Renewable Energy: Wind Power's Contribution to Electric Power Generation and Impact on Farms and Rural Communities
Released: 2004-09-29T00:00:00

Letter

Background

Description of Wind Power

Wind power is one of several renewable energy options. Other renewable sources include sunlight (photovoltaics), heat from the sun (solar thermal), naturally occurring underground steam and heat (geothermal), plant and animal waste (biomass), and water (hydropower). Unlike fossil fuels, renewable energy sources are continuously replenished.

Wind turbines can be used by themselves or be connected to a utility power grid. Stand-alone turbines can be used for pumping water—for example, to irrigate fields. However, homeowners and farmers in windy areas can also use stand-alone turbines to generate electricity for their own personal or on-farm use. For utility-scale sources of wind power, a number of turbines are usually built close together to form a wind farm. Currently, more than 50 electric power utilities use wind farms to produce part of the electricity supplied to their customers.

In general, wind turbines are divided into two major categories: horizontal axis turbines, which resemble a windmill, and vertical axis turbines, which resemble an eggbeater. Figure 2 depicts each type of turbine.

The horizontal axis turbine is the most commonly used, constituting nearly all utility-scale turbines in the United States. To generate electricity, this type of turbine captures the wind’s energy with two or three propellerlike blades that are mounted on a rotor. These rotors sit atop towers, taking advantage of the stronger and less turbulent wind at 100 feet (30 meters) or more above ground. The turbine blades generally are constructed of fiberglass, may be up to 20 meters in length, and may weigh several thousand pounds each. A horizontal axis turbine typically has a mechanism to keep the rotor headed into the wind, while a vertical axis turbine can accept wind from any direction.

Federal Role in Promoting the Use of Wind Power

The federal government represents the largest institutional user of energy in the world, and thus it is potentially a large market for wind and other renewable energy sources. Specifically, through its purchasing decisions, the federal government has the opportunity to affirm its energy and environmental policies and goals, including its goals for promoting the use of renewable sources such as wind power. In this regard, Executive Order 13123, issued in 1999, requires federal agencies to increase their use of renewable energy to a percentage determined by the Secretary of Energy. In 2000, the Secretary directed that federal agencies obtain the equivalent of 2.5 percent of their electricity from renewable sources by 2005. As of March 2003, federal agencies were using about 663 million kWh of renewable energy, or about 48 percent of the goal established by the Secretary. For example, according to Department of Defense officials, 15 military bases, including Edwards Air Force Base in California, Shriever Air Force Base in Colorado, and Ellsworth Air Force Base in South Dakota, use wind power to varying degrees. In addition, one of these bases, Dyess Air Force Base in Texas, bought 78 million kWh of wind power-produced energy in 2003, meeting the base’s entire electricity needs for that year. In addition, other federal agencies, including DOE, EPA, and USDA, are using wind power for part of their energy needs. For example, USDA’s Animal and Plant Health Inspection Service purchases 25 percent of the electricity used at its National Wildlife Research Center in Colorado from wind- generated sources.

The federal government is also the nation’s largest landholder, controlling nearly 700 million acres of land. Much of this land is in the western United States and includes some areas of the country with the highest wind potential. Thus, according to federal and industry officials, areas on these federal lands could be leased to wind power or other renewable energy developers, with the federal government collecting substantial land rental payments. For example, the Department of the Interior’s Bureau of Land Management (Bureau) has rented some of the land that it manages in California and Wyoming for wind projects. Overall, these projects include more than 1,300 turbines with a total production capacity of nearly 900 MW, and the associated rental payments provide more than $800,000 in income to the Bureau annually. The administration’s National Energy Policy also recognizes this potential. For example, the policy recommends that the Secretaries of the Interior and of Energy re-evaluate access limitations to federal lands in order to increase renewable energy production, such as biomass, wind, geothermal, and solar, on these lands. Although the establishment of renewable energy production on federal lands would result in some environmental impacts, some federal and industry officials note these impacts would be far less than the mining, drilling, and hauling associated with fossil fuel extraction.

