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Small Wind

Economic Considerations & Incentives

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There are many incentives available to make installing a small wind system more affordable. However, there are still significant costs associated with small wind systems. Before purchasing a small wind system, it is recommended that you consider the following factors:

Common Means of Evaluating Wind Turbine Economics

First Cost

A first (or initial) cost analysis simply compares alternatives of the total upfront investment you will make in a system. A first cost estimate typically includes estimates of the tower, turbine, site work, wiring, and installation costs. A range of $4,000 to $8,000 per rated kilowatt (kW) is typical (for example, the cost of a five kW system would range between $20,000 and $40,000). Costs vary depending on type of equipment used. For example, shorter towers and guyed wire towers are often less expensive than taller, freestanding towers. Similar comparisons can be made for other components as well. The first cost method is a poor method of economic analysis because it only provides information on the total upfront cost and does not look at the longer-term implications of the investment, such as energy production and maintenance costs.

Simple Payback

An investment’s simple payback is calculated by dividing the total cost of the system by the annual net savings. In some cases, the total cost is the cost of the system after incentives (grants, tax credits, etc.). Net savings is the value of the energy generated less operation and maintenance (O&M) expenses. O&M costs are sometimes estimated in terms of cost per kilowatt-hour (kWh) of electricity production. Some estimates use $0.001 to $0.02 per kWh. Other methods estimate the cost of O&M based on the initial turbine cost, such as, one to three percent of the initial purchase cost (one percent of a $50,000 system would result in an annual O&M estimate of $500). O&M costs will vary on the type of equipment. As the number of “moving parts” increase, so should your estimates of O&M expense. For example, if the turbine includes a gearbox, estimates for O&M should be increased to account for wear and replacement of gearbox components. When calculating economic return, it is a more conservative approach to assume higher O&M costs.


Capital cost:
Value of Energy:
16,500 kWh (estimated electricity generation) x $0.09/kWh (cost of electricity) = $1,485
$50,000 (capital cost) x 1.5% = $750 (per year)
$50,000 ÷ ($1,485-$750) or $50,000 ÷ $735 = 68.02 years
With incentives to off-set 45 percent of capital cost:
$27,500 ÷ $735 = 37.41 years

Simple payback is an easy calculation but does not always account for many important factors such as increases in energy prices or alternative uses for the project capital.

Cost of Energy (COE)

The cost of energy method combines the capital cost and the total expected O&M (for the life of the project) divided by the total lifetime energy production of the turbine.

Example (Using a 20-year lifespan):

If a 30-year lifetime is assumed, the COE drops to $0.146/kWh. If incentives offset 45 percent of the capital costs, then the COE over 20 years is $0.128 kWh.

Capital Cost:
$750(50,000 x 1.5%) x 20 years = $15,000
Lifetime Production:
16,500 kWh x 20 years = 330,000 kWh
($50,000 + $15,000) ÷ 330,000kWh = $0.197/kWh

COE is also considered a simple method in that it does not consider interest payments incurred from the purchase of the system, which increases the COE. This model also neglects increases in O&M expenses. It does not account for the time value of money; however, it is another means of quick evaluation to provide an indication of economic return.

Net Present Value (NPV) and Internal Rate of Return (IRR)

Most companies considering an investment in a project evaluate and compare the profitability of a project based on the net present value of the project or the project’s internal rate of return. Both of these methods estimate the cash flow generated by a project for each year the project is expected to last. This cash flow includes purchase prices, tax incentives, value of electricity, insurance costs, maintenance costs, and any other related income or expenses. For net present value calculations, the net cash flow for each period (including any salvage value of the equipment at the end of the project) is then discounted at a rate (often the expected inflation rate), back to the time of the system’s purchase and added together. If the value is positive, the project is often accepted. For internal rate of return calculations a discount rate is selected that makes the NPV calculation equal to zero. The higher the rate the better financial return of the proposed project. These methods provide a more accurate analysis of a project but both are only as accurate as the data used to generate them.

A net present value (NPV) analysis first estimates a project’s revenue and expenses for each year of the project. In the example below, the project costs $2,500 to purchase today. At the end of each of the next four years, the project will generate revenue of $1,200 and an expense of $200. The revenue and expenses are combined in each year to calculate the net annual cash flow. Each net annual cash flow is then discounted by using a discount rate and the number of years until each expected cash flow. The formula used to discount each net annual cash flow is:

Annual Net Cashflow
[(1 + Discount Rate) ^ Number of Years] = Discounted Value

NPV is calculated by adding all of the discounted cash flows. A positive NPV indicates the lifetime cash flow of the project is expected to provide a return greater than the discount rate. A negative NPV would indicate the project is expected to provide a return less than the discount rate. It is not common to proceed with a project with a negative NPV.

Electronic Calculators or Manufacturer Provided Calculations

There are economic calculators available online. Many are downloadable spreadsheets. These tools are often far more robust than the simple models discussed above. They often include calculations of the net present value and rate of return for the project. Some account for the time value of money and can show the effect of tax incentives on the project. Many allow for O&M and per kWh electricity costs to rise at rates other than the expected general inflation rate. These tools are beneficial in that you are able to run a variety of scenarios to evaluate the proposed project under different assumptions.

Manufacturers or dealers typically provide calculations on economic return as part of their project proposal package. These figures are intended to be tailored for your site and situation and may reflect specific details about your financing package or product that cannot be easily included in the generic calculations.

However, both the online calculators and manufacturer provided calculations are only as accurate as the assumptions being made in the calculations. Companies interested in selling you a product may select assumptions that shed the most favorable light on their product and not the assumptions that most accurately reflect your situation. In order to determine if the economic return indicators provided are accurate for your situation, you need to check these assumptions. The following list of questions can aid you in this assessment:

Economic returns may only be one consideration in your evaluation of a small wind system. However, whether you consider the payback period or return on investment to be your main priority, or only a passing consideration, understanding the information that is being presented to you is important. Critical evaluation of the assumptions that have been included in any economic calculations provided to you can ensure that the installed system meets your expectations and accomplishes your fiscal objectives.


NREL, Rebecca Meadows. (2009, December 7). Basics of Farm/Residential Small Wind Turbines. Presentation. Great Falls, MT: NREL.

Sagrillo, M. (n.d.). Renew Wisconsin Small Wind Toolbox. Retrieved December 2010, from Operating and Maintenance Expenses: http://www.renewwisconsin.org/wind/Toolbox-Homeowners/Operation%20and%20maintenance%20costs.pdf

US Department of Energy. (2011, March). State Energy Database. Retrieved April 12, 2011, from EIA Consumption Price and Expenditures Estimates: http://www.eia.doe.gov/states/_seds.html

US Energy Information Administration. (2010). Annual Energy Outlook 2010. Retrieved June 2010, from Energy Outlook: http://www.eia.doe.gov/oiaf/aeo/pdf/trend_1.pdf