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Building a Market for Small Wind: The Break-Even Turnkey Cost of Residential Wind Systems in the United States Ryan H. Wiser Lawrence Berkeley National Laboratory rhwiser@lbl.gov; 510-486-5474 Global WINDPOWER 2004 Chicago, Illinois March

SLIDE 1

Building a Market for Small Wind:

The Break-Even Turnkey Cost of Residential

Wind Systems in the United States

Ryan H. Wiser

Lawrence Berkeley National Laboratory rhwiser@lbl.gov; 510-486-5474

Global WINDPOWER 2004 Chicago, Illinois March 30, 2004

SLIDE 2

Background

q Small Wind Overview

Includes systems < 100kW, installed on customer side of meter
Typical installed cost is $4.00 - $5.00/Watt for 10 kW units
U.S. market is small, but growing, driven by sizable incentives
ffered in a few states (e.g., California buy-down program has

resulted in over 200 systems in 5 years)

q Purpose of Analysis

Evaluate the economics of small residential, grid-connected

wind systems by state

Show which states provide the most promising markets for small

wind based on current incentive levels

Use tool to determine the impact of different policy incentive

levels and policy types, and ultimately to assist in policy design

SLIDE 3

Model Overview

q Excel model calculates the break-even turnkey cost (BTC) or simple payback of a residential small wind system

BTC is the aggregate installed cost at which the customer’s investment

just pays off over the system lifetime (assuming a required IRR)

q BTC is calculated by balancing NPV of various costs/benefits:

Customer up-front payment for installation
Financing terms
O&M payments
Property tax
Offset of average state electricity costs
State incentives (financial incentives, tax incentives, loan programs)

q Results vary by state and wind resource class (2-6)

SLIDE 4

Break-Even Turnkey Cost (BTC): Sample Model Output

$0 $1 $2 $3 $4 $5 $6

NY CA NJ VT RI HI MT WI ME IL CT AK DE TN MA NH NC IA NV PA A Z TX OH NM OR MN FL MI SC VA KS MD GA LA MS UT ID AR AL SD CO IN OK MO NE ND WY WV WA KY

State BTC ($/Watt)- Class 3 Wind Resource

SLIDE 5

Base-Case Assumptions

qSystem Assumptions:

10 kW system
30 m tower height
25 year system lifetime
O&M is 1.5 ¢/kWh

qEconomic Assumptions:

Cash payment, unless state

loan results in higher BTC

Customers require 8% IRR
n their investment

q Grid-connected residential systems on customer-side of meter q All wind production is valued at the full average residential electricity rate, escalated over time according to EIA forecasts q State incentives taken at 2004 values

SLIDE 6

State Incentives Included

10 Low-Interest Loan Programs 9 Sales Tax Exemptions 11 Property Tax Exemptions 11 Income Tax Credits or Deductions 10 Financial Cash Incentives

(Buy Down Programs or Production Incentives)

Number of Programs Incentive Type

State financial cash incentives, some of which cover as much as 40-60% of installed costs, are most important

Note: Analysis does not consider federal USDA Energy 9006 grants for certain rural applications of small wind (which can provide significant grants for specific applications)

SLIDE 7

The Economics of Small Wind is Highly Variable by State and Wind Resource Class

Note: All states not shown on graph have even lower BTCs

$0 $1 $2 $3 $4 $5 $6 $7

NY CA NJ RI VT HI MT WI ME IL CT AK TN NH MA DE NC IA NV PA TX AZ OH NM OR

BTC ($/Watt)- Class 4 Class 3 Class 2

SLIDE 8

Results for Class 3 Resource – States With Paybacks Less than 20 Years are Shown

Cost Reductions are Necessary to Reach More Widespread, Economically Attractive Markets

5 10 15 20 NY CA NJ RI VT HI Simple Payback (Years)--

$4.00/Watt

5 10 15 20

CA NY NJ RI VT HI MT ME AK IL MA NH CT DE WI NV NC TN

Simple Payback (Years)--

$2.50/Watt

SLIDE 9

State Financial Cash Incentives Are an Essential Element of the Small Wind Market

$0 $1 $2 $3 $4 $5 $6

NY CA NJ VT RI HI MT WI ME IL CT AK DE TN MA NH NC IA NV PA AZ TX OH NM OR

BTC ($/Watt) BTC With Cash Incentives BTC Without Cash Incentives

Class 3 Resource

SLIDE 10

The Incremental “Buydown” Required to Achieve a $4/Watt 25-Year BTC Differs by State

$0 $1 $2 $3

NY CA NJ VT RI HI MT WI ME IL CT AK DE TN MA NH NC IA NV PA AZ TX OH NM OR

Buydown ($/Watt)-

Class 3 Resource

SLIDE 11

Other Policy Incentives Are Important, But Are Far Less Important than Cash Incentives

q State Cash Incentives: Incentives cover as much as 40-60% of

system costs, and are most important form of support (e.g., in NY, BTC increases by $2.5/W due to rebate)

q Property Tax Exemptions: Property taxes on small wind

systems, if required, can significantly degrade economics; exemptions can increase the BTC by as much as ~$1/W

q State Income Tax Credits: ITCs range from 5-35% of system

cost, but most state ITCs are too low (or have caps that are too low) to have a large impact on the BTC for a 10kW system (existing ITCs increase BTC by ≤ $0.75/W)

q Low-Interest Loans: Low-interest loan programs make small

wind more affordable; the most attractive programs increase BTC by ≤ $1/W relative to cash purchase with 8% IRR

