1. Cost of En gy
C t f nerg This issue b
brief provides more
information on the topics discussed in
n s n
the five Ves
stas videos ad
ddressing Cosst
of Energy.
Co
ontents
Wh focus on cost of ener
hy rgy 2
Bu
uilding block of cost of e
ks energy 2
Costs of different po
f ower source
es 3
Re
educing cost of energy
t 5
Ou energy fut
ur ture 6
FA
AQ 7
Re
eferences 7
May 2011 By Gro Governmen Relations
oup nt
Cos of Energy (Co Global
st oE),

2. Why f
W focus on cost o ene
s c of ergy
Eveeryone needs e energy, and gen nerating energy consumes
y If we want to secure a more stab and sustain
ble nable energy
limited resources and in many ca ases limited natural resources
s suupply in the futu we have to look into bette long term
ure, o er
like fossil fuels. Ev
e veryone and ev verything requires energy. The
e altternatives – we need to includ wind energy in our future
e de y
cos of energy ma
st atters for the co
ompetitiveness of local
s ennergy mix.
bussiness, for creating and maintaining local job and for
bs,
ecoonomic growth.. If energy is too expensive, it limits growth a
o and
proosperity.
What is cost of energy?
W e
As a society, we ru risks in planning our future energy supply
un e y
beccause we don’t know what the cost of energy or fuel is going
e y g It is the total cost of generating 1 kWh of pow from a powe
g wer er
to be in the future We need to lim the risks as
b e. mit ssociated with o
our plant, and includes the cost of bbuilding, fueling and operating
g g
eneergy choices coompared to the current energy mix. We need to
y th power plant.
he
get the most powe out of our inv
t er vestment both today and in thhe
future. How do we ensure that th best energy choices are
e he
made? We focus o the cost of e
on energy.
Building bl s of co of ene
B locks ost ergy
Cos of energy con
st nsists of many building blocks, both direct a
and plant), purchasin carbon perm for fossil fuel energy that
ng mits
indirect. When chooosing our pow sources, we should take bo
wer oth em greenhous gases, and st
mits se toring waste.
the direct and the indirect costs of energy into account.
e e
Th potential price volatility of some fuel type can also have a
he es
co to society, as the risk of lar price fluctuations increase
ost rge es
Direct costs
s en
nergy costs for all.
CAPEX
The capital expen
e nditure (CAPEX or initial cost covers all the
X), t,
Co are projec specific
osts ct
cos associated w building a power plant. It also includes
sts with t
the cost of capital that is, the int
e l, terest rate you have to pay to “P
Pinning a single figure to the co of wind pow is a
e cost wer
get funding.
t meaningless exe
m ercise given the range of insta
e alled costs, the
nuumber of operaating cost variab
ables, the strong influence of w
g wind
sp
peeds on wind power economi and the equ
p mics ually strong
“Th influence of i
he interest rates o the cost of wind power
on w in
nfluence of inter rates on pr
rest roject financing
g.”
genneration canno be over-emph
ot hasized. […] A single
s
perrcentage point change in the p
t project interest rate has a
t “T precise cost competitivene [of nuclear, coal, gas, hydr
The st ness r, dro
sig
gnificant effect on the end pric of the electri
ce icity produced.”
” an wind] depen more than a
nd nds anything on the local
e
ch
haracteristics of each particula market and their associate
o lar t ed
Dav Milborrow, Wi
vid indpower Monthly article in 2010
0
co of financing as well as CO2 and fossil fuel prices.”
ost g 2 l
So
ources: David Milborrow, Windpow Monthly artic in 2010, IEA
wer cle
OPEX 20 (respectively
010 y)
The operating cos (OPEX) cove operations and maintenanc
e sts er a ce,
and for some ene
d, ergy forms, the c
cost of fuel (purchasing or
dril
lling/mining an transporting the fuel used at the power
nd g a
May 2011 By Gro Governmen Relations
oup nt
Cos of Energy (Co Global
st oE),

3. Indirect cos
sts Costs of different po
C ower sources
The indirect costs are many and often hard to quantify. Indirec
e s q ct Wind energy
W
cos are often div
sts vided into socia and environm
al mental costs.
