Minnesotans For Sustainability©
Sustainable Society: A society that balances the environment, other life forms, and human interactions over an indefinite time period.
[Part 1 of 2}
Wind Energy Economics in West Virginia
A description of the environmental, scenic and property value implications and an analysis of the economic benefits and costs associated with existing and proposed “wind farms” in West Virginia
Glenn R. Schleede*
West Virginia already has one “wind farm” in operation, another has been approved and a third is awaiting approval. Such “wind farms” have far-reaching implications for the people of West Virginia –and other states where they are being considered.
The description of key environmental, scenic and property value implications and the analysis of economic benefits and costs associated with existing and proposed “wind farms” in West Virginia in the body of this report are provided to help increase public, media and official understanding of key issues.
Important conclusions include the following:
Special attention should be given to the summary of economic benefits and costs on [Table] page 16 of the analysis. Not all factors can be priced precisely but the bottom lines are clear:
The analysis demonstrates that the real motivation for construction of “wind
farms” in the U.S. is the value derived from generous federal, state and local
tax benefits and other subsidies –not environmental benefits. “Wind farms” are
not environmentally benign.
Wind Energy Economics in West Virginia
One “wind farm” is already operating in West Virginia, the Public Service Commission has approved another, and a third is awaiting PSC approval. Wind farm advocates claim that wind energy is good for the environment and can provide significant economic benefits to the people of West Virginia.
Meanwhile, opposition to “wind farms” has grown in many areas of the U.S. and Europe, as more people are learning that environmental and economic benefits of wind energy are often overstated, and costs to consumers and taxpayers, and adverse impacts on environmental, ecological, scenic and property values are often understated.
To help shed light on key issues, this paper focuses on recent and pending “wind farm” developments in West Virginia. Among seldom recognized facts that are explained are the following:
· The huge machines produce very little electricity.
· Electricity from wind turbines is unreliable, must be backed up by reliable generating units, and imposes extra costs on transmission and grid management.
· Wind energy advocates understate the true costs of electricity from wind energy.
· Claims of environmental benefits are often exaggerated.
· Adverse impacts on environmental, scenic and property values are often overlooked.
· “Wind farm” owners receive large profits due to federal and state subsidies that shift costs from “wind farm” owners to taxpayers and consumers.
· The potential economic benefits to West Virginia are very limited.
are needed to protect the interests of citizens, consumers and taxpayers when
“wind farms” are considered.
One “wind farm” is operating in West Virginia. A Certificate has already been issued for a second “wind farm” and an application is pending before the state Public Service Commission for a third project. The application for a fourth project, Dominion Mt. Storm, apparently has been withdrawn.
The three projects are summarized1 in the following table, along with estimates of the annual electricity production (in kilowatt-hours – kWh), assuming that they operate at a 30% capacity factor.2 All projects are to be in the Tucker-Grant-Preston County area on high mountain ridges (3,000 ft. or higher).
The owners and/or developers of the projects claim that the “wind farms” will
produce clean electricity, offset emissions associated with electricity produced
by generating plants using fossil-fuels, and provide economic benefits to West
Virginia and the areas where the
projects are located. The claimed economic benefits are jobs, tax revenue, and
rental payments to owners of the land where the windmills and associated cabling
and facilities are located. Each of these claims is evaluated in the pages that
The “wind farm” owners or developers have indicated that their projects will be “Exempt Wholesale Generators” (EWGs) and they expect the Federal Energy Regulatory Commission (FERC) to approve negotiated rates for the sale of their electricity output. They have indicated that electricity would be sold in surrounding states8 and, apparently, not in West Virginia.9
Since the true costs of electricity from wind are higher than the cost of electricity from other sources, exporting the wind-generated electricity will mean that electric customers in other states –not the customers in West Virginia– will bear the higher costs.
Exporting electricity is not unusual for West Virginia. During 2000,
West Virginians used only about 30% of the electricity produced in the state.10
The 410 existing and proposed turbines are huge machines, ranging in height from about 300 feet to a potential 465 feet. For comparison, the State Capitol in Charleston is 292 feet, the U.S. Capitol in Washington is 300 feet, and the Statue of Liberty is 157 feet.
