Lesson 05 · 4 min · 6 things to do
Most of the cost is paid before it runs
Tell apart the cost of building and the cost of running.
- Building it75% of lifetime cost
- Running and maintaining it25% of lifetime cost
A wind farm's lifetime cost. A gas plant's chart is close to the reverse. A wind farm and a gas plant both deliver electricity. Where does each one's cost mostly sit?
- Yes.It changes what each is sensitive to. The wind farm's economics are decided by the interest rate on its construction loan; the gas plant's by the price of gas.
- Not quite.Over a gas plant's life, fuel usually costs far more than the plant did.
- Not quite.A wind farm's running cost is maintenance. There is no fuel bill at all.
Some plants pay for themselves up front and run on weather. Others are cheap to build and pay every hour they run. Almost every energy argument turns on that difference.
The same wind farm, financed at different interest rates. Slide and watch the cost of its electricity.
3%7%12%Cost of its electricity£44/MWhGas-fired, for comparison£85/MWh3%Cheap money. The electricity is among the cheapest available anywhere.
Cost of its electricity£62/MWhGas-fired, for comparison£85/MWh7%The same turbines, the same wind, and a noticeably higher price.
Cost of its electricity£88/MWhGas-fired, for comparison£85/MWh12%Now marginal against gas — with nothing about the technology having changed.
Nothing about the turbines changed. Why did the price of their electricity nearly double?
- Yes.For technologies with no fuel bill, finance is the fuel bill. This is why interest rates move renewable projects far more than they move gas plants.
- Not quite.The wind, the site and the turbines are identical in all three frames. Only the cost of the borrowed money changed.
- Not quite.The gas bar is the same in each frame — it is there as a fixed comparison.
Move the control to see what changes.
Which of these change the cost of a wind farm's electricity a great deal, and which barely at all?
The interest rate on the construction loan.
How windy the site is.
How many years it is expected to run.
The price of gas.
This month's electricity demand.
Yes.Everything that matters is decided before it generates a single unit: what it cost, what the money cost, how much it will produce and for how long. After that it is a machine standing in the weather.A plant costs £800m to build and will produce 40 million MWh over its life, with £200m of lifetime running costs. What does its electricity cost, in £ per MWh?
£/MWhYes.(800 + 200) million ÷ 40 million. This is the whole idea behind a levelised cost — and it hides everything about WHEN the electricity arrives, which is what the next lesson is about.Two sources have the same levelised cost per unit. What does that comparison leave out?
- Yes.A unit at 6pm on a cold Tuesday is worth many times a unit at noon in June. Levelised cost averages that away, which makes it a useful number and a bad answer on its own.
- Not quite.It is the single most common comparison in energy journalism and the one that most often misleads, for exactly this reason.
- Not quite.Also left out, and usually accounted for separately. Timing is the omission that changes which plant a grid actually needs.
Why does a country keep gas plants that run only a few hundred hours a year?
- Yes.Their value is being there on the worst evening of the year. Judging them by cost per unit makes them look absurd, because that is not the product being bought.
- Not quite.They are among the most expensive per unit, which is precisely why they run last.
- Not quite.Capacity payments exist and are the mechanism. The reason they exist is the peak.
Lesson complete
For a plant with no fuel bill, the interest rate is the fuel bill.
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