◊ Part of the ‘wind energy’ series of articles ◊
The term ‘down the rabbit hole’ (Lewis Carroll – Alice in Wonderland) seems highly appropriate for this topic. Some of what you will find on the economics of wind is riddled with assumptions which make it inaccurate if you misapply the data. It can be misleading. Trying to sort through it all will take you ‘down the rabbit hole‘.
Understanding the Ontario model
The basic premise for contracted generation in Ontario is that:
Ratepayers assume the risk of profitability for generators.
What does that mean?
Wind generators in Ontario are Independent Power Producers that are compensated for the energy they produce plus the energy they don’t produce when it is considered to be available. The only time generators may not get paid is when they are not available due to maintenance or equipment failure. This way, generators can minimize any risk of profitability due to system load variations or constraints as ratepayers will compensate them regardless.
The actual unit cost of wind energy is:
The amount paid to wind generators divided by the amount of energy delivered to customers
The amount paid to individual generators is not normally available to the public. The energy amount is posted by the IESO annually in their year-end data and in their electricity supply reports.
The Ontario cost case
In Ontario it’s difficult to state a single relevant unit-price paid to wind generators due to the large number of contracts, when they came into effect and the variation of their terms.
| Ontario Program | Installed Capacity MW | Approx. Price in cents/kWh |
| FIT | 2,212 | 13.5 |
| GEIA | 1,068 | 13.8 |
| LRP | 160 | 8.5 |
| RES | 1,510 | 9.5 |
| RESOP | 285 | 11 |
Only the IESO can provide accurate weighted average overall pricing information for wind energy and at this point in time, they do not. Generator compensation is partially indexed to inflation and will continue to rise over the 20-year life of the contract agreements.
In the first pass the capacity weighted unit-price for wind energy looks like approximately 12 cents/kWh.
We need to peel back another layer to see what else determines today’s unit-cost.
Looking at Table 1 and the different offer programs we can estimate a capacity weighted average 12.1 cents/kWh. The programs span a 10 year window from 2006 until 2016. Today’s cost will be higher because of contract escalation and generator dispatch compensation payments.
Cheap power?
In most jurisdictions wind energy is now the cheapest source for new generation.
While this may be a good sales pitch from a generator owner perspective, from a grid operations perspective – low cost doesn’t cut it.
It doesn’t matter that its cheap if it isn’t available when you need it or it is available when you don’t.
The reality
Ontario exceeded its capacity of low-cost hydro-electric energy in 1950
Don’t confuse the cost of new generation with the cost of existing hydro or nuclear. New generation costs substantially more.
The OEB calculates the unit-cost for generation annually to determine the pricing for the Regulated Price Plan (RPP).
| Fuel Source | Total Unit Cost (cents/kWh) |
| Nuclear | 7.7 |
| Hydro | 6.2 |
| Gas | 18.8 |
| Wind | 15.9 |
| Solar | 51.3 |
| Bioenergy | 23.6 |
Based on the OEB published unit-costs, wind energy is cheaper than gas, bioenergy and solar. Unfortunately due to its intermittent nature, wind is not the solution to our energy needs on its own. Other generation needs to be available if wind energy is not.
If you are an average residential electricity consumer you use 750 kWh of energy per month. Based on OEB data, approximately 9% of that energy is from wind and it accounts for 14.3% of the cost. As of February 2019 that would account for $8.79 per month on your bill.
The average residential customer on the OEB Regulated Rate Plan pays $8.79 per month for wind energy
The values are approximate and are intended to provide some context for readers.
Eliminating wind energy would not save the $8.79 per month since some of that energy would come from alternate sources which you would still need to pay for at a marginal rate. Attaching a cost for the alternative energy supply would be highly speculative – so I won’t.
Other cost factors of wind energy
Determining the true cost of wind energy is not as simple as looking at what some jurisdictions’ post as the current price in cents per kilowatt-hour (unit-cost). Depending on where you look in the world you will find different numbers which may or may not reflect economic, engineering, regulatory and operational factors.
Attempting to quantify all of the factors will lead you down the rabbit hole. That’s why most articles limit their scope to a subset of considerations. It is also why the relevance of what is presented is questionable.
Here are some of the economic considerations (in no particular order):
- Government subsidies including tax incentives
- Dispatch or constraint agreement costs
- Surplus energy management
- Delivery Infrastructure upgrades
- Energy market influences
- Providing backup energy sources
- Displaced fuel cost savings
- Grid power flows
- Regulatory requirements
Each of these considerations are described in separate brief articles in this series.
