Calculating the Full Cost of Wind Energy

Published June 1, 2003

The availability of truly astounding tax benefits goes a long way toward explaining why some companies are so eager to build “wind farms.”

Of course, the tax burden escaped by wind farm owners is shifted to remaining taxpayers. Notably, wind energy promotional documents issued by the U.S. Department of Energy do not acknowledge the huge value to wind farm owners of the generous depreciation benefits that reduce both federal and state income tax liability.

Accelerated Depreciation and Tax Credits

The Federal Production Tax Credit is only one of several subsidies available to wind farm owners and developers and others in the wind industry. The value of five-year double-declining-balance accelerated depreciation permits wind farm owners to deduct hundreds of millions of dollars from income before they calculate their potential federal and state corporate income tax liability and before deducting the lucrative Production Tax Credit.

The value of accelerated depreciation alone in 2003 for a wind farm coming on line on January 1, 2003, could be $0.0533 per kilowatt-hour (kWh). When the $0.018 per kWh production tax credit is added, the value of the two federal tax benefits in 2003 would add up to $0.071 per kWh.

In most states, accelerated depreciation available to wind energy also can be used to reduce state corporate income tax liability. For example, in a state that fully conforms its corporate income tax to the federal system, and with a 10 percent corporate tax rate, the wind farm owner could reduce its state income tax liability by the equivalent of an additional $0.015 per kWh–for a total of $0.086 per kWh.

The value of tax benefits and other subsidies available to the wind industry in 2002 exceeded $300 million and are a part of the true cost of wind energy. These costs are being shifted from wind farm owners to remaining taxpayers.

Renewable Portfolio Standards and More

In addition, the Renewable Portfolio Standards adopted by several states are another form of subsidy for wind farm owners. Such standards are a particularly insidious subsidy because they force higher costs on millions of electric customers without their knowledge.

The standards force suppliers of electricity to purchase electricity from wind farms or other “renewable” energy facilities, generally without regard to higher costs. In some cases, a few electric customers who agree voluntarily to pay a premium price for electricity produced from renewable sources pay part of the extra cost. However, the remaining cost of the electricity, as well as the cost of administering the programs, is passed on to electric customers in their monthly electric bills.

There are still other elements of the full, true cost of wind energy. These include:

  • the cost of providing the back-up generation that must be kept immediately available to compensate for the intermittent, highly variable, and largely unpredictable output from wind turbines;
  • the extra costs of providing transmission for that electricity; and
  • other costs incurred in keeping transmission systems in balance.

Calculating the Impact

Consider this example of how tax policy subsidizes uneconomical wind farms.

A 100 MW (100,000 kW) “wind farm” with a capital cost of $1 million per MW (total capital cost of $100 million) coming on line in 2003 could take a $40,000,000 depreciation deduction from income.

With a 35 percent marginal tax rate, the “wind farm” owner could reduce his federal income tax liability by $14,000,000 before taking advantage of the federal Production Tax Credit.

If the wind farm began operation on January 1, 2003, and produced at an annual average 30 percent capacity factor, it would produce 262,800,000 kWh (100,000 kW x 8760 hours x .30 capacity factor). Therefore, the value of the depreciation deduction in 2003 in reduced federal tax liability would be equal to $0.0533 per kWh ($14,000,000 divided by 262,800,000).

The initial year depreciation deduction would be only 20 percent in the first tax year if the wind farm did not qualify for the “bonus” accelerated depreciation authorized by the Job Creation and Worker Assistance Act of 2002. However, the owner still would be able to take a depreciation deduction of $20,000,000 for the first tax year and then another deduction of $32,000,000 in the second year, with attendant reductions in tax liability. State income tax liability would be similarly affected.

Despite all the tax breaks and special treatment, the Energy Information Administration, in its Annual Energy Outlook 2003, projects wind will supply 27/100 of 1 percent of U.S. energy consumption in 2025. Fossil energy sources would supply 87.27 percent of U.S. energy consumption that year–more than 320 times the contribution of wind energy. Legislators should weigh these costs and benefits and realize that investing in wind farms is truly a losing proposition.

S. Fred Singer, professor emeritus of environmental sciences at the University of Virginia and president of the Science and Environmental Policy Project, shares his thoughts on environment and climate news stories of the month. Singer’s The Week That Was columns can be found at