Wind power, like most renewab
W bles, has a high initial investment
Mo of the indirect costs of energy are current not carried b
ost tly by
co
ompared to opeerating costs, b the latter are low. The cost of
but t
the owners of the power plants b by citizens and society.
e but a
wi energy is most impacted b variations in the load factor
ind m by n
Soc costs
cial ower plant runs which reflects the energy
(how often the po s,
resource among others). While the power outp is variable it is
put
Ammong the social costs we can nname the poten health cost
ntial ts
stable and predic
ctable over lon
nger periods. Th is no fuel c
here cost,
– th cost of hosp
he pitals, doctor vis and medici as a result o
sits ine of
no carbon cost and virtually no environmental cost. Onshore
o
the emissions from a power plan or as a result of an accident at
e m nt, t t
wi energy is already competiitive with conve
ind entional power
a power plant.
ources in some cases, and furt
so ther cost improvements are
vironmental co
Env osts ex
xpected.
Ammong the enviro onmental costs we can also na the costs o
ame of Th pie charts sh typical cos profiles for an onshore wind
he how st n d
air pollution and w
waste – pollutin drinking wat destroying
ng ter, ffshore wind ar higher than for onshore, but
farm. Costs for of re f
natture areas, and also the cost o using fresh water for cooling
of w g th is offset by higher energy p
his h production in most cases. The
m
in power plants, im
p mpacting both t environment and people.
the primarily to high foundation and
higher offshore costs are due p
c her
gr costs; the turbines account for a smaller percentage of t
rid t p the
Clim
mate change
to cost.
otal
The costs of clima change as a result of fossil fueled power
e ate
plant emissions affect both society and the env vironment. The e Average cost profile f onshore wind farm
e for
effe of climate change range from local chan
ects nges to weathe er
Grid
and the environment to global ch
d hanges and the associated
e Connection
cos of rebuilding of lost econo
sts g, omic activity, of crop failures a
f and
wat and food sh
ter hortages, of hig
gher insurance premiums.
p
Foundation
and Turbin
ne
Est
timating indire costs
ect Set Up
The are many un
ere ncertainties in estimates of th indirect cost
he ts
or the avoided cos of fossil-fue power genera
t sts el ation, however,, Turbine Land Rent
t
existing research suggests these costs can sur rpass the direct
t Financial
cos of energy, so
sts ometimes man times over.
ny Costs
Project
Developmen nt
ciences conclud that“the life
The U.S. National Academy of Sc
e des fe
cyc effects of co and the was stream gene
cle oal ste erated are Average operating cost p
profile for onsh
hore wind farm
m
cos
sting the U.S. pu
public a third to over one-half of a trillion dolla
o lars
ann
nually. […] Acco
counting for the [cumulative] damages
e d
Service and
con
nservatively dooubles to triples the price of el
s lectricity from spare parts
coa per kWh gene
al nerated, making wind […] econ
g nomically
com
mpetitive.” Their estimated va of coal exte
alue ernalities is Insurance
$178.4/MWh, wh does not re
hich epresent the full burden of coaal
due to difficulty in monetizing all the impacts, and therefore
e n a Administr
ration
the go on and sta that “the tru ecological and health costs
ey ate rue a ts Land rent
of coal are thus fa greater than t numbers su
c ar the uggest.”
Sou
urce: Hidden Cost of Energy: Unp
ts priced Consequences of Energy
Production and Use 2010
e, Misc
cellaneous Power from the
P
grid
So
ource for both pie charts EWEA 20
e 009, data from 2006
2
3

4. Cos of energy va
st aries…
The cost of energy is not a fixed value for each power source b
e y but
Th graph below shows averag e direct and estimated indirec
he w ct
commprises a range of values dep
e pendent on source, location an nd
co for fossil fu
osts uels, wind energ and nuclear power. There is a
gy
tim These values are affected b local politica and regulato
me. by al ory
large variability hidden in the d ata, however th is little doubt
h here
connditions, by macro-economic f factors, by financing options
th the indirect cost componen play a significant role for
hat nts
avaailable and by t structure of power markets and
the f
fo
ossil fuels and can play a poten
c ntially large rol in the case of
le f
transmission syst tems.
nuuclear energy.
Average direct and indirect costs
A t t
for selecte energy types
ed
Com
mparing power sources
r
Decommission
ning
Due to the challen of monetizi the indirect costs of energ
e nge ing t gy,
many comparison include only t direct cost components.
ns the Social cost
Environmental cost
l
The benefit of com
e mparing power sources based on both the
d
OPEX
dire and indirect components i that it will pro
ect t is ovide the best
bas for making long term energ decisions. However, the
sis gy CAPEX
commparison shoul be on a comm basis with the same
ld mon
asssumptions for a technologies based on the full lifetime
all s,
cos When you include all of the actual costs into the
sts.
calculations, wind energy can be a competitive power source –
d e
and already is in s
d some cases.