1. FPL Energy’s Mountaineer Energy Center (Backbone Mountain).
If FPL Energy’s recently completed 66-megawatt (MW) “wind farm,” with its 44 wind turbines spread over 4,400 acres, achieves an annual 30% capacity factor,11 it will produce 173,448,000 kWh of electricity each year (i.e., 66,000 kW x 8760 hours x .30).
That sounds like a lot of electricity but, in fact, it is equal to:
· 19/100 of 1% of the 92,783,000,000 kWh of electricity produced in West Virginia during 2000.
· 1.5% of the 11,595,559,000 kWh of electricity produced during 2000 by Dominion Virginia Power’s nearby Mt. Storm coal-fired generating plant.
· 5.66% of the 3,066,000,000 kWh that would be produced annually by a new 500 MW (500,000 kW) gas-fired combined-cycle generating unit in base-load service and operating at a relatively modest 70% capacity factor. Many such generating units –which occupy only a few acres– are being built around the U.S.12 The total capital cost of such a plant would be about $268 million, assuming a cost of about $536,000 per MW.13
2. Potential output of all three “wind farms.”
If all three “wind farms,” including all the 410 wind turbines (that would be spread over 30 to 40 square miles) that are summarized in the above table achieve a 30% capacity factor3 they would produce 1,616,220,000 kWh of electricity per year.
Again, this may sound like a lot of electricity but, in fact, it would be equal to:
· 1.7% of the electricity produced in West Virginia during 2000.
· 39/100 of 1% of the electricity consumed in the 5 nearby states (MD, VA, DE, NJ, OH) and District of Columbia that import electricity, in part from West Virginia. Electric utility sales during 2000 in those states totaled 414,455,004,000 kWh, with about 20% imported.14
· 13.9% of the 11,595,999,000 kWh of electricity produced during 2000 by Dominion Virginia Power’s nearby Mt. Storm coal-fired generating unit.15
One new 265 MW (265,000 kW) gas-fired combined-cycle generating plant occupying only a few acres and operating at a 70% capacity factor would produce slightly more electricity –1,624,980,000 kWh– than the output calculated above for all three “wind farms” (i.e., 1,615,220,000 kWh). Such a plant would have very low emissions.
Electricity cannot be stored in any appreciable amounts. Instead, it must be produced as it is demanded (e.g., when someone turns on a light, television or air conditioner in a home). The real “value” of a kWh of electricity varies widely, depending on when it is generated, where it is generated, and its reliability.
Electricity from wind turbines is low in value compared to electricity from traditional energy sources because electricity from wind is:
· Intermittent – i.e., available only when the wind is blowing within the right speed range. No electricity is produced when the speed is below the minimum of the range or above the maximum. For example, the NEG Micon 1.5 MW turbines used in FPL Energy’s 66 MW Mountaineer Energy Center apparently begin producing electricity when the wind reaches about 3 meters per sec or 8.9 miles per hour, achieve rated capacity at about 15 m/s or 33.6 mph, and cut out at 25 m/s or 55.9 mph.16
· Highly variable or volatile – Electricity output varies widely as wind speed changes. For a 300 MW (300,000 kW) “wind farm,” the amount of electricity would vary from 0 to 300,000 kWh and would fluctuate from minute to minute within that range.
· Unpredictable – The availability of the electricity at any moment cannot be predicted accurately. It could be predicted accurately only to the extent that momentary wind speeds at turbine locations could be predicted accurately.
· Largely uncontrollable – The electricity output from wind turbines is largely subject to wind conditions, rather than being “controllable” by electric system dispatchers.
· Counter-cyclical with electricity demand. Wind tends to be strongest during winter months and at night – which are periods when the demand for electricity in the region tends to be lowest.
Because electricity must be produced as it is demanded by users of electricity,
most generating units must be immediately available 4 and controllable so that
they can be turned on, increased (“ramped up”) in output, decreased in output,
and turned off. Such generating units are called “dispatchable.” Their output is
more valuable than electricity from wind turbines because the output can be
counted on when needed and maintained at relatively steady levels. While the
times required to start up, ramp up and shut down differ, generating units
powered by traditional energy sources –coal, oil, natural gas, nuclear energy
and hydropower– are largely dispatchable.17
Electric systems (“grids” or “bulk power” systems) must be kept in balance on a real time basis to maintain system reliability ―e.g., in terms of frequency, balance between demand and generation (supply), and load on particular transmission lines.
