Similarity #4: Project risk
From a financial perspective, both wind and gas-fired projects embody a primary source of risk that is difficult to mitigate. Gas-fired projects suffer from volatile fuel prices. Certainly, the stakeholders in gas-fired projects of the 1990s thought they were hedging fuel risk. But it quickly became clear, notably over the last three years, that they weren't hedging enough.
Wind energy projects, similarly, suffer from volatile "fuel" supply—day to day, month to month, and season to season. In essence, a wind project trades premium fuel price volatility and financial impact for variability in output and its financial impact. The potential discrepancy between the predicted and actual energy output of a wind farm is significant. Some reports indicate that errors of 20% to 50% in day-ahead production volumes are common.
Similarity #5: State-by-state patterns
There has been a shift of activity in the U.S. wind power market from the West to the Northeast and Midwest. In particular, New York, Pennsylvania, and Illinois are instituting aggressive wind and renewable energy development programs. The largest single wind project currently being built in the U.S. is in Illinois. California, of course, continues to be a hotbed of activity, along with Texas. Both are vying for the top of the mountain, so to speak, in wind energy development.
What do all these states have in common? They were in the vanguard of retail electricity deregulation, the result of which was large additions of gas-fired merchant capacity. They also generally have higher electricity rates than other states, especially in the population centers. The convergence of high energy costs, large fractions of gas-fired capacity in the mix, the end of moratoriums on electricity rate increases as part of restructuring, and capital needs for infrastructure expansion programs has led to sizable rate increases in these states (and, for that matter, around the country). It remains to be seen how long escalating rates can coexist with the development of relatively high-cost capacity such as wind power.
Similarity #6: O&M issues
The average wind energy project has a capacity factor of 35% or less. This magnifies the negative effect of any outage, planned or unplanned, on project financials. At the annual American Wind Energy Association conference in Pittsburgh in May of this year, more than one Wall Street analyst reported that the industry's top issue, after supply chain concerns, is the quality and reliability of turbines.
By now you shouldn't be surprised that this brings to my mind the worldwide spate of F-class gas turbine recalls circa 1995 to 1997, following the catastrophic failure of several machines. Thankfully, history hasn't repeated itself for onshore wind turbines. But offshore units in Europe have undergone enough across-the-board repair and modification to constitute a recall.
One organization staying on top of the O&M issues is Sandia National Laboratories. In March 2006, Sandia issued a report titled, "Wind Turbine Reliability: Understanding and Minimizing Wind Turbine Operation and Maintenance Costs." The labs followed up with a workshop on the subject in October.
One key passage in the report reads as follows:
In the late 1990s, manufacturers began to introduce wind turbines in much larger sizes. While the larger kW size machines are being produced by many manufacturers, the new "MW" size machines are being installed in significant numbers. Most major vendors offer turbines in the 1.5 MW size range and are actively developing and installing first versions of 2 MW and 3 MW machines. Most of these larger machines employ technologies that are sufficiently new that the validity of extrapolating data from the 'standard" machines of the 1990s is questionable. An example of the dramatic difference in technology is the trend toward direct-drive turbines that eliminate the gearbox entirely and employ a low-speed large diameter synchronous generator.
As gas turbines were scaled up, many expected their O&M costs to decline because the new units were extrapolations of current designs. Relative O&M costs do fall after a technology matures via production experience, but the early years are a different story. In addition, the larger size of the machines means that more capacity fails to generate (more) revenue whenever one goes down.
The Sandia report goes on to state that the track record of upsized machines does not justify downward extrapolation of O&M costs. It references data from the German insurance industry, which estimates the incremental O&M cost of a megawatt-class machine at 1.0 cents/kWh, or $25,000 per year per machine.
Here's another passage from the Sandia report that harkens back to the heyday of gas turbine development: "There exist large fleets of similar model turbines but in many cases detailed changes and revisions have been implemented, often in response to serial defects." Those who remember the parade of engineering solutions to problems with large gas turbines surely will get a sense of déjà vu from this statement.
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