The Uncertain Economics of Offshore Wind

Source: “Lazard’s Levelized Cost of Energy Analysis.” Click graphic for more legible image.

As Virginia hurtles towards a renewable energy future with lots of solar and wind power, ratepayers and taxpayers should acquaint themselves with the complexities of Levelized Cost of Energy (LCOE) analysis. LCOE incorporates the costs associated with electricity generation — up-front capital costs, fuel costs, ongoing operations and maintenance costs — to compare the economic viability of conventional and renewable energy sources with very different characteristics.

In almost anybody’s analysis, the cost of utility-scale solar power in Virginia is highly favorable. The up-front capital costs are modest, fuel costs are zero, and ongoing operations and maintenance costs low. A heavy reliance on solar, an intermittent energy source that varies with the level of sunlight, does raise issues of system reliability. But as an energy source, it’s the cheapest around. However, the same cannot be said of smaller-scale solar projects or wind power.

The Lazard Levelized Cost of Energy Analysis is widely regarded as one of the most authoritative comparisons of LCOE. The chart above shows Lazard’s calculation of LCOE for the major categories of conventional and renewable energy. Utility-scale solar is the least expensive. Community solar and commercial & industrial rooftop solar are considerably more expensive but potentially competitive, and residential rooftop are not remotely competitive on cost. Nearly all of Virginia’s solar is utility-scale. Although environmentalist and activist groups are fighting for more community and residential solar, those categories are likely to remain marginal contributors to Virginia’s energy mix — options for those whose environmental consciences weigh heavier than their pocketbooks.

Wind power is a trickier issue. Lazard shows the LCOE ranging from $30 to $60 per megawatt/hour (or 3 to 6 cents per kilowatt/hour). Even the higher-cost wind is cheaper than all conventional sources excepting combined-cycle natural gas (large gas plants that burn gas with jet-like turbines and recycle the waste heat to run steam generators).

However, LCOE analysis depends upon various assumptions that may or may not pan out. Lazard’s “wind” numbers are based primarily upon the cost of generating wind on land, not establishing an offshore wind sector on the Atlantic Coast from scratch. The only thing we know for certain is that early adopters of offshore wind, who build before a supporting infrastructure is fully established, will pay more.

Another critical question is how many years wind turbines last before they must be retired. Coal, gas, and nuclear power sources are assumed to last 30 to 40 years, although some have lasted longer. The National Energy Energy Laboratory, accused by some of having a fossil fuel bias, says solar has a 25-year to 40-year economic life, but wind turbines only a 20-year life. I don’t know what life span Lazard assumes for wind, but I did find a LCOE analysis for wind power in Iceland that assumes a 25-year life.

Writing in the Center of the American Experiment, Isaac Orr notes, however, that 14 turbines in an industrial wind facility in Kewaunee County, Wisconsin, “has been decommissioned after just 20 years of service because the turbines are no longer cost effective to maintain and operate” — confirming the NREL assessment.

If the NREL numbers are accurate, the implications for Virginia’s energy future are significant. The Grid Modernization and Security Act of 2018 enshrined the goal of increased wind power as in the “public interest.” The State Corporation Commission has protested the cost of electricity generated from two proposed experimental wind turbines would be astonishingly high but approved the project anyway because the General Assembly, without conducting any of its own analysis, had declared it to be necessary.

The two experimental turbines are mere prelude to development of a much larger, 2-gigawatt offshore wind farm at cost of billions of dollars. Thanks to economies of scale in erecting offshore turbines, the levelized cost of the larger wind project will be a fraction of that of the experimental project. But if the 20-year life span of the Wisconsin turbines is any guide, wind turbines may not last as long as assumed, and may cost more. Moreover, we still don’t have any data on how well wind turbines will hold up in East Coast conditions — especially when buffeted by hurricane winds and waves.

Complicating the analysis, a kilowatt of electricity generated by a conventional fuel source upon command is worth more for maintaining grid reliability than a kilowatt generated by a renewable energy source delivered only when the sun is shining and the wind is blowing.

