The energy supply market is very competitive, led by utilities and fuel companies that meet nearly all our energy demands. Alternative energy sources like wind power provide new options and certain advantages, but to be truly competitive with conventional energy sources, they also must be economical.

Throughout their lives, people make informed decisions on major purchases and financial investments. In the case of home and car purchases, the decision is usually which one to buy, rather than whether to buy, because these items are considered necessities. Many sources of professional advice are available to assist the buyer in making a sound decision for these common types of investments. For wind turbines, where the choice to buy is voluntary, good advice can be hard to find.

How does the average homeowner, farmer or business person choose between wind energy and the energy source he or she now uses? A wind energy system requires a large initial capital outlay, but over its lifetime it will provide years of energy with no fuel cost while the costs of other sources of energy may escalate.

How much do wind turbines cost and will they eventually pay for themselves? Will utility rates change in the future and by how much? This chapter addresses these kinds of questions and charts a course toward a well-informed investment decision. Previous chapters described the steps necessary to choose an efficient wind system for given wind conditions and energy needs. The following pages prepare prospective buyers to determine the potential financial gain available from the wind system chosen to fit a particular energy profile.

Cost

The cost of a wind system has two components: initial installation costs and operating expenses. The initial installation cost includes the purchase price of the complete system (including tower, wiring, utility interconnection or battery storage equipment, power conditioning unit, etc.) plus delivery and installation charges, professional fees and sales tax.

The total installation cost can be expressed as a function of the wind system's rated electrical capacity. A grid-connected residential-scale system (1-10 kW) generally costs between $2,400 and $3,000 per installed kilowatt. That's $24,000-$30,000 for a 10 kW system. A medium-scale, commercial system (10-100 kW) is more cost-effective, costing between $1,500 and $2,500 per kilowatt. Large-scale systems of greater than l00 kW cost in the range of $1,000 to $2,000 per kilowatt, with the lowest costs achieved when multiple units are installed at one location. In general, cost rates decrease as machine capacity increases. The curve's width reflects the range of costs available. For exact figures applicable to you, contact a manufacturer or dealer. A partial list of manufacturers and dealers can be found at Wind Turbine Manufacturers.

Remote systems with operating battery storage typically cost more, averaging between $,4,000 and $5,000 per kilowatt. Individual batteries cost from $150 to $300 for a heavy--duty, 12 volt, 220 amp-hour, deep-cycle type. Larger capacity batteries, those with higher amp--hour ratings, cost more. A 110-volt, 220 amp-hour battery storage system, which includes a charge controller, costs at least $2,000.

The other cost component, operating expenses, is incurred over the lifetime of the wind system. Operating costs include maintenance and service, insurance and any applicable taxes. A rule of thumb estimate for annual operating expenses is 2% to 3% of the initial system cost. Another estimate is based on the system's energy production and is equivalent 1 to 2 cents per kWh of output.

Several methods can be used to determine the financial benefit of a wind system investment. We will consider two important ones, estimating the payback period, and comparing the cost per kilowatt-hour from a wind turbine to purchased electricity. These methods are more appropriate for grid-connected systems than for remote, off-grid systems. The last section of this chapter discusses other economic considerations of remote systems.

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Payback Period

A common and simple way to evaluate the economic merit of an investment is to calculate its payback period, or break-even time. The payback period is the number of years of energy-cost savings it takes to recover an investment's initial cost. To determine the payback, the investor first estimates the wind turbine's total initial cost, annual energy-cost savings, and annual operating costs. Dividing total initial cost by the difference between annual energy-cost savings and annual operating costs gives the payback period:

Total Initial Cost/(Annual Energy Cost Savings - Annual Operating Costs) = Payback time, in years

The initial cost is inclusive of all expenses to evaluate, buy, install and start-up a wind system. For illustrative purposes, consider the total initial cost of a 5 kW residential system and a 50 kW commercial system:

Residential 5 kW system = $15,000
Commercial 50 kW system = $100,000

Annual electric savings is the retail value of electricity from the wind system that you would have otherwise bought from the utility company. It is determined by multiplying the retail cost of electricity given on your electric bill by the number of kilowatt-hours the wind turbine is supposed to produce in a typical year. A manufacturer or dealer can provide an estimate of the wind system's annual output as a function of your location's average wind speed. Assume the cost of electricity to be 6 cents per kWh and the annual output from the residential and commercial systems at a 14 mph site to be 10,000 kWh and 100,000 kWh, respectively. The annual energy-cost savings from both systems would be:

Residential $0.06/kWh x 10,000 kWh = $600
Commercial $0.06/kWh x 100,000 kWh = $6,000

Annual operating costs are estimated by multiplying the wind system's energy output by a typical operations and maintenance cost, such as 1 cent per kWh. For the two wind system examples, the annual operating costs are:

Residential $0.01/kWh x 10,000 kWh = $100
Commercial $0.01/kWh x 100,000 kWh = $1,000

Now that all components of the payback equation are defined, the payback period can be calculated.

