Cost comparisons for wind and thermal power generation

Highlights: • I analyse the uncertainties around estimates of wind and thermal generation costs. • For wind power, the main source of uncertainty is estimation of the cost of capital. • The cost of capital may be distorted due to the currently very low interest rates. • For thermal generation, fuel is the largest cost and the main source of uncertainty. • Fuel cost risks can only be analysed using scenarios. - Abstract: Comparisons of generation costs between renewable and conventional generation technologies are a key input to energy policy discussions. However there are many pitfalls around generation cost estimation: even apparently reliable sources can quote widely differing figures. This paper reviews methodologies and data sources to determine the main sources of uncertainty in the estimation of the costs of wind, coal and natural gas generation, based on illustrative cost calculations for the US, Denmark and India. It finds that the cost elements most likely to confound generation cost calculations are fuel costs and, particularly for renewable generation, the cost of capital. It explores the impact on calculated generation cost of alternative approaches to estimating these parameters. The results should be of particular value to users of generation cost estimates who are concerned about the reliability of the information they have to work with.