Owning your own power plant: Trickier than it seems

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“Dear Bob, If you want to buy a turbine, you aren’t likely to get any incentives or subsidies unless you’re already rich or unless you’re willing to share an ownership stake with a large investment firm. Sorry.”

That, according to John Farrell, author of “Broadening Wind Energy Ownership by Changing Federal Incentives,” is what the average citizen will hear if they express interest in purchasing or operating a wind turbine to produce energy. (The report is published by the New Rules Project, Institute for Local Self Reliance, and is available at http://www.newrules.org/de/ptc-wind-ownership.pdf.)

The facts are simple: a typical two-megawatt wind turbine provides enough electricity for around 600 American homes. It sounds wonderful and promising as an alternative to non-renewable energy sources. However, the problems arise when those 600 Americans try to own their own renewable energy source. As average citizens begin to express more interest in taking control of their energy consumption and production, the issue of who actually owns energy and how easy it is to harness becomes less about putting up a turbine and more about cutting through red tape.

“In the United States, we have a paradigm of large, central station power generation by investor-owned utilities,” said Farrell. “Utilities make less money on power generation they don’t own so they aren’t interested in democratizing power generation.”

Democratizing ownership of wind turbines does not mean building single-family, backyard operations. Because of cost and scale, democratic ownership means that many of those 600 households would have to pool funds and invest together to own a wind turbine. At that point, they run into two kinds of barriers: the structure of the federal tax credits and complex investment regulations from the Securities and Exchange Commission (SEC).

Federal tax credits, known as the Production Tax Credit or PTC, can only be taken on passive income. Most Americans don’t have passive income, which includes income from rental property or passive investments. For those that do bring in passive income, they have to owe a lot of taxes—$125,000 a year, actually, which is the amount of tax credits a single two-megawatt wind turbine generates—to receive the credit. Not many average citizens owe that much in taxes annually—it’s 2.5. times the median household income.

“In the U.S., the tax credit only applies to a specific kind of income and rules out many potential owners,” said Farrell. “It has also expired regularly, creating a boom-bust cycle of renewable power development.”

As a result, according to Farrell, local, smaller-scale investors who want a turbine enter into a partnership with large investment firms or big groups of wealthy investors, who then benefit from the tax credit instead of the local investors. Often, these projects are arranged as a flip where the large investors reap the tax credit benefits for 10 years, then transfer the credits and ownership to the local investors.

The other option here, Farrell says, is for local groups of investors to gather together and put up a turbine on their own. However, following SEC regulations and registrations can be onerous and expensive for local turbine owners, deterring many from starting the process.

Some Minnesotans have worked through the paperwork and put up locally-owned turbines. Dan Juhl worked with wind energy for many years, finally developing a 10.2 mega-watt windfarm in southwestern Minnesota. He partnered with the Kas family to raise seventeen 600-kilowatt wind turbines on their 320-acre farm. Working with Xcel Energy, Juhl secured a Power Purchase Agreement (PPA) for 25 years. The windfarm is mutually beneficial for Juhl, the Kas family and Xcel, as it allows Juhl and Kas to reap significant benefits while helping the power company comply with a state statute requiring wind power purchase.

Juhl, who owns the original windfarm he started near Woodstock, MN, was so successful in his project that he inspired the Kas family to build their own 1.5 mega-watt windfarm on another of their family’s farms. Their success has led other local farmers to explore the possibility of building significantly more windfarms in the area.

Although more rural Minnesotans are finding ways to break through the bureaucracy to own their energy production, Farrell and the New Rules Project are pushing for changes in the PTC. Changing the incentive policy would allow local, small-scale investors to own turbines and reap the economic benefits of wind energy, leveling the playing field and rewarding self-reliance.

Representative Tim Walz (D-MN) is addressing the PTC roadblock with a bill that would allow wind project investors to access up to $40,000 of the PTC against ordinary income. If it passes, the bill could greatly increase the number of local investors investing in turbines.

What is a feed-in tariff?

Wikipedia offers a straightforward explanation:
“In the effort to combat climate change, the increased deployment of renewable energy sources is regarded by many as critical. One major obstacle to this adoption is the retail price of electricity generated from renewable sources, which is typically more expensive than the retail price of electricity generated from fossil fuels. A FiT is a revenue neutral way of making the installation of renewable energy more appealing. The electricity that is generated is bought by the utility at above market prices. For example, if the retail price of electricity is 10¢/kWh then the rate for green power might be 40¢/kWh. The difference is spread over all of the customers of the utility. For example, if $100,000 worth of green power is bought in a year by a utility that has 1,000,000 customers, then each of those customers will have 10c added on to their bill annually.

“Thus, a small annual increase in the price of electricity per customer can result in a large incentive for people to install renewable energy systems. This is the essence of a FiT: it is a mechanism to instigate a change in the way power is produced, gradually shifting from present polluting means to non-greenhouse methods.”

“An amendment helps,” said Farrell, “but the best option would be a feed-in tariff, since it simplifies the process of becoming an energy producer. With such a policy, power generation would be increasingly decentralized, smaller scale and locally owned. The advantages would be enormous.

Farrell references the success of feed-in tariffs in Europe as an example of how the U.S. could benefit from such an amendment. Germany and Denmark, two countries that have had spectacular success with renewable power, both have feed-in tariff policies.

“The feed-in tariff is the best practice, as I’m seeing the wind turbines spread across the hills of Jutland in Denmark,” Farrell said. “Hundreds of megawatts are owned by non-profit, local cooperatives of Danes. These Danes have kept their turbines running for 20 years and have created a national pride in renewable energy development. Nearly 20% of Danish electricity comes from the wind. This incredible development was made possible with a feed-in tariff. Any energy producer, whether a Danish farmer or a cooperative of villagers, simply raised the money for a turbine and received a reasonable fixed price for their power.”

Farrell compares the feed-in tariffs in Europe to the U.S. policy, saying “A feed-in tariff is simple, democratic and effective; U.S. policy is unfair, haphazard and sporadically successful.”

In Minnesota, Rep. David Bly is sponsoring a feed-in tariff bill to help decentralize power generation. The bill sets a long-term, fixed price that utilities must pay for any renewable power—a price that offers a reasonable rate of return for an efficient project.

“This would be a much better way to support renewable energy because, unlike tax credits or subsidies that go to those who already have money,” said Farrell. “Everyone gets paid the same price. If we want to be serious about meeting our renewable energy goals, and to do it in a way that spreads the benefits of renewable energy most widely, we’d be instituting a feed-in tariff.”

Katie Anderson is a freelance writer in Minneapolis.