Residential Wind Potentials in Arizona: A Report for Arizona Public Service
Dean Howard Smith*
Northern Arizona University
Box 15066
Flagstaff, Arizona 86011-5066 USA
Keywords: Wind turbine investment, residential wind turbines, APS wind program
*
The author is Professor of Economics and Applied Indigenous Studies at Northern Arizona University. Professor
Smith is the Director of the Business and Policy Programs in the Sustainable Energy Solutions at NAU. This project
was completed with partial funding from Sustainable Energy Solutions and APS. Earlier versions of this paper were
completed with David Allen, Chelsea Ann Atwater, Crystal Ballentine, Kayla Priest, Nicholas Ratliff and Gary
Tallman. Sean Seitz, President of American Solar Electric provided invaluable background on the system designs.
Heath Symonds of State Mortgage provided insight for the interest rate assumptions. Janene and William Scharf
allowed us to use their actual wind installation as a demonstration site. Special thanks go to my many colleagues in
the W.A. Franke College of Business for allowing me to pester them with questions. Thanks always go to Tom
Acker and Robert ‘Bud’ Annan.
1
Residential Wind Potentials in Ari`zona: A Report for Arizona Public Service
Introduction
The Emergency Economic Stabilization Act of 2008 (Public Law 110-343, section 103,
and as amended ) was essentially designed to remedy the financial crisis, yet the bill included an
extension of the individual tax credit for installing residential wind systems. The American
Recovery and Reinvestment Act of 2009 clarified and marginally improved the 2008 provisions.
However, the IRS evaluates the rebate from APS as taxable income, so the benefits from the new
policy are seriously impacted toward the negative. In this report we evaluate the APS program
for residential wind turbines from an investment perspective.
The federal, state and APS programs are explained. The necessary assumptions
concerning wind production and installation costs are presented. The financial calculations are
presented and then a brief series of sensitivity analyses are presented. Since the financial
calculations are overwhelmingly to the negative, this report is purposely short.
Federal Policy
The new federal legislation also includes an important component for the current
discussion. Beginning in 2009, residential wind systems are eligible for a 30% tax credit. Unlike
the 2005 Energy Bill, there is no maximum credit. The eligible cost for the federal tax credit
includes installation costs. However, section 136 of the IRS code for Energy Conservation
subsidies provided by public utilities stipulates that, pursuant to the Public Utility Regulatory
Policy Act of 1978, the rebate from the public utility is considered as gross income.1
State Policy
1
Internal Revenue Code: Sec. 136. Energy conservation subsidies provided by public utilities,
http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._136._Energy_conservation_subsidies_provided
_by_public_utilities, accessed March 3, 2010.
2
The State of Arizona has a tax credit on the purchase of such a system. This allows for a
tax credit of 25% of the installation price to a maximum of a $1,000 credit. The homeowner will
receive the full $1,000 tax credit to be applied during the tax year when the system goes into
service. If the total tax due for the year is less than the credit, the balance may be carried forward
to the next year.
APS Rebate Policy
The State of Arizona has an ongoing Environmental Portfolio Standard (EPS), which
requires the electricity providers, APS in the scenario, to have a certain percentage of the
electricity sold produced by renewable energy means. At this writing the EPS has a 2.5%
requirement for 2010 and it will increase to 15% in 2025. In an effort to meet the EPS, APS
offers an EPS Credit Purchase Program. Under this program APS will reimburse the homeowner
$2.50 a watt up to a maximum of 50% of the installed costs if the house is grid-connected. Under
the agreement APS is “purchasing” the right to claim the electricity produced by the turbine as
an addition to the amount of renewable energy produced to meet the EPS requirement. As is
explained below, the homeowner owns the electricity. APS is simply purchasing the ability to
“count” it; whereas, the homeowner still owns the turbine itself.
Cost Estimate
The calculations contained herein are based on an system that has been installed in
Flagstaff. The model is a SkyStream 3.7 from a local manufacturer Southwest Wind Power.
3
The peak rated capacity is 2.4 kW. The cut in wind speed is 8 mph (3.5 m/s). The rated wind
speed is 29 mph (13 m/s).2 The installed cost of the system was $17,760.3
Wind and Production Estimates
The estimated wind speeds and production estimates are vitally important for the
financial analysis of any installation and should be made as precisely as possible prior to any
actual investment. For the purposes of this report the following methodology was utilized.
The estimated wind speeds were found using the 3Tier website. This company provides
estimates for minimum and maximum wind speeds based on the Zip Code.4 From these data, an
average was determined. The estimates, meters per second (m/s) are shown in Table 1 for
selected cities in Arizona. The 20 meter estimates are likely to be high since most residential
units are placed at heights less than 60 feet.
