CHAPTER 6
How to Finance Small Wind Power

The two most abundant forms of power on Earth are solar and wind, and they’re getting cheaper and cheaper….

—ED BEGLEY, JR.

Well, you made it through a lot of considerations when it comes to small wind turbines, and hopefully you have determined that you have enough wind energy at your particular location. Congratulations! You may feel ready to click that “pay now” button to buy that shiny new turbine. But before you do that, you want to know financially what you are getting into.

Let’s place all the items on the table, and go over all the pieces that affect your final price. Then, let’s examine a few more questions that can ground you in your decision.

This chapter discusses the long-term costs of harnessing your wind, and includes the various agencies and programs available to assist home and farm owners in getting financing for their systems. We’ll also cover tax credits and incentives from federal, state, and local governments, as well as incentives from utilities. You may be able to save two-thirds of your bill even before the first revolution of your turbine blades. In your reading process, we think this chapter is right where it belongs, just before the chapter on selecting your system.

Let’s be honest with ourselves by taking a quiz. If you answer NO to any of these questions, then you may not be a candidate for a small wind system (Figure 6-1), and this book should be used as a resource for community wind projects, to make town code changes, or to become the wind geek at the next social:

FIGURE 6-1 Bison roam in front of a 10 kW Bergey wind turbine in East Glacier, Montana. Northwest Seed/DOE/NREL.

• Does your site location have high average wind speed? (12 mph (5.4 m/s) or greater preferred)

• Does your governing body or power utility have any wind incentives?

• Does your power authority have utility rates at or above the U.S. equivalent of $0.10/kilowatt-hour?

Now, you may also still read on if you are like many people, in that we make very few decisions based primarily on financial considerations. If you don’t believe us, think about some other big decisions you have made, such as your home, vehicle, or education. Further, did you ask what the payback is on your tool shop, roof, pool, refrigerator, or boat? Sometimes, energy decisions are not so different.

Putting it bluntly, small wind author, advocate, and trainer Ian Woofenden told us, “Most things we buy have no return at all, and in fact almost everything has a negative return. I think the payback return question is sort of out of line. To those who ask me about it for wind turbines, I say, ‘cite me one thing you bought that you thought about ROI [return on investment].’ We subject renewables to that but not our other choices.”

When pressed to estimate a reasonable payback period for a quality small wind system, Woofenden said, “It depends on the resource, utility rate, incentives, and reliability, but I think between 10 and 20 years is a reasonable range.”

Let’s take a closer look.

Cost Breakdowns for a Small Wind System

Price ranges for small wind turbines—and even for a single model—vary widely due to the numerous factors affecting installation (not including marketing hype). Still, costs for a well-sited small turbine tend to gravitate between:

• $3 to $6 per watt from the estimated power rating or

• $3,000 to $6,000 for every kilowatt of generating capacity or

• $0.15 to $0.20 per kilowatt-hour of annual energy output for the expected life of the entire system

For example, a Southwest Windpower Skystream 3.7, rated at 2,400 watts, would be calculated at a market price of $6,200. That is just the turbine.

However, as discussed, the manufacturer’s power ratings are not always trustworthy. Instead, if we calculated for annual energy output (AEO) at average wind speed of 12 mph (5.4 m/s), we’re talking about 3,800 kWh/year. That’s roughly one-third of the average annual energy use of a typical American home (11,000 kWh). We’d have the full system for the modest price range of $11,400 to $15,200.

Electricity Costs Last a Lifetime

Have you ever been, or are you, in debt, in which you pay every day for something that you use every day? If the answer is no, think again. When you buy any electrical device, the cost doesn’t stop at the cash register. It is all about perspective, so let’s consider something that nearly every home has—a television.

Let’s take two 55-inch high-definition (HD) televisions with comparable features and the same ticket prices ($1,600). However, one is plasma, and the other is light-emitting diode (LED). Stamps on the sides of the units indicate the number of watts consumed per hour, the average hours used nationally, and the approximate annual cost based on rates in the local region.

As you can see from Table 6-1, the LED TV uses only 100 watts an hour, for an average annual energy cost of $22. The plasma TV, which uses 324 watts an hour, requires $71 a year. So over the course of ten years, the total price of the LED TV is $1,820, while the average cost of the plasma TV is $2,310.

TABLE 6-1 Lifetime Cost Comparison of Two New Televisions¹

If items were sold with the lifetime energy cost included, so long as the features weren’t appreciably different, people would probably purchase the energy-competitive price. In fact, if lifetime costs were placed on all sorts of things that require energy, people would have a better idea of the true cost of their purchases.

To give another example, more than 90 percent of the total cost of owning an incandescent light bulb is due to the energy costs to keep it lit, not the initial purchase price of the bulb. If more consumers were aware of this fact, we would see faster adoption of more efficient technologies like compact fluorescent lamps (CFLs) and LEDs.

Permit us to suggest that wind power is a paradigm shift with energy, because the lifetime cost is up-front. Imagine that your power authority moved its conventional utility to every home to produce energy. Imagine having to pay for the fuel and having to deal with the noise, dirt, and air pollution of a coal or gas generator in your garage (in fact, many of our grandparents had to do just that). Then imagine discovering wind power. Wow, no fuel cost!

What Is It Worth to You?

Is your goal to save the Earth, save money, generate money, find peace of mind, or something else? You need to know this before you think about financing your system.

Kevin remembers watching the wind blow furniture across his lawn and wondering if he could tap that free resource to eliminate his electric bill. Here are his answers to the aforementioned questions: 1) The wind maps (Chapter 4) stated that he was getting high average wind speed; 2) he had, and still has, relatively high utility rates; 3) he was too early to receive financial incentives for wind. Kevin saw this attractive new technology called the Skystream wind turbine, he knew a certified installer, and didn’t delay the thinking process further. Sadly, he didn’t look at the rest of the equation—finances—until more recently. Why not? Because he determined it was worth it for the asking price. And it just so happens that every windy day on Long Island, he is pleased with his decision to cough up the up-front cost for the free resource he receives now.

But you need to ask yourself what you are willing to pay.

For example, Surfin’ Sal has a boat in Nicaragua and no power source. Is it worth $3,000 to him to be assured of energy on his boat without the need to dock frequently?

Is it worth it to flower growers in Holland who pay exorbitant electric prices to spend $1 million to eliminate an equivalent of $145,000 in annual expenditures?

Farmer Fanny in Toronto has virtually no electric bills, but hears that the government is going to pay above retail price for wind energy. The bigger the turbine, the more energy, meaning a bigger paycheck.

Then there is Joe Green, who just finished defacing a gas station sign because he is angry about oil spills, and is eager to start a distributed wind project within his co-op development. He is leasing an area at the clubhouse to install a 100 kW system in return for waived fees and a legacy.

Then there is Resourceful Rahim in Nairobi. He is unemployed and rides his bike five miles to buy gas for his community’s 3 kW generator. He hasn’t any electric bill, because he has no public utility service to his home. He is willing to trek through unsafe regions on his way to the dump to find parts to build a turbine to produce light at night to study.

So, know what you are willing to sacrifice. We placed an unfinished sentence with tagged words below it in Table 6-2. You can fill in the check box for what applies to you. And the cost that you are willing to pay for it.

TABLE 6-2 What a Wind Turbine System Means to Me

If you aren’t sure what your limit is, that is okay. Once we get through this chapter, you will have a ballpark figure. The rest of the chapter also covers how you can shrink the price tag for small wind (Figure 6-2).

FIGURE 6-2 In rural Douglas County, Colorado, one of two adjacent 450-watt Winco wind turbines is tilted down to the ground for maintenance. Jim Green/DOE/NREL.

Factors That Affect Final Cost

Cost and return periods can vary due to the following factors, ranked in approximate order of importance.

Average Wind Speed

What goes up (wind speed) must come down (cost per kilowatt-hours). As stated previously, wind speed is the biggest variable determining the financial feasibility of a wind turbine. A 10 percent increase in average wind speed results in a 33 percent increase in power available to the wind turbine’s rotor. Chapter 4 on wind assessment should still be fresh in your head.

Cost of Electricity Offset

The second biggest variable is your local energy cost per kilowatt-hour. The higher the cost of electricity, the more favorable the offset. Installations tend to be most cost-effective in regions where the cost of utility-provided electricity exceeds $0.10 per kWh or utility bills average at least $150 monthly. With utility costs less than that, you’re talking about intangible returns like “awesome turbine dude!” or sizing your turbine smaller for power-specific applications such as water pumps or recreational vehicle lights and appliances.

Government/Utility Incentives and Net-Metering Policies

Net metering means that your utility credits you for the electricity generated and banked by the grid for later retrieval. If your area provides net metering, the price the utility pays for your surplus energy varies from the retail price (sweet!) to wholesale price (ho-hum), to, in some places, nothing! Some governments and utilities also offer rebate checks or credits.

