Wind generation is one of the cheapest forms of new electricity generation. In New Zealand, wind farms do not receive subsidies. For this reason, developers will only build a wind farm if it can produce electricity at a cost that is competitive with other forms of generation.
Estimates of the cost of wind-generated electricity vary from around $70 to $120 per megawattt hour (MWh). The reason for this wide range is that there are many variable factors that affect the cost of developing a wind farm - such as wind speeds, ability to maximise generation, construction costs, the cost of connecting the wind farm to transmission lines, capital costs, market conditions for wind turbines, the exchange rate and commodity prices.
A 2011 report by Deloitte used actual data from local projects to examine the cost of wind energy in New Zealand. The report concluded that existing wind farms have been developed with a long run marginal cost of between $78 and $105 per megawatt hour, and that at the lower end of the scale, wind farms are competitive with alternative technologies.
Wind generation will become the lowest cost new generation as cheap geothermal (which is limited) is built out and as wind generation costs continue to reduce.
A major benefit of wind energy is cost certainty. The fuel for wind farms - the wind - is free. This means the future cost of wind energy will not be affected by increasing fossil fuel prices or the cost of greenhouse gas emissions.
Reducing cost of energy from wind turbines
The cost of electricity from wind turbines is expected to decrease in coming years as technology and know-how improves. Essentially, modern wind turbines are able to extract more energy from the wind than turbines that are 10 or 15 years old, and this reduces the cost of generation (measured in megawatts per hour).
A working paper prepared by the International Renewable Energy Agency identifies that in the medium-to long-term, the capital costs for wind energy could reduce by 10% to 30% as a result of learning-by-doing, improvements in the supply chain, increased manufacturing economies of scale, competition and more investment in R&D.
Cost of integrating wind into the electricity system
There are costs associated with integrating increasing amounts of wind energy into the electricity system, but these costs are estimated to be less than the costs associated with continuing to rely on thermal generation.
A study lead by Goran Strbac, Professor of Electrical Energy Systems at Imperial College in the UK, and commissioned by Meridian Energy identified that costs associated with greater use of wind in New Zealand included additional costs for system reserves (instantaneous, frequency-keeping and scheduling reserves) and generation capacity (as wind has limited ability to provide generation capacity at peak demand). For integrating 2000 MW of installed generating capacity by 2020, the additional cost would be between $2.06 and $2.76/MWh of wind energy - an amount significantly less than the effect of the cost of carbon on gas and coal generated electricity.
Many of the costs associated with thermal generation are uncertain, but trends suggest they are likely to rise. The rising price of natural gas has been an important driver of increasing electricity prices. This trend is expected to continue, and could push electricity prices up another $15 to $25/MWh. New Zealand's emissions trading scheme has required generators to meet their emission costs from 2010. Analysis by NZIER shows that a cost on carbon emissions of $NZ33.32 would increase the cost of coal generated electricity by $33.32/MWh and gas generated electricity by $16.66/MWh.
The Strbac study also noted that the cost of integrating wind into the New Zealand electricity system is many times lower than experienced in Europe, primarily because of New Zealand's excellent wind resource and significant hydro generation.