Zip
Code
City
85001 Phoenix
average
high
wind
wind
wind
2
2.5
3
2.9
3.7
4.4
3
3.6
4.1
85635 Sierra Vista
2.9
3.6
4.2
85719 Tucson
2.5
3.1
3.6
85938 Springerville
3.1
3.8
4.4
85358 Wickenburg
85364 Yuma
2
low
Southwest Windpower, 2.4 KW RESIDENTIAL POWER APPLIANCE,
http://www.windenergy.com/documents/spec_sheets/3-CMLT-1338-01_Skystream_spec.pdf, accessed March 3,
2010.
3
Personal communication with William Scharf.
4
http://www.3tier.com/firstlook/, accessed March 3, 2010.
4
86004 Flagstaff
3.9
5.1
6.3
86045 Tuba City
3.7
4.5
5.3
86313 Prescott
3.4
4.6
5.7
86401 Kingman
3.9
5.1
6.2
Table 1: Estimated Wind Speed by City, m/s.
Using the speed estimates, crude estimates for monthly production were determined using a
graph on the Skystream 3.7 website. This is a nonlinear relationship, so the average speed
results in less than the average production. The monthly data were simply multiplied by 12 for an
annual rate. Since elevation varies so much in Arizona and elevation strongly impacts the
productivity of any wind turbine estimates for air density were crudely determined from a graph
located on The Engineering Toolbox website.5 Multiplying the annual output, based on sea level,
by the density factor provides Table 2 to show the estimated annual output from the system
located in each city.
annual/kWh
City
low
average
high
output
output
output
Phoenix
228.8
377.52
858
Wickenburg
772.8
1214.4
2318.4
888
1243.2
2249.6
705.6
1058.4
2016
359.04
870.4
1142.4
742.4
1067.2
1948.8
Yuma
Sierra Vista
Tucson
Springerville
The Engineering Toolbox, “Air - Altitude, Density and Specific Volume,” http://www.engineeringtoolbox.com/airaltitude-density-volume-d_195.html, accessed March 3, 2010.
5
5
Flagstaff
1113.6
2876.8
4547.2
Tuba City
1100
2300
3800
Prescott
885.6
2460
4231.2
Kingman
1363.2
3521.6
5452.8
Table 2: Estimated Annual Output based on Location.
Financial Analysis
An Excel application was created by David Allen for Allen, Atwater and Smith (2009) and was
used for the calculations herein.6 Using the installed costs of $17,760 for the system the federal
tax credit is $5,028. The state tax credit is $1,000 and the APS rebate for the 2.4 kW system is
$6,000. The resulting out of pocket cost – after receiving the tax credits – is $5,732. However,
the $6,000 from APS is viewed as gross income by the IRS and thus generates additional income
tax. Using a 28% marginal tax rate (head of household, income $117k to $190k) the additional
income tax is $1,680 making the full out of pocket cost $7,412. This value will be used for the
following calculations.
A variable cost for avoided electricity purchases is estimated for APS at 12 cents per
kWh. The implied interest rate is 5.0% based on the rate posted by Market Watch on March 3,
2010.7 The present value for 25 years worth of wind production is shown in Table 3.
PV savings
City
Phoenix
low
$391.39
avg
$645.79
high
$1,467.70
David Allen, Chelsea Ann Atwater and Dean Howard Smith “You Can Make a Positive Return by Investing in
Residential Solar Systems: An Arizona Case Study, Working Paper Series—09-04, March 2009,
http://www.franke.nau.edu/Faculty/Intellectual/workingpapers/pdf/Smith_Solar_2009.pdf, accessed March 4, 2010.
7
http://www.marketwatch.com/, accessed March 3, 2010.
6
6
Wickenburg
$1,321.95
$2,077.35
$3,965.86
Yuma
$1,519.01
$2,126.62
$3,848.17
Sierra Vista
$1,207.00
$1,810.50
$3,448.57
$614.17
$1,488.91
$1,954.19
Springerville
$1,269.95
$1,825.55
$3,333.62
Flagstaff
$1,904.92
$4,921.06
$7,778.44
Tuba City
$1,881.66
$3,934.38
$6,500.28
Prescott
$1,514.91
$4,208.08
$7,237.89
Kingman
$2,331.89
$6,024.05
$9,327.56
Tucson
Table 3: Present Value of Avoided Costs by Location
Subtracting the out of pocket costs from the present value of avoided costs results in the Net
Present Value, from which any financial decision is made. The net present values are presented
in Table 4.
