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Sustainable Society:  A society that balances the environment, other life forms, and human interactions over an indefinite time period.

 

 

 

 

 


 

Wind Energy Money Changing & Wealth Transfers

Glenn R. Schleede
July 12, 2003


Letter to Tim MacDonald from Glenn Schleede
    The magnitude and merits of energy tax breaks and subsidies
    Table: U.S. Energy Consumption by Energy Source: 2000 Actual and EIA Forecast for 2025
    The implications of your activities
    Adequacy of your research
    True cost of electricity from wind energy
Endnotes
Attachment: Letter to Glenn Schleede from Tim MacDonald


 

Mr. Tim MacDonald
Senior Vice President
Meridian Clean Fuels, LLC
1266 Furnace Brook Parkway
Quincy, MA 02169
 

Dear Mr. MacDonald:

Thank you for your July 2, 2003, letter (copy attached):

·           Indicating that Meridian is in the business of brokering Section 29 and 45 tax credits, with plans to focus on the extensive tax credits available for wind energy, and

·           Asking that I help you understand the reasons why wind energy does not really have all the advantages that its supporters claim.

In summary, I do not propose to help you because I believe:

·           Your letter is evidence that you have not done the objective research that would, if undertaken, reveal the answers you are asking me to provide.

·           Federal tax credits available under Sections 29 and 45 of the Internal Revenue Code often:

·           Encourage investments in projects that are undertaken for tax avoidance purposes rather than sound business reasons.

·           Distort private sector capital investments by directing capital to projects with little intrinsic merit.

·           Shift tax burden from highly profitable organizations to ordinary individuals.

·           Encourage investments in projects that help push up consumers’ electricity prices.

·           Result in damage to environmental, ecological, scenic and property values that has not been taken into account by lawmakers and regulators.

·           Are not in the national and public interest, despite the fact that they may be legal.

Based  on your letter, it appears that Meridian plans to serve as a “money changer” by using faulty federal and state tax law and tax policies for wind energy to aid in transferring wealth (hundreds of $ millions) from ordinary taxpayers and consumers to organizations with high profits that wish to avoid taxes.

Such a role probably is quite legal.  Whether helping to load more tax burden and high (regressive) electricity costs on ordinary citizens is morally acceptable is a separate consideration.  My sympathies in this matter lie with the taxpayers, electric customers and citizens who would bear the economic burden as well as the cost of impaired environmental, ecological, scenic and property values resulting from “wind farms.”
 

The magnitude and merits of energy tax breaks and subsidies

Normally, I would be quite willing to help keep tax dollars from flowing to Washington where they are wasted with such abandon -- as illustrated by the hundreds of millions of tax dollars that flow through the US Department of Energy (DOE) each year.  As you probably know, DOE and its predecessors have spent over $100 billion on “energy R&D” that has produced little that is technologically sound, economically competitive and environmentally acceptable.

For example, DOE has spent hundreds of millions on wind energy R&D, often using the argument that this was an “investment” in technology that would give the US an advantage in world markets.  However, some 90% of the wind turbine market is supplied by foreign companies.  The dollars being spent for wind turbines imported for “wind farms” in the US are, like dollars for imported oil, a part of the US balance of payments deficit.

My normal desire to keep tax dollars out of Washington does not extend to either:

1.        Unwarranted Section 29 and 45 tax credits which, demonstrably, are among the more wasteful and outrageous measures pushed through the Congress by various special interest groups.  For example, you may be aware that Section 29 tax credits for coalbed methane at times exceeded the wellhead market price for natural gas.  Also, the abusive use of “synfuels” tax credits is nearly legendary.  The recent Wall Street Journal story indicating that the US Treasury Department is finally preparing to clamp down on this abusive tax credits is a welcome sign.

2.        “Windfall” tax breaks and subsidies now being captured by the wind energy industry at the expense of the nation’s electric customers and taxpayers.  Contrary to the claims by wind energy advocates, wind energy may now be THE most heavily subsidized energy source WHEN CONSIDERED IN LIGHT OF EITHER ITS CURRENT OR PROSPECTIVE CONTRIBUTION TOWARD SUPPLYING THE NATION’S ENERGY REQUIREMENTS.

Many federal, state and local tax breaks and subsidies (some from regulators) are now available for commercial scale windmills even though the huge machines produce very little electricity.  The list includes:

a.         Federal five-year double-declining balance accelerated depreciation (MACRS[1]) which, with the recently enacted depreciation “bonus,” permits “wind farm” owners to deduct 60% of the capital cost[2] of a “wind farm” from otherwise taxable income in the 1st tax year, another 16% in the 2nd tax year, and the remainder over the next 36 – 48 months.

b.         A ten-year, $0.018 per kilowatt-hour (kWh) Production Tax Credit which permits the owners of “wind farms” or their parent companies to deduct additional millions of dollars each year from their tax liability.

c.         Depreciation deductions from income that would otherwise be subject to state corporate income tax in states that conform their corporate taxes to the federal income tax system.