Not that it matters. In its wisdom, the General Assembly has mandated wind generation with no clear idea of what it will cost.

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16 responses to “The Uncertain Economics of Offshore Wind”

  1. Steve Haner Avatar
    Steve Haner

    Gee, the $780 per MWH we will be paying for those two offshore turbines won’t even fit on the chart. Yes, a full size project will be more economical, but perhaps not enough to justify.

    The ocean is a harsh environment for all things mechanical, so you will not the lifespan out of an ocean turbine that you would on land. While an offshore field should enjoy stronger and steadier winds, installation, maintenance and eventual removal costs are also going to be far higher, and long distance from shore means more expensive transmission and even the issue of line loss. Build it in the shallows to make it more cost-effective and then the Nimby Birds appear, just as they will flock around anything on the windy mountain ridges.

  2. LarrytheG Avatar

    Wind turbines wear out? Shazzzzaammm !!!

    like gas turbines and other kinds of generators like Nukes don’t?

    Think in terms of replacing parts…instead of the entire thing wearing out.

    but when one says “levelized cost” , one presumes that it includes life-cycle – for all sources on an apple-to-apples basis.

    My suspects are that gas turbines also wear out but you don’t shut the plant down and leave it when that happens – you replace parts, right?

    If someone puts up a wind turbine… parts will wear out but do you tear the whole thing down when that happens? I would think no more or less than other types of generation. Even hydro-electric turbines wear out – but you don’t shut down the power plant and walk away.. you replace parts.

    1. Steve Haner Avatar
      Steve Haner

      Offshore wind turbines rust! That’ the extra issue – salt water corrosion.

  3. TooManyTaxes Avatar

    Even in Green Hawaii are there objectors to wind energy. In 2017, my wife and I went to Oahu. We took a couple of day trips around the Island. We saw a reasonably large installation of windmills on some high hills. And a very large number of signs in front of homes and on roadsides objecting to the ugliness of the devices and how it was destroying a beautiful place.

    I didn’t think the installation was that obtrusive. But then, I don’t live there every day.

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      Your Green Hawaii experience is typical. People who live on the land, and love it, typically despise living within or around wind tower farms. They debilitate peoples’ bodies, their nerves, their spirits, dissolves and despoils their souls. These machines ruin the land, and everything on, over, and around the land. Consider just the mechanical sounds, people can’t relax, think, or sleep. These mechanical monsters are a modern iteration of HELL on earth.

  4. On-shore wind has been competitive for some decades, but in the past, the utilities were guilty of thumbing their nose at anything except coal. Now, we are catching up on on-shore wind, and the good thing is we should have relatively modern turbines which are efficient with less impact on wildlife than the older styles of turbines.

    But off-shore wind is whole different ballgame, much more costly. Also I suspect your numbers are saying, with subsidies, renewables are competitive.

  5. LarrytheG Avatar

    Well… the NIMBY aspect cannot be ignored. It’s a simple reality and it won’t change much for those who donj’t want powerlines or wind turbines in their viewshed although bridges apparently are a different matter.

    But there are still places and locations where turbines will be accepted and sited and I believe that over time – even their visibility will become accepted.

    Just FYI – there are places out west where turbines are ubiquitous that look like this:

    In time, as more are built – more folks will accept them.

    but the economics are an entirely different issue though critics will tend to articulate lists of things that they consider negatives.

    Wind Turbines are like any other man-made thing that evolves and adapts to the environment it is built in. But we build bridges in “marine” environments and don’t argue that they will not last or are “uneconomic”. We do the same for powerlines, underseas cables, and all manner of infrastructure and over time – turbines will be evolved to some level that is acceptable.

    But again – when someone generates Levelized costs – it needs to include all costs for the life of the equipment on a fair apple-to-apple basis.

    It makes no sense to provide a levelized cost for offshore wind and then have folks claim they won’t last as long as expected – unless that same argument is used for other types of generation also – which leads back to whether or not we are actually calculated lifetime levelized costs across the board for all of them.

