Fickle like the wind
Wind farming is booming again in the district, but the industry remains dependent on federal subsidy.
- Senior Writer
Published November 1, 2005 | November 2005 issue
Sixty-seven wind turbines stand ready for duty on the Trimont Area Wind Farm, an 8,200-acre tract of corn, soybeans and hog pens straddling the border of Martin and Jackson counties in southwestern Minnesota. When the blades atop the 262-foot towers begin to spin this month, the 100.5-megawatt facility will generate enough electricity to serve 29,000 homes. Great River Energy (GRE), an electric cooperative based in Elk River, Minn., has agreed to buy the power.
Originally, the farmers who own the land under the towers were going to build and operate the wind farm themselves, investing their own money and harvesting all of the revenue. Their plans changed when they realized that they couldn't use the production tax credit (PTC), a write-off against federal income taxes for electricity produced from the wind; they didn't pay enough taxes. To make the project work financially, the landowners had to sell the farm to a corporation with sizable tax liabilities to write off.
That corporation is PPM Energy of Portland, Ore., one of the largest developers of wind farms in the country. Through an affiliate created to own and run the $120 million project, PPM will receive a tax break of roughly $6.5 million each year for the next decade, based on the average anticipated output of the turbines. More than 50 landowner-investors will partake of the credit indirectly, receiving development fees and a cut of gross revenues from PPM, in addition to standard lease payments for turbine sites. "They are going to get a nice rate of return, greater than any wind farm project that I'm aware of in the United States," said Earl Cummings, president of a Mankato, Minn., consulting firm that represented the landowners in negotiations with PPM.
Without the PTC the project would never have happened, Cummings said, because Trimont's electricity would have been too expensive. The credit effectively reduces the cost of wind generation by about 40 percent, making it affordable for GRE and other utilities. "The PTC is doing exactly what it was intended to do, and that is to bring outside dollars unrelated to these projects into renewable power so that it can move forward," he said.
Thirteen years after Congress enacted the PTC to foster wind power development, it remains the primary driver of wind farm construction, in both the district and the country as a whole. When the credit is available, developers rush to erect turbines and feed wind power into the grid. When the PTC expires, as it did in 1999, 2001 and at the end of 2003 before being renewed a year ago, the industry falls into the doldrums. Last year, according to data compiled by the American Wind Energy Association (AWEA), less than 40 megawatts of wind energy was developed in the district (see chart).
In contrast, this year is shaping up as a boom year for wind power in the district. Besides the Trimont facility, large wind farms either already completed or slated to begin producing power by year's end include a $190 million, 135-megawatt wind farm under construction near Judith Gap in Montana; Wilton Wind Farm in Burleigh County, N.D., a $60 million project developed by FPL Energy of Florida; and a 12-megawatt farm near Velva, N.D., that has contracted to supply power to Xcel Energy. Together with a number of smaller farms being built by farmers' co-ops and individual landowners, AWEA estimates that 332 megawatts of new wind power will come online in the district in 2005, at a cost of roughly $430 million.
Wind developers have proposed building another 1,300 megawatts of wind power in the district in 2006-07, although some of that power may never materialize because of insufficient wind, a lack of from utilities, transmission bottlenecks or other obstacles. Major projects on the drawing board: a 200-megawatt project being developed in Brookings County, S.D., by Navitas Energy of Minneapolis, a 150-megawatt PPM wind farm near Rugby, N.D., and a 50-megawatt FPL facility northwest of Bismarck.
All of these projects will benefit from the PTC, extended through the end of 2007 and increased to 1.9 cents per kilowatt-hour under energy legislation enacted in July. Less than two pennies per kilowatt-hour (the energy consumed by a 100-watt light bulb burning for 10 hours) doesn't sound like much; in fact, the PTC reallocates enormous amounts of money from taxpayers to wind farm owners, electric utilities and, ultimately, households and businesses that consume wind power. In 2003, U.S. wind developers reaped tax savings of over $95 million on newly commissioned wind farms—savings that will continue annually until 2013 with periodic adjustments for inflation.
Wind advocates, among them state energy regulators, say that wind is still a young industry that needs a leg up in order to compete with conventional fuels such as coal, nuclear energy and natural gas. They see government-subsidized wind power as a boon for the environment, a shot in the arm for declining farm economies and a crucial hedge against future shortages of fossil fuels. Bob Sahr, a member of the South Dakota Public Utilities Commission, called the extension of the credit for another two years "a great victory for wind power," ensuring that wind farm development continues without socking ratepayers with higher utility bills. "From the consumer's standpoint, we need [the PTC] in place," he said. "We won't support wind at the expense of consumers."
