Financial Incentives to Encourage Wind Power

System ProductionSasha Kemmet

Iowa State University

Presentation Overview

• Issue Definition• Background Information• Current Federal Financial Incentives• State and Local Financial Incentives• Recommendations • Summary• Questions• Acknowledgements

Issue Definition

• U.S. recognizes need for clean and sustainable power

• Traditional generation methods receive substantial government support

• President George W. Bush recognizes the potential of wind power to provide up to 20% of the nation’s energy needs

• Wind power provides zero-emission energy at an economically competitive price

Background

Feasibility

• Broad public support: 88% of Americans support expanding wind farms

• Advancements in turbine technology

• Public Utility Regulatory Policies Act (PURPA): Requires utility buy back

• Wind intermittency poses challenges

• Transmission costs add a significant cost

Background Environment

• Electricity generation CO2 emissions– Coal: 1,787

million metric tons

– Natural Gas: 337 million metric tons

• Coal has the highest carbon intensity

• A 1 MW turbine displaces 1,800 tons of CO2

Background Cost of Wind-Power Systems

• Transmission lines extension imposes significant cost

• Annual operating expenses are part of system cost

Price per kW

Small Scale $2,400 - $3,000

Medium Scale $1,500 - $2,500

Large Scale $1,000 - $2,000

Remote $4,000 - $5,000

Federal Financial Incentives

Production Tax Credit (PTC)

Concerns• Reduced by grants, tax-exempt bonds, and subsidized

financing• Cannot absorb total benefit• Do not help projects sustain debt• Delayed renewal causes significant problems

Explanation and Benefits• The Energy Policy Act of 1992: established PTC • Provide a proportional annual tax credit• Currently set at 1.9 cents/kWh• Available for the first 10 years of a generator’s operation

Federal Financial Incentives

Production Tax Credit

Effect of Delayed PTC Renewal

Federal Financial Incentives

Project Loan Guarantee

Explanation and Benefits

• Ensures loan repayment

• Reduces transaction cost and institutional barriers

Concerns

• May reduce PTCs

• High administrative costs

• Often do not help investor obtain a private loan

State and Local Financial Incentives

Net MeteringExplanation and Benefits• Producer is paid for the difference between electricity

generated and consumed• Simplifies metering and interconnection requirements• Provides more stable revenue

Concerns• Less incentive for larger projects• Does not directly reduce financing costs• Group net metering

State and Local Financial Incentives Direct Production Incentives

Explanation and Benefits• Similar to PTC without tax basis• Allow investors to absorb total benefits of the

incentive• Allow projects to sustain debt by directly increasing

revenue

Concerns• Require administrative distribution of funds • Subject to yearly budget appropriations • Do not benefit off-grid projects • Require a cash fund to be created

State and Local Financial Incentives Government Subsidized Loan

Explanation and Benefits• Lower transaction cost • Lower debt costs• Can require a technical loan application

Concerns• Reduce PTC• Loan defaults • Benefit private project owners more• Require the creation of a cash fund

Recommendations

Clear and Consistent Energy Policy

• Determine available incentives

• Long-term PTC renewal

• Eliminate the “boom-and-bust” environment

Federal Government Subsidized Loan•Reduce capital costs•Model off existing programs•Require technical application

RecommendationsAlternate Energy Revolving Loan Program

• Iowa: AERLP can serve as a model

• Funded 25 wind projects since 1996: 41,537 MWh annually

• Finances half of a project’s cost up to $250,000 at 0% interest for 20 years

• Available to all groups except for non rate-regulated utilities

• Not available to refinance existing loan

• Requires technical application

Summary

• Diversified energy portfolio to include sustainable energy

• Wind energy is a zero-emission power source, economically feasible, and has broad public support

• Clear and consistent energy policy with long term PTC renewal

• Federal government subsidized loan • Smart investment in securing inexpensive

and clean energy for the future

Questions?

Acknowledgements

• IEEE USA• Dr. Wolf Yeigh• Erica Wissolik• Pender McCarter and Chris McManes• Chelsey MacNeill, Tony Azevedo, and

WISE Interns• Dr. Mani Mina, Iowa State University• Family