In addition, through various programs, the federal government has helped to promote the use of wind power by municipal electric utilities; rural electric cooperatives; state, local, and tribal governments; businesses; and consumers. For example, DOE, in conjunction with wind stakeholders across the country, launched the Wind Powering America program in 1999 to increase the use of wind energy in the United States in order to promote rural economic development, protect the environment, and increase the nation’s energy security. The program’s original goals included (1) providing 5 percent of the nation’s electricity from wind by 2020, with near- term goals of 5,000 MW by 2005 and 10,000 MW by 2010; (2) increasing the number of states with at least 20 MW of installed wind capacity to 16 by 2005 and 24 states by 2010; and (3) increasing the federal government’s use of wind power to 5 percent of its annual consumption of electricity by 2010. The program’s work is organized under four themes: state-based activities, rural economic development, greening federal electricity consumption, and utility partnerships. Among other things, the program encourages partnerships between government and industry; educates, equips, and supports state wind working groups; and develops innovative pilot projects, such as identifying rural ownership options for small wind systems.

In another case, EPA promotes the use of wind power and other renewable sources of electricity—collectively known as green power—through its Green Power Partnership Program. Specifically, EPA provides technical assistance and public recognition to companies and organizations that make a commitment to using green power for a portion of their electricity needs. More than 200 companies, including a number of major corporations, participate in this program. In addition, the Department of Housing and Urban Development’s community development block grants have been used to assist municipal-owned utilities to purchase wind turbines. For example, in Iowa, three cities received community development block grant funds in either fiscal year 2002 or fiscal year 2003 to erect wind turbines for energy generation; these grants totaled about $1 million. Furthermore, as discussed later in this report, USDA has several programs that can be used to provide financial assistance for renewable energy projects on farms or other rural lands.

Wind Power Is a Small but Growing Part of the Nation’s Electric Power Generation Capacity

Although wind power accounted for about one-tenth of 1 percent of total U.S. electric power generation capacity in 2002, it had quadrupled in generating capacity between 1990 and 2003, and has been growing at a much higher rate than other sources of electric power generation. Nevertheless, wind power’s potential remains largely untapped. A number of factors, including limited transmission capacity and the higher capital start-up costs of wind power compared with fossil fuels in some markets, hamper wind power’s expansion, although other factors, such as federal and state financial incentives, have helped spur expansion. According to DOE estimates, the nation’s wind power generation capacity will continue to grow through 2025, but higher levels of production depend on the continued availability of federal and state financial incentives, particularly the federal production tax credit, expected price increases for fossil fuels, and continued research and development leading to further improvements in wind turbine technology.

Wind Power Accounts for Less Than 1 Percent of Total U.S. Capacity, but Has Quadrupled Since 1990

As of December 2003, wind power capacity accounted for about one-tenth of 1 percent of total U.S. generating capacity—about 6,370 MW—up from 1,525 MW in 1990. This growth exceeds the goal established by DOE’s Wind Powering America program for wind energy generation of at least 5,000 MW nationwide by 2005. This rate also makes wind power the fastest growing source of electric power generation, on a percentage basis, in the United States in recent years. For example, from 1999 through 2003, the average annual growth rate of wind power was 28 percent, and in 2003 alone, enough new wind turbines were erected to provide electricity to 400,000 to 500,000 U.S. homes. Figure 3 shows the growth in U.S. wind power generating capacity from 1981 through 2003.

As of the end of 2003, about 90 percent of wind power generation occurred in 10 predominantly midwestern and western states—California, Colorado, Iowa, Minnesota, New Mexico, Oklahoma, Oregon, Texas, Washington, and Wyoming. Two of these states—California and Texas—accounted for about one-half of the nation’s 6,374 MW of installed wind generation capacity, as of the end of 2003. Figure 4 shows installed wind power generating capacity in these 10 states and other states with at least 0.1 MW of installed capacity, as of December 2003.

The nation’s wind potential—particularly in areas with frequent, strong winds needed to generate electricity from wind power—remains largely untapped. According to a DOE study, the Midwest, including the Great Plains, theoretically has more than enough potential wind energy to fulfill the entire nation’s electricity needs. Specifically, just three wind-rich states—North Dakota, Texas, and Kansas—could accomplish this. Figure 5 shows areas of the United States with the highest wind potential.

A Number of Factors Act to Either Constrain or Promote Wind Power’s Growth

As a comparison of figures 4 and 5 shows, states with the greatest installed wind power capacity are not necessarily the states with the greatest wind potential. In addition, figure 6 shows this discrepancy for the leading states in each category.

