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Wind energy cost and feasibility of a 2 MW wind power project

Article  in  International Energy Journal · December 2007

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V.P. Khambalkar, et al. / International Energy Journal 8 (2007) 285-290 285

Wind Energy Cost and Feasibility of a

2 MW Wind Power Project

www.serd.ait.ac.th/reric V.P. Khambalkar*1, S.R. Gadge*, S.B. Dahatonde*, M.U. Kale*, and D.S. Karale+

Abstract – The present research work has been carried out on 2 MW installed capacity Wind Power Project, at Motha
District Amaravati, Maharashtra State, India. The main objectives were to evaluate various costs involved in the
energy production. The cost of energy production per kWh (electrical energy) was calculated for the first year of
operation. The economics of wind energy and thereby the feasibility of the power project were examined by estimating
per unit cost of energy, net present value (NPV), benefit-cost ratio (B-C), internal rate of return (IRR), and pay back
period of the power system. The discounted cash flow (DCF) method was used to find out the IRR. In wind energy
conversion system, three cost; installed capital cost, specific capital cost, and life cycle cost of energy, were examined
for the evaluation of the production cost of energy generated. Considering the discount rate on the investment for the
project as 7.5 percent, the B-C ratio comes to 3.51 and IRR comes to 21.82%.

Keywords – Benefit-cost ratio, discounted cash flow, net present value, wind power project.

1. INTRODUCTION installation capacity of 62.8 MW. These demonstration

projects attracted large-scale private sector investment [1].
Electricity plays vital role in the socio-economic Wind power capacity of 615 MW was added during 2003-
development of the nation. India, one of the fast 04 taking the cumulative capacity to 2483 MW, the fifth
developing countries in the world, thrives for the energy. largest wind power installed capacity in the world [2].
The second development stage in the India is on the verge The wind power project is installed at village Motha
of completion. The commercial energy resources available near the popular hill station, Chilkhaldara situated in the
in the country are limited. Several studies have established seven-hill ranges in Western Vidarbha of the state of
that wind energy produces more jobs per capital invested Maharashtra, India. The project consists of two-wind
or per kilowatt-hour generated than most conventional turbines of 1 MW each. The financial breakdown of the
resources. Out of the various renewable energy sources, system was studied for the appraisal of project. The
wind is the only source that has reached commercial working life of the wind turbine has been considered for
viability stage for large grid connected requirements. 20 years. This power project is one of the demonstration
The government of India, in 1952, has initiated an projects installed by Government of India.
ambitious project to harvest energy from the wind. In
December 1952, a wind power sub-committee was 2. MATERIALS AND METHODS
constituted under the Council of Scientific and Industrial
Research, New Delhi. Wind technology in India was Wind power generation data were collected from the
introduced in the late 1970’s with Danish Development station for first year of operation (2003-2004). The
Co-operation. gathered wind energy generation data were analyzed for
The market-oriented approach of the government of the energy pricing and system reliability. The costs
India, since the inception of the wind power programme in involved in the project were collected from the
1983-84, has resulted in effective commercialization of manufacturing company and the installation company.
wind power projects. Wind potential in the country has The agreement between the installation company and the
been assessed at 45,000 MW while in Maharashtra it is government was that for the operation of the wind power
3650 MW, as of today. project, the company has to serve at least five years from
The potential sites were identified after studies were the installation of the wind power project. The installation
carried out at different wind monitoring stations. The company has asked Rs 0.2 million per year for carrying
government of India through the Ministry of Non- out the operation and maintenance for the five year [3].
conventional Energy Sources established 34 Theory for Analysis
demonstration projects in 11 states with the total
The economics of the wind power project was calculated
by evaluating various wind energy costs and by using the
* discounted cash flow technique for project feasibility.
Department of Nonconventional Energy Sources and Electrical
Engineering, Dr. Panjabrao Deshmukh Agricultural University, Akola - Wind Energy Costs
444 104, Maharashtra, India.
+ The costs of these (wind, solar etc.) renewable energy
AICRP on FIM, Dr. Panjabrao Deshmukh Agricultural University,
systems have decreased significantly over the past 15
Akola - 444 104, Maharashtra, India.
years. Three methods were customarily used to measure
1
Corresponding Author: the costs and economic performance of wind turbine
Tel.: +91 724 225 8201 ext 1031.
systems. The measures began with the installed capital
E-mail: [email protected]
cost, then continued with the specific capital cost (the
286 V.P. Khambalkar, et al. / International Energy Journal 8 (2007) 285-290