In lieu of initial payments for the installation of the equipment, many countries have programs called feed-in tariffs that pay the homeowner at a higher-than-average electric rate for their clean energy production for a set time framework. This way, the return on investment is accelerated based on production. Your strategy for sizing your wind system will depend to a great extent on the way your utility treats net excess generation. Ideally, you want the meter to spin backward only if the compensation is adequate to improve your return on investment.

Rising Cost of Real Prices of Electricity

Rising electric prices particularly affect the financials of on-the-grid systems. Note that the future value of your investment (and money) is impacted by the inflation rate and the rising cost of electricity. So-called real prices of electricity take into account the fluctuation of the inflation rate during a period of time.

Once your system is paid for, what is the cost for wind? Wind is FREE, FREE, FREE! On the other hand, most analysts expect the price of oil, raw materials, and electricity to soar upward. If that happens, so will the worth of your energy, and your return on investment. You’ll pass the whole gang of wind naysayers, and you’ll soon take the lead.

“Except when you don’t. Because, sometimes, you won’t,” Dr. Seuss wrote in his book, Oh! The Places You’ll Go (Random House Children’s Books, 1990). The beloved author was balancing the hopeful future of a young person with unpredictable bumps in the road. In a similar way, know that no predictions of the price of electricity are assured, because prices are at best highly volatile. Analysts often publish timelines showing the rising of utility rates over time, which for renewable energy owners would seem oddly pleasing. Yet, that would be one-dimensional. We would need to compare the rise of the price of electricity to the inflation rate—the rise in the general level of prices of goods and services in an economy over a period of time.²

For example, when your bank is offering you less than 1 percent interest annual yield on your savings account, while the nation’s inflation rate creeps up to 2 percent average for the year, you can easily calculate that money left in that savings account is losing 1 percent value. And inflation is continuously fluctuating. If a linear graph of the annual average inflation rate for the last ten years is superimposed over the presumed rate of electricity increase, you will find that there are times when “real” rates actually decrease, eroding any of the potential value of each kilowatt-hour produced. Depending on what country you are in, the difference can be dramatic. A wind turbine in Zimbabwe would not provide favorable financial numbers against inflation, which is 12,563 percent as of this writing. In contrast, most of North and South America (Figure 6-3), Europe, and Australia have been keeping inflation to less than 3 percent.³

FIGURE 6-3 This Breezy 5.5 by Prairie Turbines works well in the breezes of Managua, Nicaragua. Timothy McCall/Prairie Turbines.

All of these impact the present and future value of money and the value of your investment relative to other investment options, such as a savings account, the stock market or mutual funds, or even an addition to your house.

Application

Some government incentives are contingent on your application, whether residential, agricultural, commercial, industrial, or municipal.⁴ Residential homeowners may have national governmental tax incentives for wind energy. For example, in the United States, you are likely to see a savings of 30 cents in tax deductions for every dollar spent. Further, the cost of financing a wind system through a home mortgage is currently tax-deductible. Meanwhile, a wind system purchased by a farm or small business might be eligible to have its capital expense depreciated over a number of years, and repair costs would also be deductible.

Cost of Equipment

Quality equipment costs. Of course, those costs vary by manufacturer and size. But here’s a rule of thumb: the bigger the swept area, the higher the cost. Yet, the bigger the size, the lower the cost incrementals per additional foot length of the blade and/or the height of the tower.

Recently, there has been one other tidbit. For manufacturers that conduct American Wind Energy Association (AWEA’s) new standards on performance, the additional costs for extensive testing will likely be carried over to the consumer.

However, we are currently seeing a dramatic decrease in the cost of wind energy system components. This price drop is partially due to more efficient manufacturing as well as overproduction during recent years, as the world slumped into an economic recession. Wind energy system surpluses allow the consumer to take advantage of dramatic price decreases.

Monitoring and Maintenance

Monitoring and maintaining your equipment is the only option for long-term investment, and this includes wind energy. Of course, this doesn’t mean you have to stand by the machine all the time, watching it spin. Wireless monitoring is becoming commonplace, with associated costs ranging from $0.01 to $0.05 per kWh. Other calculation methods place total operation and maintenance (O & M) costs at roughly 1 percent of the retail cost of an installation, accrued annually.⁵

With more integrated, advanced small turbines and standardized tower practices, there is a likelihood that such costs will be reduced. But if maintenance is shortchanged any time during the 20-to 30-year lifetime, expect the likelihood of depreciating return.

Installation Cost

An installation service cost can be as high as at least a third of the price of your system (Table 6-3). Yet, this is where some people make an error of judgment. This is a 20-to 30-year investment in something that lives in the harsh elements 24/7. The price cannot be bargained down much without affecting quality of service.

TABLE 6-3 Installation Costs for a Sample Small Wind System⁶

For a truly micro-turbine this will not have as much effect, but when you are still negotiating the price on the lowest bid installer for a 33-meter do-it-yourself (DIY) tower kit, you are putting its success more on faith. The funds saved up-front are no consolation when you are forced to hire a lift so that you can scrape the rust off the high rungs of the tower because your more affordable subcontractor doesn’t return your calls.

Also, the harsher your conditions, the more the total cost of installation will be. If you have 60 mph winds whipping gravel in a dramatic plume above your head, you should either relocate or invest in a bulletproof, “heavy metal” wind turbine. Invest well to produce well for the long term.

Insurance

To make insuring your wind energy system cost-effective, you will likely want to add it to your homeowner’s, farm, or business policy. Homeowner’s insurance specifically protects property owners from casualty (losses or damage to the home and its contents) and liability (damages to other people or property).

You’ll want coverage for damage and repair due to “acts of God.” The amount varies based on the size of the tower and proximity to other structures. There is more on this later in this chapter to help you make a wise choice, but for now, it is good to know that insurance on a galvanized steel bean stalk with a spinner on top that generates electricity may be added to your homeowner’s insurance, with a price range from no cost to up to 1 percent of the total cost of the system.

Source of Money

Whether you withdraw savings from your account or borrow money from a bank (long-or short-term) will affect the return on your investment. The terms and rates may vary, but here’s a general list of options:

1. You might find immediate funds in your savings account, but this may take away funds for emergencies. It is usually advisable to maintain at least five months of expenses in the bank.

2. Short-term loans are another option, but remember that they are usually at a higher interest, and are not tax-deductible.

3. Mortgage, home, or farm equity loans provide immediate funds at a lower interest and are tax-deductible.

4. Government-insured and some conventional loan programs can approve a larger mortgage payment based on the projected savings on monthly utility bills, or roll the costs of proposed improvements into the mortgage. These plans are often called green mortgages or energy-efficient mortgages. To find qualified lenders and a certified home energy rater in the United States, use this site: resnet.us/consumer.⁷ In the United Kingdom, go to: est.org.uk.

Related to this is who provides the money. We don’t spend much time on who actually owns the wind system, but know that the source of money can significantly reduce the price. Private ownership is our main focus, but investor-owned systems with corporate financing have historically maintained a lower cost. And the least costly way to install a turbine is to obtain internal or project financing from the public utility, which usually means they would claim most, if not all, ownership (and operating and maintenance costs) of the generator.

Permitting Costs

If your local municipality supports legislation specific to wind turbines, permit costs can range from $0 to $1,000+. Some local governments give special consideration to “energy conservation devices” and “energy production accessories.” In Riverhead, New York, for example, a permit for any “structure” can result in $1,500 or more depending on the square footage, but a wind turbine is only $150 dollars for a permit. That’s a sizable discount that changes your bottom line for the better.

Zoning Jurisdiction

In some cases, municipalities may be familiar only with utility-sized wind turbines, and may try to apply existing legislation for that scale to small wind turbines. Local ordinances may, therefore, require costly additional studies and reports before a project can be considered.

For example, bird migration and audible sound studies are commonplace for larger-scale projects, and they can be conducted in no less than thousands of dollars. Your goal is to educate the town that small turbines deserve an exception. We advise you to use information in Chapters 1 and 2 to inform them of the differences.

Energy Usage Tax

Wherever you live, you can’t be taxed on something you don’t use. If there are taxes or tariffs on your energy consumption, the less you use, the lower your energy tax. Taxes have a profound effect on the economics of any investment. When you “store” your excess electrical generation “on the grid” in the form of a credit for later retrieval, you also offset the usage tax.

Raw Materials

Wind turbine systems are like any other product that requires many different elements, all of which can experience price volatility, such as copper, rare earth magnets, plastic composites, and steel. This can affect not only the size that you can afford, but the distance from the building or grid. Copper wiring currently can cost $20,000 to $30,000 per quarter mile. The distance from the grid to your home and the home to your wind turbine can vary greatly. That same money could buy an entire wind energy system that will meet the electricity needs of an energy-efficient home.

