Subsidies to a Wind Farm in Nantucket Sound

In November 2001, Cape Wind Associates, filed an application with the U.S. Army Corps of Engineers for permission to construct the nation’s first offshore wind farm in Nantucket Sound. The project would consist of 130 wind turbines, each approximately 420 feet tall, arrayed over a 24 square mile area of the Sound known as Horseshoe Shoals. The wind farm would be sited five miles off the coast, in federal Outer Continental Shelf (OCS) waters. From there, undersea cables would transmit power through state waters to an onshore distribution grid. The project, according to Cape Wind, would have an installed nameplate capacity of approximately 468 megawatts (MW) of electricity.
Our estimates show that Cape Wind would receive revenue equivalent to 13.26 cents per kWh of electricity produced, gross of taxes; the present value of this revenue (in 2008, when serious construction would begin, but using 2006 prices for current comparability with other projects) is $1,527 million, which is more than adequate to cover the financial cost of building and operating the wind farm. The developer can expect to net $139 million – equivalent to a 25% return on equity – although this figure is subject to considerable uncertainty because the project faces a number of significant risks.

The project would only be privately profitable because of the subsidies it can expect to receive. It would receive a “gross subsidy” (subsidy before taxes) of $731 million (in present value terms in 2008, using the prices of 2006), consisting of (i) the Federal Production Tax Credit, which would contribute $180 million to revenue in present value terms; (ii) the sales of Massachusetts “green credits”, worth a total of $487 million in present value terms; and (iii) accelerated depreciation of investment costs, which would allow the firm to defer payment of Federal income tax, worth $65 million. The project would pay taxes, which can be offset against the gross subsidy to arrive at the “net subsidy.”

The taxes amount to $151 million in present value terms. They consist of:

(i) Massachusetts corporate income tax of $20 million;
(ii) Federal corporate income tax of $131 million (computed on the assumption of no favorable
treatment of depreciation); and
(iii) Local property tax of less than $1 million.

Bh Ion Pub Subsidiesfor Cape Wind

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MAY 1 2006
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