installed capital cost to generate one unit of energy per N

R t − Ct
year), and ended with the cost of energy [4], [5]. NPV = ∑ (1 + i)
t =1
t
(3)
Installed capital cost: This measure includes all
planning, equipment purchase, construction and Where R is the returns in year t, C is the costs in year t, N
installation costs for a turnkey wind system, that is ready is the project life, i is the discount rate in per cent. The
to operate. As such this cost will include the wind turbine decision criteria are:
and tower delivered and installed at the site together with If NPV >0 Investment is worthwhile
all electrical, maintenance and other supporting NPV<0 Investment is not worthwhile
infrastructure like land [4], [5]. NPV=0 Neutral case.
Specific capital cost: The second measure of cost Benefit cost ratio: The benefit cost ratio measures
combines the installed cost, the strength of the wind the returns or benefit per unit of cost of investment.
resource and the matching of the wind resource to the N
Rt
wind turbine power curve. The specific capital cost is the
installed cost to obtain a Kilowatt-hour of energy per year. ∑ (1 + i) t

BCR = t =1
(4)
That is, the cost to procure, install and make ready N
Ct
generating capacity that will generate a kilowatt-hour per ∑
t =1 (1 + i) t
year.
The decision criteria are:
Installed Capital Cost
C= , Rs / ( kWh / yr ) (1) If B-C>1 Investment is worthwhile
Energy Pr oduction per year B-C<1 Investment is not worthwhile
B-C=1 Neutral case.
The specific capital cost, does not include the cost
Internal rate of return: The internal rate of return
of operation and maintenance over the lifetime of the
means the discount/ compound rate at which the present
facility, the costs of frequent major overhauls or the cost
value of returns equals that of costs. Accordingly, the
of capital.
derived discount rate (IRR-r) is compared with the price
Life-cycle cost of energy: The third and the most
of the investment funds to know the worthiness of the
comprehensive measure of wind energy cost is the life-
project.
cycle cost of energy (CoE). This measure incorporates all
elements of cost i.e., installed capital cost, cost of capital, N
R t − Ct
cost of operations and maintenance and cost of major IRR − r = ∑ (1 + i)
t =1
t
(5)
overhauls and subsystem replacement.
The decision profitability criteria are:
ICC + FCC + O & M + LRC If IRR-r >1 Investment is worthwhile
CoE = (2)
Energy Pr oduction per year IRR-r <1 Investment is not worthwhile
IRR-r =1 Neutral case.
where, ICC = Installed capital cost, FCR = Annual fixed Payback period: This is the simplest of the
charge rate, O&M= Annual operation and maintenance techniques for evaluating an investment proposal. It is
cost and LRC= Levelized replacement cost (considered 25 defined as the time period within which the initial
percent over O&M). investment of the project is recovered in the form of
Economic Feasibility of Wind Farm benefits. In other words, this is the length of time between
the starting time of the project and the time when the
The project evaluation technique (discounted cash flow) initial investment is recoupled in the form of yearly
was used to measure the economic feasibility of wind benefits. Expressing it in notation:
farm. This technique measure the productivity of capital
invested and for which the flows of costs and returns over I
P= (6)
life period of the wind farm are required. These costs can C
be brought to refer to the particular point of time i.e.,
present period by discount/ compounding them. where, P is the payback period, I is the initial investment,
Comparative picture of different measures of capital and C is the yearly net cash flow.
productivity used in economic evaluation of investment in
wind farm were used are: net present value, benefit cost 3. RESULTS AND DISCUSSIONS
ratio, internal rate of return and payback period [6]-[8]. Economics of Wind Power Project
Net present value: In this method, generally the The economics of wind energy and feasibility of the
discount rate/compound rate, which reflects the price of
project was examined by estimating per unit cost of
the investment funds, is used to arrive at costs and returns
energy and by estimating NPV, B-C ratio, IRR and
to a common point of time. These costs are subtracted
payback period. The information gathered from station
from the return to get the net present values of the project.
The positive net present values indicate that the regarding the capital cost and energy production of 2 MW
investment is worthwhile and the size of the net present wind farm for one year are indicated in Table 1. The
value (NPV) indicates how worthwhile the project is in annual capacity factor was calculated from the energy data
utilizing the resources to maximize income [7], [9], and collected per month for the station.
[10]. Following expression is used to work out the net
present value:
V.P. Khambalkar, et al. / International Energy Journal 8 (2007) 285-290 287