Because the output from wind turbines is intermittent, highly variable, largely uncontrollable and unpredictable, other generating units (i.e., “dispatchable” units) must be kept immediately available to “back-up” the wind turbines by increasing or decreasing their production of electricity. Units serving this backup role must be on line (connected to the grid and producing electricity) and running below their peak capacity and efficiency, or in a “spinning reserve” mode (i.e., connected to the grid and synchronized but not putting electricity into the grid).
The generating units serving this role incur costs that they would not normally
incur if they were not serving the backup role, including fuel and operating
costs and extra wear and tear on the units as they are ramped up and down. These
“backup power” costs are a part of the full, true costs of electricity from
wind. If the “wind farm” owner does not pay for those extra costs, they would
have to be absorbed by the purchaser of the electricity and passed on to
electric customers. The true costs would constitute a subsidy to the “wind farm”
Electricity from “wind farms” makes inefficient use of transmission capacity and adds to the burden of keeping electric systems (“grid”) in balance
Electricity from “wind farms” makes relatively inefficient use of transmission capacity and adds to transmission costs. Transmission capacity must be available that is equal to the maximum capacity of the “wind farm” for those times when the “wind farm” is producing at full capacity.
Mountain top “wind farms” in West Virginia probably will have average annual capacity factors in the range of 25% to 35% which means that any lines serving those “wind farms” exclusively would be utilized only 25% to 35% of the time. Of course, the transmission lines will be used at higher capacity factors if the generating units serving in the backup role are close by and served by the same transmission lines. The added cost of inefficient use of transmission capacity is also a part of the full, true cost of electricity from wind.
In addition, the unfavorable characteristics of electricity from wind –intermittence, high variability, very limited predictability and limited controllability ―add to the burden of grid management. Actions must be taken by system managers –some with automatic controls and some manual– to keep the system (or “control area”) in balance and keep transmission lines from becoming overloaded. The added grid management burden is also a part of the full, true costs of electricity from wind.
If the added costs and burden imposed on transmission capacity and grid management are not paid for by the “wind farm” owner, they would have to be absorbed by the electricity purchaser 5 or the electric system serving the “wind farm,” and passed on to electric customers. These costs would become an additional subsidy to the “wind farm” owner.
Wind industry advocates readily admit that electricity from windmills costs more than electricity from traditional energy sources; i.e., natural gas, oil, coal, hydropower, and nuclear energy. (Otherwise they probably would not continue to lobby for the generous federal and state subsidies that are discussed below.)
However, the wind energy industry, the U.S. Department of Energy (DOE), the National Renewable Energy Laboratory (NREL), and other advocates of wind energy seldom admit the full, true costs of wind energy. In fact, the true costs for electricity from “wind farms” –which costs end up in electric customers’ monthly bills, include:
1. The price paid by the electric utility to the “wind farm” owner for the electricity.
2. The cost of providing “backup” services for the intermittent electricity from the wind turbines discussed above.
3. The capital and operating cost of transmitting the electricity from the point where it is purchased from the “wind farm” owner to the electric distribution system. As explained above, transmission and associated grid management costs are higher for electricity from intermittent, volatile sources such as wind than for electricity from stable, dispatchable generating units.
4. The normal capital and operating costs of a utility’s electric distribution system (e.g., substations, wires, transformers, meter reading, billing and other customer service costs).
The extra costs associated with electricity from “wind farms” (i.e., those costs identified in paragraphs 2 and 3, above) vary widely depending on:
· Wind conditions and characteristics of the electricity output from the “wind farms” (e.g., intermittence, variability).
· The electric systems (“control areas”) into which the electricity is sent (e.g., the type of generating units serving the backup role and their energy sources).
