Energy Tax Reform: Scrap the Baucus Proposal (Part II: High cost/low value of windpower)

[Editor note: This is the second of a four-part series reprinting the January 15th letter of Mr. Schleede to the Senate Finance Committee concerning the Baucus tax-reform proposal dated December 18, 2013. Part I yesterday reprinted the executive summary and conclusions; Parts III and Part IV next week will cover the environmental wealth effect issues of current public policies favoring wind power.]

The Senate Finance Committee has ignored adverse economic impacts of the massive tax breaks and subsidies that have been provided to owners of wind turbines and “wind farms” and, in effect, has proposed continuation of large tax breaks for these owners – all at the expense of ordinary taxpayers and electric customers.

The economic impacts of the proposed tax breaks on electric customers is not even mentioned in the rationale for the Committee’s new tax break scheme – unfortunately, another indication of the wide gulf between thinking and actions of members of Congress and the interests of ordinary people outside Washington who are burdened by costly Congressional actions.

High electricity bills, one of the impacts of wind energy subsidies, are directly harmful to consumers with limited income, and they drain money and jobs from local economies. Apart from the direct adverse impact on consumers and local economies, the economics of wind energy are decidedly negative because electricity from wind is high in true cost and low in true value.

High True Cost of Electricity from Wind

On the cost side, wind energy advocates have emphasized the fact that the energy source or “fuel” for wind turbine is free. They have played down or ignored the facts about the full, true monetary cost of wind energy, which must take into account all of the following:

a. Capital costs. “Wind farm” capital costs are much higher than the capital costs associated with conventional generating facilities such as those powered by natural gas. The high capital costs of “wind farms” include the engineering costs, cost of turbines, towers, blades, reinforced concrete tower bases, substations, controls, road and site work, construction equipment, construction labor, construction overhead, and, in some cases, cost of capital.

b. O&M Costs. The true costs of electricity from wind must also take into account O&M costs. Wind energy advocates typically try to do this by developing estimates of levelized cost of electricity (LCOE) from wind per kilowatt-hour (kWh). In theory, LCOE would include both capital and operating costs and these costs would be spread over the kilowatt-hours of electricity produced by a wind turbine or “wind farm.”

Realistic estimates of O&M costs for conventional generating facilities can be made because of extensive information on historic O&M costs. However, estimates of LCOE for wind turbines and “wind farms” (including those from the Energy Information Administration) are highly speculative because no one really knows at least three key factors used in LCOE calculations. In fact, LCOE calculations are based on assumptions or guesses about (i) the useful life of wind turbines, (ii) O&M costs during their full useful life, and (iii) the amount of electricity that will be produced during the useful life. [1]

c. Decommissioning Costs. The true costs that will be incurred in decommissioning wind turbines after their useful life or when they are abandoned remains unknown. Actually, many estimates of LCOE for electricity from wind fail to even consider costs of decommissioning “wind farms.”

d. Transmission costs. The true cost of transmitting electricity from wind turbines is higher, per unit, than electricity from reliable generating units because (i) transmission capacity must be adequate to handle the full rated output of a “wind farm” but that full capacity is seldom used, with the result that the unit costs of transmitted electricity from wind is usually high, and (ii) “wind farms” are often located distant from the place where electricity is needed, adding to high transmission line cost and leading to more costs because of line loss of electricity which tends to increase with distance.

e. Additional costs imposed by wind energy. Costs incurred at “wind farms” plus the costs of transmission are not the only true costs of electricity from wind. Wind turbines generating electricity impose two kinds of additional costs that are correctly attributed to the cost of electricity from wind:

i) First, there is the cost of having reliable generating units immediately available to compensate for the intermittent, volatile and unreliable output from wind turbines. These reliable generating units must be kept running at less than full, efficient capacity or running in spinning reserve mode.

There is a cost associated with running a generating unit at less than its full capacity and in ramping it up or down to compensate for the intermittent, volatile, unreliable output from wind turbines. Reliable units running in spinning reserve mode are incurring fuel and O&M costs that would not be necessary if it were not for the intermittent, volatile presence of electricity from wind turbines.

ii) Second, when operating wind turbines are connected to an electric grid, still additional costs are incurred in grid management – that is, in ramping up and down reliable generating units so as to keep the grid in balance (supply & demand, voltage, frequency).

Low True Economic Value of Electricity from Wind

An equally or even more important consideration when assessing the economics of wind energy is the fact that the value of a kilowatt-hour (kWh) of electricity from wind is much less than the value of a kWh of electricity from reliable generating units.

Electricity from wind has low value because:

a. Wind turbines produce electricity only when wind speeds are in the “right” range; i.e., they start producing when wind speed is about 6 MPH, reach rated capacity around 32 MPH, and cut out (to avoid equipment damage) around 55 MPH.

b. Therefore, unlike electricity from reliable, dispatchable generating units, electricity from wind is available only intermittently, the output is volatile and largely unpredictable, and is therefore very unreliable. Wind generating capacity has no real energy value when wind is not available.

c. Wind turbines are most likely to produce electricity at night in colder winter and shoulder months, not on hot weekday afternoons in July and August when electricity demand is high and the electricity has its highest real value in most areas of the United States.

[1]  These costs remain unknown since the types of turbines now being built have not been in operation long enough to reveal reliable information for these key factors.