A Utility Perspective of Wind Energy - Wind Turbine Technology: Fundamental Concepts of Wind Turbine Engineering - page 727

where
COE = cost of energy ($/kWh)
FCR = fixed charge rate; present value factor which includes utility debt and eq-
uity costs, state and federal income taxes, insurance, and property taxes
Capacity Cost = total cost of constructing the facility normalized by rated power ($/kW)
Capacity Factor = ratio of annual average power output to rated power
Fuel Cost = unit market cost for heat-producing fuel; zero for wind energy ($/
MBTU)
MBTU = million British thermal units
HeatRate = factor measuring plant thermal energy conversion efficiency (kWh/
MBTU)
OM = direct cost of operations and maintenance per unit of energy ($/kWh)
Equation (13-1) does not produce an actual estimate of the cost of power generation, but
rather it is an approximation of the levelized unit cost [Karas 1992]. In other words, EPRI
TAG “dollars” will not actually pay the annual costs of generating electricity. However, if
this method is applied consistently to a variety of technologies, it does produce a useful and
equitable index for comparison purposes. Some limitations of the EPRI TAG method are
-- It assumes a debt term period equal to the life of the power plant, which may not
always be the case; and
-- It does not easily allow for variable equity return, variable debt repayment, or vari-
able costs.
As a consequence of the second limitation, the EPRI TAG model is not particularly suit-
able for estimating the cost or revenue of a project owned by an independent power producer
or of a qualifying facility. These two terms are commonly used by utilities in the process of
purchasing power, and often include wind power projects.
Cash Flow Method
The Cash Flow method is based on an accounting spreadsheet that is a year-by-year
listing of estimated income and expenses over the life of the project. COE is calculated by
performing the following operations:
-- identifying each cost component of the plant and its operation, including the costs
of land, permits, plant construction, insurance, power transmission, O&M, and ad-
ministration
-- projecting the amount of each cost component in each year of the plant's anticipated
service life
-- projecting the depreciation, debt service, equity returns, and taxes in each year of the
plant's anticipated service life
-- discounting the resulting cash flows to present value using the utility's costof capital
as established by the state regulatory agency
-- levelizing the cost by determining the needed payment stream ( i.e. , the annuity)
which has a present value equal to the results of the previous calculation, at the
utility's cost of capital
The spreadsheet produced by the Cash Flow method provides annual COE estimates
which are the actual revenue requirements of the project. This method allows for the real