Google buys wind Energy; Cost to Taxpayers likely to be more than
$350 million
On
September 13, 2013, Google announced[i] that it had signed a contract to buy the entire output of the
239.2 megawatt Happy Herford “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[ii] is pleased to have a 20-year contract[iii] 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:
1.
The stated capacity of the planned Happy
Hereford “wind farm” is 239.2 megawatts (MW) or 239,200 kilowatts
(kW).
2.
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 areas had capacity factors[iv] of about 45% during 2011,[v] among the highest in the US.
3.
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).
4.
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.
5.
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 the purchased the output of two other
wind farms:
1.
In July 2010, Google
announced[vi] 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.
2.
In April 2011, Google
announced[vii] 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.
Glenn R. Schleede*
Ashburn, VA
*
Schleede is semi-retired after working on energy matters in the federal
government and the private sector for more than 35 years.
[ii] 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.
[iii] Technically, a “Purchased Power
Agreement” (PPA). See Google’s
explanation at: http://static.googleusercontent.
com/external_content/untrusted_dlcp/www.google.com/en/us/green/pdfs/renewable-energy.pdf
[iv]
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.
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