Financial Incentives

Now that you have the list of factors that affect price, let’s examine some of the specifics and provide some groundwork that you can further explore (Figure 6-4). By understanding the financial resources out there, you could cut thousands of dollars off your project budget.

FIGURE 6-4 This cup anemometer shows that the winds are strong. Now line up that financing! Warren Gretz/DOE/NREL.

One barrier that remains in the renewable energy industry is inconsistent financial incentives. As this industry continues to evolve, we can hope that the price of this technology comes down to a point where tax credits and utility rebates are not needed to make this investment affordable; but this day is not here yet. Currently, government incentives are one of the key forces driving this industry. Financial incentives are for many the “make it or break it” force behind the decision to purchase or not to purchase a renewable energy system. Some people actually move their project to different states just to take advantage of the benefits.

Many national and regional laws require utilities to include some amount of renewable sources of energy in their portfolios, and there are generally two ways they go about achieving this (Figure 6-5). Utilities can:

FIGURE 6-5 Many states and countries mandate some kind of renewable energy portfolio standard, which specifies that a certain amount of power must come from designated “clean” sources. Wind Powering America/NREL.

1. Purchase green energy from other generators, and then sell it to their customers at a premium.

2. Build renewable energy generators, and then sell clean power directly to their customers.

3. Encourage their customers to invest in their own renewable energy systems through incentives like energy rebates.

All of these approaches help fulfill the utility’s renewable energy standard, whatever the actual percentage may be. However, in many ways, the third option is the most economical decision for the customer.

In fact, well-sited small wind turbines can pay for themselves within 15 to 20 years, which is less than their serviceable lifetimes, if the right incentives are applied.

Worldwide, there are generally three incentives available to wind system owners:

1. Capital subsidies

2. Tax incentives

3. Low-interest loans

Let’s take a closer look.

Capital Subsidies

In many jurisdictions around the world, those who install small wind energy systems may receive money toward the purchase price, in what’s called a subsidy. The money may come from public treasuries, but the term subsidy may also refer to assistance granted by utilities with funds drawn from charges all electricity consumers pay for public benefits. Clearly, wind turbines have substantial up-front capital costs, but subsidies can lower the effective price.⁸

Capital subsidies take a number of forms, as the following sections show.

Grants and Rebates

On Kevin’s first sales meeting with a successful greenhouse business, he recalls reciting the current federal and state benefits to the client, believing that the tax credits available would be enough to fund the project and bring the business to an easy solution for its high utility bills. However, one call to the accountant made it sound less appealing. They already had a laundry list of deductions from other tax credits that couldn’t be combined; hence, the company would be unable to absorb the full value of a tax credit. This is a substantial limitation of tax credits.

In contrast, a direct payment in the form of a grant or rebate does not share the same problem. Anyone can benefit from those incentives, regardless of tax status. A grant is usually in the form of money paid directly to the recipient. With a rebate, the consumer must purchase the system first, and then file paperwork to receive money back, according to the value of the rebate. A number of countries and utilities offer such incentives.

Rebates are typically paid for with public benefit funds (PBFs) collected as a small fee on consumer utility bills.⁹ So technically, you may have been paying for wind turbines for years, but it just wasn’t on your property.

Direct payments can be made even more powerful through cost sharing, in which the government pays part of a wind system’s costs directly, because the private investor would not pay taxes on the cost-shared portion. So that is a tax incentive on top of cash. Double dipping.

When our client was informed that if we commenced the project before a certain deadline set in the incentive program the federal government and local utility would cut a lump-sum check in lieu of a cumulative tax credit, they were more inclined to get the wind turbine on their property.

Production Incentives and Feed-In Tariffs

Some governments or utilities provide cash payments to wind power owners based on the number of kilowatt-hours they actually generate, rather than on installed price tag and its predicted capacity (Figure 6-6). To proponents of this strategy, including Paul Gipe, it’s a good way to encourage consumers to invest in high-quality equipment on good sites, because they can only get paid based on production, not prediction.

FIGURE 6-6 The Northwind 100 kW turbine is designed to withstand especially cold climates. Warren Gretz/DOE/NREL.

As an example, in Washington state, the Chelan County Public Utility District’s Sustainable Natural Alternative Power program (SNAP) has helped build two 10-kilowatt wind turbines and four solar projects to date. Funding for the program comes from voluntary customer contributions of $2.50 to $50 per month, which are promoted as supporting locally generated clean energy. Yet, it does not affect the electric rates of customers who do not want to participate. Producers are paid a percentage of the pool based on their percentage of the total renewable kilowatt-hours generated, up to $1.50 per kilowatt-hour. A SNAP starter program is available to other utilities.¹⁰

Perhaps the ideal incentive would be a combination of pre-and post-installation assistance. For example, Orcas Power & Light Cooperative Green Energy Program in Washington provides up-front payments for small wind turbine installations based on expected generation during the first year. Then, system owners also receive a production incentive based on output in subsequent years.

An increasingly popular type of production incentive is the feed-in tariff (also look for FIT, feed-in law, advanced renewable tariff,¹¹ or renewable energy payments). A feed-in tariff establishes a set price at which a utility purchases excess electricity from a renewable generator, such as your small wind system. This way, natural market forces can adjust the amount of energy produced (supply) and demand accordingly. Unlike up-front rebates and tax credits, this policy is based on output (cents/kilowatt-hour) rather than turbine size (kilwatt-hour), and therefore rewards real-world performance. And unlike most net metering systems, the feed-in tariffs are typically set well above average electricity prices.

Feed-in-tariffs are normally established with long-term contracts, with 15-to 25-year agreements common.¹² And unlike many renewable energy credits, FITs are often nondiscriminatory in terms of production, meaning they apply the same treatment to wind as they do to solar.¹³

By 2010, at least 63 jurisdictions, 50 countries, and 25 states/provinces had adopted FITs. Feed-in tariffs exist in most of the member states of the European Union, as well as in Australia, Brazil, Canada, Iran, Israel, Japan, Kenya, the Republic of Korea, South Africa, Taiwan, Thailand, Turkey, Ukraine, and in more than a dozen U.S. states.¹⁴ The program is gaining momentum in China, India, and Mongolia.

Emilie Morehouse, the Small Wind Policy Manager for CanWEA, told us in an interview that there has been “interest” in feed-in tariffs for small wind at the provincial level in Canada. In fact, Nova Scotia recently announced a new FIT for small wind, which according to Morehouse will only be available on a community scale, and will only be offered to aboriginal groups, co-ops, or municipalities. As of this writing, a review board is working to develop the details.

If you want to know more about feed-in tariffs and see if your country or state has some mechanism set up, please visit:

Wind-Works.org www.wind-works.org/articles/feed_laws.html

Wind author Paul Gipe has long been a strong supporter of feed-in tariffs, because he feels they are the best way to guarantee meaningful energy production out of public-subsidized systems. Gipe told us, “For small wind to be profitable you need to be paid a higher price [for the electricity you generate], so you need a feed-in tariff. Subsidies that just pay based on estimated production are a terrible way to develop the wind turbine industry because they invariably lead to development of products that are shoddy or poorly sited.

“Feed-in tariffs only pay for electricity that is produced, so a buyer must know when they install that the turbine will work and produce sufficient electricity to make a profit. If it doesn’t they can go after the manufacturer. With basic tax credits there is a tendency for Americans to think it is a gift, and they will do something stupid financially to take advantage of the subsidy,” said Gipe.

David Sharman of UK-based small turbine manufacturer Ampair told us, “FITs are good, probably the best, since they create well-aligned interests.” He added, “Other [incentives] can also be helpful, but also unhelpful. There are many routes to heaven.”

Renewable Energy Credits (RECs)

Another type of production subsidy for renewable energy is a renewable energy credit (REC), also known as a green tag or tradable renewable certificate (TRC), and in the United Kingdom as a renewables obligation certificate (ROC). These are tradable, nontangible energy commodities that represent proof that one megawatt-hour (1,000 kWh) of electricity was generated by a green energy provider (Figure 6-7), such as your wind turbine (for reference, remember that an average U.S. household uses about 920 kWh in a month).

FIGURE 6-7 RECs are largely designed to support large-scale renewable energy projects, like this relatively new wind farm in rural Idaho. Brian Clark Howard.

A certifying agency gives each REC a unique identification number, while the associated “green energy” is fed into the grid. The REC itself can then be bartered or sold and traded on the open market, yet considered separate from the sale of commodity electricity.¹⁵

Prices of RECs depend on a number of factors, including supply and demand, the year the certificate was generated (called the “vintage”), the location of the turbine, and whether the REC is used by an entity for compliance under a scheme that requires a minimum of energy be provided by renewable sources. In the United States, several states have a so-called renewable portfolio standard (RPS) or renewable electricity standard (RES); in the United Kingdom it’s known as the renewables obligation (RO).

