Charles Morand
Once the electric and plug-in hybrid vehicle frenzy fizzles out, as
cleantech frenzies typically do when reality comes knocking (i.e. corn ethanol and solar PV), the next
hot thing to hit the world of alternative energy investing could very
well be
rare earths,
or the lack thereof. Rare earth metals are used in a number
of technologies, most importantly for alt energy
investors in
NiMH HEV batteries and in
permanent magnets for wind turbine generators and electric motors (made with the element
neodymium). This article, as its name indicates, will focus on the wind sector.
Consider the following two quotes on the significance of rare earths to the wind power industry (I got them from
articles I found on the Climateer Investing blog,
which has been keeping on top of this issue for the past few months.
Click on the link above to access a number of articles on that topic):
"
To make the most efficient, lightest weight, lowest service wind
turbine generator of electricity takes one ton of the rare earth metal,
neodymium, per megawatt of generating capacity." (
Jack Lifton, 5/07/09)
"
Let's take a look at wind turbines. In certain applications, two tons of
rare earth magnets are required in the permanent magnet generator that
goes on top of the turbine. If the permanent magnet is two tons, then
28% of that, or 560 lbs, is neodymium." (
Mineweb, 5/13/09)
Why does this matter? Because China, which accounts for around 95% of global output, is
purportedly planing on severely curtailing the export of rare earth minerals.
Naturally, this has some people worried. Given the total tonnage of
neodymium that goes into each utility-scale wind farm, some may wonder
whether this trade ban will throw a spoke in the wheel of wind power
development; a wheel, as industry observers know, that has been
spinning incredibly fast over the past five years.
Understanding Wind Energy Costs
Perhaps the single most important metric in power generation is the
levelized cost of the energy produced.
The levelized cost includes
all of the costs over the lifetime of the facility (capital and
operating) plus a pre-determined return on capital. All of these
costs (capital costs, operating costs and cost of capital) are then
expressed in present value terms and amortized over the
facility’s total lifetime production (generally expressed in $ per kWh or MWh).
When assessing the cost competitiveness of electricity generation
fuels, the levelized cost approach yields a true apples-to-apples
comparison. Thus, when trying to gauge the impact of various events
(e.g. higher natural gas prices, higher cement prices, a trade ban on
neodymium) on the relative cost positions of different generation
technologies, the impact on the levelized energy cost provides the
best measure.
Last Friday, I read a
recently-published study by Maria Isabel Blanco, former Policy Director at the
European Wind Energy Association
(EWEA) and now an academic in Spain, on the economics of wind power. In a
nutshell, the study examines, based on survey of EWEA members (EWEA's membership accounts for around 80% of global wind turbine
manufacturing) and a review of the literature, the generation costs of
wind energy in Europe.
Because there are no fuel expenditures for wind, capital costs make up
the vast majority of the levelized cost of wind energy. According to
the study, capital costs make up
around 80% of the total cost of wind energy over the lifetime of a
typical onshore facility (offshore wind is not addressed in this article). The wind
turbine
ex works -
meaning the machine itself plus the tower, transportation to the site and installation - makes up around 70%
of capital costs, or 56% of the total lifetime cost. Balance of plant costs include grid connection and site
preparation (e.g. roads and other civil engineering work), among others.
The first figure below comes from
an article on the wind power supply chain by
BTM Consult published in the January/February 2007 edition of
Wind Directions (see pages 5 and 6 for the full-size image). The second figure comes from a September 2007
report written by
Garrad Hassan
for the Canadian government on wind turbine manufacturing (see page 33
for the original figure).
Both figures show the approximate contribution of each core component
to the final cost of a wind turbine. There is, of course, variation around
the percentages shown here based on the turbine model, the
manufacturer, the location of the turbine assembly plant relative to
where components and sub-components are manufactured, etc. However,
taken together, these two figures yield a good ballpark estimate of how
the cost of a wind turbine is broken down between its main
parts.
Both sources agree that the generator, the component that requires
significant amounts of neodymium, represents around 3.4% of the
total
cost of a turbine. The generator thus
accounts for around 2.4% of the total capital cost of a typical wind project.