    I don’t think wind nor solar are “free” just because the “fuel” is “free” – there are other costs associated with the infrastructure and the life-cycle of that infrastructure – the same way there is for coal, gas and nukes.

    Finally – again – we need to better understand all of this in the context of WHY very few islands – even larger ones with millions in population – not only do not have large installations of wind nor solar – nor coal or gas – nor nukes. Why? The vast majority of the world’s island are power by imported diesel fuel burned in diesel turbines yet if you look at that chart – diesel turbines are not even on it.

    The levelized cost of diesel, by the way, is way more than wind or solar so why is wind/solar not becoming a larger part of the mix – harvesting wind/solar when available and falling back to diesel when it’s not. It would seem to save money and fuel so what are such hybrid systems not common?

    So.. bottom line – Nimby stuff aside – the economics of the various choices of energy is not what it seems when looking at most levelized costs charts or there is something else also in play – not being reflected because if wind/solar were so superior on costs – they would be common-place on most islands.

  6. Let’s clear up a few misconceptions. Our discussions about new alternatives are skewed by our history with conventional generation.

    Levelized cost of energy calculations are estimates of lifetime costs. That means they include estimates of lifetime fuel and maintenance costs for a particular type of generation. Notice that the bars are much shorter for utility-scale PV for example than for conventional generation. That is because solar costs are almost entirely upfront capital costs, and therefore fairly certain. Lazard’s LCOE numbers for solar and wind do not include the current subsidies that are due to expire soon. Fossil and nuclear units do include the benefit of the subsidies that have been in place for some time.

    Lazard’s LCOE for combined cycle units has been 7-8 cents/kWh for several years. The lower end of the scale is less this year. I suspect, but don’t know for certain, that this was adjusted downward because of the low cost of gas for the past few years. The wholesale price of gas to our region is currently $4-$4.50, up from $3 or less the past several years. We are well below our average storage capacities going into this winter, possibly because a good deal of gas that normally went into storage was sold for exports this year. Prudence tells us we should consider the high-end of the fossil generation range since fuel costs make up such a large percentage of the price.

    Wind is much like solar, in that most of the LCOE is in upfront capital. If we developed wind appropriately in Virginia, and paid 6 cents for a PPA, that is the price we would pay for the life of the project. It is only if we treat wind as a typical utility generating project (as Dominion is intending to do) that we run the risks of bearing much higher costs.

    Some wind projects are being refurbished after 20 years because the project has already paid for itself plus profits. Replacing a project that is generating at 6 cents/kWh with a new project that generates at 3 cents /kWh is good for everyone. The PPA price includes all of the considerations for maintenance costs, project life, etc. Ratepayers do not continue to pay for the project after 20 years (or whatever is the life of the contract) as they would if it was in a utility ratebase.

    It is not appropriate to compare the costs of commercial and industrial solar with utility scale solar. Utility scale solar connected at the transmission level has transmission costs that are not included in the solar project costs but that are still passed on to customers. Commercial users are comparing the cost of customer-sited solar with their cost of electricity provided by the utility, not wholesale prices for generation. The same applies to residential users. Any savings below their retail price is a good deal for them. Because of this, customer-sited solar could be a huge contributor to the energy needs of Virginia and provide lower costs to customers. But this would be a blow to the utility without a new regulatory scheme.

    When smaller scale solar is located within the distribution system, many other costs are avoided such as transmission and distribution congestion, the need for new substations, etc. These savings are not considered in the LCOE calculations.

    Our way of thinking about our energy system must adapt to these new realities. We must let go of our 20th century way of looking at things and apply the methods of this new century.

  7. LarrytheG Avatar

    I just want to point out that the CBBT is in a Marine environment . built in 1965 – 50 some years ago – out of concrete and steel and other materials.

    Not directly comparing to turbines but basically pointing out that as time goes by and experience is gained – they will find the better ways to gain longevity and it may well be that the housings will be made of non-corrosive materials like carbon-fiber or other advancing technology – which is the reason why we need these projects done on PPA entities and not cost-plus entities like Dominion.

    I still do wonder why such turbines are not a standard feature on islands where they would harvest wind when available and default back to the diesel generators when it’s not.