Even the type of renewable energy created can make a difference. For example, in July 2010 Delaware and New Jersey paid as much as $665/REC for solar electricity,¹⁶ while Canada offers $3/REC for 20-plus year contracts. In the United Kingdom, there’s a ceiling price on ROCs (£36.99/ROC in 2010–11). While the value of RECs/ROCs fluctuates, most sellers are legally obligated to deliver energy continuously under penalty if they don’t meet their obligations. The prices might not always be a fair market value, but if you have no other alternative, it will still improve your return.

The United States currently does not have a national registry of RECs, so you would need to have a third-party audit of your system to be eligible for certification. The Center for Resource Solutions maintains a list of auditors who meet the criteria to be listed on the program website: green-e.org/auditors.html.

In the United Kingdom, the RO system is a major supporter of green energy projects. It obligates UK suppliers of electricity to source an increasing proportion of their electricity from renewable sources.¹⁷

In a bid to make FITs more accessible to the developing world, the World Future Council has proposed setting up a global Renewable Energy Policy fund that would cover the feed-in tariff rate in order to avoid increasing electricity costs for low-income households. The global fund could portion out assistance based on the economic status of the country, with wealthier developed nations paying a portion of the freight.¹⁸ So, to you, in East Africa, there is hope on the way. (By the way, this is a good time to remember that most people, especially in the developing world, tend to pay much higher rates for electricity than we do in the United States, especially as a percentage of income.)

Net Metering

We’ve mentioned net metering before, especially because it is pervasive in North America, and is a key part of the relationship between a distributed producer of energy and the grid. Net metering allows access on the customer side of the meter and specifies how the wind energy producer will be paid. Most net metering programs have project size caps, but these are normally well above what most small wind turbines can produce. All renewable technologies typically receive the same price for generation.

Under net metering, your wind generator feeds your surplus (unused at your site) energy into the grid, where it is “banked” with a utility for a particular period, usually a year. When generation is less than consumption, energy is provided by the grid to make up the difference, and the amount provided is subtracted from your balance of “banked” electricity. Thus, the price or tariff for generation is effectively the retail price of electricity.

Note that most net metering programs have a cap that restricts banking of electricity to even with the customer’s total annual consumption—or, if you are lucky, to 10 or 20 percent above annual consumption. That is, if you consumed 10,000 kWh of electricity at your site that year but produced 14,000 kWh of electricity, an excess generation of 4,000 kWh, at best you would only receive payment for 1,000 kWh (110 percent) or 2,000 (120 percent), depending on your deal. As for the excess banked electricity beyond that, you provided it free to the utility.

If you think about it, it’s not hard to see why the utility would want to structure the arrangement in this way. They aren’t historically in the business of purchasing power from tiny producers. They normally buy at high volumes from big power plants and pay wholesale rates. Still, there are a number of benefits to distributed generation, as we covered in Chapter 1, so it’s an evolving relationship.

You should also be aware that, sometimes, the net metered price is not the true retail rate. Some programs add fees, while some do credit according to the wholesale rate (bummer), not the retail rate that the customer pays. So be sure to understand all the details before you sign.

Emilie Morehouse of CanWEA told us that Canada has net metering nationwide, though the rate is set by each province. She said Nova Scotia has the best rate, at 13 cents per kWh. According to Morehouse, “Experience has shown that net metering programs don’t really work to significantly deploy wind.”

They certainly help, but net metering alone is usually not sufficient to make a grid-tied system financially profitable, unless some additional factors come into play.

Tax Incentives

Tax incentives have long been used in many countries to stimulate development of renewable energy markets and industries. Small wind energy is no exception. Figure 6-8 gives an idea of the relative availability of different incentives for renewable energy around the world.¹⁹

FIGURE 6-8 Relative abundance of renewable energy incentives around the world. Center for Resource Solutions. International Tax Incentives for Renewable Energy: Lessons for Public Policy, http://www.resource-solutions.org/lib/librarypdfs/IntPolicy-Renewable_Tax_Incentives.pdf.

Let’s take a closer look at the different instruments.

Property Tax Reductions

Some people wonder if installing a wind turbine on their property would count as an “improvement,” and therefore raise their property tax rate. That is possible, although luckily, many places have rules that prevent property taxes from being raised on a new renewable energy system.

For example, in the state of New York, there is a 15-year moratorium on property tax assessments for a solar installation, although no statewide waiver exists for a wind turbine. It would be under the discretion of your local government, hence your due diligence, to determine if property taxes should be affected.

Excise (Sales) Tax Reductions

A number of jurisdictions exempt renewable energy equipment purchases, including wind systems, from up to 100 percent of excise (sales) tax. Some countries that tax electricity consumption also provide an exemption for electricity produced by renewable technologies. A few places also offer tax rebates, which refund a specific share of an excise tax already paid. Consumers apply for tax rebates at the time of purchase of equipment and systems. Many U.S. states exempt all sales tax for the installation of the entire system if purchased by a certified installer.

Investment Tax Credits

Historically, so-called investment tax credits (ITCs) are one of the most popular incentives for renewable energy offered by state and federal governments. With an investment credit, tax deductions or credits are offered based on some fraction of the costs of investing in a small renewable energy system. The incentives are most often applied against income tax that is owed. Technically, deductions reduce taxable income, while credits directly offset taxes due.

Often, the cost of installing the equipment (in addition to the equipment cost itself) is included in the calculation of the tax credit, which provides a stronger incentive. Though some states and countries have considered applying production-based incentives for smaller systems to make sure meaningful amounts of clean energy are actually produced, it is often argued that the administrative costs of tracking production are significant. As a result, most income tax incentives offered for customer-sited systems have remained investment-based, meaning they are based purely on the cost of the installed system, not energy produced. (This does not make Paul Gipe happy.)

Power Up! If you are in the United States, you might have heard that small wind turbine systems (100kW or less) are eligible for a federal income tax credit of 30 percent of the total cost of installment of the system, including parts and labor. There is no maximum credit for systems installed after 2008.

This ITC credit can be used in the first year of production, or it can be spread over a number of years. Systems must have been placed in service on or after January 1, 2008, or before December 31, 2016, which is when the current incentive expires. The home served by the system does not have to be the taxpayer’s principal residence.

Corporate Investment Tax Incentives

Corporations sometimes qualify for corporate income tax deductions or credits based on investment in approved renewable energy technology—such as that series of 100 kW turbines behind the office park. As with individuals, deductions reduce taxable income, while credits offset taxes due.

Qualifications for companies vary from country to country, but usually governments require certification of performance and safety and set size minimums to qualify for a tax incentive.

Production Tax Incentives

Production tax incentives (PTCs) provide income tax deductions or credits based on a set rate per kilowatt-hour actually produced by wind-energy facilities. These incentives, like feed-in tariffs, are designed to encourage good siting and maintenance of systems.

In the United States, the federal wind energy PTC currently provides a credit equal to 2.1 cents per kilowatt-hour produced. It is available for the first ten years of a wind generator’s operation, if it is running by the end of 2012.²⁰ Calculations show this credit could lower the life cycle cost of wind power by more than 25 percent. Publicly owned electric utilities and rural electric cooperatives are not eligible for the PTC.

When it comes to individuals, or any other groups that might qualify, they actually have a choice in the United States: elect for either the PTC or the ITC. Sorry, the law currently does not allow you to claim both types of credits. Note that for most home and farm owners, the ITC works out to a considerably better deal, which is why most people in the business spend their time talking about that, and essentially ignore production credits. The ITC is available immediately, instead of spread over ten years, and it isn’t tied to production, meaning it isn’t subject to the vagaries of the real world.

We aren’t aware of any small wind owners who have opted for a PTC over an ITC, but if you hear of any, let us know.

Research, Development, and Manufacturing Tax Credits

In order to support development of clean energy, domestic manufacturing, and job growth, many countries have research and development tax credits that offer up to 150 percent²¹ of money invested by a corporation into new, expanded, or re-equipped research or production facilities (Figure 6-9). This is usually determined based on a project’s commercial viability, job creation, carbon emissions reductions, and other factors. China, India, the Czech Republic, Bangladesh, and Jamaica have recently made significant investments in wind energy.²²

FIGURE 6-9 Many countries offer additional tax credits on research, development, and manufacturing of wind turbines in order to help build capacity in renewable energy. Paul Anderson/Wikimedia Commons.

Unless you are looking to continue to build turbines in your shop, this doesn’t necessarily apply to you now, although it’s true that you may eventually have more options in terms of purchasing turbine equipment that’s made locally. Morehouse, the Small Wind Policy Manager for CanWEA, told us that part of the reason why Nova Scotia recently passed a feed-in tariff plan for small wind was to help support and stimulate the province’s turbine manufacturing industry, which is led by Seaforth Energy.

