November1, 2002

SUBJECT:     New Mexicoís "Wind Farm" Follies

This memo responds to requests for comments on the article, "Many Utilities Embrace Wind Energy," distributed on October 24, 2002, by Utilipoint (formerly a SciTech Company), which can be found at:

The Utilipoint article apparently was stimulated by the recent announcement of FPLEnergyís intention to add more windmill capacity and, particularly, its plan to build a 204 MW "wind farm" in New Mexico and sell the power to Public Service Company of New Mexico.

As some of you have detected, the article is full of errors, omissions and misconceptions ­ probably due to the author(s) lack of familiarity with the facts about "wind energy," rather than a deliberate attempt to mislead.  Among the problems with the article are the following:

1. FEW utilities own "wind farms."  Contrary to claims in the article, very FEW "utilities" are becoming owners of windmills.  Instead, almost all "wind farms" are being built by a few unregulated entities (such as FPLEnergy) who then sell the output to regulated utilities that are either (a) forced to buy the output by renewable portfolio standards, (b) pressured by regulators or politicians, or (c) trying to appear "environmentally concerned."

Without stopping to count, Iíd guess that less than a dozen regulated UTILITIES have become windmill owners.  Most utilities do NOT like wind energy because they do not like:
a. Paying the higher costs of electricity from "renewable" sources.
b. Passing extra costs along to customers.
c. Bearing the extra costs and burden of providing backup generating capacity, transmission and grid management associated with the intermittent, variable and largely unpredictable output from "wind farms."

2. Why "wind farms" are being built.  "Wind farms" ARE being built in the US for five principal reasons:
a. "Windfall profits" for "wind farm" owners due primarily to the extremely generous federal and state subsidies that shift costs from "wind farm" developers and owners to taxpayers and electric customers.  Subsidies that shift cost to taxpayers include:
1) The federal Production Tax Credit (now $0.018 per kWh ­ not $0.015 stated in the article).  (FYI, the federal PTC will permit "wind farm" owners to avoid over $100 million in federal income taxes in 2002, and the amount will grow as "wind farms" are added.)
2) Federal 5-year double declining balance accelerated depreciation.  (FYI, this subsidy will permit wind farm owners to shelter over $500 million in 2002 income from federal income taxes.)
3) State subsidies such as New Mexicoís $0.01 per kWh state tax credit for electricity from "wind farms" and industrial development bond financing.
The value of the above subsidies to "wind farm" owners probably will exceed the income they receive from the sale of the electricity produced by the "wind farm"!
b. Renewable Portfolio Standards (RPS) in 15 states, which are probably the most insidious way that legislators and regulators have found to shift costs from "renewable" energy companies to electric customers -- and hide those costs in monthly electric bills.  (Few "wind farms" are being built in states that havenít succumbed to RPS.)

c. Mandated "Green Energy" programs in 4 states that force distribution utilities to buy electricity from "renewable" energy sources and make it available to their customers.

d. "Green Energy" pricing in 25 states, which permit distribution utilities to charge a premium prices for electricity from "renewable" sources when a customers volunteers to do so.  Apparently fewer than 2% of customers offered the "opportunity" chose to pay the premium prices.  This undoubtedly reflects:
1) Consumersí wise decision to hold down electric bills, and/or
2) Recognition that any real environmental value of these programs is miniscule.

The premium prices help utilities cover the higher cost of the electricity they buy from "renewable" energy facilities and for the utilitiesí costs of administering "green" energy programs.  However, the premiums are unlikely to cover the full costs, thus making it necessary for utilities to pass along unrecovered costs to customers or shareholders.

e. "Public relations" purposes, often called "green-washing," in the sense that providing some electricity produced from "renewable" energy shows "environmental" concern.

3. Fossil energy displacement, Diversity and emissions. The quotes in the article attributed to the CEO of PNM Resources and data on PNMís web site about displacing fossil-fueled generation, diversity and emission avoidance are a real stretch.  For example:

a. PNM claims that the "wind farm" will produce the 594,206,000 kWh of electricity per.  That would be equal to 3% of the 19,832,797,000 kWh or electricity PNM sold during 2001 (according to PNMís annual report).  The claimed 594,206,000 kWh from the wind turbines would equal 1.7% of all the 33,994,000,000 kWh of electricity (EIA data) produced in New Mexico in 2000.  (PNMís output claim assumes a 33% capacity factor for the "wind farm."  That is a courageous assumption.  "Wind farms" seldom produce at the level claimed by developers.)

b. Contrary to claims in the article, wind energy does NOT add to fuel "diversity," and wind energy does not add to system reliability."  Since wind turbines produce electricity only when the wind blows, generation powered by traditional energy sources (in NM, most likely natural gas, coal or oil) must be immediately available to back up the windmills.  Because of its intermittence, high variability and very limited predictability, wind energy tends to work in opposition to energy source diversification.

c. Very little fossil-fired electricity will be displaced and few emissions will be avoided because fossil-fueled units (operating at less than their peak capacity and efficiency or operating in "spinning reserve" mode) must be kept immediately available to supply electricity when the output from wind turbines drop because wind speed slows or falls below minimums required to power the turbines.  Units serving this backup role continue to emit when serving in a backup role.  Kilowatt-hours produced by wind turbines CANNOT be assumed displace the emissions associated with an equal number of kWh from fossil-fueled generating units.

