Jul 21 2011

Economic Cost and Capacity

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Calculating the Savings link
Economic cost is defined as weighing the opportunity cost plus the accounting cost of a proposed project against the alternative. The alternative in this case is continued use of fossil fuels as the means of energy production. While in the short run the energy is “cheap” for the consumer and producer, inevitably, the resources will be depleted. Given that, in the short run, it is difficult for a wind energy firm to enter the market, a longer time frame will allow for a chance to thrive in the energy production industry especially since the resource is renewable.
The economies of scale model proposes that spreading the overhead cost across a larger wind energy farm will reduce the per megawatt cost and subsequently, the volume of production will increase. With more turbines providing mass production coupled with a greater depth of knowledge from experience, the cost will decrease. It is also suggested that a “25% increase in wind speed approximately corresponds to a doubling in the available power” (Program on Technology… 6-2). This would significantly increase the profitability of a wind energy farm.


Cape Wind

Cape Wind estimates there will be an average of 170 megawatts produced. They report this is “almost 75% of the 230 megawatt average electricity demand for Cape Cod and the Islands of Martha’s Vineyard and Nantucket” (capewind.org).

There were no federal funds awarded to the Cape Wind project; however, if the project can begin by the end of the year, they will be eligible for the current tax credit (PTC) of 1.8 cents per kilowatt hour for the first ten years of the project. If Cape Wind can receive the PTC it will greatly help the overall financing of the estimated cost.
The Beacon Hill Institute has projected the Cape Wind projects economic costs to be a total cost of $952 million. Distributing these cost between the project itself- $888 million, Grid integration- $26million and Environmental effects- $39 million  (Barrett 5). This estimate is considerably lower than a reported $2.62 billion in costs that was published in April of this year.
Possiblilties in North Carolina
The University of North Carolina studied of the possibility of procuring wind turbines both inshore and offshore in North Carolina. The study conveyed the economic cost to be less per kWh if the site was chosen to be offshore vs. inshore. Their “high-level economic screening suggests the levelized cost of generation for either inshore or offshore development is in the $101-106 per MWh range” (climate.unc.edu/Coastal Wind). These figures are due to the economies of scale model discussed earlier. The “Cost of Generation Calculator projects [that with a] capacity [of] 1620 MW [the] capitol cost [would be] $3,360 [per kilowatt]” (Coastal Wind 346). Another aspect of the wind project that they were able to convey was the “decommissioning % of capitol at 3%,” (Coastal Wind 346) which is looked over by the typical novice. The report set the generating “capacity factor [at] 40%” (Coastal Wind 346). Even with the modest projection of 40%, figure 1 depicts a 3 month average (January, February, March 2011) of the retail pricing in the different sectors of the economy providing an estimate of the potential earning capability of energy production.
Figure 1
The capital needed for a wind energy project is scarce in the United States. Due to the size of initial investment and lengthy timeline for returns, investors are not on board. There are many facets involved in the financial backing of a wind energy project. To give an overview: permitting, site evaluation and construction costs. In addition the first few years operation and maintenance must be included in business plan proposal. Investors also consider “the cost of financing [that] is linked to the project duration. Also the debt/equity ratio, the return on equity, cost of debt, the book life, and tax life” (Program on Technology…1-3).
Some benefits of wind energy include: The variable cost of fluctuating fuel prices involved in many other energy productions is not present in wind energy due to the use of natural resources as the mechanism for generation. Another is; that as long as the Earth receives the solar radiation from the sun there will always be a breeze to generate energy which is this planets number one consumable good.

2 responses so far

2 Responses to “Economic Cost and Capacity”

  1.   Mandie Krameron 18 Sep 2011 at 11:56 pm

    Great article.

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