Wind Energy Cost per Unit Electrical Energy [11] reported that equipment and installation costs were
Generation found to be $1,200,000 per 1.5 MW general electrical
wind turbine. The annual wind energy production of the
Three costs; installed capital cost, specific capital cost,
site for this year was 3.73 MWh of electrical unit (Table
and life cycle cost of energy, were examined for the
1). The installed capital cost (equipment and land) is value
evaluation of the production cost of the wind energy
at Rs 106.92 million, the specific capital cost was
conversion system.
calculated to be (106.92/3.73) i.e., 28.897 ≈ 28.90
Total installation cost for 2 MW capacity of wind
Rs/(kWh/yr) on the basis of first year operation.
power project comes to Rs 106.92 million. Installed
capital cost per kilowatt was worked out to be Rs 53640
with 10 percent inclusive of the land cost. Canada et al.

Table 1. Capital statement and energy production of 2 MW wind farm

Sr. No. Particular Parameter
1 Wind farm capacity 2 MW
2 Installed capital cost
a. Equipment cost Rs 97.2 million
b. Land cost 10 % of Equipment cost
3 Total installation cost Rs 106.92 million
4 Annual capacity factor 23 % (From initial year of operation)
5 Annual operation and maintenance cost Rs 0.2 million
6 Sale price of electricity 3.50 Rs/kWh
7 Discount rate / Annual fixed charge rate (FCR) 7.5 %
8 Project life time 20 Year
9 The annual energy yield (kWh) 3.73 million kWh
10 The gross annual income for first year Rs 13.05 million
11 Levelised replacement cost 25% on the annual operation and maintenance cost for the
first year