d.         Dozens of state and local government tax breaks, enacted in response to wind industry lobbyists, including (depending on the state) state production tax credits, reductions in or exemptions from business and occupation taxes, sales and use taxes, and state and local property taxes.  Some reductions in the 85% to 95% range.

e.         Direct DOE subsidies (via contracts, grants and subcontracts) for wind energy R&D and for wind promotional activities carried out by DOE “national laboratories,” trade associations and numerous “non-government organizations” that have been created to promote expensive “renewable” energy.

f.           Similar state subsidies (e.g., in New York), which are provided to “wind farm” developers from funds collected from electric customers via so-called “public benefit funds.”

g.         “Renewable Portfolio Standards,” (RPS), enacted in several states (and proposed as a federal measure), which shift additional costs to electric customers. This insidious subsidy forces electric distribution companies to purchase high cost electricity from “renewable” energy companies and pass energy and administrative costs not recovered through “green” programs on to all electric customers.

h.         “Green” energy programs that are forced on electric distribution companies to provide a market for high cost renewable energy.

i.           Mandated or voluntary “green” energy purchases by federal, state and local government agencies and schools, with the higher cost of renewable energy borne by taxpayers.

j.           Costs of building electric transmission capacity to serve “wind farms,” with costs shifted by regulators from the “wind farm” owners to electric customers.[3]  Examples include a $148 million Xcel project in Minnesota and capacity additions in Texas.

k.         Arbitrarily awarded “capacity” credits for “wind farms” that exceed the true contribution that this intermittent, variable, and largely unpredictable source can provide.

My preliminary estimates indicated that tax breaks and subsidies for wind energy from the first few items in the above list will easily exceed $300 million in 2002 and will be higher in the years ahead.

The wind industry’s claims that it does not get its fair share of government subsidies should be considered in light of the small contribution that wind is expected to contribute in supplying US energy requirements.  This small contribution (despite the enormous growth in subsidies) can be seen in the following table that is based on the Energy Information Administration’s (EIA) Annual Energy Outlook 2003.
 

U.S. Energy Consumption by Energy Source: 2000 Actual and EIA Forecast for 2025

 

Energy Source

Actual 2000

EIA Forecast for 2025

Quadrillion Btu

% of Total

Quadrillion Btu

% of Total

Traditional Sources

 

 

 

 

   Petroleum products

38.39

38.60%

56.22

40.40%

   Natural Gas

24.07

24.20%

35.81

25.73%

   Coal

22.64

22.76%

29.42

21.14%

   Nuclear Power

  7.87

   7.91%

  8.43

   6.06%

   Conventional Hydropower

  2.84

   2.86%

  3.12

   2.24%

   Other

     .31

     .31%

    .07

   0.05%

      Sub-Total – Traditional

96.12

96.64%

133.07

95.62%

 

 

 

 

 

Non-Hydro Renewables

 

 

 

 

   Geothermal

  0.30

   0.30%

   1.02

0.73%

   Wood

  0.41

   0.41%

   0.40

0.29%

   Other Biomass

  2.07

   2.08%

   3.42

2.46%

   Municipal Solid Waste

  0.31

   0.31%

   0.44

0.32%

   Solar Thermal, electric & hot water

  0.06

   0.06%

   0.09

0.06%

   Solar Photovoltaic

  0.00

   0.00%

   0.01

0.01%

   Ethanol

  0.14

   0.14%

   0.34

0.24%

   Wind

  0.05

   0.05%

   0.37

0.27%

      Sub Total – Non-Hydro renew.

  3.34

   3.36%

   6.09

4.38%

 

 

 

 

 

Total  

99.46

100%

139.16

100%

 

As the table shows, fossil energy sources (petroleum, natural gas and coal, combined) are expected to supply 87.27% of US energy requirements in 2025 – or 323 times the 27/100 of 1% expected from wind.  If wind subsidies totaled $300,000,000 in 2002, the industry’s “fair share” argument would suggest that subsidies for fossil energy sources should be at least $96,900,000,000!  Clearly, the wind industry’s claim is without merit.
 

The implications of your activities

Please consider seriously the fact that subsidies for wind energy are shifting hundreds of millions of dollars in cost from “wind farm” owners and placing it on the backs of ordinary taxpayers and electric customers – with this extra burden then hidden in tax bills and monthly electric bills.  Does Meridian really want to participate in, encourage and profit from this activity?

Please note also the point that subsidies distort investments by directing capital toward endeavors that often have little long-term value.  The federal and state governments are repeating a mistake made during the 1980s when tax credits were the motivation for building thousands of windmills in California which produce little electricity. Many were abandoned once tax benefits were exploited – resulting in California’s “windmill junkyards.”

Finally, please note that the high front-end tax benefits for wind energy provides an incentive for (a) similar abandonment of today’s “wind farms” once tax benefits have been captured,[4] and/or (b) “churning” of “wind farm” ownership to permit successive owners to take advantage of lucrative accelerated depreciation benefits.


Adequacy of your research
.

I have some doubt whether your research has been as thorough as you suggest.  Your questions suggest that you have focused primarily on promotional information from the wind industry, DOE, the National Renewable Energy Laboratory (NREL), and various wind energy advocacy groups – none of which can be relied on for objectivity. You should have found answers to most of your questions if your research had extended to such sources as the following:

·           The growing number of articles in the general press on opposition to proposed “wind farms.”

