1. Federal Production Tax Credit for electricity from wind (PTC). First, BP and Shell would each receive the federal wind PTC, currently $0.02 per kilowatt-hour (kWh) for electricity produced during the 1st 10 years of operation. Congress is expected to extend this tax shelter beyond its current December 31, 2008, expiration date. By itself, this tax credit would reduce each company's federal income tax liability over 10 years by $526,100,000, [vii] effectively shifting that amount of tax burden to taxpayers who don't enjoy such tax shelters.
2. Accelerated Depreciation. Second, each oil company's (i.e., BP and Shell) $2 billion [viii] in "wind farm" capital investments would qualify for the exceedingly generous 5-year, double declining balance accelerated depreciation for federal income tax purposes. [ix] Assuming that $2 billion is the full cost of each company's "wind farms" in 2009, the following amounts could be deducted from each company's otherwise taxable income and further reduce each company's federal income tax liability; specifically:
Deduction from taxable income Further reduction in federal income
tax liability (in addition to PTC)
Tax Year % of Capital investment Amount
1st 20% $400,000,000 $140,000,000
2nd 32% $640,000,000 $224,000,000
3rd 19.2% $384,000,000 $134,400,000
4th 11.52% $230,400,000 $ 80,640,000
5th 11.52% $230,400,000 $ 80,640,000
6th 5.76% $115,200,000 $ 40,320,000
Totals 100% $2,000,000,000 $700,000,000
Note that these deductions from otherwise taxable income and from federal income tax liability could be taken regardless of whether the "wind farm" investment is financed with debt or equity. [x] So, if each company were to put up only $1 billion of equity and finance the other $1 billion with borrowing (to hold down the cost of their capital investment), the deductions from income and reduced tax liability would still be based on the full $2 billion shown in the table above.
Note also that, in addition to the further reduction in tax liability, this generous accelerated depreciation deduction for federal income tax purposes has two other huge benefits; specifically:
a. Prompt recovery of each company's equity investment. The example above, conservatively assumes that the entire "wind farm" capital investment would be equity, rather than debt. If the equity investment was only half the capital cost and the remainder borrowed, (i.e., $1 billion), the table above shows that BP and Shell would each recover through depreciation deductions all of its equity investment in less than 2 years and in just over 1 year if the project(s) begin operation late in the first tax year. With no remaining equity investment, each company's return on equity would be infinite.
b. A large interest free loan. The depreciation deduction continues even though all equity has been recovered. Thus, each company would, in effect, be receiving an interest free loan, courtesy of US taxpayers for an amount equal to the debt financing.
In the unlike case that either company was unable to use all the tax deductions in 2009, part of the allowable deduction could be deferred or, alternatively, schemes are available to "sell" tax credits to other firms that have tax liabilities that they wish to avoid.
3. Avoiding State Corporate Taxes. Tax breaks for "wind farms" are not limited to those provided by the federal government. Most states also allow a corporation to take advantage of 5-year double declining balance accelerated depreciation deductions from otherwise taxable corporate income. Therefore, each company could be able to take deductions like those shown above when calculating their state corporate tax liability. Assuming a 6.5% state corporate tax rate, each company's $2 billion "wind farm" capital investment would permit the following deductions from state level taxable income and reductions in each oil company's tax liability:
Deduction from taxable income Reduction in State Corporate
tax liability (assuming 6.5% rate)
Tax Year % of Capital investment Amount
1st 20% $400,000,000 $ 26,000,000
2nd 32% $640,000,000 $ 41,600,000
3rd 19.2% $384,000,000 $ 24,960,000
4th 11.52% $230,400,000 $ 14,976,000
5th 11.52% $230,400,000 $ 14,976,000
6th 5.76% $115,200,000 $ 7,488,000
Totals 100% $2,000,000,000 $130,000,000
4. State Production Tax Credits or Subsidies for "Wind Farm" Owners. Several states have adopted their own "production tax credits," and other states provide a direct subsidy. If BP or Shell were to build their "wind farms" in states with such subsidies they would enjoy still another tax break or income stream. State programs vary widely. If the tax break or subsidy were worth $15 per megawatt-hour (MWh) of electricity produced — which is equal to $0.015 cents per kWh, the tax break or subsidy would be $39,420,000 per year and $394,420,000 over 10 years. [xi]
5. State Renewable Portfolio Standard (RPS). In addition to the above tax breaks and subsidies, several states have virtually assured big profits for "wind farm" owners by requiring that a growing percentage of the electricity sold in their state must come from "renewable" energy, which, in most states is now expected to be mostly from wind. By dictating that a large portion of electricity must be produced from "renewable" energy, owners of facilities that produce electricity from wind and other "renewables" are likely to be able to demand higher prices for their electricity than would be paid under normal market conditions. The higher costs of electricity from renewables that electric distribution companies are forced to pay are passed along to electric customers in their monthly bills.
6. Other Tax Breaks and Subsidies. "Wind Farms" enjoy a variety of other federal and state financial, market and regulatory subsidies. For example, in some states, "wind farms" are eligible for exemption from all or a part of their property taxes or sales taxes on wind farm equipment. In some regions "wind farm" owners receive a variety of regulatory subsidies; e.g., being awarded an artificially high "capacity credit" by an Independent System Operator (ISO), or being excused from penalties for not delivering electricity to an electric grid at the time called for in contracts. In some states (e.g., Texas), state utility commissions are counting on the construction of transmission lines to serve "wind farms" that will cost billions of dollars, with the costs passed along to electric customers in their monthly bills.