Accelerated Depreciation

For those of us who don’t work in accounting or finance, the concept of depreciation can seem a bit mysterious, but it can be helpful, at least to those of us who run agricultural or commercial businesses. Depreciation, as you probably know, refers to the fact that assets decline in value over time as a result of wear and tear, obsolescence, and changing trends. The financial instrument of depreciation is a way to approximate that decline. It’s a “non-cash” expense that reduces income as calculated for income tax purposes. If your wind turbine is a business asset, it could be depreciated over a 20-to 30-year period, the estimated life of the system.

In an accelerated depreciation incentive, agricultural businesses and investors in renewable energy facilities are permitted to depreciate equipment at a faster rate than typically allowed, often 15 years or less instead of 20 to 30. This substantially reduces stated income for income tax calculations during those years, and thereby reduces income taxes. In India, you can depreciate the entire value of the facility and equipment in the first year.²³

Get your “non-cash” now, and get it while it lasts.

Value-Added Tax Reductions

Many countries have value-added taxes (VATs), instead of income, sales, or other taxes. This would include most of Europe, Australia, New Zealand, Russia, India, Japan, much of Latin America, and a good many other countries. A value-added tax is similar to a sales tax, in that the people who actually pay it are the end-level consumers. However, a VAT has a more complicated collection and accounting process, which proponents say takes the burden of deciding who is the ultimate consumer away from businesses.

In an area with a VAT, whenever a business or individual buys a good or service, they have to pay the stated tax. For end users of products, either individual or corporate, the process stops there. But if the buyer adds something to that purchase, by refining it into something else, for example, they will get a credit back from the government for the tax that was initially paid. In other words, they don’t effectively pay taxes on things they buy in order to make other things.

Value-added tax can hurt renewable energy if the output of electricity is not taxed, while inputs, like capital expenditures on equipment, are taxed. In other words, a person who buys a small wind system is taxed as an end user of that equipment, instead of getting a credit for “adding value” by producing clean energy.

Typically, countries with VAT reduce the rate of the tax applied to the production of renewable energy and the domestic manufacturing of renewable energy parts, equipment, and systems. Alternatively, some countries collect the full tax on such activities, but refund a portion of it.

Import Duty Reductions

Some countries have reduced or eliminated duties on imported wind system equipment and materials, especially if the nation doesn’t have a developed manufacturing and support infrastructure for the sector. Although reducing import duties may not have a huge impact on your final cost, it is not something to be overlooked. Import duties can vary by technology, depending upon the status of domestic manufacturing.

Taxes on Conventional Fuels

Most countries tax fossil fuels in some manner. In the United States, there is a lot of discussion about gasoline taxes, which are generally lower than in much of the world. Some countries, particularly in Europe, also tax consumption of fossil fuel–based energy in the form of a carbon tax, which is typically assessed on emissions like carbon dioxide. If your country taxes only on the emissions side, wind-energy turbines are exempt from paying a tax. In other words, if your home or business is using clean wind power, you may be saving money on fossil fuel taxes that you don’t have to pay, yet you maintain your same quality of life.

That’s like your government saying, “Thanks for nothing” (no emissions, that is).

Tax Holidays

Particularly popular with consumers, tax holidays are time-limited reductions or eliminations of excise (sales), income, VAT, or property taxes. Time frames can be as short as a month and as long as a decade. In India, the government offers a ten-year tax holiday on income produced from wind systems.

INTERCONNECT

Dominica, the Caribbean’s “Nature Island,” Gets a Wind Turbine

One of the least developed islands in the Caribbean, Dominica is often described as a green paradise, teeming with lush forests, sparkling waterfalls, and spectacular diving opportunities. In 2008, “The Nature Island” also got its first wind turbine, a Norwin 225 (225 kW) (Figure 6-10).

FIGURE 6-10 In 2008, Rosalie Bay Resort in Dominica installed a 225 kW Norwin wind turbine, which powers 70 percent of the property’s energy needs in combination with solar panels. Rosalie Bay Resort.

Although a 225 kW turbine is typically considered utility scale, we thought this project was worth including because it shows how wind power can be accessible to a broad range of stakeholders, particularly in remote areas. Interestingly, the turbine’s owners—Beverly Deikel and her partner Patrick Oscar—told us they originally wanted something smaller to power their new green resort, but say they were unable to entice any installers to come out to the island for anything less than 225 kW.

Along with some rooftop solar panels, the grid-connected turbine provides about 70 percent of Rosalie Bay Resort’s energy needs. Open to guests in late 2010, Rosalie Bay Resort was founded by Oscar (he goes by his last name), who is from Dominica, and Deikel, who hails originally from Minnesota. The property occupies a gorgeous stretch of coast in the southeastern part of the island, and it is loaded with eco-friendly features, including an organic garden and advanced water treatment. One of the small resort’s main goals is to preserve the area’s nesting sites for endangered sea turtles, so local guards are hired to protect vulnerable baby turtles from poachers. Guests have the chance to pitch in or just watch the reptiles’ march to the sea. Guests can also enjoy kayaking and tubing, nature walks, hikes into the surrounding mountains and to a boiling lake, or, of course, snorkeling and diving.

For a unique thrill, visitors can don a harness and ascend to the top of the wind turbine, where they are rewarded with spectacular panoramic views of the Caribbean and the rugged countryside. “I went up, and it is so beautiful,” Deikel told us while she was in New York to kick off the resort’s opening. “It’s one of the few islands Christopher Columbus would still recognize,” she added.

Rosalie’s wind turbine is estimated to produce 586,000 kWh of clean energy per year, offsetting 160 metric tons of carbon dioxide emissions per year. According to Deikel, Dominica’s government was helpful in getting the turbine approved and connected, although she said the utility was hesitant at first. The resort site had not previously had electricity or water (or much in the way of employment, though the resort has brought about 60 permanent jobs for locals).

“Some people don’t like the look of it but most do,” Deikel said of the turbine (Figure 6-11). “One neighbor doesn’t like it but he doesn’t like anything.” Deikel said the neighbor asked them to paint it a different color to try to match the hills or the sky, but she doubted that would really make a difference to this “angry neighbor.”

FIGURE 6-11 Resort guests can ascend the wind turbine for spectacular views of the Caribbean, and to learn about wind energy firsthand. Rosalie Bay Resort.

Rosalie Bay Resort’s general manager, Jan Neel, told us, “Guests and locals alike are thrilled to see the turbine generating power. It’s quite a landmark for the progress that Dominica is very proud of in the eco-sensitivity sector.”

In January 2011, the Obama administration announced that Dominica will be receiving U.S. funding for a new large-scale wind farm, through the Energy & Climate Partnership of the Americas.

Low-Interest Loans

It’s true that a wind turbine can call for a significant initial cash outlay. And even with all the available subsidies removing a big chunk, what remains might still make you uneasy. So, depending on the size of your system, you might want to consider a loan. Assuming you own some property, a standard home equity line of credit is definitely one option, since the terms are generally favorable.

Kevin remembers the day an astute client asked, “With all the federal and state tax incentives and local authority rebate cutting the cost by more than 40 percent, what would the loan amount be?” It turned out to be the initial total cost. That’s because many incentives don’t kick in until after it is built and producing. The installers are not likely going to defer the cost, so you are left with bringing the money to the table first.

For those who can relate, getting a big loan is not easy to swallow. And many people who are keen on eliminating their bills are the same people who might struggle to make the initial high monthly loan payments that would follow.

The good news is that if you are receiving a grant or rebate check a month or two following the install, you can quickly pay down the principal, which means that this payment is not going toward the interest accrued on your debt, but the actual amount you owe. So long as there is no clause that prevents prepayments, any additional payment amount to be applied toward the principal saves you money on the interest, and reduces the life of your loan.

After the recent global recession, financial institutions do not provide much incentive for saving your money in a bank, so that makes it doubly important to get yourself out of high-interest loans. Our most recent look at interest rates for certificates of deposit shows that banks don’t break one percent unless you invest for at least five years. That is not even enough to adjust for inflation.

For those committed to lowering your bottom-line cost, don’t stop with the lump-sum rebates. We suggest you send in two checks each month: one for the regular loan payment and the other an amount equal to your previous monthly electric bill, clearly marked that it is to be applied to principal. This can clarify your wishes to the bank beyond a doubt. Please remember to ensure that there is no prepayment clause that prevents you from being able to reduce the interest paid.

Well, that is nice, but how do I reduce the monthly payments? Well, that requires refinancing the loan. That is an option. Especially if you have just prepaid a substantial sum and the loan interest rates have reduced, you could seek a loan advisor on the steps to reduce your long-term debt.

Now, let’s look at a few other types of loans.

Revolving Loan Funds

One potential source of funding worth exploring is a revolving loan fund for renewable energy projects. Banks in some areas offer the program, in which a loan is made to one person or business at a time to finance a new system. As repayments are made on the initial loan, funds become available for new loans to other folks. Hence, the money “revolves” from one person or business to another.