NPV
City
low
Phoenix
($7,020.61) ($6,766.21) ($5,944.30)
Wickenburg
($6,090.05) ($5,334.65) ($3,446.14)
Yuma
($5,892.99) ($5,285.38) ($3,563.83)
Sierra Vista
($6,205.00) ($5,601.50) ($3,963.43)
Tucson
($6,797.83) ($5,923.09) ($5,457.81)
Springerville
($6,142.05) ($5,586.45) ($4,078.38)
Flagstaff
($5,507.08) ($2,490.94)
7
avg
high
$366.44
Tuba City
($5,530.34) ($3,477.62)
($911.72)
Prescott
($5,897.09) ($3,203.92)
($174.11)
Kingman
($5,080.11) ($1,387.95)
$1,915.56
Table 4: Net Present Value of a Skystream 3.7 by Location.
In nearly every case, the net present value is negative. Since the high estimates for wind will
never be true for an entire year, let alone for 25 years, the positive numbers for Flagstaff and
Kingman can be dismissed.
Sensitivity Analysis
Given the extremely negative results in Table 4, there is no need for any type of complex
sensitivity analysis. Using the average, middle column, value for the wind estimatesa baseline
was determined for the 10 cities. Table 5 shows how the net present value will change if the
$1000 cap is removed from the State tax credit and a total tax credit of $4,440 is allowed..
City
avg
Phoenix
$ (3,326.21)
Wickenburg $ (1,894.65)
Yuma
$ (1,845.38)
Sierra Vista
$ (2,161.50)
Tucson
$ (2,483.09)
Springerville $ (2,146.45)
Flagstaff
$
949.06
Tuba City
$
(37.62)
Prescott
$
236.08
Kingman
$ 2,052.05
Table 5: Eliminating the State Tax Credit Cap.
The elimination of the state cap minimally improves the situation in the state.
8
The APS rebate program for wind varies between the solar program and the wind
program. The solar program offers a rebate of $3/watt. If this program were adopted for the wind
project, the net present value will change by the difference between the additional $1,200 and the
additional $336 in income tax from the APS benefit for a net change of $864 for the 2.4 kW
rated system as shown in Table 6. This policy change is insufficient to make the investments
worthwhile.
City
Phoenix
($5,902.21)
Wickenburg ($4,470.65)
Yuma
($4,421.38)
Sierra Vista ($4,737.50)
Tucson
($5,059.09)
Springerville ($4,722.45)
Flagstaff
($1,626.94)
Tuba City
($2,613.62)
Prescott
($2,339.92)
Kingman
($523.95)
Table 6: Increasing the Rebate Program to $3/watt.
Combining an increase in the APS rebate with a relaxation of the state cap adds a
combined $4,354 to the net present values. As shown in Table 7, this opens more of the state to
the potential for viable investments in wind.
City
Phoenix
($2,462)
Wickenburg
($1,031)
Yuma
($981)
Sierra Vista
($1,298)
Tucson
($1,619)
Springerville
($1,282)
Flagstaff
$1,813
Tuba City
$826
Prescott
$1,100
Kingman
$2,916
Table 7; No State cap and $3/watt
9
In order to open more of the state up to the investment in wind energy the state cap on the tax
credit must be removed and APS needs to increase the buyback amount to $3/watt and the IRS
needs to change the ruling that makes the APS payment taxable income. As shown in Table 8,
the combination of these modifications results in positive net present values for all locations in
the analysis except for the two largest cities – which are also the most densely populated.
City
Phoenix
($1,118)
Wickenburg
$313
Yuma
$363
Sierra Vista
$46
Tucson
($275)
Springerville
$62
Flagstaff
$3,157
Tuba City
$2,170
Prescott
$2,444
Kingman
$4,260
Table 8: No state cap, $3/watt and no IRS payments.
Conclusions
Given the current policy situation, investment in residential wind turbines for electricity
production is a poor decision in the state of Arizona. A removal of the $1,000 cap on the state tax
credit to allow for the full 25% cost saving would improve the situation, if the state serious
desires to stimulate the wind turbine industry in the state. An increase of the APS rebate to match
the $3/watt solar program would minimally improve the situation. A combination of these policy
changes would result in a market potential predominately for the northern portion of the state
(Flagstaff, Tuba City, Prescott and Kingman.)
The recent IRS ruling that treats the APS rebate as taxable income is particularly
problematic. If this ruling can be changed to allow the investment to realize the full value of the
rebate then the investment potentials can be viewed as positive. Combining the three policy
10
changes – regardless of the political realty of this – would open investment in residential wind
power to most of the state.
11