Indeed, wind power is about to play a major role in the European transition to a more climate friendly production of energy, reducing the need for conventional energy production and the threat to energy security. During the last 20 years the wind power generated output has increased to more than 100 TWh from the small 0,7 TWh, most of it in countries like Denmark, Germany and Spain. But in several other countries the wind power development is ready for departure and among these countries we find Norway. In 2000, ten years after the enactment of the new Energy Act, which laid the legal foundation for the liberalization of the Norwegian electricity market, the target of 3 TWh annual production of wind energy by 2010 was launched. The ambitious target was accompanied by the establishment of the public company Enova, which responsibility was to ensure domestic wind energy investments and provide financing through the new Energy Fund.For wind power, like all other new renewable energy sources, the long-run marginal cost exceeds the market price. In a liberalized competitive market we would expect to see investments if and only if the long-run marginal cost equated the market price. In other words, we should not expect any new investments in wind energy as long as the competitive market principle is not fulfilled. However, the rapid development of wind power and the establishment of public financial institutions like Enova underscore the political will to subsidize the wind industry. Given that society finds it important to invest in wind power, it is important to acquire knowledge about the magnitude of the subsidy in the future. Even though society chooses to support wind power financially, it is in society’s best interest to minimize the subsidy. The main purpose of this thesis is to study the grid parity of Norwegian wind power. Grid parity is defined as the point at which the cost of electricity from wind power will equal the cost of producing electricity by traditional means without taking into consideration subsidies. For a technology to reach its grid parity either the market price must increase or the long-run marginal cost decrease. By estimating future energy prices, information about the future price development can be obtained. By identifying the cost components and estimate their value, calculation of the long-run marginal cost is obtained. Comparison of the two will provide information on whether or not Norwegian wind power will reach its grid parity, hence, if there will a need for subsidies in the future.The wind power industry is capital intensive, as much as 75 to 80 percent of the total cost is related to upfront capital costs while the operation and maintenance cost attribute to the remaining 20 to 25 percent. Further, the wind turbine cost attributes to approximately 70-80 percent of the total capital cost, which means that any future cost decrease in large part must come from the turbine producers or more efficient turbines. The information from the capital and operational and maintenance cost breakdown has been used to calculate the long-run marginal cost for 12 of the Norwegian wind farms which have gotten their application for concession approved by the energy authorities. The long-run marginal cost, also referred to as the levelized production cost (LPC), is calculated in range between approximately 0,5 NOK/kWh and 0,7 NOK/kWh with a discount rate of 6 percent. In order to estimate the future price development, a scenario for 2025 has been developed. The future price is estimated by the use of the BID-model for Norway and the neighboring trade partners, and is for Norway reported at an average NOK 0,33.
It then remains to see whether or not it is reasonable to expect the cost of wind power to decrease. Studies of experience curves show that the turbine price is expected to decrease between 2 to 8 percent when the cumulative production doubles (Neij et al., 2003).
The rest of the thesis is organized as follows: In Chapter 2, a brief review on how wind power entered the Norwegian political agenda is provided. Chapter 3 describes the policies for promoting the development of wind power, with emphasis on the Norwegian model for subsidies. Chapter 4 describes the development of wind power and other energy sources in EU27 and Norway. In Chapter 5 an equilibrium model with hydro power and wind power is presented, as well as cost calculation methodology. Chapter 6 describes the components of the costs related to wind power and calculates the levelized production costs for 12 Norwegian wind farms. The discount rate and the annual energy output have a major impact on the level of the LPC, and the chapter provides a thorough discussion on the two factors. Chapter 7 uses scenario methodology to estimate future electricity market prices for five of the Norwegians price regions and the neighboring trade partners (reported in the Appendix). Chapter 8 establishes a Salter-diagram which illustrates that the Norwegian wind power industry has yet to reach its grid parity. It also briefly discusses the future development of wind power costs. Chapter 9 concludes the thesis.