This discrepancy occurs, in part, because of factors that constrain growth, such as access to transmission lines, as well as factors that encourage development, such as state incentives. The following factors constrain the growth of wind power: The cost of wind power production in relationship to fossil fuels.

According to AWEA, the cost of electricity from utility-scale wind power projects was as high as 30 cents per kWh in the 1980s, far greater than the cost of electricity from alternative technologies using fossil fuels to generate power. Various state and federal incentives helped overcome wind power's cost disadvantage in many locations, as did dramatic cost reductions due to improvements in wind turbine technology. At present, DOE estimates the cost of generating electricity from wind power ranges from 3 to 6 cents per kWh. Cost reductions also occurred in fossil-fuel power generation technologies, but recent increases in natural gas fuel costs may result in further market penetration by wind power. For example, if natural gas prices continue to be substantially higher than average levels in the 1990s, wind power is likely to be competitive in parts of the country with good wind resources and transmission access. However, wind power will continue to be too expensive to compete with fossil-fuel generation in parts of the country with poor wind resources. Although cost reductions due to technological improvements affect all segments of the electric industry, they tend to be particularly important for newer power generation technologies such as wind power in comparison to fossil-fuel generation technologies. Furthermore, continued federal and state actions that promote renewable energy power generation or raise the cost of emissions from fossil-fuel technologies could also play a significant role in improving the competitiveness of wind power.

Connection to the power transmission grid. In general, frequent, strong winds tend to be found in sparsely populated areas, which may be far from transmission lines or lines with adequate capacity to bring power to consumers. For example, renewable energy generators in the wind- rich areas of the Upper Midwest, such as North Dakota, may want to transmit electricity to heavily populated areas in other states. However, as with any remotely located power source, a renewable energy generator can incur transmission pricing mechanisms that charge according to the distance covered or according to the number of utility territories crossed. In addition, transmission capacity is limited in many areas of the nation for all electric power sources. According to AWEA and industry sources, transmission congestion policies generally allocate limited capacity on a “first-come, first-served” basis and discriminate against recent market entrants. Moreover, interconnection policies are often controlled by utilities that make it difficult for new entrants, such as wind power projects, to have timely interconnection at reasonable rates. The Federal Energy Regulatory Commission, which is responsible for approving rates for the transmission of electricity—and overseeing the sale of electricity—in competitive wholesale markets, is currently developing market standards for new entrants, such as wind and other renewable sources, to connect to the transmission grid. DOE is also conducting research to develop efficient, lower-speed wind turbines for deployment in less windy areas of the nation; such turbines would enhance the ability of industry to bring cost-effective wind power closer to population centers and avoid already congested long-distance transmission lines.

Intermittency of wind power. Renewable energy sources such as wind power have unique technical characteristics that can constrain their use in an existing transmission system that was built to accommodate large central-station power plants located near population centers. This system relies on precisely predicting and controlling power plant output to avoid blackouts and other disruptions. As a result, with this system, the value of electricity is determined in part by the time of day at which the electricity is delivered to the grid and also by the probability that it will be available when needed. In general, fossil fuel and nuclear power generation plants can be run without interruption and are consistently available when called upon, except when idled by equipment problems or for maintenance. However, wind power is an intermittent source in that wind speed and availability can vary from day to day, and thus the amount of electricity produced varies. On average, wind power turbines operate the equivalent of less than 40 percent of the peak hours in a year due to the intermittency of wind. While penalties may apply whenever energy deliveries vary from scheduled amounts, the possibility of penalties is of particular concern for intermittent sources. As a result, utilities that derive part of their electricity generation from wind power may have to develop or purchase costly reserve capacity in case wind power is not available on demand. However, some federal and wind industry officials downplayed the importance of this factor, noting that if wind power constitutes less than 20 percent of a utility’s generating capacity, the remaining capacity may be sufficient to meet demand during periods of low winds. Furthermore, according to DOE, recent studies show that in cases where wind power constitutes up to 10 percent to 20 percent of a utility’s generating capacity, the additional operating cost of integrating wind power is only up to 0.5 cents per kWh. Specifically, this amount represents the ancillary cost due to the variability of wind.

