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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Blowing The Competition Away: The Wind Power Boom In The U.S.

Mid west wind turbines

Wind energy is changing the economy of the Midwest. Wind is the fastest growing source of electricity in the United States, and about 70 percent of wind power is located in low income counties. These counties are typically rural, often Midwestern areas, where the dominant industry for decades has been agriculture. Increasingly though, many farmers are finding that leasing space to wind turbine operators is more lucrative than growing corn. That trend is likely to continue going forward, and it should alter the way energy companies and investors alike should think about wind power.

Wind power represents an important economic boost in many areas of the U.S. and as a result local farmers and communities welcome wind turbine developers. Farmers benefit directly from wind turbines to tune of between $7,000 and $10,000 per turbine in annual leasing fees. A farmer who could lease land for 10 wind turbines would likely receive between $70K and $100K in annual lease income with essentially no overhead for that income.

Farmers are not the only beneficiaries however. Communities as a whole benefit directly from wind farm development as well. A two MW wind turbine can carry a tax assessment value of $720,000. If a community can host 100 turbines across farms throughout the county, that equates to an additional $72 million in property tax values which in turn provides an enormous influx of cash for renovating schools, upgrading infrastructure, and adding new services for local residents. The average U.S. property tax rate is around 2 percent, meaning that 100 two MW wind turbines would generate $1.4 million in property tax revenue annually – enough to pay for more than $40 million in local improvements at typical muni cap rates.

Nationally, there are more than $100 billion of wind farm investments with more on the way, and rural land owners will likely receive around $1 billion in lease payments annually by 2030 according to some estimates. Against this backdrop and given the value that wind power provides to rural communities as a whole, it is little wonder that wind power projects are quite popular in most rural towns. Related: OPEC Deal Still Wobbly, But Oil Investment Takes Off

The popularity of wind projects with the residents of these areas is important because, unlike most other forms of power production (including solar power in some areas), wind turbine developers get significantly less pushback from local NIMBY protesters. Add to that the extension of the five-year wind tax credit which passed Congress last year, and the wind power business looks likely to continue to be strong for years to come. Congress’ tax credit pays wind power producers $0.023 per kwh of power produced for a 10-year period. Bloomberg estimates the credit will lead to a doubling of the current ~83 GW of wind power by 2030.

Add together the supportive regulatory environment and clamor by local residents for more wind turbines, and its little wonder that wind is one of the best areas of the power generation markets right now. Investors can capitalize on the trend either with large diversified conglomerates like Berkshire Hathaway which owns wind power producer MidAmerican Energy, or with pure play power producers like Alliant Energy. Both approaches have merit depending on one’s investment philosophy, but investors should look closely at one path or the other because strong secular growth stories in the energy business are in short supply at present.

By Michael McDonald of Oilprice.com

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  • john bozeman on October 19 2016 said:
    Every single project I have seen in texas Panhandle has had property tax abatements-Every Lease I have seen makes actual royalty payments terms very obscure-royalty payments are often late- leases require extremely long-term commitments by landowners with no commitment by wind guys-little or no provision for de-commissioning and cleanup-In short, it is a govt funded scam
  • Janna Swanson on October 19 2016 said:
    Landowners in the Midwest are fighting back against industrial wind installations. They interfere with the peace of our homes and the way we run our businesses. The people who live on our coasts don't want them in their views??? Well, we don't want them 1000-1500 foot outside our front doors. See Coalition for Rural Property Rights.
  • Harcourt on October 20 2016 said:
    As Warren Buffett says, "without the tax breaks, wind developments don't make sense." This is not a market driven phenomenon, but rather an insider crony government driven phenomenon. The philosophy seems to be to grab what you can as quickly as possible, before the scheme breaks the bank and the power grid.
  • ronrogers on September 17 2017 said:
    well written post

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