Bobby Rupp and Jamie Scovern
Enst 480: Interdisciplinary Investigation of the Environment
5/6/08
Economics of Wind Energy at ColgateUniversity
Introduction
Efforts to mitigate the effects of carbon dioxide emission has become a topic of interest at academic institutions across the nation, as evidenced by the American College & University Presidents Climate Commitment; a voluntary carbon abatement pledge currently signed by 514 institutions. While Colgate currently has no plans to endorse the commitment due to its dubious goals of 100% Carbon abatement, we still believe that ColgateUniversity has an interest in cost-effective carbon reduction programs. As Colgate’s campus is situated in close proximity to numerous upstate wind farms, we thought that this would be an intriguing way to lower Colgate’s carbon footprint. We chose to look at utility scale wind turbines because they are more efficient at producing electricity than residential scale turbines. Throughout this paper we will explain our research and the results that we gained from the research and how that is applicable to the ColgateUniversity situation.
Interview with Sean Graham, Municipal Utilities Commission
Colgate faces a unique set of obstacles to renewable energy implementation due to the cheap price of electricity in Hamilton. In order to better understand the nuances of Colgate’s power purchase agreement, our group met with Sean Graham, director of Hamilton’s Municipal Utilities Commission.
Our electrical power is purchased from the Hamilton Municipal Utilities Commission (MUC). The MUC negotiates electrical power procurement for the village of Hamilton, including ColgateUniversity. Power in Hamilton is purchased mainly from NY Power, a state owned and operated utility. Cheap hydroelectric power constitutes Hamilton’s main source of power, and our contract was recently extended until 2025. While NY Power provides Hamilton’s fixed electricity supply (baseload), supplemental power is purchased through the New York Municipal Power Agency (NYMPA), a privately owned utility, with whom we have a contract extending to 2013. Sean indicated that the capacity purchased by the M.U.C. is 10,660 kw/month of baseload at approximately $1.00 per kilowatt capacity. The price of supplemental power increases significantly to $7.00 per kilowatt, and is made up of a blend of power including coal, natural gas, and nuclear.
Colgate plays a large role in Hamilton’s power purchase decisions, and we constitute about one-third of the total electricity demand. The electrical infrastructure on campus is made up of transformers, underground conductors and meters owned by the Hamilton MUC and worth over one million dollars. The campus has a well-looped distribution network, meaning that an external power source could be integrated nearly anywhere on campus. If Colgate were to produce its own power via 1.65 MW turbine, the effects on the community would mainly stem from a change in the town’s electrical demand. Prices would rise substantially because of a decrease in demand and the fact that our contract with NY Power dictates a fixed supply of 10,660 kw/month until 2025. Offsetting this effect is the fact that the extra available baseload would reduce Hamilton’s purchase of expensive supplemental electricity from NYMPA. Depending on the size and capacity of a turbine, Colgate would have to renegotiate their power purchase agreement or buy the on campus electrical infrastructure from the MUC. Other major obstacles exist to installing a wind turbine, including possible local opposition based on real estate values and issues regarding suitable nearby sites.
Another of our major questions regarded the environmental effects of erecting a Colgate-owned turbine. We currently purchase power from a clean renewable resource, meaning that building a wind turbine might not actually result in a decrease in carbon emissions. In reality though, hydroelectric produced power is a very desirable and cheap power source, and any abatement in our purchase of Hydro power would result in that power being purchased by another municipality. This theoretically means that coal fired capacity would be shut down elsewhere, resulting in an overall reduction in carbon emissions.
A smaller scale option would be to install a .5 MW capacity turbine to supplement power purchased from the Hamilton MUC. Such a project would face similar protests by the local community. It would still alter the price of power paid by residents, though the effects would be much smaller, and it would likely be visible from most locations in the village, because it would have to be built nearer to the distribution loop to minimize installation of new power lines. The payouts of a smaller turbine would make it necessary to reduce the percentage of total cost attributed to new distribution infrastructure. Although such a turbine would need to be nearer to town, it would be substantially smaller than an industrial size turbine, making it unclear which framework would be less visually invasive. A major benefit of a smaller turbine is that Colgate would not need to purchase electrical infrastructure from the MUC, and the only adjustment would be a rewrite of the power purchase agreement.
An alternative to producing power for use by Colgate would be to build a turbine to feed the grid and use any earnings to continue buying electricity from the Hamilton MUC. Nearby 46 kV lines feed other municipalities with more typical electricity rates, in the 10-12 cent/kWh range. It remains unclear if Colgate-owned property (most likely the Bewkes center) near the lines would make a suitable wind resource. The distance from a likely turbine site is uncertain; however our estimated yearly income from an industrial turbine is large enough to pay off the infrastructure in a short time. From a policy standpoint, it is unclear whether the grid would be obligated to purchase power from a small producer under the Public Utilities Regulatory Policy Act (PURPA), but this type of project seems most attractive in terms of both political and economic viability.