Those who favor abolishing the PTC, including conservative think tanks, blast it as a colossal waste of resources, a crutch for an expensive technology that can't come close to satisfying the country's electricity needs.
The consensus in the wind industry is that wind power has a way to go before it weans itself of subsidies. Some wind experts say that the here-today, gone-tomorrow PTC itself helps keep wind dependent on the taxpayer by perpetuating a boom and bust cycle that drives up development costs.
Chasing the wind
If wind power can make it anywhere without subsidies, it's in the district, one of the windiest regions in the nation. Four district states—North Dakota, South Dakota, Montana and Minnesota—rank in the top 10 of the U.S. Department of Energy's national rankings of wind energy potential.
Minnesota was the first district state to exploit the wind. Since the mid-1990s more than 50 wind farms have taken root in the state, mostly on and near Buffalo Ridge, a gusty glacial rise in the southwest. As of August, Minnesota ranked fourth nationally in installed wind power, with 615 megawatts, two-thirds of it under contract to Xcel. By state law the gas and electric utility is required to more than double its wind power purchases in Minnesota to 1,125 megawatts within five years. And a less stringent state law requires GRE and other electric utilities to make a good-faith effort to increase their use of renewable energy to 10 percent of sales by 2015.
In the last five years, other district states eager to promote rural, environmentally friendly industry have lent support to the development of renewable energy, chiefly wind. Wisconsin enforces a renewable portfolio standard (RPS) that requires utilities to derive 2.2 percent of their sales from renewable sources by 2011. Montana enacted a much tougher RPS last spring, ordering utilities to procure 5 percent of their electricity sales from renewables by 2009, and 15 percent by 2015. The output of the Judith Gap Wind Farm, the second utility-grade farm to be built in Montana in the last year, will help NorthWestern Energy of Sioux Falls, S.D., to achieve those goals.
Neither North Dakota nor South Dakota mandates the use of renewables, but their respective state governments are bullish on wind. In 2001 North Dakota granted large wind farms a 70 percent break on property taxes and exempted wind equipment and building materials from sales tax. South Dakota offers wind farms a similar property tax break intended to jump-start wind development.
State governments, and utilities striving to meet statutory mandates and objectives for renewable energy, have embraced wind power—rather than biomass, solar, geothermal and other alternatives to conventional fuels—because it's easily the least expensive renewable available.
In the last 15 years, advanced turbine design combined with the economies of scale inherent in large wind farms have lowered the cost of wind-generated electricity from about 20 cents to 2.5 cents per kilowatt-hour, factoring in the PTC. At that price, wind is the best deal for utilities looking to expand their generating capacity, said Jay Haley, a Grand Forks, N.D., wind development consultant. "For the last three or four years, wind energy has been the cheapest form of new energy generation of any of the forms, whether it be coal, nuclear or natural gas," he said.
But the choices facing electric utility executives aren't as clear-cut as Haley and other wind boosters imply. The reality of wind today is that despite all the progress the technology has made toward economic viability, the technology still needs the PTC to compete with most conventional fuels.
Free but fickle
Wind power's great advantage in the marketplace is its stable price. Because the wind is free, utilities can bank on steady prices for the life of a power purchase agreement, typically 15 to 25 years. But there's a big downside to wind—its intermittent nature. When the wind drops, as it's prone to do in the northern Plains on hot and bitterly cold days, the flow of electricity from wind turbines slows to a trickle. Utilities must be prepared to crank up their coal, nuclear or natural gas plants to meet heavy demand, which often coincides with faltering wind output.
"Because [wind power's] only available when the wind blows, it's less valuable than power from a resource that is available more on demand," said Rick Lancaster, vice president of generation for GRE. "That's not to say wind power is infeasible; it means that it's less valuable and so it needs that production tax credit in order to make it economically feasible." In other words, 4 cents per kilowatt-hour for coal-fired electricity, summoned at the flip of a switch, is a better deal for a utility than the same price for wind power, which flows into the grid only 30 percent to 40 percent of the time.
Lancaster declined to reveal the price GRE has agreed to pay for power from the Trimont Area Wind Farm. In Minnesota, as in many other states, utilities need not reveal the details of power purchase agreements. But he did say that GRE will pay about 40 percent less for Trimont electricity than it would for power from a new coal-fired plant. In his mind, that 40 percent saving is a discount that offsets the additional cost of "firming" wind power with electricity from existing coal and natural gas plants.
