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The economics of wind energy  

Credit:  James O'Donnell, Wednesday, November 12, 2014, untingtonccc.org ~~

The following talk by Jim O’Donnell, Professor Emeritus of Business and Economics, Huntington University, was given to the Huntington County Planning Commission.

I’m speaking tonight as an adopted son of Huntington Co. But as that adopted son, I have struggled to understand why my chosen homeland would develop wind energy in the southeast part of the county. I guess it’s for the tax revenue, the few jobs that will come with it, and the lease payments to the several farmers who will permit turbines on their land. But as an investor and economist, I feel a little like the auto mechanic who’s being shown a car that a good customer wants to buy. Mechanically and economically, the purchase makes no sense to me, the mechanic, at all, but the buyer insists that he’ll get so many credits for buying the car that even if it never starts, he’ll make a bundle.

Warren Buffett is no auto mechanic or used car salesman, but his name is known by many as a great investor. He’s chairman of Berkshire Hathaway and makes enormous bets on companies we all know, companies like Coca Cola, Wells Fargo, Geico Insurance, Fruit of the Loom, Heinz Ketchup, Dairy Queen, and many more. He’s very smart and is, arguably, the most successful investor alive, maybe of all time.

He’s made about $15 billion dollars of investments in wind and solar energy in Iowa and Wyoming, according to financial publisher Bloomberg. He’s planning on investing $15 billion more elsewhere in America. Soon.

His wind investments, he says, have treated him especially well. But they’ve treated his tax liabilities even better.

June 4th, The Wall St. Journal quoted him before an audience in his hometown of Omaha, Nebraska. He said, “I will do anything that is basically covered by the law to reduce Berkshire’s tax rate. For example, on wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.”

Those are not the words of, say, Sally and Joe living in Huntington County. No, Buffett is one of the richest men in the world, one of the shrewdest investors in the world, too, whose team has analyzed wind energies economic and investment possibilities with a fine-toothed comb. And he finds wind energy, essentially, an economic wasteland, save for the tax credits. Now if Buffett thinks that, why would Huntington be making investments in wind energy? Because the county will increase its tax revenues, even if only by benefiting from tax breaks to the very rich, paid for my ordinary taxpayers. It simply does not make sense. I don’t even think it’s right. But it makes sense for Buffett and for Huntington County because their bottom line is increased.

Let’s try to understand Buffett’s and other very wealthy people’s attitudes towards “the tax credits” from wind energy? If we understand, then we’ll understand why Huntington Co. might be willing to help rich people take more from the government breast at taxpayers’ expense.

Back in 1992, Congress created the Wind Production Tax Credit, or the “PTC,” a small tax credit of about 2c per kilowatt hour that today is an even smaller $23 per megawatt of wind electricity generated, to nurture energy production in the then-infant wind energy industry. Earlier, government supported those who build structures, not energy production. Today, at least the incentive is the production of energy. Government incentives, like the PTC, are often used to promote young but crucial industries. That’s not the problem with the PTC.

The history of the PTC has been an off and on credit, renewed since 1992 by Congress for a year or two at a time. Then, it expires and fans of wind [no pun intended] get it renewed. It expired again last Dec. 31st. If we were to look at an honest graph of investments made in wind, we would see that it rises with the credit and collapses with its expiration. Moreover the infant industry it is meant to encourage is now more than 30 years old, kept alive by U.S taxpayers who keep paying to make it attractive for rich investors.

It’s important, too, to realize that the PTC can only be taken against “passive income” – that is, income from other investments by rich people and big companies. Wall St. bankers put together investors who want tax write-offs, which are provided by the PTC. Recall Buffett’s words: “we get a tax credit if we build a lot of wind farms. That’s the only reason to build them.”

Approximately $24 billion of Federal subsidies have poured into wind energy since its beginning over 30 years ago. These credits limit funds that might help find really viable sources of alternative energy. In other words, as an investor myself, I’m saying the PTC is a misplaced bet. The PTC actually blocks funding for other green energy technologies that hold more promise. Rather than helping another infant, but worthy technology, the PTC is a handout to rich people and Wall Street.