    So.. I’m not buying the “anti” NIMBY narratives but at the same time I need to see something to convince me that wind/solar actually is a path forward on the worlds islands. It makes no sense to me to this point because diesel generation is by far the most expensive of the generation choices on the mainland but when you add transport costs to islands for the other fossil fuels – diesel is the lowest cost and nukes are out of the question.

    I remain convinced that the day is coming when wind/solar will become a primary source of electricity and that when we see major islands install it – we’ll know the mainlands are next and the standard fossil fuel utility model will be disrupted and companies like Dominion will be disrupted and changed.

    But right now, today places like Hati, Dominican Republican, Puerto Rico, Barbados, Trinidad, Bahamas, and dozens, hundreds of other populated Carribean islands still are powered by diesel and not solar and wind.

  8. Wind and solar, as with any energy technology, require an infrastructure to develop and maintain it. That is why you are seeing the burgeoning use of renewables on the mainland first (in the US wind and solar comprised 65% of new generation in 2017 ).

    Even though islands have a higher cost of electricity, they do not have the infrastructure necessary to rapidly put renewables to use. Once the solar infrastructure was developed in Hawaii, solar was quickly adopted. In fact, it happened much too quickly for the investor-owned utilities and they put limits on its use. But Hawaii is much more commercially developed than many other islands and the less developed islands are not yet prepared to put renewables to use even though it is economic for them to do so.

    Wind requires specialized equipment for the erection of the towers and placement of the turbines. It is very expensive to transport the required equipment and materials to isolated islands.

    Offshore wind requires even more sophisticated construction techniques and is currently limited to within a few miles of shore. Virginia’s lease area is just 30 miles offshore, but will present more difficult issues than the wind farm that was developed just off of Block Island. Most islands in the world are hundreds or thousands of miles from the nearest land mass. They will eventually be equipped with renewable generation, but it is unrealistic to expect them to lead the charge.

  9. Jane Twitmyer Avatar
    Jane Twitmyer

    Here are a few additional facts about offshore wind that have not been mentioned.
    Wind power is also unique because it does not use any water. By 2030, wind power will save around 30 trillion bottles of water in the U.S. The UCS wrote a nice paper on the amount of water it costs to make our electricity, certainly the most with nuclear but with fossil fuels as well.
    Then there is the water problem with fracking; flowback water that is full of radon and heavy metals from deep in the earth. Flowback water can’t be processed and put into our water system, and when it is re-injected back into the earth it causes earthquakes.

    Regarding transmission costs …70% of the energy use in the US is consume near our coast lines and doesn’t have to been transmitted long distances over land where siting and line loss are both issues.

    Jobs: A wind turbine has as many as 8,000 different components and that is why the onshore development is also important. However, it also provides jobs. At the recent conference in Boston, AWEA CEO Tom Kiernan said that the 8,000 MW by 2028 will bring with them some 40,000 jobs; that’s almost as many as there now are in US coal mining.

    High price … “The cost of offshore wind power has historically been higher than that of onshore wind generation, but costs have been decreasing rapidly in recent years and in Europe has been price competitive with conventional power sources since 2017.”

    Life cycle .. The lifespan of a wind turbine offshore is supposed to be 25 years. The oldest wind farm in the US is in Palm Springs. Here is their record …
    • Number of wind turbines in Palm Springs: 2,700
    • 1980: the year the first turbine went up
    • Height: Between 65 and 299 feet
    • Blade length: Between 15 and 140 feet
    • Rotations per minute: The older models make 600 – 700 rotations per minute; the newer models, 45 rotations.
    • The oldest model of wind turbine, built in the 1980s, stand 65 feet high and have 15-foot blades that rotate between 600 and 700 times per minute.
    • The newest models stand about 299 feet high, and have 140-foot blades that rotate 45 times per minute
    • Number of birds killed by wind turbines: 3 of out 100,000
    • turbines emit a sound no louder than a refrigerator hum.
    Sounds good to me. Evidently they sit in a unique windy spot in the desert.