These are real costs. There should be a clear understanding how they are to be determined and who will bear those costs. As indicated above, if these costs are not borne by the “wind farm” owners, they will have to be absorbed by the purchaser of the electricity or the electric system serving the “wind farm.” In one way or another, these costs will be passed on to electric customers served by the electric system. The added cost borne by any one customer may be small, but the total costs can be significant and should not be ignored.
The costs enumerated above are NOT the full costs of electricity from “wind energy.” The federal government and some state and local governments –including West Virginia ―now provide very generous tax shelters and other subsidies for “wind farm” owners.
Due to generous subsidies –in addition to the income received from the sale of electricity– “wind farms” have become highly profitable ventures for organizations with income to shelter from federal and state corporate income taxes.
It is important to keep in mind that all federal and state tax shelters and other subsidies shift costs and/or tax burden from “wind farm” developers and owners to taxpayers who must continue to pay taxes and/or to electric customers. The added burden and costs are then hidden in tax bills or monthly electric bills.
The subsidies available to “wind farms” in West Virginia include:
· Federal accelerated depreciation
· Federal Production Tax Credits
· Reduction in West Virginia Corporate Net Income Tax (due to federal accelerated depreciation).
· 87.5% to 93.75% reduction in West Virginia’s Business and Occupation Tax.
· 91.67% reduction in West Virginia property taxes.
Those generous subsidies provided by the federal and West Virginia governments are described and, to the extent practicable, quantified in the pages that follow.
1. Two generous federal subsidies. The federal government now provides two generous tax shelters for “wind farm” owners. These subsidies shift costs (i.e., tax burden) from “wind owners” to remaining taxpayers.
a. Accelerated depreciation. One very generous subsidy available to companies with income to shelter is 5-year double declining balance accelerated depreciation (5-yr.; 200% DB) that can be used be to calculate depreciation for tax purposes. Five-year 200% DB can be used for capital costs of facilities using wind to produce electricity for sale. Nearly all other electric generating facilities18 must use 20-year depreciation, so “wind farm” owners have a tremendous advantage.
This shelter has been generous since it was first adopted in 1981. It became even more generous as a result of the Job Creation and Worker Assistance Act of 2002 which provided a special 30% depreciation deduction in the first year before taking advantage of 5-year 200% DB. The special 30% deduction applies to qualifying assets purchased after September 10, 2001 and before September 11, 2004, provided those assets are placed in service by January 1, 2005.
Five-year double declining balance (5-yr. 200% DB) depreciation as it existed prior to the change enacted in 2002 permitted sheltering the depreciation deductions from otherwise taxable income shown in the first table below. The table below is based on an assumption that the capital costs of a “wind farm” is $300,000,000 ―which is the approximate mount that NedPower has estimated for its proposed “wind farm” in West Virginia.
Specifically, the table shows for each year:
· The percentages and amounts of capital costs that could be deducted from otherwise taxable income, and
The reduction in tax liability, assuming a 35% marginal corporate income tax
If the “wind farm” were sold to a new owner, that new owner would be able to utilize the generous accelerated depreciation benefits to “recover” its capital investment.
b. Federal Production Tax Credit. The second generous federal subsidy available to “wind farm” owners is the Production Tax Credit of $0.018 per kWh of electricity generated during the first 10 years of a wind project’s life.19 At the current rate of $0.018 per kWh, NedPower’s proposed 300 MW “wind farm” would receive a tax credit (i.e., a direct deduction from its federal income tax bill) of $14,191,200 per year if the turbines produce at an average 30% capacity factor (i.e., 300,000 kW x 8760 hrs. x .30 x $0.018). The rate, originally $0.015 per kWh, is adjustable each year for inflation.
Organizations owning “wind farms” must have substantial taxable income to take advantage of these two federal tax shelters.20 That is one reason why small companies specializing in “wind farm” development sell off their projects to larger companies early in the life of their projects. For example, FPL Energy purchased the 66 MW “wind farm” (now called the Mountaineer Energy Center) from the initial developer, Atlantic Renewable Energy Corporation. The annual report of the FPL Group, the parent of FPL Energy and Florida Power & Light Company, makes clear that the FPL Group has substantial income that can be sheltered from federal corporate income taxes through its investments in “wind farms.”