In this example, the turbine is not directly abating Colgate power usage. By connecting a wind turbine to the grid Colgate would be providing renewable energy to the houses served by those transmission lines. By doing this, we assumed that some amount of older, high emission electrical production capacity would be shut down to keep the total power fed into the grid stationary. This type of project would be preferable from an economic perspective because the price paid for electricity is likely higher than what Colgate pays the M.U.C.
St. Olaf Background
St.OlafCollege in Northfield, Minnesota is a school that has utilized wind power for about a hundred years now. Originally, they had a windmill that was used to provide water for students. More recently, in 2004, St.OlafCollege embarked on a project to install a 1.65 mW capacity wind turbine at the base of their campus. This project was completed in 2005 when they finished erecting the Danish NEG Micon NM82 1.65 mW windmill[1].
Pete Sandberg, Assistant Vice President for Facilities at St.OlafCollege was the man who got St. Olaf rolling on their wind turbine project. He is the one who applied for all of the funding and is the one who coordinated many of their other efforts involved with choosing a location and then building the turbine there. Through many conversations with him, we found out that he had many motivations for wanting a wind turbine for St.OlafCollege. Many of these motivations were based off of the St. Olaf Sustainability Principles which include “Rely increasingly on natural energy flows”, “Build for the future” and to “Put our money where our values are”[1].
Mr. Sandberg elaborated more on the principle of building for the future by explaining that this was one of the most important reasons for their procurement of a wind turbine. They are building a new ScienceCenter for their school and are wary of incremental increases in operating costs for new buildings. The wind turbine, they believed, would be able to offset much of these costs as science centers are known to be energy sinks as the air in them must be constantly circulated and filtered. Also, related to incremental increases in operating costs that worried Mr. Sandberg is the increase in electricity prices that occurs throughout time. He figured, if St. Olaf produces a good portion of their energy through the wind turbine, they will be better off in the long run when electricity prices increase. Furthermore, the estimated $300,000 per year that St. Olaf will be saving as avoided costs for energy bills can be used to support their academic program which was very important to Pete[1],[2].
St. Olaf was in a very special situation due to their location. Xcel energy, operating in 8 Western and Midwestern states, is forced to pay $500,000 per cask of nuclear fuel waste towards renewable energy projects. St. Olaf applied for $1.5 million of funding from this Xcel Energy Renewable Development Fund and received all of it. This represented almost all of the estimated $1.85 million that they believed it would cost them to construct their wind turbine. However, prices went up to $2.5 million during their process due to a federal tax incentive ending. This did not deter Pete Sandberg as he was still able to come up with the money for the project through “internal sources of capital”[2]. Of this $2.5 million total cost, $2,005,000 was for the turbine itself. The remaining $495,000 was used for construction, consultations and other fees necessary to erect a turbine.[3]
The turbine that St. Olaf’s erected was 70 meters in height with a 270 foot diameter blade assembly. They knew that an 80 meter tower would provide them with a better wind resource but the crane that they would need in order to erect the 80 meter tower was prohibitively more expensive to rent so they decided on the 70 meter tower. The extra wind speed that accompanies higher altitudes would have been a welcome resource for the St. Olaf turbine because they only have a moderate wind resource. However, they made up for some of the lack of wind with the turbine they chose, the NEG Micon NM82 1.65 mW utility scale windmill, as it is known to perform well in low wind resources and to operate very quietly[2].
From their turbine, St. Olaf’s projects an annual production of 5,700,000 kWh. They power their campus directly with this power through their “internal distribution loop”. They chose to do this because they could save more money via avoided costs of electricity than they would have earned by selling their electricity to the grid because they buy electricity for $0.056/kWh and are able to sell it for only $0.033. The only time they are selling to the grid is if their campus demand is less than the amount of electricity they are currently producing. The power they generate cannot be counted on as “standby” power if the campus were to lose electricity because there is no guarantee that the wind will be blowing when the power outage occurs. They have a series of diesel generators to deal with this problem. St.OlafCollege projects a 12-14 year payback for their turbine and a rebuild of their generator in 25 years as that is the expected life of a generator. Beyond the construction and operations costs of the machine, there are very few additional expenses as the machine is serviced quarterly by Vestas and monitored at all times by Vestas2.
CarletonCollege Background
CarletonCollege, also located in Northfield, Minnesota, finished construction on their wind turbine on September 25, 2004. By doing so, they became the first College in the country to have a utility grade wind turbine. The wind turbine that they chose to erect was a Vestas 82, a 1.65 mW turbine. Like St. Olaf, their tower is 70 meters. While St. Olaf’s turbine is at the base of campus, Carleton’s turbine is located approximately 1.5 miles from campus. So, instead of building 1.5 miles of electricity transmission lines, Carleton decided to sell their electricity to the grid for $0.033/kWh to Xcel Energy. They have this price contracted for 20 years. However, in addition to the $0.033/kWh that they are earning from Xcel Energy, they are also earning a Federal Tax Credit of $0.015/kWh for their first ten years of production[4]. Carleton buys their electricity for $0.076/kWh[5],[6]. The costs of purchasing and erecting Carleton’s wind turbine are summarized in the table below[7].