Barriers to marketplace entry. As emerging technologies, renewable energy sources such as wind power face market entry barriers. For example, developing new renewable facilities requires high up-front costs to build the necessary infrastructure, such as construction costs to connect power lines to the transmission grid. According to DOE, the average cost of building new power lines to connect wind turbines to the transmission grid could be $100,000 or more per mile, depending on such factors as the size of the wind project, terrain, and the transmission line rating. In addition, manufacturers produce renewable energy components on assembly lines, where mass production can reduce costs. As long as relatively few units are produced, prices will remain high. Economies of scale would likely lead to cost reductions for wind and other renewable technologies. Furthermore, small renewable energy projects have high transaction and other costs at various stages of the development cycle. For example, lending institutions charge more to evaluate the creditworthiness of many small projects than one large one. These institutions also are generally unfamiliar with new technologies and are more likely to perceive them as riskier, causing the institutions to lend money at higher interest rates. Higher financing costs are especially significant for the competitive position of renewable energy sources such as wind power because these sources generally require higher initial investments per unit of electricity produced than fossil fuel plants, even though renewable sources have lower operating costs.

Impacts on visual landscape, bird deaths, and noise issues. Although wind power turbines do not emit pollutants, they do present some environmental issues. According to AWEA and industry sources, wind power project developers must gauge a local community’s receptivity to the placement of wind turbines in scenic areas that may have high wind potential, such as ridge lines, mountain passes, or off-shore coastal areas, or else risk expensive litigation. Regarding birds that die when they collide with turbine blades, these sources said that developers should study the numbers and species of birds (and bats) present at various times of the year at potential site locations. In general, if the locations are commonly used by endangered or threatened avian species or are in bird migration pathways, they may be unsuitable for wind power development. New construction techniques and technologies may help to reduce bird deaths, such as switching from latticework towers that entice birds to perch to smooth-sided cylindrical towers that do not offer perches. In addition, the longer blades on newer, larger turbines turn more slowly—about 21 to 23 revolutions per minute in optimum wind conditions—than earlier turbines with shorter blades, making these longer blades more visible to birds in daylight. Concerning noise, new turbine designs and engineering as well as the use of appropriate setbacks from residences have helped to decrease the importance of this issue. For example, aerodynamic noise has been reduced by adjusting the thickness of the turbine blades’ trailing edges and by orienting blades upwind of the turbine tower.

Several factors help promote wind power’s growth. First, according to federal and industry officials, direct public sector support programs have been important to increasing the demand for wind power in the United States because of wind power’s competitive disadvantages in most domestic markets. For example, the federal production tax credit, established by the Energy Policy Act of 1992, as amended, is available to tax-paying owners of wind or “closed loop” biomass energy generation systems. The act provides a credit of 1.5 cents per kWh for the first 10 years from initial plant operation, indexed for inflation, for electricity generated by renewable energy sources such as wind turbines; it was 1.8 cents per kWh during 2003. According to our analysis, using this incentive, a moderate-sized wind farm with 30 MW of generating capacity could receive up to $1.6 million a year in tax credits. In addition, in some cases this tax credit may be combined with the 5-year depreciation schedule allowed for renewable energy systems under the Economic Recovery Tax Act of 1981, as amended. In conjunction with the tax credit, this accelerated depreciation allows an even greater tax break for renewable projects facing high initial capital costs. The authority for new facilities to qualify for the production tax credit expired at the end of calendar year 2003; as of August 2004, legislation was pending in Congress that would reauthorize this tax credit.

At the state level, the states with the most installed wind power capacity generally have implemented strong policies providing regulatory, financial, or tax incentives to wind power development. For example, 17 states have implemented renewable portfolio standards. Under these standards, utilities must derive a certain percentage of their overall electric generation (on a sales basis) from renewable energy sources, such as wind power. California and Texas—2 of the 17 states that have instituted these standards—also are the leading states with installed wind power capacity. California requires that 20 percent of the state’s electric generation be derived from renewable sources by 2017. In Texas, the requirement is 2.7 percent by 2009. Figure 7 shows the states that have enacted these standards, including the target amount of generation from renewable sources and the associated dates for achievement.

Multiple states have taken other, similar actions to support renewable energy sources, including wind power. Specifically, according to the Database of State Incentives for Renewable Energy compiled by the Interstate Renewable Energy Council in August 2004: Thirty-two states and the District of Columbia have implemented net metering laws, which allow customers with their own power generating units, such as small wind turbines, to sell power that is excess to their needs back to the power grid, enabling the flow of electricity to and from the customer through a single meter.

