Relative prices tell us that wind power is more scarce than its primary fossil fuel competitor for electric generation -- gas-fired generation in modern, state-of-the-art facilities (known in the industry as "combined cycle" plants).⁷ That is because wind power's high up-front capital costs and erratic opportunity to convert wind to electricity (referred to in the trade as a "low capacity factor") more than cancels out the fact that there is no energy cost from naturally blowing wind.⁸

Low capacity factors, and still lower dependable "on peak" capacity (DOPC) factors, are a source of wind power's cost problem. In California, for instance, where some 40 percent of the world's capacity and over 90 percent of U.S. wind capacity is located, wind power operated at only 23 percent realized average capacity in 1994.⁹ This compares to nuclear plants with around a 75 percent average capacity factor, coal plants with a 75-85 percent design capacity factor, and gas-fired combined-cycle plants that have a 95 percent average design capacity factor.¹⁰ All these plants produce power around the clock. Wind does not blow around the clock to generate electricity, much less at peak speeds.

Peak demand for electricity and peak wind speeds do not always coincide.¹¹ A study by San Diego Gas & Electric in August 1992 concluded that wind's DOPC was only 7.5 megawatts (MW) per 50 MW of nameplate capacity (a 15 percent factor).¹² The California Energy Commission has consequently recalculated the state's 1994 wind capacity from 1,812 MW to 333 MW, an 18 percent "dependable capacity" ratio.¹³

The cost of wind power fell from around 25 cents per kilowatt hour (kwh) in the early 1980s to around 5-7 cents (constant dollars) in prime wind farm areas a decade later.¹⁴ By the mid-1990s, wind advocates reported that a new generation of wind turbines has brought the cost down below 5 cents per kwh and even toward 4 cents in constant dollars.¹⁵ A DOE estimate was 4.5 cents per kwh at ideal sites.¹⁶ However, even at the low end of the estimate, the total cost of wind power was really around 6-7 cents per kwh when the production tax credit and other more subtle cost items are factored in, as discussed below. This all-inclusive price in the mid-1990s was approximately double the cost of new gas-fired electricity generation -- and triple the cost of existing underutilized generation.

The total cost of wind power is higher than advertised estimates for several reasons. First, wind receives a 1.5 cent per kwh federal tax credit, escalating with inflation, which is approximately one-third of its (as-delivered) selling price. Accelerated depreciation, allowing a five-year write-off compared to the standard 20 years or more, is also given to wind, significantly lowering its tax rate. Gas-fired electric generation does not have a tax credit or an option of accelerated depreciation, and natural-gas extraction has a total deduction (primarily a scaled-back percentage depletion allowance) of under 2 percent of its wellhead price.¹⁷ State severance taxes, which totaled $45 billion for oil and gas extraction between 1985 and 1994, swamp this wellhead deduction.¹⁸ Thus wind's entire tax credit can be added back in for an apples-to-apples comparison with gas-fired alternatives.

Local tax incentives for wind, such as exist in California, as well as industrial revenue bonds, a common inducement for renewable projects, would increase this add-back. All told, preferential taxation can reduce renewable bids between 2 and 3 cents per kwh compared to the fossil fuels or hydroelectric projects, not to mention nuclear. At today's prices for new generation, this can be over 50 percent of the final selling price, a very sizeable preference.

Second, low-cost wind depends on select sites with strong, regular wind currents (Class 4 and above wind speeds) versus other power generation that can be built in larger increments in far more places, or converted or repowered in existing locations. Remote wind sites¹⁹ often result in construction of additional transmission lines, estimated to cost as much as $300,000-$1 million per mile. ²⁰ The economics of transmission are poor because while the line must be sized at peak output, wind's low capacity factor ensures significant underutilization. This adds a half-cent per kwh, more in California and sometimes less elsewhere, to the levelized cost of wind.²¹

Third, since wind is an intermittent (unpredictable) generation source, it has less economic value than fuel sources that can deliver a steady, predictable source of electricity.²² Utilities obligated to provide firm service must either "firm up" the intermittent power at a premium (estimated to be between one-half and 1 cent per kwh)²³ or penalize the provider of interruptible supply. Uncertainty of output also increases financing costs from outside lenders compared to more predictable, proven power generation.²⁴ Therefore, a premium has to be added to the intermittent wind rate to compare it to firm "baseload" generation alternatives such as gas-fired combined cycle.