Capital cost component was calculated using production of 3.73 million kWh and selling price of Rs 3.5
specific capital cost (28.90 Rs/kWh/yr) and fixed charge per kWh, the gross annual income comes to Rs 13.05
rate of 7.5 per cent, which comes to 2.17 Rs/kWh. Annual million. The production cost comes to (Rs 2.23 X 3.73
operation and maintenance cost was Rs 0.2 million for the million kWh) Rs 8.31 million and therefore profit for the
wind power project and this was 0.05 Rs/kWh for one first year of operation is Rs 4.73 million.
year. Kemmet [12], reported that annual operating costs Economic Feasibility of Wind Power Project
were 2% to 3% of the initial system cost or approximately
1 to 2 cents per kWh of output. Cost of levelized For initial project appraisal, some form of
replacement was examined by considering 25 percent of discounted cash flow is normally required and the non-
wind farm operation and maintenance cost, which comes discounted indicators are not used. In economic term, the
to 0.0125 Rs/kWh [5]. discount rate is an indication of the opportunity cost of
The cost of energy is equal to the sum of the three capital to the organization. Opportunity cost is the return
components mentioned above i.e., capital cost component on the next best investment and so below it will not be
(2.17 Rs per kWh), operation and maintenance cost (0.05 worthwhile to invest in the project. In India at present,
Rs per kWh) and cost of replacement (0.0125 Rs per discount rate of 7.5 percent is common for commercial
kWh) which comes to 2.23 Rs per kWh. Joseph et al. [13] power projects reflecting the value placed on capital and
have recorded the cost of electricity from wind to the the perceived level of risks [2], [8].
extent of 4 cents per kWh. The relative magnitudes of While working out the costs and returns from wind
these estimated cost values (Table 2) provided insight into power project in the above analysis which was carried out
where the overall economics of this system may be for first year of installation, the time factor was not
impacted. From Table 2 it is seen that the leading considered. To bring the past and future costs to present
component of cost of energy is the capital cost component worth, compounding and discounting technique were used
followed by the cost of operation and maintenance. The and were done at 7.5 per cent discount rate. The economic
capital cost represents 97.20 percent of the total cost of feasibility of wind power project was examined by
energy. This is true because all renewable energy systems working out the net present value (NPV), benefit-cost
require very high initial investment and operation ratio (B-C ratio), internal rate of return (IRR), payback
maintenance and replacement cost are meager i.e., 2.8 period, considering operation and maintenance cost for
percent only. first five years as 0.2 million per year, from 6 to 10 years
as 0.3 million per year, from 11 to 15 years as 0.35 million
Profit Statement of Wind Power Project at Motha per year and 16 to 20 years as 0.4 million per year. For the
Information presented in Table 3 shows the profit income calculations, the sale price of wind energy
statement for the 2MW wind power project. The profit per generated per kWh is taken as Rs 3.5 in the first year of
kWh of energy production was worked out to be Rs 1.27 operation and small escalator from the next year as 15
in the first year of operation. Considering electrical energy paise (Rs 0.15) per kWh every year for a period of thirteen
288 V.P. Khambalkar, et al. / International Energy Journal 8 (2007) 285-290

years [14]. The present worth of cost and present worth of Internal Rate of Return
benefits at 7.5 percent discount rate are Rs 109.80 million The internal rate of return of the wind power project for
and Rs 386.03 million respectively (Table 4). the 20 years life period was worked out from the trial and
Net Present Value error method of calculation. The IRR in the present case
The information presented in Table 4 reveals that the net was worked out to be 21.82 per cent.
present value (NPV) is positive and so the project is Payback Period
feasible and suitable for further consideration. The net
present worth for wind power project was worked out to Payback period discriminates whether the project is
be Rs 276.23 million with 7.5 percent discount rate and feasible or not for the threshold lifetime. The net cash
discount factor in 20 years as 0.2354. This discount factor flow is calculated by deducting yearly operation and
indicates that the present value of income stream in that maintenance cost from the gross annual income of the
year is only 23.54 percent of its cash value. wind power project. Then cumulative net cash flow is
calculated for different years (Table 5). Payback period of
Benefit-Cost ratio the wind power project was worked out to be six years
The project is insensitive to operation and maintenance five months and three days, where the cumulative net cash
costs at the level of each year (as only 0.2 million to 0.4 flow becomes equal to the initial investment. Canada et al.
million per year range is considered for operation and [11] reported that payback period of a wind farm with
maintenance cost). The B-C ratio of wind power project conservative estimate is around eight year [11].
was found out by taking ratio of present worth of benefit It means that after nearly seven years of operation
and present worth of cost, which comes to 3.51. Since the of the project, it will be giving net profit and since the life
ratio is greater than unity, the investment is financially of the wind energy conversion system is nearly 20 years,
justified. However, the capital investment of one rupee in the project is found economically feasible.
wind power project shows a profit of Rs 2.51.