    Finally, the value to VA’s offshore wind is the Bight, it’s wind strength and shallow water depth 30 miles from shore. That ‘no fuel cost’ value is being used to reinvent cost accounting that can make it more acceptable to monopolies like Dominion. (See America’s Power Plan)

  10. Steve Haner Avatar
    Steve Haner

    I will be far more comfortable with the proposed development off Virginia if all the risk is not on the backs of Dominion ratepayers. Let it be two or three or even four utilities, or a couple of utilities and some merchant generators. If it can only be built in Virginia’s corrupted regulatory environment, where the legislature has neutered consumer interests, if nobody else will touch it, that is a giant red flag even the Jane T’s of the world need to notice.

  11. Just one comment: any renewable resource generation (wind, solar) MUST be paired with generation that will pick up the load when the renewables aren’t available, AND/OR with batteries capable of time-shifting the energy that’s generated to “off” hours.

    Paired generation these days mean natural gas cycling units.

    Batteries these days means lithium-oxide technology, which: is expensive due to the raw materials involved, some of which are scarce, unstable and even explosive if not very carefully manufactured; has limited recharge cycles and declining storage with age; and is expensive to dispose of.

    Really decent and cheap battery technology has been on our doorstep for decades, but has never quite got into production, for good technological reasons, and there’s no promise of a solution to those problems. When that day comes, cry “grid nirvana” — and already, lithium ion technology is affordable in some grid situations today — but we should not mandate more than what’s feasible by dictating “100% renewables” or the like willy-nilly without looking at what MUST be built to accompany such a commitment. There’s more involved here than just the cost of the windmills.

  12. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    Acbar says:

    “Just one comment: any renewable resource generation (wind, solar) MUST be paired with generation that will pick up the load when the renewables aren’t available … Paired generation these days mean natural gas cycling units.”

    Yes, for sure. Until storage batteries arrive, if ever, or some substitution thereof arrives, 100% renewable is a fantasy. And until then gas and renewable power are the Yin / Yang, by far the best combination to keep driving carbons down world wide. So lets focus on that conversation, getting that done to the full extent we can.

    Meantime, there are more amusing fantasies we can chase with far less harm to the environment that 100% renewable power, such as what Mike Allen’s today’s Axios AM reports:

    10. 1 wedding thing

    “To protect the environment, many couples are saying ‘I do’ to Zero-Waste weddings, focusing on sustainability for everything from floral design and dresses to invitations and food,” writes the AP’s Katherine Roth.

    “The goal is to recycle, reuse, compost and otherwise keep anything from becoming trash in a landfill.”

    Some tips for hosting your own:

    “Choose cloth napkins, and authentic tableware, glassware and plates, rather than disposables.”

    “Use “colorful displays of fruits, vegetables or even flower petals as table centerpieces that guests can take home and enjoy.”

    “Vintage or second-hand dresses are also popular, and can be tailored to size. Some designers now make Zero-Waste dresses using fabric scraps otherwise destined for the trash.”

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      “Unfortunately the US Media have become a positive hindrance to public understanding. Consider that systemization of banality known as Axios. Last week it told its presumably politically engaged readership that the way to ‘be smart’ about Climate Change is to understand that “In climate science, one side is the scientific consensus, and the other is a small by vocal faction of people trying to fight it.”

      “In other words, reduce everything to a binary question of believers vs. deniers, good guys vs. bad guys. This narrative is mostly an invention of journalists for their own convenience. It relieves them of having to understand the subject.” End Quote.

      This quote taken from “Press Is the Enemy of Climate, by Holman W. Jenkins, Jr. in today’s (Dec. 5, 2018) Wall Street Journal.

      1. Reed Fawell 3rd Avatar
        Reed Fawell 3rd

        Holman’s overarching point here is not only true, it is of enormous consequence, namely that the “ignorant crisis-babble (of journalists) is why electorates everywhere now believe climate and prosperity are necessarily at odds. Every study, including the US government’s latest show the opposite: Continued prosperity is essential to mitigating the risks of climate change.”

        See also my comments in:

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