Wind energy subsidies yield more than they cost

Revenues for US Treasury calculated

Wind energy is often criticised by competing forms of energy generation for some of its perceived aspects. It is said to cause dispatching problems, to be more expensive than fossil fuel, to have a limited global potential, and to represent a high cost to society. This last critique has now been contradicted by GE Energy Financial Services. Their study ‘Impact of 2007 Wind Farms on US Treasury’ concludes that the financial incentive for wind energy by the US federal government has a positive Internal Rate of Return (IRR).

This incentive consists of a Production Tax Credit (PTC), currently rated at 2.1 US cents/kWh, which is granted for the first 10 years of a wind farm’s production. The PTC has been a key element in the expansion of wind energy in the US.

An Internal Rate of Return of 5%

GE calculated the financial impact on the US Treasury of the PTCs granted to the wind turbines constructed in 2007. This construction represents a total capacity of 5.2 GW. The total cost of those PTCs was around $2.5 billion. The following tax revenues from the construction and operation of these particular wind farms were estimated, in Net Present Value (NPV) as:

• $1.9 billion of taxes on project income
• $540 million of income tax on individual wages
• $280 million of income tax on vendor’s profit
• $30 million of income tax on lease payments and royalties to landowners

This brings the total revenue to $2.75 billion NPV compensating the investment cost. The Internal Rate of Return (IRR) of the investment by the US Federal State was calculated to be 5%.

The boundaries of the investigation

The above conclusions are clear and, on the face of it, convincing, but they also requires a few sidenotes. An initial remark is that studies such as this depend a great deal upon where you draw the boundaries of your investigation. Wind turbine production replaces a corresponding production from fossil fuel power plants. The tax income from the latter will consequently be lower than if no wind turbines were to have been built. This is an effect that is not taken into account in the GE study. More generally, an IRR of 5% is considered a success, but one could wonder whether there are other investments of the same magnitude in the energy sector capable of an even higher rate of return.

Another point is that the calculation does not incorporate the externalities — the hidden social and environmental cost to society. Given the fact that the externalities of fossil fuel power plants are a factor higher than those of wind energy, the IRR of the PTCs would be higher if the externalities had been taken into account.

A final remark, albeit a bit sceptical, is that you can make these kinds of studies prove whatever you want them to, since there are so many boundary conditions you can play with and the global energy system is so complex that every estimate is an approximation (see blog post 'Studies can prove whatever you want them to'). How trustworthy is this investigation? What was the reason for executing this study in the first place? And are the GE calculations unbiased or did they aim at a certain outcome?

Carbon emission reduction is main goal

Despite the questions asked above, I think one conclusion can certainly be reinforced by the GE study. Far too often, the public cost of renewable energy incentives is presented without estimating the resulting revenue. The GE study might have a large margin of error, but one could at least conclude from it that the US incentives do not represent a high cost for the Treasury and probably are even a good investment on the part of the government. That in itself is indeed quite an achievement for a measure in which the overarching goal is to reduce greenhouse gas emissions.

Reference

Press release announcing the study 'Impact of 2007 Wind Farms on US Treasury' on the GE Energy Financial Services Web site.