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Wind, Coal, and the Cost of Environmental Externalities

Environment and Climate Change

We compare the cost of generating electricity with coal and wind in Chile’s Central Interconnected System (SIC). Our estimates include the cost of marginal damages caused by coal plant emissions. On average, we estimate that the levelized cost of coal, including externalities, is $84/MWh. It is efficient to abate emissions of air pollutants (SOx, NOx and PM2.5) but not of CO2. Then the cost wrought by environmental externalities equals $23/MWh or 27% of total cost. Depending on the price of coal, the levelized cost of coal may vary between $72 and $99/MWh. The levelized cost of wind is $144/MWh with capacity factor of 24%. This cost includes the cost backup capacity to maintain LOLP, which equals $13/MWh or 9% of total cost. The levelized cost of wind varies between $107/MWh with capacity factors of 35% to $217/MWh with capacity factors of 15%. We conclude that wind is competitive only when it achieves capacity factors around 35% and coal prices are very high. So far the average annual capacity factor achieved by existing wind farms in Chile has been less than 20 %, which suggests why wind has developed only slowly.

468wp.pdf (323.74 KB)
Alexander Galetovic
Cristián M. Muñoz
Publication Date
February, 2013