Financial Incentives to Encourage Wind Power System Production Sasha Kemmet Iowa State University

Presentation Overview Issue Definition Background Information Current Federal Financial Incentives State and Local Financial Incentives Recommendations Summary Questions Acknowledgements

Issue Definition U.S. recognizes need for clean and sustainable power Traditional generation methods receive substantial government support President George W. Bush recognizes the potential of wind power to provide up to 20% of the nation’s energy needs Wind power provides zero-emission energy at an economically competitive price

Background The Growth of Wind Power in the U.S. 9,971 megawatts (MW) of installed turbine capacity 2000 to 2005, the U.S. wind industry - average annual growth rate of 29%

Background U.S. Wind Resources 7 Wind Power Classes (1 thru 7) –1 Poor –7 Superb 3,500 GW of available wind capacity rated at Class 5 – Class 7 Wind project owners: –Individuals –Farmers –Schools –Communities –Businesses –Utilities

Background Feasibility Broad public support: 88% of Americans support expanding wind farms Advancements in turbine technology Public Utility Regulatory Policies Act (PURPA): Requires utility buy back Wind intermittency poses challenges Transmission costs add a significant cost

Background Environment Electricity generation CO 2 emissions – Coal: 1,787 million metric tons –Natural Gas: 337 million metric tons Coal has the highest carbon intensity A 1 MW turbine displaces 1,800 tons of CO 2

Background Cost of Wind-Power Systems Transmission lines extension imposes significant cost Annual operating expenses are part of system cost Price per kW Small Scale$2,400 - $3,000 Medium Scale$1,500 - $2,500 Large Scale$1,000 - $2,000 Remote$4,000 - $5,000

Federal Financial Incentives Production Tax Credit (PTC) Concerns Reduced by grants, tax-exempt bonds, and subsidized financing Cannot absorb total benefit Do not help projects sustain debt Delayed renewal causes significant problems Explanation and Benefits The Energy Policy Act of 1992: established PTC Provide a proportional annual tax credit Currently set at 1.9 cents/kWh Available for the first 10 years of a generator’s operation

Federal Financial Incentives Production Tax Credit Effect of Delayed PTC Renewal

Federal Financial Incentives Accelerated Depreciation (AD) Explanation and Benefits More important at federal level Early tax benefits Net benefit for turbine owners Concerns Little effect on overall project cost Does not directly reduce transaction or financing costs Cannot be captured fully by public and nonprofit wind owners

Federal Financial Incentives Project Loan Guarantee Explanation and Benefits Ensures loan repayment Reduces transaction cost and institutional barriers Concerns May reduce PTCs High administrative costs Often do not help investor obtain a private loan

State and Local Financial Incentives Net Metering Explanation and Benefits Producer is paid for the difference between electricity generated and consumed Simplifies metering and interconnection requirements Provides more stable revenue Concerns Less incentive for larger projects Does not directly reduce financing costs Group net metering

State and Local Financial Incentives State Tax Reduction and Exemption Explanation and Benefits Apply to both small and large scale facilities Act as incentives especially for small wind systems Concerns Moderate effect on the overall cost of a system Not extremely effective in encouraging large scale development Decreases state and local revenue Cannot be implemented at the federal level

State and Local Financial Incentives Direct Production Incentives Explanation and Benefits Similar to PTC without tax basis Allow investors to absorb total benefits of the incentive Allow projects to sustain debt by directly increasing revenue Concerns Require administrative distribution of funds Subject to yearly budget appropriations Do not benefit off-grid projects Require a cash fund to be created

State and Local Financial Incentives Direct Investment Incentives (Grants) Explanation and Benefits Based on cost or capacity of a proposed project Effective in reducing capital cost Encouraging small-scale and non-metered projects Concerns Reduce PTCs Not production based High administrative costs Funds must be stable

State and Local Financial Incentives Government Subsidized Loan Explanation and Benefits Lower transaction cost Lower debt costs Can require a technical loan application Concerns Reduce PTC Loan defaults Benefit private project owners more Require the creation of a cash fund

Funding for Financial Incentives Earmarked Taxes Rersonal and corporate income taxes, sales taxes, gas taxes, and user fees Electric Service Wires Charge Tax on electricity that is charged to either the supplier or consumer based on usage Voluntary Consumer Payments Customer-choice programs allows customers to pay more for green energies

Recommendations Clear and Consistent Energy Policy Determine available incentives Long-term PTC renewal Eliminate the “boom-and-bust” environment Federal Government Subsidized Loan Reduce capital costs Model off existing programs Require technical application

Recommendations Alternate Energy Revolving Loan Program Iowa: AERLP can serve as a model Funded 25 wind projects since 1996: 41,537 MWh annually Finances half of a project’s cost up to $250,000 at 0% interest for 20 years Available to all groups except for non rate- regulated utilities Not available to refinance existing loan Requires technical application

Summary Diversified energy portfolio to include sustainable energy Wind energy is a zero-emission power source, economically feasible, and has broad public support Clear and consistent energy policy with long term PTC renewal Federal government subsidized loan Smart investment in securing inexpensive and clean energy for the future

Questions?

Acknowledgements IEEE USA Dr. Wolf Yeigh Erica Wissolik Pender McCarter and Chris McManes Chelsey MacNeill, Tony Azevedo, and WISE Interns Dr. Mani Mina, Iowa State University Family