For example, Iowa’s Alternate Energy Revolving Loan Program provides loan funds equal to 50 percent of the total financed cost of a project (up to $250,000), at 0 percent interest. Talk to installers in your community, others who have wind systems, and industry associations to find out more.

Related to this, it’s possible that you may be able to tap into a local community development loan, or public investment loan, if you organize a group of people and propose a small-scale wind project for your town. There isn’t a lot of money available for such projects, but some places do have funding to support green initiatives, so it doesn’t hurt to ask and to talk to your fellow wind enthusiasts.

Green Loans

In many cases, lenders can approve a larger mortgage on a property to provide funding for energy efficiency and renewable energy projects, based on the projected savings on monthly utility bills. Such loans may be called green, green business, or energy efficiency loans, and they apply to all technologies that meet the lending bank’s investment criteria. They typically provide a competitive rate, and will be calculated based on a wind-turbine’s long-term return on investment.²⁴ Use this site to find qualified lenders and a certified home energy rater in your area.²⁵

Resource

resnet.us/consumer

Does Small Wind Pay?

With all of these financial considerations, you may be feeling kind of side-tracked from all the constants we previously discussed, such as swept area, betz limit, and annual energy output. You also may want to put it all together: given all the factors that can affect the price of a system, the incentives that are available to you and the potential savings in energy, you may be asking if small wind will really “pay” for you. Undoubtedly, that is an important question, and one that receives a lot of media attention and discussion by the public, although as we have pointed out, some of the rhetoric can be blown out of proportion.

Consider this response from Mick Bergey of the well-respected manufacturer Bergey Wind Turbines: “You are already paying for it regardless if you participate or not.” That is, even if you don’t buy a wind system, the money you pay every month toward your electric bill is money that could go toward a wind turbine. So, if you decide not to become your own wind generator, at least you know you get the benefit of paying for one without actually having to install one. Congratulations! Yet, all facetiousness aside … we are sure you would like to make sound decisions regarding your energy solutions.

Before we get deeper into the question of how quickly your system might return your investment dollars, let’s step back a moment and give some thought to that query itself.

Does a Small Wind System Have to Pay for Itself?

Although some pundits talk like return on investment (ROI) is the only variable worth considering when it comes to renewable energy systems, we know that the real world is more nuanced. Ultimately, buying a wind system is an individual choice, and like all consumer decisions, it must be made at the individual level, based on each person’s unique circumstances, needs, and desires (Figure 6-12).

FIGURE 6-12 This grid-connected, 10 kW Bergey wind turbine offsets the energy use of a small business in Norman, Oklahoma. Bergey Windpower/DOE/NREL.

For an off-grid user who would be required to pay their power authority tens or even hundreds of thousands of dollars to install an underground electric line and transformer in order to provide power to a remote location, a wind turbine can readily appear to be a cost-effective solution. In fact, demand among the roughly 180,000 American families who are currently living off the grid has helped spur innovation in the small wind industry for decades.

What about farm owners with good wind sites and moderate distances from street-side power lines, or business property owners with high demand fees (explained shortly) due to their heavy energy requirements? In these cases, a small wind system may or may not pencil out in terms of ROI in a short period, depending on the specific circumstances.

What about the typical homeowner on the grid? Is small wind energy the least costly way of getting electricity? Well, no, not overnight at least. But the question arises, does it need to? Why do you think owning a wind turbine should be treated so different from all the other “necessary” purchases you have made in the past?

Consider typical big purchases people often make: a ready-to-walk-in house, a sleek new sports car, an iPad, a multimedia gaming computer, a backyard pool, a cruise trip, or a sailboat. True, a devil’s advocate might say you can’t really compare such items with a wind turbine, because the wind turbine is designed to earn or save money. But why must that statement be a fact?

One of us owns a small wind turbine, and it provides great gratification, even if on the surface it doesn’t appear to provide an immediate positive cash flow. Isn’t that like those other items we mentioned? It cost $10,000 out of pocket, but to this day Kevin remembers the joy of seeing it spinning during the installation process, even though there wasn’t enough wind to meet the cut-in speed. Kevin reasoned that he is a homeowner, not a professional contractor, yet he chose to build his own house. He is a consumer, not an application programmer for Apple or Google (yet), yet he bought a smart phone; he is a swimmer, not an Olympian, but will install a small lap pool. He realized that he didn’t purchase any of these items for immediate cash flow. Perhaps in the long run, some of these things could earn some income—historically, at least, a home has been a relatively good asset—but for the most part, most things actually depreciate in value.

We ask, why must buying a sports car be only about “fun,” while buying a wind turbine is only about “ROI”? Many people rarely drive their sports cars, and even if they do they seldom have a chance to really open them up, what with all the congestion and speed limits and everything. Sure, it can make you look cool … but then so can a wind turbine, which also has a significant image and “wow” factor.

Perhaps the devil’s advocate is right: wind energy is different in a significant way, because it appreciates, like a rare collectible car, slowly over time. How? Renewable energy systems not only maintain their value (for the most part), they actually make money for the owner, both in terms of the value of the electricity generated and the taxes saved on not purchasing grid electricity. The same cannot be said of most other purchases.

And the true gift of wind energy, besides the fuel being free, is that it doesn’t need to pay your whole bill to be economical. In fact, if you are not going to be compensated at least the retail rate for your surplus electricity, sometimes it is better to size the system down so it merely pays for your needs. Come to think of it, placing a micro-turbine in a yard with an awning and chairs, in lieu of a swimming pool, would over the long term be a more cost-effective solution—even providing respite on a hot day from the savings on running your air conditioner. A swimming pool has a high up-front cost, raises property tax, and requires constant maintenance and energy costs, yet it doesn’t fully appreciate the property value over the long haul. (It may also be worth pointing out that swimming pools are much more dangerous than wind turbines, if you consider the number of people who drown in them every year.)

In Kevin’s case, his wind system (1) did not raise his property tax (ask your local assessor), (2) has low maintenance, (3) has no energy costs, (4) appreciates the property value (“Do you want a home where this small turbine pays the equivalent of your cable bill every month?”), and (5) gives immediate gratification every time the wind blows.

That being said, there are also wind advocates who make a strong case for increasing the payback power of the technology. Author and industry consultant Paul Gipe told us: “For small wind energy to be used by many more people, for it to have a chance to reach a scale necessary to confront the crisis we face, it has to be profitable.”

Gipe said he’d ultimately like to see “millions” of small turbines installed across the country. But in order for that to happen, he said people would need to be in a position to make money on them, not just save money. “To do that, small turbines must be much, much cheaper than what they are today, or owners must be paid a higher price for their electricity,” he explained, alluding to the feed-in tariffs that he strongly supports. “Small turbines are far less productive and less reliable than large ones, and as a consequence, it’s very difficult in the current situation to make small wind pay,” said Gipe.

In any case, there are many ways to calculate value, so let’s look at some more related factors.

Initial Cost

As you are probably aware, a wind turbine has a significant up-front cost. Seasoned wind installers tend to treat the price tag like the pot handle test—it might be too hot to touch. For the individual, small wind may at first appear to be a lost cause, if you look one-dimensionally at the initial price. True, if you compare the cost of hooking up to the grid to installing a wind system, hands down, it is cheaper up-front to stick with the grid … unless you live more than a thousand feet from it (copper wire is really expensive). Heck, it might even be cheaper to buy a diesel generator or build a wood-fired steam engine. But initial price only determines if the wind system will cost more, not if it is a bargain.

The Concepts of Payback and ROI

For many people, the next logical consideration is to look at the payback period of the system. In renewable energy, payback is generally defined as the amount of time it takes for a system to pay for itself through energy savings (once you have already deducted any incentives from the cost of the system). In the world of finance, some investments have a short time span, making payback important, because you would want to know that you made your investment quickly so that you can turn around on another quick investment. But wind turbines are not stocks being sold short, or three-to five-year certificates of deposit. They last for 20 to 30 years.

Experience shows that the payback period for a small wind system can range from several years to several decades, depending on the cost of the system, incentives, the cost of the electricity you are offsetting, and the average annual wind speed the turbine “sees.” Actually, the average wind speed is usually more critical to the payback period than anything else, including the initial installed cost.

In fact, if the only reason to install a small wind system were to make money, then wind turbines would be constructed only in the windiest areas. We know that this is not always the case. In fact, we are familiar with a number of projects that have been installed on urban rooftops that have payback periods far in excess of the presumed lifespan of the systems. Such installations are controversial in the industry, though some owners have argued that the other benefits they provide, such as press coverage and a green profile, justify their expense.