Not coincidentally, the PTC amounts roughly to a 40 percent discount for utilities and consumers of wind power. With it, the price of Trimont's electricity and that generated by a new coal plant would be roughly equal, Lancaster said. And electricity from older coal and nuclear plants would be much cheaper. The same can be said for Judith Gap, Wilton Wind Farm and all the other wind projects under construction or planned in the district. Without the credit, they would have trouble competing with conventional power plants that rely on the constant output of fossil fuels or uranium.
The one fuel that wind can compete with head to head, even without the PTC, is natural gas, typically burned to meet peak electricity demand. Natural gas prices have increased sharply since the late 1990s. When the price of natural gas surpasses $6 per million British thermal units—as it has consistently this year, spiking to $12 per Btu in the wake of Hurricane Katrina—gas-fired electricity can cost over 6 cents per kilowatt-hour, considerably more expensive than power from large wind farms.
Wind power is no substitute for reliable, low-cost coal and nuclear power, said Ron Rebenitsch, manager of member marketing for Basin Electric Power Cooperative, the Bismarck-based utility that has agreed to buy electricity from Wilton Wind Farm. But it can save utilities money when power consumption spikes, and eke out dwindling gas reserves.
"We have centuries of uranium and coal supplies," Rebenitsch said. "We've only got a few decades of natural gas, so it makes very good sense to use wind to help stretch those natural gas supplies."
Hungry for tax relief
Given the fact that utilities have cheaper options to meet their everyday or baseload needs, the fortunes of wind power continue to rest on the PTC. Without it, as the fever chart of wind deployment in the district illustrates, developers have little incentive to plan new projects. Utilities can always put off power purchases required to satisfy state renewable mandates and voluntary targets, as Xcel Energy did in 2004.
The PTC far outweighs the stimulating effect of state financial incentives. Haley credits North Dakota's 2001 tax cut package with helping to get the state's first large wind farms, two FPL Energy facilities with a combined capacity of 61.5 megawatts, built near Edgeley in 2003. But FPL would have passed on the projects without the PTC in place, he added. "The production tax credit is by far the largest incentive," he said. "Without that, nothing happens."
The tax credit is the reason big companies such as FPL and PPM Energy dominate the U.S. wind industry. Their investors or parent companies (PPM is a subsidiary of ScottishPower, a $13 billion multinational corporation) have an "appetite" for the tax credit—income tax liabilities that can be written off for the first 10 years of a wind farm's operation. Usually local entrepreneurs who want to build a wind farm don't have enough income tax liability to fully write off, so many opt to hand over the keys to a corporation or a wealthy individual in return for a share of power revenue.
Edison Capital, an affiliate of electric utility Southern California Edison, and John Deere Credit, an arm of the agricultural equipment manufacturer, have invested in district wind farms started by farmers or nonprofit organizations. In the case of the Trimont farm, PPM was the entity with an appetite for tax relief and the means to compensate local landowners for their early investments in planning and regulatory paperwork. "The production tax credit allows a PPM to do this project, but it also gives landowners the opportunity to do the project," Cummings said.
While the PTC makes wind farming profitable—the credit amounts to between 30 percent and 40 percent of a wind farm's revenue, depending on its efficiency—arguably the industry would be better off with a committed financial incentive than one that comes and goes with shifting political winds. Terry Hudgens, CEO of PPM Energy, told attendees at a national wind industry conference last spring that an "erratic, PTC-dependent market" drives up the cost of wind-generated electricity by 20 percent, impeding progress toward self-sufficiency. Development costs rise because of fluctuations in demand for labor and materials. Over the summer, before Congress extended the PTC through 2007, wind developers rushed to get wind farms up and running before the credit was due to expire at the end of the year. The surge in demand, coming after widespread production cutbacks and layoffs by turbine manufacturers in 2004, created a worldwide turbine shortage.
"They can't make them fast enough," said Stephen Wilson, renewable energy analyst for Xcel Energy in Minneapolis. "And part of that has to do with the fact that every time the production tax credit expires, the whole wind industry comes to a grinding halt." Naturally, prices for turbines and other wind farm hardware have climbed, exacerbated by high steel prices and a weak U.S. dollar against the euro. (Most wind turbines sold in this country are made in Europe.) As a result, the cost of building new wind farms has increased 40 percent in the last three years, to about $1,400 per kilowatt of capacity. Developers have little choice but to pass those increased costs along to utilities, and ultimately to investors and/or consumers.