SLIDE 12

The Proposed 30% Federal Investment Tax Credit Could Help, but the $2,000 Limit is Binding

$0 $1 $2 $3 $4 $5 $6 $7 $8

NY CA NJ VT RI HI MT WI ME IL CT AK DE TN MA NH NC IA NV PA AZ TX OH NM OR

BTC ($/Watt)-

30% Federal ITC 30% Federal ITC with $2k Cap No Federal ITC

Class 3 Resource

SLIDE 13

Alternative Financing Scenarios Have an Impact on the BTC

8% required IRR on customer investment

Cash Purchase

30 year and 6% Interest Rate (Tax- Deductible)

Home Mortgage

10 year and 8% Interest Rate

Personal Loan

10 year and 2% Interest Rate

Low-Interest Loan

$0 $1 $2 $3 $4 $5

Cash Purchase Low-Interest Loan Personal Loan Home Mortgage

BTC ($/Watt)-

Results for California (Class 3 Resource)

SLIDE 14

Additional Sensitivities: California Class 3 Examples

$0 $1 $2 $3 $4 $5 Tiered Rates O&M System Life Tower Height IRR

BTC ($/Watt)-

5% 8% 15%

30m 20m 30 yr 25 yr 20 yr

0.5

¢/kWh

1.5

¢/kWh

3.0

¢/kWh 20% Increase 12.2 ¢/kWh

SLIDE 15

Conclusions

q Market for small, grid-connected residential wind systems in the

U.S. remains small, but is growing

q Economics of these systems are highly variable by state q Significant cost reductions are necessary to stimulate widespread

market acceptance absent significant change in policy support

q A number of policies could help stimulate the market, but state

cash incentives currently have the most significant impact, and will be a critical element to continued growth of this market

q Modeling tool presented here could be used by policymakers to

Building a Market for Small Wind:

The Break-Even Turnkey Cost of Residential

Wind Systems in the United States

Ryan H. Wiser

Lawrence Berkeley National Laboratory rhwiser@lbl.gov; 510-486-5474

Background

q Small Wind Overview

resulted in over 200 systems in 5 years)

q Purpose of Analysis

wind systems by state

wind based on current incentive levels

levels and policy types, and ultimately to assist in policy design

Model Overview

q Excel model calculates the break-even turnkey cost (BTC) or simple payback of a residential small wind system

just pays off over the system lifetime (assuming a required IRR)

q BTC is calculated by balancing NPV of various costs/benefits:

q Results vary by state and wind resource class (2-6)

Break-Even Turnkey Cost (BTC): Sample Model Output

Base-Case Assumptions

qSystem Assumptions:

qEconomic Assumptions:

loan results in higher BTC

q Grid-connected residential systems on customer-side of meter q All wind production is valued at the full average residential electricity rate, escalated over time according to EIA forecasts q State incentives taken at 2004 values

State Incentives Included

10 Low-Interest Loan Programs 9 Sales Tax Exemptions 11 Property Tax Exemptions 11 Income Tax Credits or Deductions 10 Financial Cash Incentives

Number of Programs Incentive Type

State financial cash incentives, some of which cover as much as 40-60% of installed costs, are most important

The Economics of Small Wind is Highly Variable by State and Wind Resource Class

Note: All states not shown on graph have even lower BTCs

$0 $1 $2 $3 $4 $5 $6 $7

BTC ($/Watt)- Class 4 Class 3 Class 2

Results for Class 3 Resource – States With Paybacks Less than 20 Years are Shown

Cost Reductions are Necessary to Reach More Widespread, Economically Attractive Markets

$4.00/Watt

$2.50/Watt

State Financial Cash Incentives Are an Essential Element of the Small Wind Market

Class 3 Resource

The Incremental “Buydown” Required to Achieve a $4/Watt 25-Year BTC Differs by State

Class 3 Resource

Other Policy Incentives Are Important, But Are Far Less Important than Cash Incentives

system costs, and are most important form of support (e.g., in NY, BTC increases by $2.5/W due to rebate)

systems, if required, can significantly degrade economics; exemptions can increase the BTC by as much as ~$1/W

cost, but most state ITCs are too low (or have caps that are too low) to have a large impact on the BTC for a 10kW system (existing ITCs increase BTC by ≤ $0.75/W)

wind more affordable; the most attractive programs increase BTC by ≤ $1/W relative to cash purchase with 8% IRR

The Proposed 30% Federal Investment Tax Credit Could Help, but the $2,000 Limit is Binding

$0 $1 $2 $3 $4 $5 $6 $7 $8

BTC ($/Watt)-

30% Federal ITC 30% Federal ITC with $2k Cap No Federal ITC

Class 3 Resource

Alternative Financing Scenarios Have an Impact on the BTC

Results for California (Class 3 Resource)

Additional Sensitivities: California Class 3 Examples

$0 $1 $2 $3 $4 $5 Tiered Rates O&M System Life Tower Height IRR

Conclusions

U.S. remains small, but is growing

market acceptance absent significant change in policy support

cash incentives currently have the most significant impact, and will be a critical element to continued growth of this market

help determine appropriate types and levels of policy support