It’s important to remember that the payback view alone gives no indication of the earnings a wind turbine will produce after it has paid for itself. Much of its return comes later—more like a cumulative interest on a lower interest bond. This is compounded by the reality that electric rates tend to go up, an average of 4.5 percent every year (of course, curbed by inflation). So then we are talking about a special “bond” with a cost of living and/or inflation control. Huh? Well, your wind turbine keeps producing electricity while the cost of electricity is going up, right? So the value of what you produce is going to rise. Now this long-term thinking is not a well-beaten path made by the average consumer. But we suppose you are not average and that you are ready to realize that durable wind machines, even many of those with seemingly low energy output, will pay for themselves—they are long-term investments.

Did you notice we slipped in “durable” there? It should be implied, but with the current small wind turbine boom, people sometimes presume that all wind turbines make the distance. But you can’t sacrifice quality for price. The equation needs to be clarified: Initial high cost for a durable wind machine brings long-term positive cash flow; a low-quality turbine lowers initial cost at the risk of reducing longevity to the point that payback is never actualized. Dead turbines provide no cash flow.

Rather than payback, small wind expert Mick Sagrillo prefers the question: “What is the return on my renewable energy investment?” He rightly points out that no one asks what the payback is on a certificate of deposit. So, if renewable energy is pursued as an investment, it should be evaluated the same way that other investments are.

Working out ROI involves including the factors we’ve covered, such as the inflation rate, rising energy prices, any applicable depreciation, and other incentives (Figure 6-13). Sagrillo suggests starting a spreadsheet, and he recommends the two downloadable templates on Windustry’s website (windustry.org/calculator/default.htm), namely Wind Powering America’s “Wind Energy Payback Period Workbook” and “Bergey Wind Power Small Wind Project Calculator.”

FIGURE 6-13 In addition to straight ROI accounting on this small wind turbine at a supercenter in Colorado, Walmart would do well to consider new business attracted by the visible machine, as well as good publicity. Brian Clark Howard.

So let us take a look at the average U.S. residential home with a wind turbine adequate to supply typical annual energy needs, roughly 12,000 kilowatt-hours of electricity.

Residential Economics: Homer Hank

Homer Hank lives at sea level, where he installed a 10-meter tower and a 10k wind turbine that cost about $50,000 in total. The site has an average wind speed at hub height of 12 mph (about 5.4 m/s). The expected AEO is 12,000 kWh per year under these conditions. Nice setup!

Homer sees an average increase in electricity prices of 4.5 percent a year, and an annual inflation rate of 2.5 percent. That means 4.5 – 2.5 = 2%, for the real price increase.

For his financing, Homer got an equity loan, and he put 20 percent down so he wouldn’t have to pay mortgage insurance. Fortunately, he was able to get the loan for 4 percent interest for 20 years to pay for his wind system. He is in the 34 percent tax bracket.

To calculate his net present value, we need to know the discount rate—the interest rate used to discount future cash flows. At a minimum, the discount rate on a 20-year income stream will reflect the rate on a 20-year mortgage (currently in the United States this was lower than 4 percent).

With electricity used in Homer’s home at a retail rate of $0.10/kilowatt hour, and interest payments on his mortgage tax-deductible, his wind system will produce a net positive cash flow after ten years. This is not even taking into account government subsidies or other agency incentives.

Farm and Business Economics: Energy Demand

For commercial and some farm properties, the equation for earnings has an additional component. In many cases, such larger operations must pay not only for the energy they use, but also for the demand they put on the utility system.

One way this is handled is that many commercial accounts are given an allotted energy load. Yes, they get special rates, because they give the power authority plenty of revenue. But if their consumption of electricity exceeds what is allocated by their contract, they are charged a penalty and a “demand rate,” sometimes multiple times the retail rate. This is common for businesses that have energy-hungry machines running around the clock, and it can be especially significant in populated regions, where the load is relatively high.

So, wouldn’t wind power generation counter that excess? Not according to most power authority policies. As Paul Gipe states, “This charge is based on the maximum power drawn during the billing period in relation to their total energy consumption. This compensates the utility for maintaining generators online to provide power at the demand of the customer. By installing a wind turbine a business lowers its total consumption while hardly affecting its peak demand. Thus the wind system could actually increase the demand charge while lowering costs for the energy consumed.”²⁶

It has to do with how the power authority interprets your energy usage. During an interview with our local authority, they explained that they calculate average energy consumption from meter readings of the commercial account multiple times an hour during the day and consider the power entering the grid from the wind generator as a separate service. Even if a 100kW wind turbine owned by a printing service company produced enough energy for 25 New York homes (250,000 kWh), if the business’s electricity consumption crossed the line into their demand zone at the time of the meter reading, it would be penalized.

Fortunately, the power authority was pleased to say they are working on updating their policies and infrastructure to better support wind energy. A simple thing like a smart meter would avoid this scenario. Perhaps by the time of publishing, you will see more wind turbines at Walmarts around the world.

Insurance: Protecting Your Investment

A wind system is a significant investment, and as such it is worth protecting. In addition, wind systems can pose some hazards, so you want to take care to reduce your exposure to liabilities. A time-tested method for meeting these goals is through insurance, which often ends up being the only ongoing fixed expense of the system.

We’ll cover property and liability insurance and provide you with the kernels of information, but this is one area where it’s a good idea to talk to a local experienced wind installer, such as Mick Sagrillo of Sagrillo Power & Light Co. in Forestville, Wisconsin. Sagrillo’s knowledgeable and helpful advice columns on small wind systems have appeared in national magazines and in the AWEA “Windletter” for many years. We sum up his expertise in this section, but the footnotes lead you to his articles for further explanation.

Property Insurance

Here are some general guidelines for your wind system:

• Insure it as an appurtenant structure under existing homeowner’s insurance.

• Insure from “acts of god,” fire, theft, and vandalism.

• Install to National Electric Code standards.

The most cost-effective way to insure a wind system is under an existing homeowner’s insurance policy on your house. This is far cheaper than purchasing a policy specifically on the wind system. However, this option is generally only available to you if your system is on the same property as your home. Otherwise, you will likely have to get a separate policy.

Fortunately, there is a precedent of insurance companies generally being supportive of renewable energy, including small wind turbines. Jason Cassee, director of marketing for personal insurance for Fireman’s Fund Insurance in Novato, California, said, “Homes with wind systems and green features are more self-sustaining and energy efficient overall.”²⁷

“They offer benefits to homeowners from a financial perspective and to us from a risk-management perspective,” Cassee added. It’s worth noting that both State Farm and Allstate Insurance advertise that their offices are powered by renewable energy, so it seems appropriate that they, too, understand the risk-savings of such an investment.

If you have a grid-connected system, it should be comforting to know that insurance companies will often pay the expenses for inspection, reconnection, and permits needed to get the system back online after an outage, as well as the cost of replacement power until the system is replaced or repaired to the manufacturer’s specifications. The homeowner is also reimbursed for any power-generation income lost while the system is down.

The best policy is honesty and complete information. You don’t want to deny your insurance agency crucial information, such as the existence of a wind turbine. Not only is this approach illegal and unethical, but the insurance company could ultimately deny future claims based on disclosure issues, especially with Google Earth and OpenStreets offering satellite photos of your property. On the other hand, it’s true that simply informing an agent that you want to insure a “wind turbine,” and expecting that they know what you are talking about, can be costly. Uninformed insurers may perceive greater risk and, in response, raise their rates, or simply deny coverage.

Appurtenant structure. Instead, Sagrillo suggests that you say you wish to insure a “wind mill and tower,” since both are terms everyone is familiar with. It’s a good idea to also specifically ask for coverage of an appurtenant structure on your current homeowner’s policy. This is a term used by the insurance industry to refer to any uninhabitable structure on your property, such as garages, silos, barns, sheds, towers, satellite dishes, and so on, although note that some companies place any farm structures in a different category.

According to Sagrillo, it is common for insurance companies to cover appurtenant structures for the total cost of materials and labor, meaning the entire installed cost of your system. However, as mentioned earlier, your system must be on the same premises as your house.

Cost. Insuring a wind system as an appurtenant structure is relatively affordable, and shouldn’t raise your premiums very much. If you want to raise your coverage, you should be looking at $2 to $3.50 extra per year per $1,000 of additional coverage. In general, rural properties have somewhat higher rates because they are usually farther from fire departments.

Note that you might qualify for a discount with some insurance companies if you can demonstrate that the equipment is UL-listed (Underwriter’s Laboratories), meets the National Energy Code, is approved by an energy commission, meets national performance standards, and is fully warrantied by the installer and manufacturer. If you are an owner of a Leadership in Energy and Environmental Design (LEED)–certified home, Fireman’s Fund offers a 5 percent discount off its premium.

What You Want in Insurance Coverage

Vandalism Unfortunately, vandalism is one of the biggest concerns for wind turbine owners. Incidents are relatively rare, luckily, but the most frequently filed vandalism claim is from guns being fired at turbine blades or generators. Another risk is intentionally undone guy cables, which can cause a guyed tower to come crashing down. In either case, damage can be substantial.

