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March 11th, 2009 12:00 am NIGEL JAQUISS | News Stories

A Mighty Wind

Oregonians want green energy at any price—and that’s what we’re getting.

JOLLY GREEN GIANTS: PGE generates 4 percent of its electricity from renewable sources, including Biglow Canyon.
IMAGE: Matt D’Annunzio

Adam Morse, a slender, 28-year-old New Mexico transplant, is in an enviable position. At a time when nearly 10 percent of Oregonians are unemployed, he recently scored a $54,000-a-year job.

In July, Portland General Electric hired him as a wind-turbine technician at the Biglow Canyon Wind Farm, near the Sherman County hamlet of Wasco.

The Biglow Canyon project, Morse says, “is the biggest thing to happen to Sherman County [population: 1,677] since the motorized tractor.”

Wind energy is one of the few bright spots in the otherwise dismal economy of Oregon, which has the nation’s fifth-highest home-foreclosure rate and is considering cutting days from what is already America’s shortest school year.

But the wind business is booming. When Biglow is complete in 2010, PGE will have invested nearly $1 billion in 217 gleaming white wind turbines spread across 25,000 wheat-stubbled acres the utility leases from grateful local farmers.

Or more correctly, PGE ratepayers—with a large hand from state and U.S. taxpayers—will have spent nearly $1 billion.

Local pundits and bloggers decry spending public money to renovate PGE Park for Major League Soccer, to erect a long-planned hotel adjacent to the Oregon Convention Center, or even to finance election campaigns for Portland city commissioners.

But less controversy surfaces about a far larger nose in the proverbial subsidy trough.

There are a variety of explanations for the lack of outcry about the subsidies for wind farms: The patchwork of tax support is complicated, and wind farms are tucked far away from the view of most Oregonians.

But perhaps most important, the idea of subsidizing renewable energy has the strong support of Gov. Ted Kulongoski, other political leaders and—if polls are correct—a large portion of Oregonians. It’s the reason why, in addition to Biglow Canyon and a handful of other large projects, Oregon will soon boast the world’s largest wind farm—Windy Flat, in Gilliam County. According to the American Wind Energy Association, Oregon is the seventh-leading producer of wind energy in the U.S.

In 2007, Oregon lawmakers mandated that 25 percent of the state’s electricity come from green sources by 2025. They effectively chose a windy future, because wind is by far the most cost-competitive form of renewable energy. Utilities must build or acquire green generation, legislators decreed, and ratepayers must foot the bill. Oregon’s is among the most aggressive state mandates anywhere in the country.

Given that wind and other renewable energy sources cannot yet compete with fossil fuels, such efforts require subsidies.

“We’ve tried to level the playing field with incentives to reduce the cost and then also increase demand,” says Rachel Shimshak of Renewable Northwest Project, a Portland green energy advocacy group.

Today, the largest of the local incentives—the business energy tax credit—is the subject of furious debate in the Legislature. Supporters say the credit is a runaway success that has pushed Oregon to the head of the pack on renewable energy and generated thousands of “green-collar” jobs; critics say the policy is out of control.

Last year, for example, wind farms collected more than $150 million in state income tax breaks. At a time when the Legislature is considering slashing school days, that sum is enough to pay the salaries and benefits of 1,500 veteran teachers for an entire year.

“The trajectory of this credit is zooming out of the stratosphere,” state Sen. Ginny Burdick (D-Portland) said at a recent legislative hearing on the business energy tax credit program.

Is the development of wind worth the public investment? To make that judgment, it’s best to look first at the variety of ways in which taxpayers subsidize the move to wind energy and then assess how much money that means for Biglow Canyon, the largest Oregon wind project built by a local utility.

subsidies, both direct and indirect, have long played a crucial role in energy development.

Oil, natural gas and mining companies enjoy a variety of tax benefits, cheap access to federal lands, and limited responsibility for the pollution they create.

As a consequence, many Oregonians and most members of the environmental community say that in order for Oregon to shift to green energy, subsidies are necessary to wean consumers from their fossil fuel addiction.

“We need to fundamentally change our energy policy away from fossil fuels, which are destroying the earth,” says Bob Jenks, director of the Citizens’ Utility Board. “You can price carbon to include the real cost of fossil fuels through cap and trade, or you can subsidize the alternatives.”

Oregon regulators say they are keeping a close eye on utilities to make sure the various layers of incentives do not create windfall profits.

“There’s no evidence of that so far,” says the PUC’s Deborah Garcia.

PGE’s Piro says it might be simpler, now that renewables are mandated, to require ratepayers to bear all costs and remove all subsidies. But he points out that the massive upfront capital costs of wind farms would cause “rate shock.”

“Tax credits reduce the upfront costs and spread them out over time,” he says.