Table 2. Comparison of calculated cost of energy (CoE) component

Value
CoE Component Basic of Estimate Percent of Total CoE
(Rs/kWh)
Capital cost 2.17 Used FCR = 7.5 % per year 97.20
Operation and maintenance cost 0.05 As planned by MEDA Rs 0.2 million per year 2.24
Levelized replacement cost 0.0125 25 % on the operation and maintenance cost 0.56
Total CoE 2.23 Total of all cost component 100

Table 3. Profit per unit of wind energy generation

Sr. No. Particular Per unit (Rs)
a) Capital cost component 2.17
b) Annual O and M Cost 0.05
1
c) Levelized replacement cost 0.0125
Total cost of Energy (a+ b+ c) 2.23
2 Return per unit 3.5
3 Net profit (2-1) 1.27

Table 4. Financial outlays for wind power project, Motha

Sr. No. Particular Amount (Rs in million)/Percent
1 Present worth of cost 109.80
2 Present worth of benefit 386.03
3 Net present value (NPV) 276.23
4 Benefit-cost ratio (B-C) 3.51
5 Internal rate of return (IRR) 21.82

few years. Internal rate of return of the wind farm was

4. CONCLUSION
also more than the discount factor taken for the cash flow
Wind energy cost was determined for the energy analysis.
production in terms of Rs per kWh. A very simple Wind energy costs of the power project were worked
technique was used for finding the cost of energy for the installation capital cost, specific capital cost and
generation. The cost of energy of the wind generation the life-cycle cost of the energy. Installation cost per kW
includes three cost components. It was realized that was found more, which affected the cost of energy of the
installation cost is the leading factor in the wind energy wind energy conversion system.
cost. The net present value of the wind power project was
Economic feasibility of the wind power project was found positive for the lifetime of the project. In the year
determined over the life of the system. The result obtained 20 the discount factor indicates that the present value of
from this method indicated that the project is feasible and income stream is only 23.54 percent of its cash value.
acceptable based on the net present value (NPV). The B-C ratio of wind power project was found out
Payback period of the wind farm comes within the early by taking ratio of present worth of benefit and present
V.P. Khambalkar, et al. / International Energy Journal 8 (2007) 285-290 289

worth of cost, which comes to 3.51. Since the ratio is the wind power project was worked out to be six years
greater than unity, the investment is financially justified. five months and three days, where the cumulative net cash
The internal rate of return (IRR) in the present case is flow becomes equal to the initial investment at the
worked out to be 21.82 per cent. The payback period of beginning.

Table 5: Computation of payback period of the wind farm of 2 MW capacity

Net Cash Flow, Cumulative Net
Year Initial Investment, Rs* Income, Rs/year
Rs/year Cash Flow, Rs/year
0 106.92 - - -
1 0.2 13.05 12.85 12.85
2 0.2 13.61 13.41 26.26
3 0.2 14.73 14.53 40.80
4 0.2 16.41 16.21 57.01
5 0.2 18.65 18.45 75.46
6 0.3 21.44 21.14 96.61
7** 0.3 24.80 24.50 121.11
8 0.3 28.72 28.42 149.53
9 0.3 33.19 32.89 182.43
* Shows rupees in million.
Payback period = Six years five months and 4 days
** Shows year in which the installed capital cost recoupled i.e., Rs 106.92. million

ACKNOWLEDGEMENT [10] Fabrycky, W.J. and Thuesen, G.J. 1975. Economic

Decision Analysis. New Jersey: Prentice-Hall, Inc.,
The authors would like to thank Maharashtra Energy Englewood Cliffs. 130-135.
Development Agency (MEDA), Pune and SUZLON Wind [11] Canada, C., von Mutins, L., Wu, S., and Schoung, V.
Farm Developers, Pune (India) for providing valuable 2006. Report on the feasibility of a wind power
information and data of installation and energy generation project on the Berlin Pass, accessed at
in first year of operation of the wind farm. www.williams.edu/CES/mattcole/resources/
[12] Kemmet, S. 2006. Using incentives to encourage
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