·           Open literature and web sites that include analyses and commentary from individuals and organizations that are not biased in favor of wind energy.

·           Web sites sponsored by organizations that actively oppose wind energy because of its adverse impacts on environmental, ecological, scenic and/or property values, and sites that encourage discussion of the issues that are involved.  Such sites exist in the US, UK, Denmark, Germany, Spain, Italy, Australia and probably other nations.

·           Numerous papers that I have written and distributed.


True cost of electricity from wind energy

While not important to your plan to capitalize on faulty government tax policies, you may want to note that most claims about the per kWh cost of electricity from wind turbines are without a solid foundation and are often understated.  For example:

·           Often, those calculations are based on assumed turbine (and related windmill components) lifetime of 20 years and assumptions about O&M, repair and replacement costs.  In fact, no one has experience with today’s generation of wind turbines over a long enough period to demonstrate the validity of those assumptions.

·           The claimed per kWh costs often ignore the fact that the generous subsidies for wind energy described above shift large portions of the true cost from “wind farm” owners and hide them in bills paid by ordinary taxpayers and electric customers.

·           The claimed per kWh costs generally do not include the true cost of backup generation, integration of electricity from intermittent wind generation into electric grids, or transmitting electricity from “wind farms” to areas where the electricity can be used.

I hope that the above information will explain adequately why I do not wish to provide the help for Meridian’s venture that you requested in your letter (attached).  In summary, like the tax benefits you wish to exploit, I do not believe that your venture would make a positive contribution to the national or public interest.

Sincerely,

 

Glenn R. Schleede
PO Box 3875
Reston, VA 20195-1875
Phone: 703 709-2213
Email:  EMPAInc@aol.com.

Attachment:  Letter from Mr. Tim MacDonald, Senior VP, Meridian.

Endnotes:
[1]  MACRS = Modified Accelerated Cost Recovery System.
[2]  Whether financed with debt or equity.
3 In addition to the subsidy value of shifting transmission costs from “wind farms” to electric customers, note that “wind farms” tend to be inefficient users of transmission capacity.  That is, transmission capacity must be available to serve the full rated capacity of a “wind farm” but that capacity is likely to be utilized less than 30% of the time.

4
Note especially that most “wind farms” are owned by single asset limited liability companies (LLCs) that are wholly owned by relatively large companies with substantial income from other activities that they wish to shelter from federal and state taxes.
 

Attachment:  July 2, 2003 letter received via Email from Mr. Tim MacDonald of Meridian

Dear Mr. Schleede;

My name is Tim MacDonald. I am a Senior Vice President at Meridian Clean Fuels. We are an affiliate of Meridian Investments, Inc. Meridian is the largest independent broker in the tax credit industry. Meridian Clean Fuels is a Meridian company that specializes in energy-related tax credit programs under Section 29 and 45 of the Internal Revenue Code. This includes Wind.

I have been researching the wind industry for some months now, in an effort to understand all the complex policy and economic issues. I have found many sources advocating wind. Your name continues to surface as a major opponent of wind.

As Meridian gears up to begin representing the wind industry in the tax credit market, it is very important to us that we represent these investments fairly, but also accurately. We are very sensitive to any countervailing concerns that could adversely affect the long term viability of the Production Tax Credit program orthe wind industry, generally.

Unless I have missed something, however, it appears that your objections to wind are based entirely on cost, arguing that wind is just more expensive than combustion technologies, and cannot compete on price. It is interesting that you do not appear to have addressed the one issue that seems to drive all the advocates for wind, and that is the environmental benefits from clean generation.

It would be of significant benefit to Meridian, if you would be willing to comment on the following assertions.

1.       There is an environmental cost to combustion generation that is not reflected in the current market prices for electricity produced from fossil fuels.

2.       Wind is clean generation, that has no environmental cost attached.

3.       The incremental difference between the cost of clean generation from wind and the cost of polluting generation from combustion represents a useful and affordable measure of the environmental cost of combustion generation.

4.       Any reduction in adverse environmental impact achieved at a national level is worth any incremental increase in the cost of generation, overall - although there are important unresolved issues regarding the question of who should pay those incremental costs.

5.       The challenges presented by introducing intermittent wind generation into the existing transmission grid reflect an obsolete grid design that is the legacy of decisions made in the early days of the electric power industry, under very different circumstances. This legacy design is increasingly inadequate to today's power needs on many levels, with the adoption of clean generation being only one. The grid needs to be redesigned, anyway, so why not design a new grid that can handle as much clean generation from wind as we can harness, consistent with the competing goals of adequate supplies of electricity with no meaningful adverse environmental impact for the lowest possible cost.

Whatever time you are willing to invest in sharing your thoughts on these points will be much appreciated.

Sincerely,
Tim MacDonald
Senior Vice President
Meridian Clean Fuels, LLC
1266 Furnace Brook Parkway
Quincy, MA 02169
< www.meridianinvestments.com >.
______
Used with permission of the author.

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