Other Economic Factors

The simple payback method does not account for all the actual costs and savings associated with a wind turbine investment over its operating lifetime. Additional costs and savings might include the following:

  • increases in energy costs relative to general inflation
  • interest paid on borrowed money
  • insurance
  • utility buy-back
  • state and federal tax benefits
  • wind turbine resale value

To an extent, these items can offset one another, depending on your particular circumstance. To determine the impact of one or more of the above factors on your investment, it is necessary to perform a life-cycle cost analysis. This comprehensive method calculates the wind system value by considering all the costs and savings on a yearly basis throughout a wind turbine’s lifetime, and discounting them back to a present value. For most applications, the payback year estimated by this method will be fairly close to that estimated by the “simple” method. Because this approach is fairly complicated, it is not detailed here. Instead, you can refer to an economics reference source. The cost and savings items mentioned are discussed below.

Energy-Cost Increases
Although a wind turbine’s energy savings may average out to be relatively constant from year to year, the value of that savings may actually increase annually. During the last 20 years, energy costs have risen more rapidly than the general inflation rate. For instance, if electric utility rates increase at 6% per year versus a 3.5% general inflation rate, the real increase in energy cost is 2.5%. As long as this trend continues, the cost savings from a reduced energy load will rise each year. This shortens the payback period on your investment. The extent of future energy cost increases will depend upon many factors, including fuel availability, government policies, international activities and consumer demand.

Cost of Borrowing Money
It is likely that part of the initial purchase price of a wind system will be paid in cash and the remainder in borrowed money. Lending institutions base their interest charges upon a number of factors, including the amount of risk involved in a particular loan and current economic conditions.

You should contact several lending institutions to determine the interest rates and term (number of years to repay a loan) available to you for a particular wind machine. Usually a fixed monthly payment is arranged, consisting of two parts: repayment of a portion of the principal amount borrowed, and interest charges on the remaining principal. The principal repayments are part of the initial costs of the wind turbine and the interest charges are an annual expense that reduces the energy-cost savings.

IEC’s Alternate Energy Revolving Loan Program
The IEC offers a revolving loan program called the . The program is designed to encourage the development of alternate energy production facilities within Iowa. The AERLP was created by the Iowa state legislature in 1996 as an amendment to the 1990 Iowa Energy Efficiency Act and it is funded by Iowa’s investor owned utilities.

The AERLP provides loans for the development of alternate energy facilities. Loan applicants work through a lending institution of their choice. Successful applicants will receive a single, low-interest loan from a combination of IEC and lender funds. The IEC provides loans for 50% of the project’s cost or up to $250,000. The IEC portion of the loan is provided at 0% interest for up to 20 years. The remainder of the loan is provided by the lending institution at a negotiated rate. The lender manages the entire loan and arranges repayment to the IEC.

The lending institutions are responsible for financially qualifying the borrower, while the IEC assists in technically qualifying the borrower. By using the expertise of commercial lending institutions, the IEC is able to cost-effectively process the loans in a timely manner and maximize the impact of the loan program.

The AERLP is open to all individuals and groups who want to build alternate energy facilities in Iowa. An exception to this is non rate-regulated utilities. AERLP loans are also not available for refinancing an existing loan. To provide a balanced mix of projects, the IEC awards a percentage of funds for various types of alternative energy technologies. Portions of the reserve funds are allocated for specific technology systems as follows:

To be considered for a loan, applicants must complete a technical loan application. The technical application provides information to help determine the project’s potential for success. The technical application then receives a ranking and loans are provided to the highest ranked projects first, until all the funds for that lending period are gone. Detailed technical application guidelines are available by contacting the IEC.

The IEC has approximately $5.9 million total funds available for the program. Deadlines for technical applications are October 31, January 31, April 30 and July 31 for the duration of the program.

Insurance Expenses
For the same reasons you protect a car and home investment with insurance, a wind system should be similarly covered. Insurance coverage should apply to the system itself as well as to any potential machine-related accidents. Policies and premiums for insurance vary by insurance company. Coverage may be included under an existing homeowner’s or general liability policy at little or no added cost, or a separate policy may be required.

Utility Buy-Back Rates
In the previous payback examples, it was assumed that all the electricity produced by the wind machine was used by the owner. However, there may be occasions when more energy is generated than is needed at a particular time. An on-site storage system would save the power for use at a later time or at a different location. The use of the local utility company electric lines for sales of surplus electricity, as well as a back-up supply, is another option in Iowa.

Utilities are required to buy electricity that is fed into their power lines. In Iowa the buy–back rate for this electricity varies by utility, but in most cases it is about 1.5 cents per kWh. Iowa has a buy-back rate that may be negotiable, and people have negotiated a wide range of rates. In any case, this rate is considerably less than the retail rate at which you buy electricity. This means that a wind turbine’s output has far more value when used directly by the owner. Therefore, a wind turbine’s payback period is affected by the buy-back rates if excess electricity is sold to the utility. Assume that 1,000 kWh from the residential system example cannot be used when produced and is supplied to the utility at 3 cents per kWh. The wind system owner would receive a $30 credit on his or her electric bill. If the owner later purchases 1,000 kWh at the retail rate of 10 cents per kWh, it costs $100. The owner, therefore, has lost $70 in an even energy exchange.

When buy-back rates are lower than the retail price of a kWh of purchased electricity, a wind machine should be sized to minimize the amount of energy sold to the utility. In the rare instances where buy-back rates are equal to or higher than the consumer’s purchase price, this constraint does not apply.

It is important for commercial customers to realize that their rate structure may change dramatically if their utility usage decreases.

Resale Value
The resale value of a wind turbine refers to the potential salvage at the end of its useful life. Future resale value will depend on many factors, including the extent of changes in the design of new systems and upon the attractiveness of wind machines relative to other alternative energy technologies.

The salvage value of the wind energy system increases the ultimate rate of return on the investment. A moderate estimate for salvage value might be a selling price after 20 years that is worth 10% of its cost at today’s dollar value. For example, if we assume a 5% annual inflation rate, today’s $15,000 machine might sell for about $4,000 in 20 years. This salvage value equal to $1,500 at today’s prices.