4. Meaningless cost data.  The cost data in the article are meaningless (as is most cost data on electricity from "wind farms" that is published by DOE, NREL and the wind energy industry) because:
a. Neither the source of the estimates nor the underlying assumptions are revealed.
b. Calculations of costs for wind energy are highly dependent on assumptions about facility lifetime.  Calculations often assume 20 or 30 years when no one has experience with actual life of todayís wind turbines or their O&M, repair and replacement costs over 20-30 year periods.
c. The author apparently assumes naively that the huge federal subsidies for wind facilities (which merely shift cost from "wind farm" owners to taxpayers and electric customers and hide them in tax bills and monthly electric bills) are not a part of the true costs.
d. The cited costs for electricity from wind apparently do not take into account the cost of providing backup generation or the extra costs of transmission and grid management.

5. Transmission capacity and costs.  The article makes the useful point that lack of transmission capacity is a barrier to wind energy.  The intermittent and highly variable output from "wind farms" makes inefficient use of transmission capacity and cannot by itself justify the costs of adding new transmission capacity.  When transmission capacity is added to serve "wind farms," the costs should be counted as part of the full cost of the wind-generated electricity.  The wind industry is seeking to avoid these costs by getting regulators to roll them into base rates, thus shifting the costs from "wind farm" developers to all electric customers.  (Such a case involving over $100 million is underway in Minnesota.)
Alleged Economic Benefits.  Not mentioned in the article but cited on PNMís web site are the alleged economic benefits to New Mexico including, annually,  $450,000 in payments in lieu of taxes, $550,000 in land rental payments, and $500,000 in compensation for 12 employees who will operate the "wind farm" when completed.  When making these claims, PNM failed to note that:

1. The annual total of $1.5 million is claimed "economic benefits" is equal to about 12.6% of the $11.88 million in EXTRA costs loaded on electric customers each year if the full, true costs of the electricity from the "wind farm" were only $0.02 per kWh above the cost of electricity from other sources (i.e., 594,206,000 kWh x $0.02 per kWh = $11,884,120).

2. New Mexico legislators have decided (according to the Albuquerque Journal) to exempt wind generation equipment from NMís gross receipts tax in addition to providing the wind farm owner a $0.01 per kWh state income tax credit for the first 400,000,000 kWh of electricity produced during each of the first 10 years, and authority to use of industrial development bonds.  Once again, tax burden is shifted from "wind farm" developers to remaining taxpayers.

In effect, it appears that New Mexico has decided to export about $10 million of its citizenís wealth annually to an out-of-state "wind farm" owner.

Due to a rate freeze recently accepted by PNM, its customers may be protected from some of the extra costs of electricity from the wind farm until the "freeze" ends (but apparently not from any voluntarily accepted "premium" rates for "green" electricity or if NM adopts a "Renewable Portfolio Standard").  Taxpayers will not be protected.

The Utilipoint article also refers to wind energy development in other parts of the US, including 1,800 MW of in the Northwest "to meet the demands of the Bonneville Power Administration."  Apparently the authors arenít aware the ambitious plans announced by Bonneville in 2001 have been reduced sharply.  Also, the authors didnít note in the article the growing opposition to the siting of "wind farms" that has sprung up across the US, including in Maine, Massachusetts, New York, Pennsylvania, Michigan, Illinois, Wisconsin, Kansas, California, and Washington.  A growing number of people are realizing that wind is not the environmentally benign energy source that DOE, NREL, the wind energy industry, and other advocates have claimed.

More on "Wind Farm" Ownersí WindFall Profits.  Few people outside the wind industry seem to recognize the extent to which "wind farm" owners profit from their ventures, particularly due to the subsidies.  Consider the following:
1. Federal Production Tax Credit.  If FPLEnergyís wind farm produces the estimated 594,206,000 kWh per year, the company will get an annual tax credit of $0.018 per kWh each year for 10 years of $10,695,708 (i.e., 594,206,000 kWh x $0.018).
2. State Production Tax Credit.  $0.01 per kWh for the first 400,000,000 kWh produced during each of the first 10 years or $4,000,000.
3. Income from sale of electricity.  The price has not been disclosed.  However, assuming it is $0.025 per kWh, PNM will be paying FPLEnergy $14,855,150 each year (i.e., 594,206,000 kWh x $0.025)
4. Under the generous federal 5-year double declining balance accelerated depreciation allowed for capital investments in commercial wind electric facilities, FPLEnery (or its parent company) will be able to shelter significant income from federal taxation.  Specifically, assuming the $200,000,000 capital investment estimate is correct, these amounts could be sheltered:

First year:  20%   $40,000,000
Second year:  32%   $64,000,000
Third year:  19.2%   $38,400,000
Fourth year:  11.52%   $23,040,000
Fifth year  11.52%   $23,040,000
Sixth year:  5.76%   $11,520,000
      Totals  100%   $200,000,000

I hope these few comments are responsive to your requests and will place the article in context.

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This analysis is provided as a public service and without charge by Glenn R. Schleede, Energy Market & Policy Analysis, Inc. PO Box 3875, Reston, VA 20195-1875; Phone: 703 709-2213; Email:  Schleede is semi-retired after spending more than 30 years on energy matters in the federal government and private sector.  He now spends part of his time on self-financed analysis and writing about:
a. Government policies, programs and regulations that are detrimental to the interests of consumers or taxpayers.
b. Government or private programs and projects that are presented to the public, media, Congress and other government officials in a false or misleading way.
The views presented in this analysis are provided in Schleedeís role as a citizen, consumer and taxpayer and are not on behalf of any client or other interest.