Still, critics say there are plenty of ways current subsidies could be made more effective.

On Feb. 19, lawmakers held a hearing on a bill that would rein in business energy tax credits. Kevin Owens, general manager of the Columbia River Public Utility District in St. Helens, criticized BETCs and noted that some wind farms that receive the credits sell all of their output to utilities in Idaho and California.

“As much as 75 percent of the energy produced under BETC is being sent out of state on 10- to 20-year contracts,” Owens says. “This business model [for the BETCs] is seriously flawed.”

The larger concern, however, is that the 2007 law mandating renewables gave little direction for how such credits should be prioritized or limited.

In the current budget crunch, lawmakers are weighing conflicting goals of funding state services and encouraging more Biglow Canyons.

“The question is, can we get all or nearly all of the renewable energy development we’re getting, with less tax money?” says Rep. Phil Barnhart (D-Eugene), chairman of the House Revenue Committee. “Because all those tax dollars [that subsidize renewables] come out of schools, health care and public safety.”

Federal Tax Breaks

Production Tax Credits
While Oregon has its own unique incentives, the federal government provides the biggest carrot for green energy producers. The most important is the production tax credit, without which wind farms would be built about as quickly as nuclear power plants. For every kilowatt of electricity a wind farm produces, its owner receives 2.1 cents worth of tax credits from the federal government. The reason is simple: Wind energy costs more than energy produced from burning fossil fuel.

PGE CEO Jim Piro says wind can be 20 percent to 50 percent more expensive than natural gas-fired generation, depending on market fluctuations.

The federal subsidy helps close that gap. Congress first authorized production tax credits in 1992, but the credits have expired three times since 2000. In each case, according to the American Wind Energy Association, development of wind farms plummeted more than 70 percent the following year. Last November, after months of false starts, Congress reauthorized the credit for three more years.

Piro says the recently approved federal stimulus package offers PGE the opportunity to claim its subsidy as a cash grant rather than tax credits.

“We may get $60 million to $80 million for the second phase of Biglow,” Piro says.

Value of the federal production tax credit for Biglow Canyon: At its full capacity of 450 megawatts, Biglow Canyon will produce about 1.3 billion kilowatts of electricity annually. Each kilowatt earns PGE a credit of 2.1 cents per kilowatt, or $27 million annually.

Accelerated Depreciation
When PGE built its new natural gas-powered generation plant in Columbia County, the utility could depreciate, or write down the value of that real estate, over 20 years, says Jim Lobdell, PGE’s vice president of power operations. Put simply, PGE can reduce the taxable value of its property by about 5 percent each year. That reduction in value provides a tax benefit. In order to encourage wind farm development, the feds allow developers to depreciate wind turbines much faster—in just five years. So even though the turbines are supposed to function for 30 to 40 years, PGE can write off its investment in five. “Five years is really aggressive,” says Randy Falkenberg, the Georgia-based utility consultant who testifies in utility rate proceedings around the country, including in Oregon.

Value of accelerated depreciation on Biglow Canyon’s $866 million investment: John Settle, an associate professor of accounting at Portland State University, says the accelerated depreciation on a $1 billion wind farm is worth about $70 million more in the first year than depreciation on $1 billion natural gas plant.

Renewable Energy Credits
For each megawatt hour of energy Biglow produces, PGE earns a renewable energy certificate. PGE can sell those so-called “green tags” to companies that want to reduce their carbon footprint, or it can “bank” them in order to comply with the 2007 Oregon law requiring utilities to ramp up their production of renewable energy. (The first milestone is 5 percent by 2011.) The current wholesale market value for a “green tag” is between $4 and $10 per megawatt.

Value of green credits at current market value when Biglow Canyon reaches full production next year: Biglow will produce 1.3 million megawatts; at the mean value of the current market, $6 per tag, the tags are worth $7.8 million annually.

Oregon Tax Breaks

Business Energy Tax Credit
While federal incentives have fueled a national effort to build more wind turbines, Oregon is among the most aggressive in the nation when it comes to providing state incentives.

The richest subsidy Oregon offers is the business energy tax credit program, which allows builders of renewable energy plants to recoup up to $11 million in income tax credits—which are essentially cash—for each project.

Tax credits can be used to offset state tax liabilities; they can also be sold to other companies seeking to reduce their tax burden (although PGE’s Piro says doing so is far less efficient than keeping them). Previously, the maximum credit from BETC was $3.5 million, but in 2007 lawmakers tripled that amount. BETCs have proven far more popular than expected: Last year the state handed out nearly $200 million worth, more than four times the projected amount.

Value of business energy tax credits to Biglow Canyon after completion of its third phase: A one-time bonus of $33 million, which comes from three separate BETCs of $11 million each. (Each phase is treated as a separate project, which riles critics.)

