Wind Power, Eating the Seed Corn
In the past, farmers had to save enough corn from the current year’s crop to provide the seed for next year’s crop. Today, large companies, such as Monsanto, produce the seed corn that’s sold to farmers for each new crop.
In like manner, any business that requires an investment in a fixed asset must provide for replacing the asset when it wears out.
This is the purpose of depreciation. Every year the business sets some money aside from earnings to provide the money needed to replace the physical asset when it wears out. If an asset is to last for 20 years, the business would set aside enough money each year for 20 years, so that it will have enough money to replace the old asset at the end of 20 years.
If the business can’t replace the old asset, the business will die … or get money from somewhere else to build the new asset and restart the process.
The farmer, for example, who now buys the seed corn from a supplier, must use some of the money earned from the sale of this year’s crop to buy the seed corn for next year’s crop. He could borrow the money, but this requires his putting other assets up as collateral and paying interest on the money he borrows.
This “farmer” analogy describes the current situation with respect to wind power.
Wind-generated electricity costs about 10 cents per kilowatt-hour (kWh) when all the investment and operating costs, i.e., investment, asset age, interest and fuel, etc. are included when calculating the levelized cost of electricity (LCOE).
But now, some proponents of wind power are claiming they can sell electricity for around 5 cents per kWh, which is about the LCOE for electricity from a natural gas combined cycle (NGCC) power plant.
How can this be?
It’s because they are eating their seed corn.
As reported by the media, some wind farm owners have entered into long-term agreements to sell electricity for 4 or 5 cents per kWh.
They claim electricity from wind turbines is as cheap as electricity generated by NGCC or coal-fired power plants.
But this is misleading, and basically dishonest.
Without going into lengthy calculations, here is the bottom line.
A 1 MW wind turbine costs around $2 million to build. If it has a capacity factor of 30%, which is higher than the average for all wind turbines installed in the United States today, it can generate 2.6 million kWh per year. (1,000 KW x 0.3 CF x 8,760 Hours/Year = 2,628,000 kWh/year)
Over a 20 year period, the life of a wind turbine, it will generate, without tax credits, $2.6 million in revenue if the electricity is sold for 5 cents per kWh, which is enough to give the owner a return on his investment of $628,000, minus any operating expenses such as maintenance. To this would be added $600,000 for the 2.3 cents per kWh income tax credit. (See note 1) This is a potential overall return of over $1 million, that investors have put in the bank.
The problem? There won’t be any money available to replace the wind turbine when it wears out after 20 years. And, where will the money come from to remove the old wind turbine when it no longer works?
They have eaten their seed corn.
Comparing long-term contract prices for electricity from wind farms with the levelized cost of electricity (LCOE) from natural gas (NGCC) power plants is deceitful, because it compares apples with oranges.
This is another way by which the media, and proponents of wind energy are deceiving the public.
Admittedly the calculations are more complicated than shown here. Any business will issue an annual report that includes accelerated or straight line depreciation, interest and operating expenses to calculate its tax liability. There is also the question of who claims the production (PTC) or investment (ITC) tax credit, the initial builder or the operator. This would arise, for example, with a YieldCo, where the wind farm has been “dropped down” from a parent company to a YieldCo subsidiary.
The Capacity Factor is determined by dividing the total amount of electricity actually generated by a wind turbine during a year, by the amount that could theoretically be generated based on its nameplate rating.
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Nothing to Fear, Chapter 6, Wind Energy, provides information on wind farms.
Nothing to Fear is available from Amazon and some independent book sellers.
Link to Amazon: http://amzn.to/1miBhXy
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