Comparison of financing costs for wind turbine and fossil powerplants

This paper compares the financing costs of wind turbine powerplants with those of fossil powerplants. The goal of this examination is to determine the extent to which these costs differ and what the sources of such differences may be. The discussion is organized in the following fashion. Section 2 introduces basic terminology and concepts from finance, as they apply in the powerplant setting. Section 3 reviews available data from a variety of sources to estimate the magnitude of the variables identified in Section 2. In Section 4 we examine the effect of the production tax credit enacted in the Energy Policy Act of 1992 on the financing of wind turbine projects. Conclusions are offered in Section 5. In the past two years there have been only two wind turbine projects that have been financed, so the basis for broad conclusions is limited. Nonetheless, there appears to be a significant advantage in financing costs for conventional projects compared to wind turbines. The two sources of disadvantage to wind power are first, the cost of equity capital is significantly more expensive, and second, the capital structure of wind projects has a much greater fraction of expensive equity than conventional alternatives.