Fourth, wind power becomes more expensive if one takes negative environmental externalities into account, as mainstream environmentalists do for fossil fuel plants ("full cost pricing"). Whereas coal and gas plants have incurred higher costs to reduce emissions pursuant to Clean Air Act mandates (and in some cases have been penalized in resource planning decisions when state regulators add "externality adders" to plant costs), there has been no penalty imposed for the environmental problems of wind farms -- noise, land disruption, visual blight, avian mortality and air emissions associated with the incremental materials required in wind turbine construction.²⁵ Neither has there been an allowance for the substantial "social cost" of taxpayer subsidies.²⁶

All-inclusive wind prices, factoring in those hidden incremental costs, are quite different from the advertised price of new wind capacity.²⁷ San Diego Gas and Electric, referring to its "winning" wind power bids of around 8 cents per kwh in a 1993 auction, complained that it:

observes that the resulting price to wind developers of 6-6.5 cents per kilowatt hour when added to the 1.8 cent [federal and state] tax credit is so far above the five cents/kilowatt hour revenue wind developers have reportedly claimed they require as to indicate that the BRPU [Biennial Resource Plan Update] auction would result in unfair costs to consumers. Before the [California Public Utilities] Commission commits to such high prices, wind developers should be asked to explain why the price customers must pay to them is so much higher than what they claim they need.²⁸

SDG&E's bid experience was approximately the same as the calculated cost of a proposed (but more recently canceled) 45-MW wind project in northern California that would have sold power to the Sacramento Municipal Utility District (SMUD).²⁹ A new 35-MW wind power project in West Texas, enjoying better winds, has a 25-year fixed-price contract for 4.7 cents per kwh. Adding in the federal tax credit, a half-cent per kwh for incremental transmission expenses for the 400-mile trip to Austin, and a half-cent or more for intermittency, however, the cost is around 7 cents per kwh from the get-go -- not including the implicit costs from the incidence of off-peak production and higher financing costs.

A December 1996 report from the Northwest Energy System, a group of electricity stakeholders throughout the Pacific Northwest, including environmental groups, reconfirmed the economic plight of wind and other renewable energies:

Utility-scale solar, wind and geothermal technologies still are more expensive than gas-fired combustion turbines and current market prices. . . . Several renewable resource projects designed to confirm various technologies under Northwest conditions . . . are anticipated to produce electricity that is from one and one-half [wind] to four times [geothermal] more costly than gas-fired combustion turbines.³⁰

This estimate for wind also does not account for implicit costs, which would add approximately 1 cent per kwh to its price, making it double the cost of gas-fired generation and triple the cost of widely available economy energy in the Pacific Northwest.

Paul Gipe, in his treatise on wind power, estimates that the best technology (as of 1995) could deliver wind power for $1,050 per kilowatt, or for between 7.5 and 8.3 cents per kwh.³¹ This estimate, adding the incremental costs discussed above, again confirms the conclusion that as of the mid-1990s wind energy was double the cost of new gas-fired generation and triple the cost of surplus energy (called "economy energy," which refers to the price of electricity on the spot market).

New gas-fired combined cycle capacity in the same time frame, the early to mid 1990s, could generate electricity for between 3 to 5 cents per kwh, according to the Federal Energy Regulatory Commission (FERC).³² SDG&E and SMUD estimated their gas-fired generation alternative at around 4 cents per kwh.³³ This is firm generation with the flexibility to be located near customer demand and thus avoids the subtle costs that wind faces.

A gas-fired project can even lock in long-term gas prices to remove the price risk for consumers and ensure a savings over renewable-energy projects with relatively high capital costs. This advantage is impervious to short-run gas prices, even a near-doubling of prices such as occurred last winter. Because of a "backwardation curve," long-term prices fell substantially below near-term prices, reflecting the long-term supply optimism of the market.³⁴ The result was that ten-year fixed-price gas prices and the resulting price of electricity were little changed.³⁵