Residential payback period:

$15,000/($600 - $100) = $15,000/$500 = 30 years

Commercial payback period:

$100,000/($6,000 - $1,000) = $100,000/$5,000 - 20 years

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Other Economic Factors

The simple payback method does not account for all the actual costs and savings associated with a wind turbine investment over its operating lifetime. Additional costs and savings might include the following:

increases in energy costs relative to general inflation
interest paid on borrowed money
insurance
utility buy-back
state and federal tax benefits
wind turbine resale value

To an extent, these items can offset one another, depending on your particular circumstance. To determine the impact of one or more of the above factors on your investment, it is necessary to perform a life-cycle cost analysis. This comprehensive method calculates the wind system value by considering all the costs and savings on a yearly basis throughout a wind turbine's lifetime, and discounting them back to a present value. For most applications, the payback year estimated by this method will be fairly close to that estimated by the "simple" method. Because this approach is fairly complicated, it is not detailed here. Instead, you can refer to an economics reference source. The cost and savings items mentioned are discussed below.

Energy-Cost Increases
Although a wind turbine's energy savings may average out to be relatively constant from year to year, the value of that savings may actually increase annually. During the last 20 years, energy costs have risen more rapidly than the general inflation rate. For instance, if electric utility rates increase at 6% per year versus a 3.5% general inflation rate, the real increase in energy cost is 2.5%. As long as this trend continues, the cost savings from a reduced energy load will rise each year. This shortens the payback period on your investment. The extent of future energy cost increases will depend upon many factors, including fuel availability, government policies, international activities and consumer demand.

Cost of Borrowing Money
It is likely that part of the initial purchase price of a wind system will be paid in cash and the remainder in borrowed money. Lending institutions base their interest charges upon a number of factors, including the amount of risk involved in a particular loan and current economic conditions.

You should contact several lending institutions to determine the interest rates and term (number of years to repay a loan) available to you for a particular wind machine. Usually a fixed monthly payment is arranged, consisting of two parts: repayment of a portion of the principal amount borrowed, and interest charges on the remaining principal. The principal repayments are part of the initial costs of the wind turbine and the interest charges are an annual expense that reduces the energy-cost savings.

IEC's Alternate Energy Revolving Loan Program
The IEC offers a revolving loan program called the Alternate Energy Revolving Loan Program (AERLP). The program is designed to encourage the development of alternate energy production facilities within Iowa. The AERLP was created by the Iowa state legislature in 1996 as an amendment to the 1990 Iowa Energy Efficiency Act and it is funded by Iowa's investor owned utilities.

The AERLP provides loans for the development of alternate energy facilities. Loan applicants work through a lending institution of their choice. Successful applicants will receive a single, low-interest loan from a combination of IEC and lender funds. The IEC provides loans for 50% of the project's cost or up to $250,000. The IEC portion of the loan is provided at 0% interest for up to 20 years. The remainder of the loan is provided by the lending institution at a negotiated rate. The lender manages the entire loan and arranges repayment to the IEC.

The lending institutions are responsible for financially qualifying the borrower, while the IEC assists in technically qualifying the borrower. By using the expertise of commercial lending institutions, the IEC is able to cost-effectively process the loans in a timely manner and maximize the impact of the loan program.

The AERLP is open to all individuals and groups who want to build alternate energy facilities in Iowa. An exception to this is non rate-regulated utilities. AERLP loans are also not available for refinancing an existing loan. To provide a balanced mix of projects, the IEC awards a percentage of funds for various types of alternative energy technologies. Portions of the reserve funds are allocated for specific technology systems as follows:

To be considered for a loan, applicants must complete a technical loan application. The technical application provides information to help determine the project's potential for success. The technical application then receives a ranking and loans are provided to the highest ranked projects first, until all the funds for that lending period are gone. Detailed technical application guidelines are available by contacting the IEC.

The IEC has approximately $5.9 million total funds available for the program. Deadlines for technical applications are October 31, January 31, April 30 and July 31 for the duration of the program.

Insurance Expenses
For the same reasons you protect a car and home investment with insurance, a wind system should be similarly covered. Insurance coverage should apply to the system itself as well as to any potential machine-related accidents. Policies and premiums for insurance vary by insurance company. Coverage may be included under an existing homeowner's or general liability policy at little or no added cost, or a separate policy may be required.

Utility Buy-Back Rates
In the previous payback examples, it was assumed that all the electricity produced by the wind machine was used by the owner. However, there may be occasions when more energy is generated than is needed at a particular time. An on-site storage system would save the power for use at a later time or at a different location. The use of the local utility company electric lines for sales of surplus electricity, as well as a back-up supply, is another option in Iowa.

