Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Technology Corridor

How the wind farm capacity factor and a tax subsidy can beef up a utility's bottom line.
Fortnightly Magazine - August 2003

How the wind farm capacity factor and a tax subsidy can beef up a utility's bottom line.

Many interested by a profit motive or an environmental motive wax eloquently about the economy of wind farms to generate electricity, since wind energy is an environmentally friendly source of energy or "green power." Thus, the interest in wind farms attracts the attention of citizens, environmental groups, politicians, and commercial companies.

With this diverse interest, a sense of direction is needed to bring a reality check on the economics of wind farms. Consider the following example for a large-scale wind farm.

MidAmerican Energy Inc. plans to build the world's largest wind energy generation project in Iowa. 1 The reportedly $323 million project will consist of 180 to 200 wind turbines and have a capacity of 310 MW. An additional capital cost of $15 million for interconnecting and development adds up to a total estimated capital cost of $338 million for the economic evaluation. Landowners will be paid $4,000 per turbine annually for easements.

With this data as a basis, consider the economics of this project in two case studies (see next page).

Case 1 uses a capacity factor of 35 percent to approximate a break-even cost of 3.4 cents kWh for wind-generated electric power from a large wind farm. If a more detailed economic analysis is done using the Modified Accelerated Cost Recovery System (MACRS), the break-even price for wind energy turns out to be 3.4 cents/kWh-illustrating that the approximation method can be useful. For another site where the capacity factor is lower and the site-specific case has a capacity factor of 20 percent, 2 the break-even cost increases and the value becomes about 5.9 cents/kWh using the approximation method.

The economic analysis 3 of Case 2 yields an Internal Rate of Return (IRR) after taxes of 4.26 percent when the selling price of wind farm-generated energy is 3.4 cents/kWh, with no federal tax credit. Case 3 includes a federal tax credit of 1.8 cents/kWh of wind farm energy generated for customers, with all other factors the same as Case 2. The annual federal tax credit becomes $17.1 million (950,463,000 kWh/year x $0.018/kWh).

This subsidy in effect increases the IRR (after taxes) to 27.1 percent. If, for this same case, the debt was decreased to 60 percent at 7 percent interest and with a 40 percent equity, the IRR (after taxes) would be reduced to 13.8 percent considering the federal tax subsidy, but with the operation/maintenance cost increased from $3.23 million to $5 million per year.

These analyses illustrate the economics of wind farming, the importance of the wind farm capacity factor, and that a tax subsidy can generate much cash to the bottom line of a utility in a specific and properly chosen wind-farm site.

Another factor to consider is the matter of "green credits." Customers, if they wish, can be charged extra by the utility for purchasing wind energy. This additional revenue can make a project more profitable.

A state wind energy tax credit of 1.0 cent/kWh, such as recently contemplated for the

Pages