Fossil fuels
s Wind energy
d Nuclear
The graph below s
e shows levelized cost of electricity from vario
d ous So
ources: Direct cos compiled from EER 2009 and 2010 and IEA
sts m d
pow sources in 2
wer 2009, based o data collecte from OECD
on ed 20
010. Indirect costs compiled and/ calculated ba
/or ased on data from
m
and BRICS countries. The graph highlights that large variabilit
d t ty EP 2011, World Bank 2011, and Stern Review 20
PA B 006. Fossil fuel d
data
in costs and is bas only on dire costs- the in
c sed ect ndirect costs off ba
ased on supercrit
tical coal and CCG gas technolog
GT gies. Wind energy
y
eneergy are not inc
cluded. da based on onshore wind plants Nuclear data ba
ata s. ased on generation
III technology.
Cost rang for selecte energy tech
ges ed hnologies
601
6
Re
elative impact of different co components
ost s
501
5 Va
ariations in the direct cost com
mponents of en
nergy impact
different energy technologies in unique ways as a result of th
n heir
Cost $/MWh
401
4
co structures.
ost
301
3
Fo fossil fuel-ba
or ased technolog variations in the fuel price
gies i e
201
2
ha the largest effect on the le
ave evelized cost of energy. A 50%
f %
increase in the fu price can ca
uel ause the cost of electricity to
f
101 increase by more than a third de
e epending on th fuel. Fossil fu
he uels
or nuclear power
r r-based power pplants have a laasting - and moost
1
lik rising - fuel cost, and the f
kely fuel cost for wind is zero.
Fo
ossil fuel-based power plants will - or potent
d tially already do –
o
ha a price on their emissions of carbon and other pollutant
ave ts,
an that price is also zero for wiind energy.
nd
Sou IEA 2010
urce
4

5. Reduc c
R cing cost of en y
o nergy
The cost of energy for various so
e y ources fluctuates over time an
nd Many potential risks can impac energy invest
ct tments, and every
som trends can b seen for different sources. The cost of win
me be nd ris has a cost. Risks have an im
sk mpact on the interest rates for r
ergy is still falling.
ene geetting funding, and they can b reduced by addressing
be
poolitical and regu
ulatory uncertaainties: the mor political and
re
Wh Vestas is do
hat oing
regulatory uncertainties there a around wind energy, the
are
Ves works in a focused way to continue lowe
stas o ering the cost o
of higher the risk prremium that an investor will re
n equire and the
eneergy through teechnological ad dvances in turbine technology y. higher the interest rate that a b
bank will deman This higher risk
nd.
Thi means that w make turbines that are fine tuned to eac
is we ely ch makes it more ex xpensive to fun wind projects – increasing t
nd the
typ of wind speed and each typ of site. Anoth key focus
pe pe her direct cost of eneergy. The cleare and more tra
er ansparent the
are is to make th power production from our turbines as
ea he t rules are for plan
nning and deve loping a projec for financial
ct,
stable, predictable and efficient as possible. Veestas gives co
ompensation, fo grid connect
or tion, and for all the other facto
ors
guaarantees for avvailability and lo production thereby reduciing
ost th impact energy projects, the more certain the projected
hat e
risk further. In that way we get t most energ out of every
ks the gy return on investm ment – and the lower the cost of project fund ding,
blade and every tu urbine, lowering the cost of en
nergy compared d wh lowers the final cost of en
hich e nergy.
to the installed am
t mount of MW.
In addition, governments can loower the cost of energy throug
f gh
How government can help
w ts stable support scchemes, furthe reducing the risk of investin in
er ng
wi energy. Sup
ind pport schemes can make reve enue from a winnd
Gov
vernments play an important part in lowering the cost of
y
prroject more predictable, which make the projected return on
h n
ene
ergy by reducin risks and ind
ng direct costs for wind project
w
investment more certain. Again this decrease the cost of
e n, es
dev
velopers and owwners.
boorrowing money which again d
y, decreases the cost of energy.
Ves
stas product portfolio
A ra
ange of turbine suited to spe
es ecific wind spee and conditiions, customiza for various environments and requireme
eds able s s ents.