Utilities are required to buy electricity that is fed into their power lines. In Iowa the buy--back rate for this electricity varies by utility, but in most cases it is about 1.5 cents per kWh. Iowa has a buy-back rate that may be negotiable, and people have negotiated a wide range of rates. In any case, this rate is considerably less than the retail rate at which you buy electricity. This means that a wind turbine's output has far more value when used directly by the owner. Therefore, a wind turbine's payback period is affected by the buy-back rates if excess electricity is sold to the utility. Assume that 1,000 kWh from the residential system example cannot be used when produced and is supplied to the utility at 3 cents per kWh. The wind system owner would receive a $30 credit on his or her electric bill. If the owner later purchases 1,000 kWh at the retail rate of 10 cents per kWh, it costs $100. The owner, therefore, has lost $70 in an even energy exchange.

When buy-back rates are lower than the retail price of a kWh of purchased electricity, a wind machine should be sized to minimize the amount of energy sold to the utility. In the rare instances where buy-back rates are equal to or higher than the consumer's purchase price, this constraint does not apply.

It is important for commercial customers to realize that their rate structure may change dramatically if their utility usage decreases.

Resale Value
The resale value of a wind turbine refers to the potential salvage at the end of its useful life. Future resale value will depend on many factors, including the extent of changes in the design of new systems and upon the attractiveness of wind machines relative to other alternative energy technologies.

The salvage value of the wind energy system increases the ultimate rate of return on the investment. A moderate estimate for salvage value might be a selling price after 20 years that is worth 10% of its cost at today's dollar value. For example, if we assume a 5% annual inflation rate, today's $15,000 machine might sell for about $4,000 in 20 years. This salvage value equal to $1,500 at today's prices.

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Calculating the Cost Per kWh

The information gathered to find the payback period easily enables us to compute the cost per kWh of wind-generated electricity. The calculation for cost per kWh is a two-step process.

Step 1

Annual Cost = (Initial Cost/Expected Life) + Annual Operating Costs

This formula defines the annual cost over the wind system's lifetime. Wind turbine manufacturers estimate a useful life of between 20 and 30 years for their product. In this example, let's assume a 25 year estimate of useful life. The annual cost is equal to the total initial cost (defined previously) divided by the expected life of 25 years, plus the annual operating costs for maintenance (defined previously).

Step 2

Cost Per kWh = Annual Cost/Annual Energy Output

This formula takes the annual cost calculated in Step 1 and divides it by the projected annual energy output (defined previously). Using our previous examples of residential and commercial machines, the cost per kWh calculation is:

Residential:
($15,000/25 years) + $100/year = $600 + $100 = $700/year

Commercial:
Annual cost = ($100,000/25 years) + $1,000/year = $4,000 + $1,000 = $5,000/year

Cost per kWh = ($5,000/year)/100,000 kWh/year = $0.05 per kWD

These costs can be compared with your utility company rates. These examples indicate that both wind system applications should produce energy over their life at a lower cost per kWh than purchases from the utility.

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Considerations for Remote Systems

The economics of remote wind systems are different than grid-connected systems, for several reasons. One is that a decision has to be made to either install an independent energy system or to pay to have the power line extended to your location. As a rule of -thumb, it is probably cost-effective to install a wind system to meet the energy needs of a small, remote load (e.g., residence, water pump) if the power line is more than a half-mile away and the site has an average hub-height wind speed of at least 12 mph. However, for an energy intensive application, such as a business or factory, a line extension may be justified.

Another reason for the difference between remote and grid-connected system economics is that there are many types of independent energy and storage technologies available to choose from, with wind energy being just one. They can be used exclusively or combined into hybrid systems.

A third reason is that the selection and sizing of your system components is critical to energy supply dependability. An intermittent power application like water pumping has different design criteria than a home or communication repeater station where electric needs are more continuous. These issues are very user- and site-specific, thus making the discussion of remote system economics non-generic.

The cost to extend an electric utility line is a function of many factors:

The particular utility company
Distance from the utility
The terrain and ground cover along the line extension route
The need to obtain rights of way from affected land owners along this route.
Zoning regulations that control the use of overhead versus underground lines
The line capacity.

Similar to a grid-connected system, a remote system has initial and lifetime operating costs. Initial costs will include equipment components such as batteries, controls and an inverter to supply AC loads. In addition to servicing, maintenance and insurance, annual operating costs will include battery replacement every 3 to 10 years, depending on the battery type and the number of discharges.

The cost effectiveness of a wind system relative to a solar electric (photovoltaic) or propane generator cannot be determined solely by comparing the initial and annual operating costs. This is because these systems rely on different fuels that are available at different times. For example, a solar system without a battery can't work at night. The availability of energy output from these systems must be compared to the time periods when energy is needed, both on a daily and seasonal basis. Battery systems can store excess energy for use when your energy system is not operating. However, the size and cost of the battery system depends on the degree of match or mismatch between when energy is produced and when it is used. It is economically beneficial to minimize battery size by properly matching the wind resource availability with load requirement. Therefore a careful analysis of your energy needs is essential to design an optimal remote energy system. Remote system dealers and installers can assist you in developing an appropriate system design.

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