Getting over the hump
With the renewal of the PTC, the clock is ticking until the next potential downturn in the industry. Can wind power get over the hump—compete with coal and nuclear generation sans taxpayer assistance—in the next 26 months? Or, failing that, before Congress' patience runs out? No one knowledgeable about the industry believes that wind power can thrive without the PTC within the next two or three years. Too many factors—the turbine shortage, exchange rates, strong Chinese demand for plate steel used in wind towers—militate against lower costs and
Beyond that time frame, opinions diverge dramatically. In pushing for a 5-year extension of the PTC, wind lobbyists told Congress that through increased efficiency, wind farms could lower electricity prices even further and stand on their own by 2010. Haley, an engineer, agreed: "When I see what this industry can do when manufacturers are able to gear up, and not have to start and stop, I think that's entirely possible."
Haley added that wind power cannot be expected to do without the PTC when conventional fuels such as coal, oil and natural gas also receive generous but less overt subsidies. For example, the Energy Policy Act of 2005 includes $8.6 billion in tax credits, grants and other subsidies for oil and gas drilling, development of cleaner coal plants and synthetic fuels, and investments in new nuclear power generation.
Opponents of continued federal support for wind power retort that at least that $8.6 billion is being spent on technology that works. Jay Lehr, science director of the Heartland Institute, a Chicago-based think tank that has lambasted both wind power and environmental concern over global warming, argued that wind farms can never produce enough electricity to make a significant contribution to the country's energy needs. The wind is too unreliable, and not enough land is available—especially in the eastern United States—to accommodate tens of thousands of wind turbines, he said. "The government justifies the tax credit in the belief that if you keep the industry going, eventually it will figure out better ways to do things and some day won't need a tax credit. But the laws of physics make that an impossibility. ...There [are] simply no engineering or material science advances that are possible." Income taxes lost to the PTC would be better spent on pressing social needs such as homelessness and drug addiction, Lehr said.
Other critics point out that because the wind blows in rural areas—not near big cities where most electricity is consumed—wind power requires costly additional investment in high-voltage transmission lines. And they decry wind turbines for marring bucolic landscapes and killing birds.
Ryan Wiser, an energy economist at the U.S. Department of Energy's Lawrence Berkeley National Laboratory in California, said it's too early to tell when—or if—wind power can prosper without the PTC. He noted that virtually every commercial wind turbine in the world receives some form of tax break or subsidy. Even in Denmark, where wind farms have been established for 30 years and generate almost 20 percent of the country's electricity, the government guarantees owners a minimum price for their power.
"The more economic wind is relative to its competitors, the more development we're going to see," he said. "But I do think there are some fundamental barriers to wind that will put some constraints on development." For wind developers to prove the critics wrong, wind power must catch a number of technological and economic breaks (see "Sure wind power can make it on its own ...").
Wiser argued that the time has come to give wind power a firm push toward self-sufficiency by phasing out the PTC. Extending the credit for several years while gradually scaling it back would end the boom and bust cycle and force wind developers to become progressively more efficient in order to stay in business. "The industry needs to come to grips with the fact that perhaps the PTC at a 1.9 cents per
kilowatt-hour level ... is no longer necessary," he said. "There can be a gradual reduction in that tax credit over time, and the industry can sustain those reductions."
Lancaster of GRE agreed; tapering off the credit over a period of 10 years would help Minnesota utilities achieve the state's 10 percent renewables goal by 2015, while allowing them to base their power purchasing decisions on predictable wind prices. But John Dunlop, Great Plains regional manager for AWEA, said that it would be unfair to wind developers to abolish or phase out the PTC while conventional energy industries continue to receive tax breaks, federal insurance coverage and other incentives. AWEA wants an inflation-adjusted, escalating PTC to remain in place, although it hasn't formulated a position on how long the credit should last beyond 2007.
In the end, Wiser speculated, Congress may insist on phasing out the PTC as a condition for extending it a few more years. As the wind industry grows in the district and other windy regions of the country, keeping the PTC on the books means forgoing hundreds of millions of dollars in corporate tax receipts.
When wind farms pull in so much revenue that policymakers can't resist fully taxing them, wind-generated electricity will have entered the mainstream, taking its place alongside coal, natural gas, nuclear and hydroelectric power as a significant component of the national energy portfolio. For now, the production tax credit shelters wind farms from the harsh winds of the energy marketplace.