For example, according to EIA (Electricity Information Administration), the average wholesale cost to

generate electricity for 2007 was 5.72 cents per kilowatt-hour (¢/kWh) (2007 is their most recent data).
And according to PacifiCorp annual reports (a Mid-American Subsidiary) the average revenue (cost to
buyers) is 7.2 ¢/kWh. This value is necessary for calculations, not the wholesale value. The costs for
transmission are extra and not addressed here.

These figures vary by region, state, regulated versus non-regulated, and a number of other things.
People in some areas of the country pay an average as high as 25 ¢/kWh for their power. However, for
the calculations here, I will use 7.2 ¢/kWh because it is a good national average.

A few equations

According to NREL (National Renewable Energy Laboratories), the formula for calculating profitability or
the cost to generate power (Pcost to gen ) with a wind turbine or farm is:

Pcost to gen = [(FCR x IC) / AEP] + [(LRC + O&M + LLC) / AEP ] (1)

where:

FCR = fixed charge rate. For the interested reader, https://www.e-education.psu.edu/eme801/node/560

has a good discussion on the rate, and says this of the variable: It’s the fraction of the Total Installed Cost
that must be set aside each year to retire capital costs which include interest on debt, return on equity,
and so forth.

For our purposes, we use 7% or 0.07.

IC = initial capital or CapEx, the capital expenditure, in $.

AEP = net annual energy production, kWh.

LRC = levelized replacement cost (yearly sinking fund for overhauls and replacements), $

O&M = cost for operations and maintenance (turbine maintenance, cost/yr), $

LLC = land lease cost, $/year

Finding values for the terms in Equation 1

FCR Assume we are a utility company building a 1-MW wind power plant rather than building another
coal-powered plant. Because we are a utility, we expect to sell power for 7.2 ¢/kWh (or $0.072 /kWh), as
per above.

IC The initial capital investment or Capex is the total cost of the entire installation, which according to
AWEA (American Wind Energy Association) is about $1.3 million for a 1-MW (1,000 kW) turbine.

AEP For the annual energy production, assume a 39% capacity factor. That is, a turbine will generate on
average 39% of its nameplate rating. Hence:

AEP =1,000 kW x 24 hr/day x 365 day/yr x 0.39,

AEP = 3,416,400 kWh per year.

Note to those who are checking the math here: Always include units because they will hint at a correct
or meaningful figure. If a unit such as $2 comes up, look for an error.

LRC The Levelized Replacement cost is simple. Use:

LRC = Cost of turbine / Expected life

LRC = $1.3 million / 20 years

LRC = $65,000/yr
O&M Operations and Maintenance cost simply runs about 8% of annual gross revenue. Hence:

O&M = AEP x average revenue/kWh x 0.08

O&M = 3,416,400 kWh x $0.072/kWh x 0.08

O&M = $19,678

LLC The Land Lease Cost is a variable as well but according to AWEA statistics its runs 5% of annual
revenue

about $12,220

Results

With these few figures, we can calculate a value for Equation 1.

Pcost to gen = [(0.07 x $1,300,000) / 3,416,400] + [($65,000 + $19,678 + $12,220) / 3,394,400

Pcost to gen = 0.0266 + 0.0284

Pcost to gen = 0.055

Pcost to gen = 5.50 ¢/kwh

Next, find a total annual expense (Tae) using

Tae = Pcost to gen x AEP

Tae = $0.055 /kwh x 3,416,400 kwh

Tae = $187,902

This is the total annual expense.

From here, find annual Gross Income (Ig) using:

Ig = $0.072 x 3,416,400

Ig = $245,980

Find annual profit (Pa) from the turbine using:

Pa = (Pselling price – Pcost to gen ) x AEP

Pa = ($0.072 − $0.055) x 3,416,400 kWh

Pa =$0.017 x 3,416,400

Pa = $58,079

Now that we know how much the wind farm (of one turbine) makes each year, we can calculate a return
on investment or ROI using:

ROI = Pa / Total investment

ROI = $58,079 / $1.3 million

ROI = 0.0447 or 4.47%.

This seems a fairly low number for an ROI. Generally, companies require an ROI of 8% or higher if they
are to invest in an idea or product.

Another important figure, the Break Even Point, tells how long until your investment is paid for. To find a
BEP, use:

BEP = Cturbine / Pa

BEP = $1,300,000 / $58,079/yr

BEP = 22.38 years

Hence, with a product life of 20 years, the product will have to work for more than 22 years before it is
paid for. The reader-accountant might apply these figures to a spreadsheet to make playing with the
variables more interesting.