumption of no interest. It still comes back unprofitable and the rate is too low. If wind energy is to replace fossil fuels, it needs to be sold at a respectable price point instead of these absurdly low rates. Wind energy IS cheaper than fossil fuels, but it is NOT a miracle worker. If you see an error anywhere, let me know.
WARNING, large volume of text and calculations, TL;DR, skip to the bottom.
For this example, lets take a wind farm with 10 MW capacity using 5 2 MW turbines in the US, state can be anywhere but I will focus most of the information on PA.
Turbine Cost (Vestas): $960,000 per MW * 10 = $9,600,000
Turbine Cost (GE): $1,700 per kW * 1000 MW/kW * 10 = $17,000,000
Installation Cost: $1,500,000 per turbine * 5 turbines = $7,500,000
Land Lease: $5,000 per turbine * 5 turbines = $25,000 per year
Total Initial Costs: $17,125,000 (Vestas); $24,525,000 (GE)
Neglect O&M costs, grid connection costs, employees, taxes, and saving for decommission. Lifespan of 20 years per turbine. Turbine power generation factor = 0.26-0.41, avg 0.33.
Max Capacity: 10 MW
Worst Case AEP = 2.6 MW; Typical AEP = 3.3 MW; Best Case AEP = 4.1 MW
Penelec Price: $122 Per MWh
Average Wind Power Price: $0.018 kWh * 1000 MWh/kWh = $18 Per MWh
Here, we can see the cost for wind power is SUBSTANTIALLY lower than the rate of electricity under the current Penelec contract. But, let's continue the analysis.
8760 Hours Per Year
Revenue and Profits at Average Wind Power Price & Payback:
Worst Case Revenue: 2.6 MW * 8760 Hours * $18 = $409,968/Year; Profit = $384,968/Year
Typical Revenue: 3.3 MW * 8760 Hours * $18 = $520,344/Year; Profit = $495,344/Year
Best Case Revenue: 4.1 MW * 8760 Hours * $18 = $646,488/Year; Profit = $621,488/Year
Assume no interest on loans; use Vestas wind turbines
Worst Case Payback: $17,125,000 / $384,968 = 44.48 Years, ~24 years past the lifetime
Typical Payback: $17,125,000 / $495,344 = 34.57 Years, ~15 years past lifetime
Best Case Payback: $17,125,000 / $621,488 = 27.55 Years, ~8 years past lifetime
Not profitable at average wind power price even with generous assumptions. Lets take a look now at the price Penelec has instead. Since I have done the calculations above, I will skip to the answers.
Worst Case Profit = $2,753,672/Year; Payback = 6.22 Years
Typical Profit = $3,501,776/Year; Payback = 4.89 Years
Best Case Profit = $4,356,752/Year; Payback = 3.93 Years
As we can see here, at the standard rate of electricity, wind turbines are immensely profitable under generous assumptions. Even in the worst case scenario, the payback period is well above half the expected lifetime of the turbine, which is ideal. However, green energy (at least for wind), does not appear capable of turning a profit at severely discounted rates.
Yet the industry average for a wind power contract agreement is at the very low rate of ~$18/MWh. Why? Why is this the case? Shouldn't this industry operate like any other? Where the wind farm could offer their electricity at $100/MWh and it would be pretty much guaranteed to be bought by the utility company (Penelec for this case) since it is a price that other power plants can't compete with? So, then why are wind farms expected to sell their electricity so low that it makes them unprofitable?
Now, it is entirely possible I could be missing something that explains it. But I seriously doubt that any wind farm that wasn't completely paid for by the government could charge that low of a rate.
What do you guys think? Is there anything stopping a wind farm from demanding rates more in-line with the standard going rate? Do keep in mind, there are A LOT more expenditures for a wind farm then I listed, particularly decommission and replacing the turbines every ~20 years, so you are looking at more money than the total initial costs, so it is critical to turn a hefty profit out in 20 years to be able to pay for that massive expense.
EDIT: As pointed out in the comments, I neglected to take into consideration PTC's which have been renewed as part of the Inflation Reduction Act which sets a deadline for construction January 1st 2025. Below will be another section of calculations. Some key points in the Act:
The Act creates a new clean electricity tax credit (ITC and PTC) that replaces the existing ITC and PTC once they phase out at the end of 2024. The successor ITC/PTC is technology neutral. Any project producing electricity can qualify for the tax credit if its greenhouse gas emissions rate is not greater than zero. The successor ITC is 30% and the PTC is 1.5c/kWh, escalated annually with inflation. The Clean Energy ITC/PTC will phase out the later of 2032 or when emission targets are achieved (i.e., the electric power sector emits 75% less carbon than 2022 levels). Once the target is reached, facilities will be able to claim a credit at 100% value in the first year, then 75%, then 50%, and then 0%.
PTC Full rate = $0.026/kWh; PTC Partial rate = $0.003/kWh; use Full rate
PTC Full rate: $0.026/kWh * 1000 MWh/kWh = $26 Per MWh
New Sale Price: $18 Per MWh + $26 Per MWh = $44 Per MWh for 2 years (2024)
Worst Case Profit = $977,144; Year 1,2
Typical Profit = $1,246,952; Year 1,2
Best Case Profit = $1,555,304; Year 1,2
New Sale Price After Year 2 = $33 Per MWh for Year 3 to 10
Worst Case Profit = $726,608; Year 3-10
Typical Profit = $928,964; Year 3-10
Best Case Profit = $1,160,228; Year 3-10
Sale Price After Year 10 = $18 Per MWh; Profits same as before the edit
Worst Case Payback = ~35 Years
Typical Payback = ~25 Years
Best Case Payback = ~18 Years
With PTC's included, the finances comes out a bit better but ultimately only the best case scenario do you payback the costs with 2 years to spare with the assumption of no interest. It still comes back unprofitable and the rate is too low. If wind energy is to replace fossil fuels, it needs to be sold at a respectable price point instead of these absurdly low rates. Wind energy IS cheaper than fossil fuels, but it is NOT a miracle worker. If you see an error anywhere, let me know.