How Taxes Pervert our Energy Choices

In 2009 Nuclear engineer Joseph Somsel examined some of the US tax code provisions which favor building wind rather than nuclear power. This was originally published in American Thinker.

(…snip…) the current code allows what’s called accelerated depreciation so that they can recover the capital costs earlier in the asset’s life rather than later.  Like cash and lottery payouts, a tax deduction today is worth more than one 20 years from now so we can see how Congress views competing electrical generation sources by how quickly they allow the write-offs to occur.

For wind farms, the current code allows the write-offs over 3.5 years, a real boon for investors in wind mill projects. In fact, many such projects depend on this tax advantage to secure financing, especially since the right to take these deductions can be allocated with some freedom amongst the project’s investors and the developers.

Alas, for nuclear power plants, the tax picture is not so rosy.  They have to take their write-offs over 20.5 years, a significant disadvantage over a comparable investment in a wind project.  Taking a hypothetical $5 billion in generation investment in each technology, here’s a chart showing when those deductions could be taken and for how much:

Depreciationfavorswind

From this chart, it is easy to see that the investors in a wind project get to write-off a LOT more money a LOT sooner than the investors in a nuclear plant.  This is greatly to the advantage of the wind developers.  At a 35% corporate tax rate, the difference in Year 2 alone is over $650 million in bottom line after-tax profits to the wind investors – that’s cash money that can cut dividend checks.  Maybe now you can see why T. Boone Pickens is pushing wind farms.

Let’s take the figures from Department of Energy’s Energy Information Agency for capital costs and productive experience (“capacity factor”) to see exactly what this means in terms of electrical production.  Let’s assume an equal “overnight” investment of $5 billion in wind mills and $5 billion in nuclear power plants.  That will buy you about 1.5 gigawatts of nuclear capacity and 2.6 gigawatts of wind farm capacity.  However, that’s only the equipment’s theoretical ability to make electricity and not how much electricity it likely will supply per year once in service.  For that we need to multiply our capacity by something called “capacity factor” which is what it really delivers.  Again, using EIA’s numbers on what really happens out in the real world in terms of expected production:

Nuclear2xwindsameinvestment

So that $5 billion will produce over TWICE the annual electrical output for American consumers if invested in nuclear power plants than if in wind farms.  One has to ask, do these provisions in the tax code really serve Americans’ interests or are they written with someone else in mind?  Yet, Congress wants 20% of our electricity to come from “renewables” like wind.  The California legislature, to prove its green bona fides, recently passed a law to make California electric consumers buy 33% of their electricity from renewables.  All I can say is, “Thanks guys!”

(…snip…)

So, in comparing the tax treatment of wind against that of nuclear power, one could get the idea that Congress is rewarding the inefficient while hobbling the productive.  I’d call that perversion and poor public policy.