Acts of God As with homes, any wind system should include this coverage. While most wind towers are designed to withstand wind speeds greater than 120 mph, few can withstand a direct hit by a twister.

Lightning strikes Hopefully, you took proper steps to ensure that your wind system is adequately protected against lighting, so you shouldn’t have any problems. However, there’s always the possibility of a freak accident, so you want to be covered.

Fire If you want to scare yourself for a moment, Google “wind turbine fires.” Go ahead and enjoy the fiery devastation, then take a breath and notice that you’re looking only at utility-scale machines. When it comes to small wind systems, fire is quite rare. We hope you set your system up to at least the National Electric Code (NEC). Otherwise, if you try to make a claim, your policy may be canceled.²⁸

Theft While it may seem unlikely, there have been claims filed for wind turbine parts that have gone missing, both from the ground level and from atop towers. Bad form, Peter Pan!

Flood insurance In the United States, flood insurance is administered nationally by Federal Emergency Management Agency (FEMA). The program is not without controversy, and flood insurance can be quite expensive for those situated in low-lying areas. If you live in a floodplain, it’s a good idea to get an estimate before you start building a turbine. You don’t want your turbine to end up as a boat propeller.

Liability Insurance

Points to consider:

• Incidents are extremely rare, but it’s important to protect against damage to other people’s property and personal injury.

• Cost tends to be inexpensive, typically an additional $6 to $50 dollars annually for up to $1,000,000 coverage on your homeowner’s liability coverage.

• Your local utility may dictate level of liability.

Liability is definitely something worth thinking about when it comes to wind systems, even though accidents are rare and claims are exceedingly rare. Still, there is considerable risk, and Paul Gipe has cataloged at least 20 deaths that have occurred in the wind industry, including several with small home-based systems.

In July 2010, a three-year-old boy was killed in Ontario, Canada, after a pole fell off a small residential wind system that was under repair. According to the Toronto Sun, the boy had been playing beneath the 34-meter tower with other children, and their movement caused a holding strap to loosen. The boy became pinned by one pole and was struck by a second. He was immediately rushed to the hospital but reportedly died two hours later. A handful of small wind owners have also been killed by falls or collapsing equipment, and the utility-scale industry has seen electrocutions and amputations.

In order to protect a system, liability coverage needs to address two areas: property damage and personal injury or death. Possible accidents could include falls, falling objects, or electrocution.

Like insurance on the wind system itself, liability coverage is relatively inexpensive if associated with a homeowner’s policy. In many localities, the basic homeowner’s liability coverage is for $300,000. Increasing this coverage to $500,000 is typically only an additional $10 per year, according to Sagrillo. Spend up to $50 more a year for liability coverage of $1,000,000 or more.

If your system is connected to your local utility, accept the fact that liability insurance may be a requirement, and may have a specified level of coverage.²⁹

Companies Offering Insurance for Renewable Energy

Lexington Insurance (Program: Lexelite Eco-Homeowner bit.ly/insurelexelite (617) 330-1100

Fireman’s Fund Königinstr.28, 80802 München +49(0)8938004511 corporate.affairs@ allianz.de

Allstate Insurance P.O. Box 12055 1819 Electric Rd. S.W. Roanoke, VA 24018 1-800-ALLSTATE

Warranties

If your turbine shuts down due to an impact from a UFO, contact your insurance agent (and the news). If it locks up on a sunny, breezy day and never turns back on, you will need to contact the installer or the manufacturer and remind them of your warranty.

Many people choose to forgo extended warranty coverage, believing their property insurance will cover things like prematurely worn bearings, only to be surprised when that claim is denied. It is better to rely on your warranty as much as possible. Only involve your insurance company when absolutely necessary—filing an insurance claim may result in higher premiums down the line, or possibly even denial of coverage if it happens multiple times.

Most wind power systems and their controllers come standard with a one-, two-, or five-year warranty on workmanship and parts (Figure 6-14). Inverters for wind-electric systems normally have two-or five-year warranties. And the certified installer should offer at least a six-month warranty on installation. However, the expected lifetime of most turbines is 20 to 30 years, so some thought has to go into who is receiving your funds and faith to keep your dream alive.

FIGURE 6-14 Your wind system is a significant investment, so you want to make sure it is well protected. Stephen Wilcox/DOE/NREL.

In Riverhead, Long Island, Kevin saw one of his pioneering neighbors install the first 10 kW wind turbine on the island. Later, he watched it fail consistently. When the turbine manufacturer went out of business, the warranty was no longer honored. The installer had left the state, so each time there was a problem, he had to travel hours back to Riverhead to conduct repairs. Eventually, the cost of “extraditing” the repair crew became so burdensome that the owner decided to dismantle the turbine and reuse the copper cable elsewhere.

You may want to stick with the original equipment manufacturer (OEM), sign a deal with a third-party provider, or perhaps venture into managing operations and maintenance in-house. On any deal, the devil is in the details. Carefully consider the terms of the agreement and the guarantees provided. Don’t hesitate to ask questions.

The biggest drawback to manufacturer’s extended warranties is higher cost. They can run as much as 80 percent more than third-party services. Of course, since the original manufacturer has access to the complete history of their machines, you will enjoy a better integrated service package. Moreover, if you have high ambitions to expand to a fleet of turbines, you may benefit from discussing discounted longer-term relationships. Or you may simply get discounts on parts.

Another advantage of using an OEM is that some are adding monitoring capabilities, so they can stay abreast of issues before they happen. Finally, it’s sometimes of benefit in keeping lenders and insurers happy for you to consider OEMs.

In-House Management

“In-house” is another word for you or your company cutting the umbilical cord from the manufacturer and doing it yourself. Theoretically, it can save you thousands of dollars. But you should know what you’re getting into.

You need to really understand all the parts of your system. Question other owners about that specific model’s repair history, check out forums, and ask yourself if you are really ready to troubleshoot problems. Note that smaller turbines generally have fewer parts to fail and less maintenance. Larger turbines are generally sturdy, but upon opening up the nacelle, you might find an amusement park of contraptions that are not as familiar as your turbo diesel truck motor.

Note that if you received government incentives, the installers may be required to offer longer warranties. For example, in California, a ten-year warranty is mandatory, largely because the state wants to ensure that it gets a good return on its subsidies.³⁰

Third-Party Warranties

Your local certified installer may offer an extended warranty for an added annual or biannual cost—a package maintenance and fix-up agreement. Ensure it doesn’t overlap with what may be already included from the manufacturer.

You can also explore a third-party warranty. Coverage is often sold in blocks of five-year periods. Third-party warranties are often calculated on a maximum probable loss (MPL) basis. That means providers look at the weakest links of wind turbines, measure the probability of loss, and calculate the foreseeable costs.³¹ If something goes wrong, they will cover up to the limit of the policy.

Consider a five-year warranty for a 10 kW wind system:

In this example, the wind turbine owner would save an estimated $12,000 with a third-party warranty, reducing warranty costs by 80 percent. One possible drawback is that there is less of a guarantee that service provided through the third-party warranty will be of high quality, by properly trained technicians and with premium parts. Still, references from satisfied customers can give some insight into the type of long-term relationship you would be expecting.

On the surface, the choice between OEMs, third-party warranties, and self-maintenance may appear to be relatively simple, based on cost considerations. But before making this cost-critical decision, consider all the factors at play (Table 6-4). Remember to read all the details of any contract before you sign.

TABLE 6-4 Comparison of Warranty Options on a Small Wind Turbine

Resource

Power Guard Insurance
19000 MacArthur Blvd., Suite 575, Irvine, CA 92612-1447
Tel: 1.877.556.0090
Fax: 1.949.253.9665
Email: [email protected]

Financial Resource Checklist

To make sure you take advantage of all incentives that may be available to you, please consider calling your local authorities and electric utility. You could also start with an Internet search by typing: +wind+[name of financial incentive] +[your city, local, state, or federal government].

If you are in the United States, check out dsire.org, which has a long list of incentives by location. Outside of the United States, you can use Paul Gipe’s website windworks.org/articles/feed_laws.html, where there is an extensive listing of all countries and their incentive policies.

Handy Cost Calculators

Now that we have explained the financing behind small wind systems in some depth, let’s talk about simplifying your work. Most of the following tools are designed for utility-based projects, so don’t be alarmed by some of the costs that do not pertain to your project. But these calculators can help you get a sense for some of the variables involved.

Summary

A small wind system is a sizable investment, so it isn’t something you want to choose on a whim. Fortunately, a number of incentives are available that can help make it more affordable, from tax credits to rebates and grants. And once you have your system, you’ll want to make sure it is well protected with insurance and warranties.

When all is said and done, all the feasibility studies in the world can’t predict without a doubt if a wind system will be right for you. There’s always going to be some uncertainty and some risk. It’s not a bad idea to take everything you have learned to your accountant, who may be able to give you some additional advice to help you realize your dream.