IEC III IEC II IEC I
Wind speed (m/
/s)
6 6.5 7 7.5 8 8.5 9 9.5 10
V
V164 7MW
V112 3MW Offshore
2
V112 3MW Onshore
W
V100 1.8MW
W
V90 3MW
3
V90 2MW
W
V90 1.8MW
V80 2MW
V 850 kW
V60
V52 850 kW
5

6. Our en y futu
O nergy ure
We keep the cost of energy low a stable in th future by
e and he th financial crisis and resulting deep recessio in most of th
he g on he
making the right d
decisions now r regarding what power
t wo and energy experts includ
orld y ding the IEA wa of a further
arn
tec
chnologies and what types of f to rely on. We need to foc
fuel W cus rebound in fuel costs due to groowth in develop economies
ping s.
on both the direct and indirect co
t omponents of cost of energy.
c
Wind energy is a less risky futu re energy inves
W stment than fuel-
Redducing our dependency on lim mited resources such as non-
s
ased energy because wind ene
ba ergy has a stab and certain
ble
newable fuels is a way to secure a stable, predictable and
ren s
co model imbedded – there ar no fuel costs no carbon cos
ost re s, sts
affo
ordable energy supply for the future.
y e
an virtually no environmental costs. So all in all, wind energy is
nd e
Buiilding a power p
plant today is a bet on future energy and fue
e el th safest bet for our energy fut
he ture. Including wind energy in
n
pric in terms of future cost of e
ces d
energy. Building a fossil fueled bo short- and long-term energ planning will continue
oth gy
pow plant is a bet on future fos fuel prices and the price o f
wer ssil a en
nsuring a local, stable, predict
table, clean and affordable power
d
car
rbon emissions. Fossil fuel cos have remain high despit
sts ned te upply for many countries.
su
Oi price chronology 1974-2011
il
Dollars per barrel
D
So
ource: EIA
6

7. FAQ
F
Question
Q Answer
A
What’s the diffe
W erence Th cost of energ is what it cos to actually generate powe whereas the price of energy refers to
he gy sts er, y
be
etween cost of energy
f th rates paid for the use of ene
he ergy. The price of energy may include fees, ta
axes, grid and
an price of ene
nd ergy? ansmission cos among othe beyond sim the cost of energy. The p rice reflects supply and
tra sts, ers, mply f
deemand of powe and the exist ing transmissio infrastructure – it may not express the tru cost of
er on ue
geenerating that electricity.
e
Why use leveliz cost
W zed When comparing power plants the comparison should alway use the level ized cost of energy, which
W g ys
of energy and n
f new-build ta
akes into account the full lifetiime costs, rathe than the energy price at any given time. Moreover a
er y M
po
ower plants fo
or co
omparison shou always be m
uld made between new-build power plants, since the costs for existing
e e
co
omparing cost of
t po
ower plants rep
present the cos of resources at the time whe they were bu and over their
st a en uilt
en
nergy for vario
ous op
perating time, which may have changed sign
w e nificantly compa to new-bu power plants, even
ared uild
en
nergy sources? ? th
hose of the sam type.
me
Why are there
W Th
here are differe
ences in the est
timates for cost of energy pub
t blished by diffe
erent institution for the
ns
di
ifferences in th cost
he sa power sources because to calculate cost of energy, you need to expre the full lifet
ame o u ess time costs
of energy calcul
f lated by of a power plant as net present value – what those costs wou be today. Diifferent institut
f uld tions may
di
ifferent institu
utions? ch
hoose different costs and fact
t tors depending on the data they have and th accuracy thereof, where
he
th are, the mac
hey cro-economic s situation, and th assessmen of the risks fo each techno
heir nt or ology and
ea situation.
ach
How about the Leevelized cost of energy can be used at the individual project level or at the electricity sys
f e e stem-wide
baalancing and s
system level; in order to compare techn
nologies, using it at the individ project lev makes more sense.
dual vel e
in
ntegration cost for
ts Baalancing and sy ystem integratiion costs are re
elevant when discussing the s system-wide co of
ost
wind?
w ennergy. For more information o n this please co
e ontact GR Oper rations in Grou p Government Relations
at governmentre
t elations@vestaas.com.
References
R
So
ource
EW
WEA The Economi of Wind Ene
ics ergy, 2009;
IEA
A iea.org; Proje
ected costs of generating elec tricity 2010 by OECD/NEA/IEA;
y
U.S EIA
S. eia.doe.gov;
U.S NAS
S. Hidden Costs of Energy: Unp
priced Conseque
ences of Energy Production an Use, Nationa Academy of Sciences, 2010
nd al S
U.S NREL
S. Wind Leveliz Cost of Ene
zed ergy: A Compar
rison of Techni and Financ Input Varia
ical cing ables, October 2009;
Win
ndpower Annual Powe Costs Compa
er arison series, Ja
anuary 2011 and January 2010; Cutting the cost of offsho wind
e ore
Mo
onthly energy, Augu 2010; all by David Milborr
ust y row
7