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New Energy Economics: New Option to Finance Wind Development

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Cole Gustafson, NDSU Biofuels Economist Cole Gustafson, NDSU Biofuels Economist
A new federal incentive allows U.S. taxpayers to deduct 30 percent of the cost for installing new wind energy systems by way of a tax credit or obtain a 30 percent direct grant.

By Cole Gustafson, Biofuels Economist

NDSU Extension Service

A new federal incentive signed into law by President Obama in February allows U.S. taxpayers to deduct 30 percent of the cost for installing new wind energy systems by way of a tax credit through the year 2016 or obtain a 30 percent direct grant if the project is completed by 2012. Landowners who participate have to give up the production tax credit (PTC), which has been a major catalyst for wind development.

Last year, the PTC provided a .021 cent per kilowatt-hour tax credit for electricity produced by a wind tower for 10 years after it was placed in service. However, many landowners didn’t have sufficient income to utilize fully the PTCs that were generated. Therefore, landowners typically partnered with high-income external investors who could claim all of the credits during the 10- year project life. This source of investment capital was commonly referred to as “tax equity” financing.

Instead of now claiming the PTC during the life of the project, the new legislation provides commercial businesses (including farmers and ranchers) the opportunity to receive this incentive in the form of an immediate investment tax credit or grant. These commercial businesses no longer will have to search for external tax equity partners. Rural small businesses and agricultural producers can receive the grant through the U.S. Department of Agriculture’s Rural Energy for America Program.

At the recent American Wind Energy Association meetings, Edward Zaelke, wind energy consultant, presented a financial comparison of these alternatives. His analysis is based on a 50-megawatt wind project with a total investment cost of $110 million, annual operating costs of $2 million and a $3.3 million PTC for the first 10 years of operation. When the PTC was not included in his base analysis, the project loses $1.6 million annually if capital costs are 6 percent.

When traditional PTCs are included, the profitability of wind energy improves. In his analysis, the economic benefits of previously available federal tax provisions totaled $36.3 million during the project’s first five years. Assuming a traditional mix of 40 percent equity and 60 percent tax equity, one comes up with a break-even price of $75 per megawatt hour (mwh).

Prior to the 2009 stimulus act, very little external debt was utilized for wind power financing. The reason tax equity financing was so prevalent was to capture all of the production tax credits that were available. Thus, demand for additional debt financing was minimal. Under President Obama’s new stimulus program, developers now have the option of forgoing the PTC and claiming either a direct 30 percent investment tax credit or a grant. The advantage of this is that wind developers now can use sale-leaseback financing structures and rely less heavily on tax equity.

The addition of President Obama’s new stimulus provisions, either the tax credit or grants, improves investment returns. Moreover, less investor capital is required. With a 30 percent federal grant, Zaelke feels that lenders will have enough security and interest in providing debt capital. Therefore, the new financing structure he envisions is 30 percent federal grant, 45 percent debt financed at around 8 percent interest and 25 percent landowner equity or tax equity.

With this financing structure, the break-even price of electricity rises to $80 per mwh. He notes that the availability of debt capital from financial markets is still very uncertain. However, equipment warranties and other enhanced project qualities would reduce potential lender concerns.


NDSU Agriculture Communication

Source:Cole Gustafson, (701) 231-7096, cole.gustafson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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