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Harnessing the wind for the production of electric energy is among the fastest growing segments of the power industry, especially in major energy producing states including Texas, Oklahoma and California. Like many relatively new sources of energy production, wind energy is still relatively expensive to older sources of power including fossil fuel generation, although as continued development of the technologies progresses the cost of wind energy continues to decline. However, in the near term wind energy continues to rely upon federal subsidies in the form of tax benefits to remain economically competitive with existing forms of power production. The purpose of this paper is to provide an understanding of the economics of wind farms, defining what a wind farm is and then focusing on their development processes and cost structure, major areas of risk, and their financing and accounting challenges.
Physical Structure of a Wind Farm
Wind farms differ from fossil fuel power plants in several key ways with two differences in particular having significant implications for plant economics. First, a fossil fuel power plant is able to provide operationally driven generating capacity to the power grid. This means that a natural gas or coal-fired plant can deliver energy on-demand; that is, they can produce power on a scheduled or instantaneous basis. This is a critical component to the operation of the power grid in that as factories, office buildings and homes turn energy using equipment and appliances on and off the power system is able to respond to the fluctuations in power requirements. Wind farms, in contrast, may be unable to deliver when the power system operator determines that additional energy is needed but instead can deliver energy only when the wind is blowing. Because generators that are able to deliver power on demand provide utility grid operators with flexibility that protects the integrity of the power system, they provide higher economic value and thus capture higher prices than energy - as-available power plants such as a wind farms.
The second issue is the scale of the power plant. Traditional fossil fuel plants consist of a single utility scale - typically defined as 50 (MW) increments or more - power plant unit or a cluster of units constructed in a contained space. Utility...