Wind gets cheaper

By Bryan Walker 03/10/2012

Writing in the latest newsletter from the NZ Wind Energy Association CEO Eric Pyle rebuts the idea expressed by some market analysts that because there is significant excess of electricity generation capacity in NZ and demand is flat there is no need to build new generation. He tackles them on economic ground and it’s interesting that he claims new wind generation is justified in purely market terms, without invoking its environmental benefits.

Markets should encourage innovation and drive least-cost solutions. In the electricity sector this means lower cost generation is used instead of higher cost generation. This happens on an hourly basis in New Zealand’s electricity market. This does mean there will be excess capacity as more expensive generation is replaced over time by lower cost generation.

Here’s the market logic for wind generation:

If wind is genuinely the most cost-effective form of new generation and has a lower cost of energy than some existing generation, then wind generation will be built. The more expensive generation will be used less and less until it is retired. In this light, the excess capacity is a shift to the most cost-effective generation at the time and a product of a well-functioning market.

And some interesting figures on what is happening to the costs of wind generation, confirming the role of improvements in technology in driving down costs (as we can expect to be the case in all forms of renewable energy):

Analysis of 2010 data by Deloitte indicates that wind is being developed for as low as $78/MWh in NZ, which is competitive with the costs of other forms of generation. The general view in the wind industry is that costs have reduced since that analysis was completed, and will continue to do so as turbine technology continues to improve.

Some very interesting analysis from the US National Renewable Energy Laboratory and the International Renewable Energy Agency (IRENA) highlights that the cost of energy (expressed as dollars per megawatt-hours) from wind turbines is falling, and more notably so when the cost of raw materials, such as steel, is levelised. The key point from the analysis is that the amount of energy able to be produced is increasing for any given site as a result of improvements in technology.

The impact of improving technology is positive for the bottom line of wind farm developers – the cost of energy is reducing, all other factors being equal. For example, wind turbine manufacturer Gamesa has publicly stated that it expects the cost of energy from wind turbines to reduce 30% over the next three years as a consequence of improvements.

He concludes with the possibility that we may be seeing renewable energy winning out over fossil fuel-powered sources in purely market terms:

Rather than a problematic excess of capacity, perhaps we are seeing the electricity market working coupled with fundamental changes to the costs of generation. New wind farms are one sign of this, signals that the coal units at Huntly will be phased out are another sign.

We must move quickly and substantially to renewable energy if we are to have any hope of mitigating dangerous climate change. For anyone who understands what the science is telling us, that is the primary imperative. The imperative would be unchanged even if renewable energy was more expensive than energy from the burning of fossil fuels. But there are many signs that the trumpeted relative cheapness of fossil fuels is overstated and that once the technologies for renewable sources are developed and adequately employed they hold their own and more. The claimed cheapness of fossil fuels is in any case a mirage since the environmental costs of their use are externalised and left for others to meet. Increasingly it becomes apparent that a green economy can function quite as well as that which was based on fossil fuels and without the attendant dangers.

Here in New Zealand Ministers who can’t move beyond thinking for the foreseeable future of a transport system powered by oil and serviced by heavy expenditure on new roading, for example, need to be jolted out of their lethargy. In a time of transition yesterday’s orthodoxies mean today’s missed opportunities. The success of wind may prove a paradigm for many new avenues to an economy which functions without continually adding to atmospheric CO2 levels.