2. Subsidies provided by West Virginia. In addition to the generous federal tax shelters, the State of West Virginia also provides subsidies that contribute significantly to the profits of “wind farm” owners. These include:
a. Reductions in “wind farm” owners’ West Virginia Corporate Net Income tax liability. West Virginia taxes net corporate income at a rate of 9% but “it is a federal conformity tax in that the starting point in computing West Virginia taxable income is the federal taxable income of the corporation.”21 Thus the generous federal accelerated depreciation deduction described earlier reduces the taxable income basis used when applying West Virginia’s 9% corporate net income tax rate.
The amount of West Virginia corporate net income tax that can be avoided due to the federal accelerated depreciation benefit cannot be estimated accurately without knowing a lot of details about the “wind farm” owner and its parent and affiliate organizations. The impact on the owners’ West Virginia Corporate Net Income tax liability could be as much as 9% of the owners’ federal accelerated depreciation deduction in the particular tax year due (i.e., the amount shown in the tables presented earlier on page 7).
b. Business & Occupation Tax Break for “wind farms.” Most electric generating units (except peakers) are valued at 40% of nameplate capacity for purposes of calculating their West Virginia B&O tax liability. However, due to a special tax break enacted in 2001, wind generators are valued at only 5% of their nameplate capacity.22 This tax break significantly reduces a “wind farm” owners tax liability.
Specifically, at the current tax rate of $22.78 per kW, a 300 MW (300,000 kW) “wind farm” that is:
· Valued at 40% of capacity (300,000 x .4) or 120,000 kW would owe B&O taxes of $2,733,600 (i.e., 120,000 x $22.78).
· Valued at 5% of capacity (300,000 x .05) or 15,000 kW would owe B&O taxes of $341,700 (i.e., 15,000 x $22.78), thus saving the owner $2,391,900.
c. Industrial Expansion and Industrial Revitalization Credit Offset for B&O Tax.
The Industrial Expansion and Industrial Revitalization tax credit can be used to offset up to 50% of the Business & Occupational tax liability. It appears that the potential tax of $341,700 identified above for a 300 MW “wind farm” with a capital investment of approximately $300,000,000 would easily qualify to offset 50% of the estimated B&O tax liability, or $170,850, reducing the owner’s annual B&O tax liability to $170,850.
d. West Virginia Business Franchise Tax. It appears the potential liability for West Virginia’s Business Franchise Tax for a “wind farm” would be zero, assuming that the owner of the facility was 100% engaged in electric generation.23
e. Property Tax Break for “wind farms.” Normally, in West Virginia, assessed valuations for property tax purposes are set at 60% of fair market value. However, a special tax break enacted in 2001 for “wind farms” provided that assessed valuations would be set at only 5% of fair market value.24 This, of course, results in a significant reduction in:
· The amount of the tax that would be due on the “wind farm” owner’s property.25
· The annual revenue that would be received via the property tax by Grant County, the school Board and other organizations that receive portions of the property tax revenue.
The following table shows the impact of the special tax break for “wind farms,” assuming:
· The fair market value of the wind turbines and other facilities that would be built by NedPower is $300,000,000, and
tax rate will remain the same as Grant County rate for the period from July 1,
June 30, 2002; i.e., $1.56940 per $100 of assessed valuation.26
NedPower officials have also testified that “NedPower has created public-private partnerships with Maysville Elementary School and Union Educational Complex to provide funds annually to support scholastic and extra-curricular activities at those schools.”28 The Grant County News has reported that NedPower has promised the two schools “an annual royalty from wind-generated power sales, up to $350 per turbine.” That could come to $35,000 per school [annually] once all turbines are in operation.”29
Information is not available to show whether the reduced tax revenue that would accrue to the various recipients would be adequate to cover the additional costs that would be incurred due to the construction and operation of the “wind farm” (e.g., county costs for road maintenance, police and fire protection).
[Continue to Part 2 of 2.]
1 Primary data sources: WV Public Service Commission case files: 00-1209-E-CN,
01-1664-C-CN, 02-1189-E-CN, and 02-1295-E-CN.
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