The impact of national energy policy on the economics of wind power

In 2002, a national planning goal of a yearly wind power generation of 10TWh by 2015 was adopted. Before this planning goal was introduced, Sweden's wind power policy was characterized by soft formulations stating that wind power should be promoted in the Swedish energy system, without explicitly stating when and how much (Astrand and Neij, 2006). Although the cost of producing wind power has declined substantially during the last two decades, public support is still generally needed to make investments in wind turbines commercially attractive. In the past, investment and production subsidies dominated the policy portfolio used to encourage wind turbine investments. However, a green certificate system for renewable energy was introduced in 2003. Its aim is (similar to that of competitive bidding systems) to secure a predetermined market share for renewable electric power sources, but also to promote cost-effective competition between the different types of renewable energy sources (Swedish Government, 2003). The new system has replaced previous investment subsidy programmes and will gradually replace the production subsidies, which will be lowered annually and (in the case of onshore wind power) be completely abandoned in 2010. It should also be noted that in the past no carbon tax was paid for fuels used in the Swedish power sector. However, with the 2005 introduction of European Union (EU) trade in emissions allowances for carbon dioxide, power-related carbon emissions also carry a price.

Table 7.1 summarizes the levelled (lifetime) cost estimates for different new power generation technologies in Sweden (for commissioning in 2003) as reported by the Swedish electricity research institute Elforsk, including one onshore and one offshore wind power alternative. The costs for wind power include all investment costs (turbine, electrical installations, foundation, etc.), but ignore the highly site-specific costs related to connections to the electric grid.5 Overall, the cost figures show that in the absence of taxes and subsidies, gas-, coal- and some hydro-based power are the cheapest alternatives (although further development of new large-scale hydropower is strongly restricted according to Swedish law). However, when existing taxes and subsidies are added and subtracted from the private costs, the competitive positions generally change in favour of wind power. Specifically, the far right column in Table 7.1 shows the different levelled costs after an electricity certificate price of 0.15 Swedish kronor (€0.016, or £0.011) per kilowatt hour and the discounted value of the future time-declining environmental bonus have been subtracted from the wind power costs; and after the taxes charged on sulphur and nitrogen emissions have been added to the fossil-fuelled power generation alternatives.6 As a result of the policies implemented, wind power appears to be one of the most attractive new power generation investments in Sweden.

Nevertheless, the engineering cost figures presented in Table 7.1 build on specific assumptions about discount rates and subsidy levels. They also, therefore, neglect the role of different uncertainties related to the policies and institutional frameworks that govern wind power development. For this reason,

Table 7.1 Lifetime generation costs for new power plants in Sweden

Plant type (CHP = combined heat and power)

Capacity (MW)

Levelled cost (Swedish kronor per kWh)* Without taxes With taxes and and subsidies subsidies

Coal - power plant

400

0.39

0.43

Coal - CHP

100

0.30

0.79

Gas - power plant

400

0.30

0.31

Gas - CHP

150

0.31

0.46

Bio-fuel - CHP

80

0.40

0.24

Wind power - onshore

20

0.38

0.20

Wind power - offshore

90

0.41

0.23

Hydropower - low

**

0.23

0.23

Hydropower - high

0.36

0.36

Notes: * The levelled cost estimates are based on the use of a 6 per cent discount rate and an economic lifetime of 20 years (except for hydropower, for which the economic lifetime is assumed to be 40 years). The costs for producing hydropower tend to vary significantly depending upon location, and for this reason two estimates are presented, where the actual cost is assumed to lie somewhere between these two extremes. Since the Swedish government has decided to gradually phase out nuclear power and, thus, no new nuclear plants are planned, this option is not included here.

** It is not possible to provide a meaningful value for hydropower capacity since much depends on the site used.

Notes: * The levelled cost estimates are based on the use of a 6 per cent discount rate and an economic lifetime of 20 years (except for hydropower, for which the economic lifetime is assumed to be 40 years). The costs for producing hydropower tend to vary significantly depending upon location, and for this reason two estimates are presented, where the actual cost is assumed to lie somewhere between these two extremes. Since the Swedish government has decided to gradually phase out nuclear power and, thus, no new nuclear plants are planned, this option is not included here.

** It is not possible to provide a meaningful value for hydropower capacity since much depends on the site used.

Söderholm et al (2007) analysed the impacts of tradable emission rights for carbon dioxide and the green certificate system under different rate-of-return requirements on the relative cost structure of wind power. The levelled cost of gas-fired power generation served as a benchmark in this analysis. There are two major conclusions from these simulations:

1 The allowance system alone would provide a sufficiently strong policy instrument to put wind power on an equal footing with gas-fired power only if the carbon trade is expanded to additional sectors than the ones currently involved (e.g. heat and power, iron and steel, pulp and paper, etc.), and/or a stricter cap on total emissions is introduced.

2 Overall, the green certificate system has (so far) provided a strong economic stimulus to wind power. The average certificate price over the time period of September 2003 to September 2004 was 0.22 Swedish kronor (€0.024, or £0.016) per kilowatt hour (Swedish Energy Agency, 2004), and at such prices wind power will be cost competitive compared to gas-fired power even at relatively high discount rates.

Nevertheless, the certificate system has been connected with a number of uncertainties - such as price fluctuations - implying that the risk-adjusted discount rate has been high. Most importantly, perhaps, while the economic time horizon of a wind power project is generally (at least) 20 years, the green certificate system has had a much more limited time horizon; it was planned to exist at least until the year 2010; but after that it was unclear what would follow. This signalled a lack of political commitment and increased the economic risks faced by investors; but in 2006 a proposal for an extended system was put forward by the Swedish government (Swedish Government, 2006).

An important result of the analysis is also that wind power loses competitive ground from the use of higher rate-of-return requirements. This is because the capital costs involved in wind power development form a sizeable part of the total levelled costs, and the higher the uncertainties about the future rate of return of the investment are, the less competitive wind power will be. For instance, both bio- and gas-fuelled power are less capital intensive (in relative terms) and will thus benefit from increased uncertainties about market and policy developments, as well as about the outcome of planning and permitting procedures. In addition, the presence of an unstable policy environment tends to favour investments in - and intensified use of - existing capacity at existing sites. A number of renewable power alternatives that involve investments - and resulting production increases - in existing capacity are eligible for certificates. These include, most notably, the substitution of biomass for coal in existing combined heat and power (CHP) plants and the upgrading of existing hydropower. This introduces a large degree of path dependence in the energy system, and harms all new investments in power generation technologies in Sweden. The main advantage of these options lies in the fact that the investment costs of the existing plants are sunk, and they will compete with new capacity largely on the basis of their variable costs. The greater the difference between the total cost of a new plant and the variable cost of an existing plant, the greater the incentive for better and more intense use of the existing plant. This is typically the case when new wind power competes with existing hydropower or nuclear energy.7 In sum, our analysis suggests that it is generally more efficient to promote wind power by reducing the uncertainties about future regulations and policies than providing additional economic incentives by introducing new policy instruments or strengthening existing ones.

Renewable Energy 101

Renewable Energy 101

Renewable energy is energy that is generated from sunlight, rain, tides, geothermal heat and wind. These sources are naturally and constantly replenished, which is why they are deemed as renewable. The usage of renewable energy sources is very important when considering the sustainability of the existing energy usage of the world. While there is currently an abundance of non-renewable energy sources, such as nuclear fuels, these energy sources are depleting. In addition to being a non-renewable supply, the non-renewable energy sources release emissions into the air, which has an adverse effect on the environment.

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