Twenty states offer property tax exemptions or special assessments for renewable energy sources, and 6 states allow localities to offer this exemption.

Fifteen states allow sales tax exemptions for renewable energy sources.

Twenty states offer personal or corporate income tax incentives for renewable energy sources.

Many states have grant (20), loan (18), and rebate (12) programs to promote renewable energy sources. Utilities or private sources offer these types of financial incentives in many of these states as well.

Fifteen states have public benefit funds for renewable energy sources. In these states, a surcharge is assessed to all customers on utility bills. The money generated goes into a public benefit fund to, among other things, support renewable energy research and development and education programs.

Some states promote wind power creatively. For example, California has formed a collaborative—known as the California Wind Energy Collaborative—to promote wind power’s growth in the state. The collaborative includes officials from federal and state government agencies, wind energy developers, electricity suppliers, environmental groups, and the academic community. Its primary purpose is to coordinate statewide activities related to wind power and to recommend policies to support its growth. The collaborative has developed a number of recommendations, such as (1) simplifying the permitting process for establishing a wind project in California and (2) focusing research and development on, among other things, improving turbine performance and reliability, addressing transmission grid and interconnection challenges, and enhancing wind forecasting. The California State Energy Commission funds the collaborative, providing about $350,000 annually for its activities.

A second factor helping to further wind power’s expansion is environmental benefits. Wind power is considered a green technology because it has only minor impacts on the environment. In contrast, fossil fuel power plants are a significant source of air pollution. In general, these plants produce harmful emissions, such as carbon dioxide, nitrogen oxides, sulfur dioxide, mercury, and particulate matter, which can pose human health and environmental risks, such as acid rain and global warming. In some cases, these emissions may increase as electricity generated by fossil fuels increases to meet growing demand. For example, EIA forecasts that if this generation increases by 42 percent from 2000 through 2020—from 3.5 trillion kWh in 2000 to almost 5 trillion kWh in 2020—annual emissions of carbon dioxide and mercury from these plants will rise nationwide by about 800 million tons (or 35 percent more) and 4 tons (or 9 percent more), respectively. To some extent, these anticipated increases could be offset by an increasing reliance on nonpolluting, renewable sources such as wind power. For example, according to DOE, by 2020, the growth of wind power could eliminate millions of tons of atmospheric carbon that would otherwise be released by fossil fuel power plants, thereby reducing greenhouse gas emissions.

Fossil fuel power plants are also the nation’s second largest user of water resources after agriculture. Specifically, power plants use about 48.2 trillion gallons of fresh water from rivers, lakes, and other sources each year, primarily to produce steam to turn turbines and for cooling, according to the U.S. Geological Survey. This amount represents nearly 40 percent of the nation’s total water usage. Power plants’ water requirements will likely rise as demand for electricity grows over the next 2 decades. Although state and local authorities protect certain water uses, such as for drinking water, when approving the construction of new power plants, these plants nevertheless can affect aquatic ecosystems. For example, drawing water into a plant can kill fish, and discharging water with elevated temperatures back to its source can damage aquatic organisms or habitats. Wind power, as an alternative energy source, does not use water to generate electricity.

In addition, increasing environmental consciousness has created “green consumerism”—a segment of consumers who are willing to pay more for products, including wind-generated electricity, whose production, application, and disposal are less harmful to the environment. Thus, utilities may offer customers the option of paying a higher rate for electricity produced from renewable sources such as wind power in lieu of electricity produced from fossil resources, arrangements often referred to as green pricing programs. For example, in the program sponsored by Xcel Power in Colorado, known as Windsource®, customers pay a premium of $2.50 per 100 kWh for wind-generated electricity. According to some sources, customer interest in this program was an important factor in the installation of more than 230 MW of wind power capacity in the state. In Texas, Austin Energy has a green pricing program, known as GreenChoice®, for wind power, which accounts for about 4 percent of its annual electricity sales. Although participating customers generally pay a premium for this wind-generated electricity, demand is such that this utility is currently negotiating to add an additional 91 MW of wind power capacity. As an added inducement, this utility offers its wind power customers the choice of locking in a rate for a period of 10 years, while regular customers are subject to possible rate increases if the costs for fossil fuels increase.