But government largesse does NOT end with the PTC. Not by a long shot. Not in a government as friendly to green energy and as hostile to fossil fuels as the Obama administration is. In fact, rarely has a multi-decade old infant industry enjoyed such disproportionate favoritism. Even though the wind industry produces currently only about 3.5 to 4% of the country’s electricity, it receives 42% of the federal government’s electrical financial support.

Combined with other targeted incentives, the federal government, in fact, gives wind producers $56.29 per megawatt-hour, according to the federal government’s own Energy Information Administration – the “EIA”. By comparison, natural gas, oil, and coal power generation only get 64 cents per megawatt, while nuclear power receives $3.14.

Seemingly innocuous, the PTC gives wind companies $23 in subsidies for each megawatt-hour of electricity they produce. This money adds up quickly; it costs taxpayers billions of dollars every year; while wind energy also creates huge problems, too, with sound, noise, landscape blight, bird kill, bat kill and intermittentcy. On average, wind turbines are spinning only about 30% of the time and, ironically, can’t spin at all in high winds (Detroit Edison, DTE, to cite only one utility, turns their turbines off when winds exceed 45 mph.)

In addition to the support that wind power gets at the federal level, it gets huge support at many state levels, too. Currently, 30 state governments enforce mandatory purchases of wind, solar, or other green energies under so-called Renewable Portfolio Standards that require utilities to buy a certain percentage of their electricity from green sources, whatever the cost. This, of course, jacks up consumer’s electric rates.

We’ve all heard the saying, “there is no such thing as a free lunch,” and that applies to government subsidies, too. When lawmakers give special tax breaks to their friends and favorite industries, they shift the tax burden onto everybody else left in the tax base. While subsidies may allow wind turbine makers to pump up their payrolls, such as putting a few people to work in Huntington Co., the rest of the economy suffers. Government subsidies divert labor and capital away from more productive areas of the economy, to those where cronies get richer, which slows overall economic growth – something I would think Hoosiers don’t like.

The PTC, when combined with federal and state benefits gives wind producers a great advantage over other energy producers. In fact, it exceeds half of electricity’s wholesale price in many areas of the country. True, more wind energy is being produced each year, and its cost, relative to other forms of electricity is becoming more competitive. But only because of massive subsidies and higher rates for consumers.

Federal and state subsidies are so high that they lead many wind farms to sell their electricity at a substantial loss, just to collect the tax credits. Many wind producers are literally paying utilities to buy their product – and yet they’re still turning a profit because the taxpayer foots the bill by providing credits and subsidies.

I have no ax to grind against the rich, but I don’t think their gains should come as a loss to great numbers of Americans through higher energy costs.

While wind’s tax credits may be great for Warren Buffet and his bottom line, it’s harmful for American taxpayers and very expensive to America’s energy consumers.

I really wish wind energy worked better. Many people, including me, think alternative energy, in time, will offer huge environmental benefits for our children and those who come after us. But right now, wind is a museum specimen of a government boondoggle, a monument to crony capitalism’s, a favor to the rich and powerful over the little guy or the average person.

Huntington Co. can make money on this, no doubt. We’ll get tax revenue, a few jobs, and a few farmers get lease payments for turbines on their property. Living off the government breast is just not how I want to make money and I think such activities fly in the face of Indiana’s character and Huntington’s, too, as a place that favors freedom and honest work. It’s won a reputation of late for free markets, low taxes, and for encouraging growth in the private sector. Indiana is and Hoosiers are enemies of senseless, wasteful spending. And Warren Buffett sees wind energy as senseless right now, except for the tax benefits it offers its investors. As conscientious, publicly-minded citizens of Huntington Co. who give of your own time and talents to consider what’s best for our county’s land, its people and its future, please don’t allow wind energy’s horrible economics to find a place to make a home.

Source:  James O'Donnell, Wednesday, November 12, 2014, untingtonccc.org

This article is the work of the source indicated. Any opinions expressed in it are not necessarily those of National Wind Watch.

The copyright of this article resides with the author or publisher indicated. As part of its noncommercial effort to present the environmental, social, scientific, and economic issues of large-scale wind power development to a global audience seeking such information, National Wind Watch endeavors to observe “fair use” as provided for in section 107 of U.S. Copyright Law and similar “fair dealing” provisions of the copyright laws of other nations. Send requests to excerpt, general inquiries, and comments via e-mail.

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