Bethany Preservation Group

To begin with, I would like to make it clear that I am neither a lawyer nor an accountant, merely a concerned homeowner. But I have been looking into the financial operations of commercial wind farms and have learned several things that I would like to share with the community. Wind developers quickly see handsome profits, while many communities and property owners see little or nothing in the way of tax revenue, due to state and federal income tax shelters which are provided to the industry.

In particular, developers can recover their capital investment very quickly, because wind energy facilities are eligible for “five-year double declining balance accelerated depreciation” for federal income tax purposes[1]. In an example $500,000,000 wind farm (the approximate cost of a 480kWh farm), UPC Wind Partners can recover the entire investment through depreciation charges to offset income tax liability in just six years[2].

In order to benefit from tax shelters, the wind developer must have income. For this reason, many wind farm developments consist of two or more small companies. One company will develop the wind farm and then sell it to the partner company, using the income for depreciation and presenting an entirely different company for the community to deal with[3].

Due to these unique tax situations for wind farms, there is a great incentive for wind farm owners to abandon these projects once the five to six year term of tax credits have dried up, forsaking their projections and promises of twenty- to thirty-year life expectancies for the project.

I have located a number of suggestions made by and for communities to zone in accordance with these realities.

1. First, it is recommended that towns do not attempt to override state tax shelters for wind farms, as they will have limited "on the books" income. Instead, many municipalities are negotiating fixed annual payments to the community in lieu of taxes. The Wethersfield Project, a much smaller farm, negotiated annual payments of just over $30,000 to the community, school board and other local agencies, funding which has been used to improve roads and improve the quality of life in the community. The Fenner Project is based on MW produced and may (or may not!) add up to as much as $150,000 annually[4].
   
2. With respect to the lifespan of the project, it is recommended that zoning include consideration for the not-insignificant cost of dismantling of these machines when their useful life has ended. As they will be depreciated to little or no value and subsidies will likely have dried up, there is little incentive for wind farm developers to "do the right thing" and dismantle them properly[5]. Some municipalities are requiring a bond be posted prior to construction, the purpose of which is to ensure proper removal[6].
   
3. Also in relation to the lifespan of the project, it is recommended that any "annual" payments, whether made to individual property owners or community agents, be made contracted for a specified number of years and placed in escrow. This prevents the developer from abandoning their financial responsibilities along with the project when the tax credits dry up.
   
4. With respect to the depreciated value of the structures over time, it is recommended that insurance covering full replacement value (not actual cash value) be required for the wind turbine during its entire production cycle. Should the structure be damaged after depreciation, any insurance policy which does not cover full replacement cost will likely leave the town and residents with an eyesore.
   
5. Finally, with respect to the expected sale of the farm to an affiliate company, it is strongly recommended that contracts are worded so that any financial and community burdens of the parent company (original developer) are passed unchanged to any and all subsequent owners of the wind farm.

References

1 Title 26, Section 168 of the Internal Revenue Code contains a Modified Accelerated Cost Recovery System (MACRS) by which businesses can recover investments in solar, wind, and geothermal property through depreciation deductions. The MACRS establishes a set of class lives for various types of property, ranging from three to 50 years, over which the property may be depreciated. For solar, wind, and geothermal property placed in service after 1986, the current MACRS property class is five years. See IRS Form 946: How to Depreciate Property and Form 4562: Depreciation and Amortization and Instructions for Form 4562, and Internal Revenue Code Title 26, Section 168 (e)(3)(B)(vi).

2 Depreciation table for sample $500,000,000 wind farm:
Year % of Investment Recovered Amount Recovered
First 20% $100,000,000
Second 32% $160,000,000
Third 19.2% $ 96,000,000
Fourth 11.52% $ 57,600,000
Fifth 11.52% $ 57,600,000
Sixth 5.76% $ 28,800,000
Total 100% $500,000,000

3 Here is an example of a wind "developer" selling off to a wind "owner" with whom it has clearly already been working: http://www.amec.com/news/mediareleasedetails.asp?Pageid=876&MediaID=844 Here is another http://www.enel.it/northamerica/powerPlantsDett.asp?reg=ne&sm=4 I was unable to find other specific examples, but many instances of second-hand information that this is commonly the case (which does make financial sense).

4 http://www.powernaturally.org/publications/largewindpresentation.pdf and other sources place the payments at $5,000/MW produced.

5 This self-guided hike describes dozens of derelict wind turbines which zoning officials did not require to be removed and their effect upon the landscape. http://www.wind-works.org/articles/TehachapiTourGuide.html

6 Wording from http://egov.oregon.gov/ENERGY/SITING/docs/SWPa3Req.pdf, Zoning for the Stateline Wind Project in Oregon: "The applicant (facility owner/operator) shall submit to Umatilla County a bond or letter of credit acceptable to the County, in the amount of the decommissioning fund naming Umatilla County and the landowner as beneficiary or payee."

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