A third factor is energy security. This could help promote wind power and other renewable energy sources in order to reduce the nation’s dependence on foreign fossil resources, including oil and natural gas. For example, the United States currently imports about 65 percent of the oil and 15 percent of the natural gas it uses. Natural gas, in particular, is increasingly used to produce electricity, and according to DOE, the anticipated growth in demand for this fossil fuel will lead to an increasing reliance on imports. According to DOE, this dependence harms the U.S. trade balance and exposes our economy to potential supply disruptions. In light of these concerns, federal legislative and regulatory initiatives have encouraged a diversified energy portfolio. For example, the Public Utilities Regulatory Policies Act of 1978, as amended, was enacted in part to encourage the development of alternative energy resources. More recently, the administration’s National Energy Policy, issued in May 2001, states that sound energy policy should encourage a diverse portfolio of domestic energy supplies and that renewable energy can be a reliable source of energy at a stable price because it does not depend on the availability of fossil fuels. Furthermore, while the nation’s transmission grid and central power plants remain vulnerable to terrorist attack, renewable sources, such as wind power, are geographically more dispersed and contain no volatile or radioactive fuel stocks.

Fourth, government and industry experts expect that improvements in wind power technology and forecasts for higher fossil fuel prices will continue to help wind power compete with other sources of electric power generation. For example, technology improvements in turbine design and components have dramatically increased the efficiency and cost competitiveness of wind power generation, and continuing research and development will likely lead to further improvements. Regarding forecasts for higher prices, EIA projects that 69 percent of the 235,000 MW of new generating capacity needed in the United States by 2020 will be fueled by natural gas and another 9 percent by coal. In recent years, prices for natural gas have, at times, spiked dramatically, and the market for natural gas remains volatile, with small shifts in the supply of or demand for gas likely to cause wide price fluctuations. In addition, DOE and industry sources anticipate that as domestic and international demand for natural gas increases in the electric and other industrial and commercial sectors, the prices for natural gas will rise, making alternative energy sources such as wind power more competitive.

Growth of Wind Power Will Depend on Continued Government Financial Incentives and Prices for Fossil Fuels

According to EIA forecasts prepared at our request, future wind power capacity could increase to 48,000 MW or more by 2025—enough to power about 13 million homes based on current usage rates—if the federal production tax credit were to remain available through 2010. On the other hand, if this credit is not available after December 31, 2003 (its authorization expired after that date and it had not been reauthorized as of August 2004), capacity will increase to only about 11,000 MW by 2025. According to EIA and other DOE officials, these forecasts are likely conservative estimates because the assumptions used were conservative. Other stakeholders have offered larger estimates. For example, AWEA estimates that wind power capacity could grow to 100,000 MW by 2020, representing about 6 percent of total U.S. production. In another case, the National Petroleum Council estimates that renewable capacity—primarily wind power—will grow to between 73,000 MW and 155,000 MW by 2025, with the larger number dependent in part on proactive public policies to promote renewable sources. Despite these varying estimates, DOE and industry sources agreed that the key to the potential future growth of the wind industry is the continued availability of the production tax credit or other subsidy support, although expected increases in fossil fuel prices, particularly for natural gas, also will be an important factor.

DOE and industry sources noted that prior periods of uncertainty about the availability of the production tax credit led to a boom-and-bust cycle in the installation of new wind power capacity. For example, in years in which the authorization for the credit expired and its renewal was delayed, the installation of new capacity fell dramatically compared with the years in which it was available without interruption. Figure 8 provides information on this cycle.

According to DOE and wind industry sources, the expiration of the production tax credit at the end of 2003 has significantly reduced wind power expansion. Potential developers are reluctant to commit resources to the planning and construction of new capacity without the certainty that the tax credit will be reauthorized. For example, AWEA estimates that the uncertainty over the reauthorization of the tax credit has caused the loss of over 2,000 manufacturing and construction jobs related to wind power and put about 2,000 MW of new wind energy production and nearly $2 billion in economic activity on hold. Thus, industry sources expect a significant drop in the installation of new capacity in 2004 from 2003 levels—capacity expansion in 2003 was a near record 1,700 MW, attributable in large measure to the availability of the tax credit.