Local Tax Breaks

Strategic Investment Program
Wind farms not only enjoy income tax credits and a subsidy for the energy they create, but some now get hefty property tax breaks as well by virtue of being located in rural areas. In 2007, lawmakers sweetened a county-level property tax break called the “Strategic Investment Program.” Now, wind farm developers such as PGE pay property taxes on only the first $25 million in assessed value of their property. It would be as if your house was valued at $1 million, but you only had to pay property taxes on the first $25,000.

Such property tax breaks are more generous than similar tax breaks targeted at employers in urban or suburban areas. In Washington County, for instance, SIP property tax breaks awarded to Intel kick in only after the chipmaker has paid taxes on the first $100 million in assessed value.

The program is not a total freebie, however. In addition to paying some property taxes, PGE must pay a “community service fee” of up to $7.5 million over the life of the credit. One such payment helps fund a popular program for wind farm technicians at Columbia Gorge Community College in The Dalles, where PGE’s Morse got his training.

Value of the Strategic Investment Program tax break for Biglow Canyon: $30 million over 15 years, according to the Oregon Economic and Community Development Commission.

Grant from the Energy Trust of Oregon
In 1999, lawmakers ordered utilities to set aside 3 percent of revenues to the Energy Trust of Oregon. That money—$64 million last year—is used to help Oregonians consume less electricity, to subsidize indigent customers and to promote alternative energy. In 2007, the trust gave $6 million to Biglow Canyon, its single biggest grant. But with the passage of 2007’s renewable energy mandate, the trust decided to stop funding large projects and instead focus on far smaller community-scale renewable projects. “With a mandate that allows the utilities to put renewables into rates, [the utilities] shouldn’t need our money anymore,” says the Energy Trust’s Peter West.

Value of the Energy Trust grant to Biglow Canyon: $6 million in 2007.

Windy Job Prospects

It’s easy to make the argument that subsidizing green energy helps to build an industry that will wean Oregonians from coal, which provides about 40 percent of the state’s electricity.

It’s a more difficult argument to suggest that wind farm investments meet the second claim proponents make: that green energy is an economic development engine that provides lots of new jobs.

There is a big difference between wind farms and the other green energy industry that’s won big tax breaks: solar-panel manufacturers.

Consider Solarworld’s new plant in Hillsboro, for instance. That facility is receiving many of the same tax incentives as Biglow Canyon, and Solarworld projects it will generate 1,000 manufacturing jobs by 2011.

But wind farms are a different story. Biglow Canyon has provided about 150 construction jobs but, so far, employs just five permanent PGE workers. (A team of 14 contract workers also maintains the turbines.) While the wind farms create lots of jobs in the construction phase, they simply don’t require many workers to run.

Permanent employees, such as PGE’s Adam Morse, spend most of their time sitting in control rooms monitoring computer screens that show how each turbine is performing. If there’s a problem, a worker may have to climb the 260-foot turbine towers (no elevators) to check on machinery.

An Oregon Economic and Community Development Department report, for instance, highlights tax breaks that helped build six wind projects that generated about $3 billion in investment—but they will create only 75 permanent jobs, including 30 at Biglow Canyon when all phases are complete.

Dick Stradley, the tax assessor in Sherman County, where Biglow Canyon is located, welcomes the new investment but says it raises two big issues: equity and tax policy.

Stradley says he isn’t sure wind farms deserve huge tax breaks when other employers don’t get them, and he also worries that affluent urbanites are driving expensive policies at a time when public budgets statewide are shrinking.

A windmill at Biglow Canyon (a turbine plus tower) weighs 246 tons. The blades spin in a circle 269 feet in diameter up to 14.4 rotations per minute. Blade-tip speeds can reach 130 mph.

The first phase of Biglow Canyon, in operation now, has an installed capacity of 125 megawatts, enough to power about 34,000 homes.

Tax credits are transferable, which makes them just like cash. If the company that generates the credits does not need them, it may sell them to another company that has a tax liability.

Texas is by far the leading wind energy producer in the U.S., according to the American Wind Energy Association. As of Oct. 1, 2008, Texas had 6,297 megawatts of installed capacity, about seven times Oregon’s capacity.

PGE leads the nation in kilowatt-hours of green power sold to residential customers, according to federal figures.

In December, Gov. Ted Kulongoski and Portland Mayor Sam Adams scraped together nearly $30 million to tempt Vestas, the world’s largest wind turbine manufacturer, to locate its North American headquarters in Portland.

In 2007, the Legislature passed one of the most ambitious renewable energy mandates in the country. Senate Bill 838 requires large Oregon utilities to generate 25 percent of their sales here from renewable sources by 2025. The law also allows the utilities to pass those costs along to customers as soon as the plants are built, which is not true of conventional gas- or coal-fired generation.

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