What determines the financial viability of a wind farm?

The profitability of a Wind Farm depends on the type of wind turbine used, construction costs, performance of wind turbine generation, Operations and Maintenance (O&M), land lease/ royalty payments, and wholesale energy prices from a Power Purchase Agreement.

Large turbines selling power to the grid can be financially viable where the average wind speed is estimated to be greater than 7 m/s (15.66 mph). They are likely to become more attractive to businesses in future, as technology continues to improve and the deregulated energy market develops.

Furthermore, small turbines and wind pumps may also be viable with average wind speeds as low as 5 m/s (11.18 mph), assuming the only alternative is a more expensive power source such as a diesel generator.

Costs

The construction costs of a wind farm are largely determined by two factors: the complexity of the site and the likelihood of extreme loads. Project sites with difficult ground conditions such as hard rock, wet, or boggy conditions may be considered complex. Also, project sites with difficult access maybe be considered complex, as well. Further, a very windy site with high extreme loads would result in a more expensive civil infrastructure as well as a higher specification for the turbines.

Additionally, the cost of the grid connection may also be important. Grid connection costs are affected by the distance to a suitable network connection point, the voltage level of the existing network, and the network operator’s principles for charging for connections and for the use of the electricity system.

Since the primary cost of producing wind energy is construction with no additional fuel costs, the average cost of wind energy per unit of production depends on key assumptions, such as the cost of capital and years of assumed service. The marginal cost of wind energy once a plant is constructed is usually less than 1 cent per kWh. Because the cost of capital plays a large part in projected cost, risk perceived by investors will affect projected costs per unit of electricity.

The commercial viability of wind power also depends on the pricing regime for power producers. Electricity prices are highly regulated worldwide, and in many locations may not reflect the full cost of production, let alone indirect subsidies or negative externalities. Customers may enter into long-term pricing contracts for wind to reduce the risk of future pricing changes, thereby ensuring more stable returns for projects at the development stage. These may take the form of standard offer contracts, whereby the system operator undertakes to purchase power from wind at a fixed price for a certain period (perhaps up to a limit); these prices may be different than purchase prices from other sources, and even incorporate an implicit subsidy.

In jurisdictions where the price for electricity is based on market mechanisms, revenue for all producers per unit is higher when their production coincides with periods of higher prices. The profitability of wind farms will therefore be higher if their production schedule coincides with these periods.