The table below looks at the impact of generator costs on the installed
cost (i.e. capital cost) of a fictional wind project. The data comes
from EERE's
2008 Wind Technologies Market Report,
where capacity-weighted average installed wind costs in the US are
reported at around $1,915/kW, and capacity-weighted average turbine
costs
ex works
are reported at around $1,360/kW, or approximately 71% of installed
costs (in line with the European numbers above). The
calculations assume that all other costs remain constant.
| Original Generator Cost @ 3.4% of Turbine Cost ($/kW) |
% Increase In Generator Cost |
New Generator Cost ($/kW) |
Installed Cost Following The Increase In Generator Cost ($/kW)
|
% Increase In Installed Cost |
| 46 |
50% |
69 |
1938 |
1.2% |
| 46 |
100% |
92 |
1961 |
2.4% |
| 46 |
150% |
116 |
1984 |
3.6% |
| 46 |
200% |
139 |
2007 |
4.8% |
| 46 |
250% |
162 |
2031 |
6.0% |
| 46 |
300% |
185 |
2054 |
7.2% |
| 46 |
350% |
208 |
2077 |
8.5% |
| 46 |
400% |
231 |
2100 |
9.7% |
| 46 |
450% |
254 |
2123 |
10.9% |
| 46 |
500% |
277 |
2146 |
12.1% |
The Levelized Cost of Wind Energy
Using a model she built, the author of the European study discussed above
calculated the levelized cost of wind energy in Europe, based on actual capital, operating and financing
costs and ignoring all incentives and taxes - she therefore computed
the "true" cost of wind power.
She found that the single most critical variable impacting the
levelized cost of wind energy was full load hours, or the average
annual production divided by the facility's nameplate capacity (the more often
cited
capacity factor is equal to full load hours divided by total hours over the measurement period). Capital costs came in second.
A drop of 10% in full load hours, according to the author's model,
leads to a cost increase of 8.5%. In comparison, a 10% increase in
capital costs, all else equal, triggers a 7.7% increase in
total lifetime costs. As can
be noted in the table above, generator costs would have to increase by
over 400% to trigger a 7.7% increase in levelized energy costs -
while 7.7% is not a trivial number, especially if the increase is sudden, it probably does not constitute a
project killer in most cases.
Of course, the costs and calculations presented here are rough
estimates and will differ across installations and regions.
Nevertheless, they provide a good approximation of the potential impact
of higher generator costs on the cost of wind energy.
The Market For Wind Generators
Over the past three years, the supply of many core components
for wind turbines has been incredibly tight, leading to a reversal of
the long-term trend toward lower levelized wind energy costs (for a recent analysis
this reversal in the US, see the EERE's
2008 Wind Technologies Market Report). Generators, however, were not one of those rare components. Bearings
and gearboxes are the two parts for which the most severe shortages
exist (or did, pre-crisis), while the market for generators is
relatively well supplied by the likes of
Siemens (SI) and
ABB (ABB).
Even though increases in copper prices have put upward
pressure on generator costs in the past few years, it is fair to say
that generators have not been a problem component in the wind supply
chain.
Conclusion
It is too early to tell what impact Chinese restrictions on rare earth
exports will have on the price of wind generators and, ultimately, on
the levelized cost of wind energy. However, as shown above, the wind
industry is an position to bear substantial cost increases in this one
component before the overall economics of wind projects are
affected.
More generally, I believe it's premature to conclude that limits on the
export of rare earths mean that China will also limit the export
of value-added manufactured goods such as permanent magnets. The main idea here is, most likely,
to bolster the country's manufacturing sector - the very same manufacturing
sector that acts as a giant job creation machine and prevents China from
experiencing widespread social unrest. As
recently pointed
out by The Economist,
all of emerging Asia's consumers consume about 40% of what Americans do
and, although this is gradually changing, it wouldn't be in China's
interest to strain that trade relationship by depriving the West of a
whole host of technologies that consumers here have gotten used to.
While rarer rare earths may materially impact certain sectors of the
economy, the wind industry, by-and-large, should do just fine.
DISCLOSURE: The author is long ABB
.
The quality of the information is generally excellent, as Charles has described
in his reviews of the 
Since
the model does not include negative cost investments in energy efficiency or
solar thermal collectors, it is likely that these levels of abatement could be achieved
at considerably lower cost by incorporating these opportunities.