It is an error to conclude that even if wind is not competitive now, it soon will be. Wind is competing against improving technologies and the increasing abundance of natural resources. The cost of gas-fired combined-cycle plants -- the most economical electric generation capacity for central station power at present -- has fallen in the last decade due to improving technology and a 50 percent drop in delivered gas prices adjusted for inflation.³⁶ Gas turbines have increased their energy efficiency factors from just above 40 percent in the early 1980s to nearly 60 percent today.³⁷ Forecasts by the Department of Energy and other sources expect continued efficiency improvements in the years 2000 and 2015 for gas-fired generation.³⁸ By one forecast, new gas-fired generation of virtually any capacity will cost from $200 to $450 per kilowatt, generating power at 2 cents per kwh.³⁹

To illustrate the point, consider the most recent nominal levelized prices of advanced wind technologies operating in prime wind areas and new-generation gas turbines. Long-term fixed-price wind bids have been recently reported at around 3 cents per kwh (nominal), translating into an all-inclusive price of 5 to 6 cents per kwh when factoring in the production tax credit, accelerated depreciation, local tax preferences as well as the implicit costs of intermittency and transmission. Yet the price of combined-cycle gas turbines in 1996/97 has also reached new lows, between $400 and $500 per kilowatt, bringing electricity below 3 cents, even below 2.5 cents, per kwh in select regions such as the Pacific Northwest where natural gas prices are the lowest. This suggests that the historic delivered price discrepancy is still holding and may continue to hold in the future. Indeed, technological change in different energy forms can be congruent, and falling gas price and electricity prices from gas-fired generation itself are lowering wind turbine costs as well. But even if the gap were cut in half, a 50 percent premium for new wind capacity is still very substantial and probably beyond the reach of "green pricing" without blending in fossil fuels with wind generation.

Head-to-head comparisons between wind power and other generation alternatives for new generation capacity is mostly a hypothetical debate. An even greater competitive problem for wind, and an environmental problem as well,⁴⁰ is the surplus sunk-cost capacity with very low incremental costs that exists in many markets around the country. California, in particular (where the U.S. and world wind industry is centered⁴¹) has had substantial surplus gas-fired capacity that in the early to mid 1990s was generating electricity for as little as 2 cents per kwh.⁴² New wind capacity had to compete with 2 cent existing power, not 3 cent new power, which made new wind capacity between 100 percent and 300 percent more expensive than the relevant competition. That insurmountable competitive disadvantage for wind, ironically, has been partly created from California's multibillion dollar investment in demand-side management programs, which idled gas-fired capacity and helped to remove the need for new generation capacity in the state.⁴³ In northern California, where the state's wind industry is concentrated, new capacity is not forecast by the California Energy Commission until 2004. In southern California, where the solar industry is centered, new capacity is not forecast until 2005.⁴⁴ Moreover, this gas-fired capacity, experiencing utilization rates of 30 percent and less due to low demand,⁴⁵ has been retrofitted pursuant to California's stringent air quality rules to become virtually environmentally benign.

The surplus capacity problem for prospective wind power exists outside of California as well. Most other regions have surplus gas-fired (if not coal-fired) generating capacity, particularly off-peak, and this surplus will increasingly become national as electric industry restructuring makes the grid more interconnected. Today, with wholesale prices falling even more with open-access competition, often reaching lows between 1 and 2 cents per kwh, new-generation wind capacity still finds itself three times more expensive. Ironically, this discrepancy can become self-fulfilling if new renewable capacity creates or worsens overcapacity to lower spot electricity prices.⁴⁶

The above analysis pertains to central-station wind power. Regarding residential wind systems, the American Wind Energy Association states, "As a general rule of thumb, a turbine owner should have at least a 10 mph average wind speed and be paying at least 10 cents per kwh for electricity."⁴⁷ Properties need to be one acre or more to support a 80-to-120 foot tower, and noise levels "about half as much as . . . a lawn mower" can be expected.⁴⁸

Assuming optimal wind speeds and the right sized property, the 10-cent criterion leaves 11 states -- Alaska, California, Connecticut, Hawaii, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont -- as potential sites.⁴⁹ With the impending restructuring of the electric industry (discussed below), 10-cent electricity will become a thing of the past in the lower 48 states. Opening up the national electric grid will likely equalize rates across state boundaries and reduce the nation's 8 cent per kwh average residential rate,⁵⁰ leaving still fewer economic applications for wind power.