Breakdown: / Cost:Turbine / $1,515,000
Road / $26,000
Site Electrical / $18,000
Power Line Upgrade / $47,000
Phone Line (monitoring) / $5,000
Turbine Installation and Foundation / $215,000
Consult./permits/fees / $39,000
Total: / $1,865,000
Table 1: CarletonCollege Wind Turbine Cost Breakdown
All has not been smooth sailing with CarletonCollege’s wind turbine. In October, 2007, the computer monitoring system on Carleton’s wind turbine indicated that the wind turbine was overheating. After shutting down the wind turbine, the internals were inspected and the inspection showed that the teeth in a gearbox had been destroyed. This meant that Carleton had to bring out a crane to bring down the blade assembly for repairs. Luckily, Carleton had an extended warranty on the turbine so they did not have to spend the $28,000 on setting up the crane and then an additional $5,000 per day on renting the device. However, they did lose all of the income that they would have earned via selling electricity to the grid which would have been substantial as this malfunction occurred during their windy season. This, has been the only problem that Carleton has encountered in the nearly four years that it has been operating its wind turbine.[8]
This one major problem with their wind turbine has not stopped Carleton’s Director of Energy Management, Robert Lamppa, from starting the process of looking into purchasing a second wind turbine. The costs for the machines have grown significantly as demand has increased. Furthermore, many companies are unwilling to construct a single turbine. This is because they do not wish to bring all of the construction equipment for a single turbine and would rather capitalize on economies of scale from a larger project. The costs of the new turbines that Carleton is looking into are summarized in the table below5.
Machine: / Cost / kW of Production / kW of Production / Total Cost:Vestas 82 / $2,300 / 1,650 / $3,795,000
Suzlon 88 / $2,050 / 2,100 / $4,305,000
GE / $2,200 / 1,500 / $3,300,000
Table 2: New Turbine Costs
Introduction to Our Model
When approaching a major investment like installing a wind turbine, it is important to analyze the expected costs and benefits to decide if the project is worth undertaking. Because many of the costs and benefits of a wind turbine occur in the future, they must be discounted back to the present in order to be comparable. To do this, economists use discounting as a way to adjust values from different time periods for comparison in the present. Discounting occurs for 3 main reasons: 1. Opportunity Cost – the opportunity cost of a project is the sacrificed earnings of the next best alternative use of the money. On a very basic level, the money used to install a turbine could simply be put in a savings account and earn interest. For this reason, we discount future values to reflect lost interest payments. 2. Uncertainty – Because our future status is uncertain, rational agents prefer to have money in the present. For example, if inflation were to grow substantially, money in the future would be worth less than in the present, and this uncertainty is generally provided for by interest. 3. Richer Future – the belief that we will be better off in the future means that a payment in the future will constitute a lesser percentage of our income and thus be worth relatively less to us.
A basic calculation of interest occurs in the equation:
Future Value (FV) = Present Value (PV) * (1+ interest rate) ^Year (t).
This reflects annual compounding of interest. In Discounting, we know the future value of some payment and want to find out it’s present value, and thus by solving for PV we get:
PV= FV (1/(1+d)^t), where d = discount rate.
The discount rate used in our analysis was 5%, which is the standard used by the Colgate Treasurer’s Office[9].
The objective of our model is to allow individuals to analyze the payoff period of a wind energy project based on any unique set of cost and benefit parameters. The output of our model shows graphically the net present value costs and benefits of a project to quantify the payoff period of a project. Our model produces a number of outputs reflecting changes in various parameters in order to yield a comprehensive outlook of different market situations and assumptions. The payoff period followed the basic equation:
Σ Costs = Σ Yearly Benefits + Σ Carbon Abatement Benefits + Σ Non-Monetary Benefits
In the following sections we will discuss our model in more depth, with a breakdown of user inputs and how they produce our graphical results.
Costs
The costs that go into this model are split into two different categories. The first of these categories is the up-front costs that ColgateUniversity will have to pay from the outset of the project. All of the costs listed in CarletonCollege’s breakdown of costs, shown in Table 1 above, were up-front costs. These include the price of the turbine, the road, the electrical upgrades, the phone line, the installation and foundation costs and the consultations, permits and fees that go into the planning of the turbine. These are all considered up-front costs because they are paid in full either at the time of construction or beforehand. Due to this, the up-front costs do not need to be put in terms of Net Present Value.