Global Winds Harvest Inc. and UPC Wind Partners, LLC announced in April a joint effort to install wind turbines with a total capacity of 480 megawatts (MW) in Dickey County, North Dakota and McPherson County, South Dakota. While the partners tout the project as an economic development boon, the economics of the proposal in fact leave much to be desired.
Doing the math
The developers’ press release calls wind a “second crop,” as farmers would be paid for hosting the huge windmills on their land (and, presumably, for substations, cable, road, access, noise, and construction easements). The press release does not specify how much revenue each windmill would bring to a farmer, but other wind farm developments have made offers as high as $5,000 or even $10,000 per MW of turbine capacity.1
That may appear to be good money, and easy money at that. But there’s far more to wind farm economics than meets the eye:
- Assume the developer agrees to pay landowners $5,000 per year per MW of rated turbine capacity. Each year, all landowners together in North and South Dakota would receive a total of 480 times $5,000, or $2,400,000.
- Wind farm developers acknowledge that electricity produced by wind turbines costs more than electricity produced by traditional energy sources. That’s why they insist on special treatment—that is, massive subsidies—from federal and state governments. Assume wind-generated electricity costs just two cents per kilowatt-hour (kWh) more than electricity produced from other energy sources. (That’s almost certainly a conservative estimate.)
- If the wind turbines produced electricity at 100 percent of their maximum rated output for 24 hours per day, 365 days per year, they would produce a total of 4.20 billion kWh (480,000 kW times 8,760 hours per year = 4,204,800,000).
- But wind turbines produce electricity only when the wind is blowing within certain speed ranges. Assuming the turbines have an average capacity factor of 30 percent (i.e., their actual output equals 30 percent of the theoretical maximum), the annual output of the North-South Dakota turbines would be 1.26 billion kWh per year (.30 times 4,204,800,000).
- The electricity from the wind turbines, then, would cost $25.2 million more, every year, than electricity generated by conventional sources ($0.02 per kWh times 1,261,440,000 kWh).
- Consumers will pay $25.2 million more every year for the higher-cost electricity from the wind farms, while the host farmers will be paid $2.4 million: roughly 9.5 percent of the extra financial burden on electricity consumers.
Not only will consumers pay more than 10 times as much as host farmers will benefit, but the region’s economy as a whole will likely suffer:
- If the wind developer is from outside North or South Dakota, the net dollar outflow could be as much as $22.8 million: $25,228,400 minus $2,400,000. That negative impact on the state economies could, of course, be avoided if the wind-generated electricity is exported so that some other state’s residents pay the extra costs.
Incidentally, while an annual electricity production from wind turbines of 1.26 billion kWh may sound like a lot, it’s just 3 percent of the year 2000 electricity production in North and South Dakota, which totaled 41.0 billion kWh.
Windfall for wind farm developers
If North and South Dakota go ahead with the wind farm proposal, landowners should not be bashful about negotiating sizeable annual payments from the developers.2 Global Winds Harvest and UPC Wind Partners will themselves see handsome profits thanks to the federal income tax shelters available to them:
- First, they can recover their total capital investment very quickly, because wind energy facilities are eligible for “five-year double declining balance accelerated depreciation” for federal income tax purposes. (See IRS Publication 946.) Recovery of the $500,000,000 investment the developers claim they would make in the proposed North Dakota-South Dakota wind farms would be as follows:
|Year||% of investment
Thus, the entire investment can be recovered through depreciation charges to offset income tax liability in just six years. The owners and shareholders of Global Winds Harvest and UPC Wind Partners will see an infinite return on equity thereafter.
- Second, the wind farm developers are eligible for a federal Production Tax Credit of $0.017 for each kWh of electricity produced during the first 10 years of the project. If the wind turbines generate the 1.26 billion kWh estimated above, the wind farm owners will receive an additional tax credit of $21.4 million per year.
These subsidies are, of course, in addition to any revenue the wind farm owners will receive from consumers who purchase the electricity produced by the wind turbines.
To obtain the full benefit of the federally provided tax shelters, the owners must have income to shelter from federal taxes. For this reason, it is not unusual for small companies that develop wind farms to sell them to large companies. Precisely that has happened with several existing wind farms. Alternatively, ownership could be divided up into smaller entities to provide “doctor and dentist-sized” tax shelters.
While developers tout the economic benefits of wind, the citizens of North and South Dakota would do well to ask into whose pockets those benefits blow.
Glenn R. Schleede is semi-retired after spending more than 30 years on energy matters in the federal government and private sector. Schleede can be reached at Energy Market & Policy Analysis, Inc., Reston, Virginia.
1 Articles on the Enron-FPL Energy Manfort wind farm and the proposed Addison wind farm in Wisconsin suggest payments of $5,000 and $10,000. See www.jsonline.com/news/OzWash/mar00/wind13031200a.asp; www.jsonline.com/bym/News/oct00/wind19101800a.asp; http://www.doa.state.wi.us/depb/boe/pdf_files/ governor_energy_plan.pdf; p. 36; and www.jsonline.com/news/OzWash/mar00/wind13031200a.asp. For example, a former FPL Energy project manager stated that “the fee was about $10,000 per turbine, up from the initial offer of $2,500.”
2 Landowners may also want to require that wind farm developers set aside money in some kind of trust account to cover the not-insignificant cost of removing the structures in the future. Wind farm developers may be tempted to abandon the turbines once subsidies run out and maintenance costs rise.