On September 13, 2013, Google announced that it had signed a contract to buy the entire output of the 239.2 megawatt Happy Hereford wind farm that is being developed by Chermac Energy near Amarillo, Texas. The project is expected to begin operation in late 2014.
Undoubtedly, the developer of the facility, Chermac Energy* is pleased to have a 20-year contract for the sale of the electricity that will be produced. The Google deal will provide the developer a guaranteed cash stream that will make it possible for Chermac to obtain financing for the project.
Undoubtedly, Google is pleased with all the favorable publicity the company has received for being so environmentally committed even though the wind-generated electricity will not be used in a Google facility. Instead, according to Google, the electricity will be sold in the wholesale market and Google will purchase the electricity it needs from the utilities serving its facilities or a wholesale supplier. Google will “retire” the renewable energy credits (REC) resulting from the deal.
The “big losers” in the Google transaction will be taxpayers, a point that none of the media stories have mentioned. Specifically, taxpayers will have to pick up the cost of the tax breaks that the wind farm owner (currently Chermac) will enjoy. As explained below, the tax burden that will be shifted from the wind farm owner to remaining taxpayers will be at least $170 million and probably more.
The most lucrative federal tax break for the project owners will probably be the federal wind production tax credit (PTC). This tax break will provide the owners with a tax credit, currently set at $0.023, for each kilowatt-hour of electricity that the “wind farm” produces during the first 10 years of operation. The $0.023 rate applicable during 2013 is subject to upward adjustment for inflation and undoubtedly will be increased during the next 10 years.
Also, the wind farm owners will likely qualify also for another lucrative federal tax break known as “accelerated depreciation” which allows the owners to depreciate for tax purposes the entire capital cost of the wind energy equipment over a 5-year period, thus providing a significant cash flow benefit.
The actual cost of the PTC to taxpayers can only be estimated at this time since the amount paid depends on the amount of electricity produced as well as the rate at the time of production. The benefit to the owners and added tax burden to remaining taxpayers can be estimated with a few assumptions. Specifically:
- The stated capacity of the planned Happy Hereford wind farm is 239.2 megawatts (MW) or 239,200 kilowatts (kW).
- Amount of electricity produced each year will only be known after the fact since this will depend on wind conditions at the site and condition of the turbines. Two large existing wind farms in the Amarillo area had capacity factors** of about 45% during 2011, among the highest in the US.
- Assuming that Happy Hereford will achieve a capacity of 45%, the project would produce approximately 942,926,400 kilowatt-hours (kWh) of electricity each year (that is, 239,200 kW capacity x 8760 hours per year x .45 capacity factor = 942,926,600 kWh).
- Production of 942,926,400 kWh x the 2013 rate of $0.023 would produce an annual PTC break for the wind farm owners and annual cost to taxpayers of $21,687,307. At this rate, the tax break would be $216,873,070 over 10 years if production continued at the same level.
- If the PTC rate is increased due to inflation adjustments to an average of $0.026 during the 10 year operation, the average annual PTC break would be $24,516,086 per year and $245,160,860 over the 10-year period.
Google had earlier announced it had purchased the output of two other wind farms:
- In July 2010, Google announced the purchase of 114 MW of the capacity of NextEra’s Story County II wind farm in Iowa. This project began producing electricity in 2009. Assuming a capacity factor of 35%, this project would produce 349,524,000 kWh of electricity per year and earn production tax credits of $8,039,052 in one year at a rate of $0.023 (the 2013 rate) or $80,390,520 in 10 years if the average rate over the 10 years turns out to be $0.023.
- In April 2011, Google announced the purchase of the output of NextEra’s 100.8 Minco II wind farm in Oklahoma. This project began producing electricity in 2011. Assuming a capacity factor of 40%, this project would produce 353,203,200 kWh of electricity per year and earn production tax credits of $8,123,674 in one year when receiving a rate of $0.023 (the 2013 rate) or $91,832,830 over 10 years if the average rate over that time turns out to be $0.026.
As indicated earlier, the actual 10-year cost of the wind Production Tax Credit (PTC) tax break for the owners of the three projects will depend on their actual production and the PTC rates that are in effect during each of those 10 years. Based on the assumptions outlined above, the three projects signed up by Google probably will cost taxpayers between $370 million and $417 million for the production tax credits received by the “wind farm” owners over the first 10 years of each of the projects’ operation.
In summary, one big winner in the Google purchase of wind-generated electricity from three wind farms would be Google because of all the favorable press attention. The other big winners will be the project owners because of the lucrative tax breaks. The big losers will be taxpayers who must pick up the tax burden escaped by the owners or, perhaps more accurately, their children and grandchildren who will inherit the huge and growing national debt, now about $17 trillion.
*Identified by Google as a small Native American-owned company based in Oklahoma. While Chermac is the “developer,” it would not be unusual for the project to be sold to a new owner once all regulatory hurdles ahead of construction are crossed.
**A wind farm’s annual “Capacity Factor” is determined by dividing the generating unit’s metered production (in megawatt or kilowatt-hours) by the product of the unit’s rated capacity (in MW or kW) times 8760 hours in a year. Capacity factors for “wind farms” depend, of course, on wind conditions in the area. Capacity factors differ significantly from one location to another.
Glenn Schleede is retired after working on energy and related matters in government and the private sector for over 30 years. From 1992 until September 2003, Schleede maintained a consulting practice, Energy Market and Policy Analysis, Inc. (EMPA), providing analysis of energy markets and policies, primarily natural gas and electricity issues. Prior to forming EMPA, Schleede was Vice President of New England Electric System (NEES), Westborough, MA, and President of its fuels subsidiary, New England Energy Incorporated. He served as Executive Associate Director of the U.S. Office of Management and Budget (1981), Senior VP of the National Coal Association in Washington (1977-1981) and Associate Director (Energy and Science) of the White House Domestic Council (1973-1977), and held career service positions in the U.S. OMB and the U.S. Atomic Energy Commission
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