All of these costs/savings are most likely incremental to the publicized unit-cost paid to generators. They are hidden in various cost categories that tend to be overlooked when discussing wind energy in isolation. In Ontario they are either part of the Global Adjustment or delivery charges. Considering that these factors contribute to energy unit-cost, the true cost/kWh of wind energy is more than what is normally divulged to the public.
Wind energy development can be justified based on the combination of social, environmental and economic criteria. It is difficult to justify based solely on the cost of building and operating a wind farm. It all depends on how you bake the numbers.
In Ontario the contracted generator compensation model is unique and the true economic unit-cost is not disclosed.
What about other jurisdictions?
If you really want to compare unit-cost between different jurisdictions, the first step would be to complete a check list using a full set of economic considerations. Determine which ones are accounted for in the stated cost by jurisdiction. Then you would attach a cost to each of them that isn’t.
Some work to standardize costing has been done by reputable agencies such as the Energy Information Administration in the United States, Lazard (US-based) and the Canadian Energy Research Institute (CERI). The accepted term for standard unit-cost is the levelized cost of electricity (LCOE). The LCOE is a standardized way to represent the energy cost for building and operating a generating facility for its lifespan. It is considered to be the price that a generator must charge in order to ‘break-even’ over the asset’s lifetime.
The reduction in the capital cost of wind turbines and industry experience in constructing wind farms have contributed to lower energy unit-pricing globally. According to US-based advocacy group Windustry, the costs for a utility-scale wind turbine range from about $1.3 million to $2.2 million USD per MW of nameplate capacity installed. Investors would then seek to recover the cost, plus a profit over the life expectancy of the installation (about 20 years).
The Alberta cost case
Alberta is Canada’s third largest wind-energy producer and has a Renewable Energy Program. Their target is to have 30% of their electricity capacity from renewable sources by 2030. In their three-part procurement process which began in 2017, they have secured 1,360 MW of capacity at 3.7 to 3.9 cents/kWh. That’s the lowest cost seen in Canada. These rates are guaranteed by the Alberta Government to reduce investor risk and provide an indexed price guarantee for developers. The mechanism used to procure the renewable energy was by auction, thus ensuring competitive pricing. The projects are being done through partnerships between private companies and First Nations.
CBC news reported that the first 600 MW of capacity will cost approximately $1 billion to build. That puts the installed cost at the very low-end of the range cited by Windustry for 600 MW of capacity.
These numbers are specific to Alberta and cannot be directly compared to any other jurisdiction. They do not include all the economic considerations in the LCOE studies along with the ones I’ve pointed out. Someone else is picking up the tab. The cost to connect the wind farms to the grid are pushed into the delivery charges and are hidden. Ontario requires the Independent Power Producer to cover most of those costs in the unit-cost they charge for energy.
It will be some time before anyone fesses up to what the true cost is in Alberta.
The United States cost case
In the broader North American market the U.S. Energy Information Administration (EIA) produces a Levelized Cost of Electricity report. In their March 2018 LCOE report the average cost per kWh for wind energy coming online in 2020 is 4.8 cents US (Table A1a) or 6.4 cents Cdn which includes a transmission cost and a 42% capacity factor.
The LCOE is based on a large number of assumptions, some of which are skewed or may not apply to every jurisdiction. It is an average or generalization for a geographic area. If it is applied consistently over time it will be useful in determining the industry trend for costs and relativity for different types of generation. You may consult the EIA report to see what considerations went into producing the costs.
The European Union cost case
According to Wind Europe the LCOE for onshore wind in 2016 was between 52 and 110 Euros or 7.9 to 16.7 cents/kWh Cdn. I present these numbers for information only as their interpretation is beyond the scope of this blog. It will lead you down the rabbit hole.
The takeaway
The 2018 unit-cost of wind energy as posted by the OEB is 15.9 cents/kWh. That is the lowest cost of all new generation types in Ontario. The next closest is natural gas generation at 18.8 cents/kWh. You need to peel back some more layers to understand the value and context of the numbers.
The average residential customer participating in the OEB Regulated Price Plan pays $8.79 per month for wind energy.
Not all forms of generation are created equal.
- Nuclear and hydro provide ‘base‘ generation.
- Natural gas provides ‘peak‘ generation.
- Wind and solar provide ‘intermittent’ generation.
In Ontario we pay Independent Power Producers for energy to be available; whether we use it or not. That’s part of the reason why our unit-costs are high.
There is a substantial effort within the industry to standardize on the estimated cost of new generation. It is referred to as the levelized cost of electricity (LCOE). While the information is useful as a reference, it cannot be directly applied to the industry in Ontario without a thorough understanding of the assumptions used to produce it.
Derek
Previous article… Ontario’s wind energy snapshot
Next article… Capacity and capacity factor of wind energy