According to EIA, without the production tax credit, wind power will be relegated to a niche resource whose expansion will depend largely on long- term trends in natural gas prices. Furthermore, in the view of some stakeholders, the most stable, predictable production tax credit would have a long-term or permanent authorization that would not induce market booms and busts but would facilitate steady market development for wind power and other renewable sources. Other stakeholders note, however, that to the extent this credit would be used, tax revenues would be lost to the federal government that could be used for deficit reduction or other purposes. For example, the Congressional Joint Committee on Taxation estimates that if the authorization for the production tax credit were extended through 2006, its cost to the Treasury for the 10-year period ending in 2013 would be $3 billion, or about $300 million annually. On the other hand, some stakeholders believe that renewable energy sources require subsidies such as the production tax credit to level the playing field because various subsidies for fossil fuel and nuclear technologies have made it difficult for renewable energy sources to compete, even when renewable technologies become cost competitive with these conventional technologies. In general, it is difficult to quantify all of the subsidies provided to the fossil fuel and nuclear power industries, and there is sometimes disagreement on how to define a subsidy. Nevertheless, many stakeholders maintain that these subsidies are substantial—measuring in the billions of dollars annually. For example, EIA estimates that the federal subsidies to the oil, natural gas, coal, and nuclear power industries totaled about $2.8 billion in fiscal year 1999, the most recent year for which EIA compiled these data.

Wind Power Does Not Contribute Significantly to Total Farm Income, but Some Individual Farmers and Communities Have Benefited

Wind power does not currently contribute significantly to total farm income in the 10 states with the highest installed wind power capacity, although some individual farmers and rural communities have benefited considerably from this energy source. However, wind projects located on farmland have increased some individual farmers’ income significantly, according to our site visits and analysis. In addition, large wind power projects established in some of the poorest rural counties in the United States have generally benefited these counties through the tax revenues they produce and the employment opportunities they provide.

Wind Power Accounts for Only a Very Small Amount of Total Farm Income, but Provides Substantial Income to Some Farmers and Communities

In the 10 states we examined, total net farm income exceeded $14 billion in 2002, but total direct income to all U.S. farmers from wind power ranged from only $10 million to $45 million, representing only a fraction of 1 percent of net farm income in these states. Nevertheless, wind projects located on privately owned farmland—the majority of U.S. wind power projects, according to AWEA—have increased individual farmers’ income by as much as tens of thousand of dollars annually, according to our analysis and site visits. In most cases, the farmers do not have an ownership interest in the projects. Rather, they receive lease payments from energy development companies for the use of the land and the associated “wind rights.” According to AWEA and other sources, the compensation a farmer receives for leasing land for wind power turbines effectively amounts to between $2,000 and $5,000 per year per MW of installed capacity. However, actual compensation received varies widely, depending the following factors: The number of turbines. One California project includes turbines with a total generating capacity of approximately 60 MW. Based on data developed from our site visit to this project, we estimate that one of the landowners has enough turbines on his land to have generated over $200,000 in annual lease payments from the project owner. In another case, an Iowa project consisting of about 260 turbines has a total generating capacity of approximately 190 MW. However, the turbines are spread out over separate properties owned by 65 farmers. According to the project owner and one of these farmers, the average annual lease payment is about $2,000 per turbine, with each farmer’s total payments depending on the number of turbines located on that farmer’s land.

The value of electric power generated by the project. Land lease income is often linked to wind power project revenues. For example, land lease income may be a percentage of the gross revenues from the sale of the project’s wind power. Thus, the higher the sale price of power, the higher the lease income to the landowner. The price paid by utilities for the electricity produced from wind power projects has varied by location and over time. Nationwide, these prices currently range from $20 to $35 per MW hours (MWh). However, power purchase contracts signed in California in the early 1990s tended to be well above this range. For example, the price currently received for electricity from one California wind power project is about $70 per MWh.

The terms of the lease payments. The lease payments may include a single lump sum payment, fixed annual fees per turbine or per unit of power generation capacity, or a percentage of the project’s gross revenues. The farmer may receive additional lease payments for other structures or considerations related to the wind project, such as substations, operations and maintenance buildings, and rights-of-way, including roads leading to and from the project and transmission poles and lines to connect the project to the local power grid. In cases in which the farmer has an ownership interest in the project, the potential financial benefits may be even greater per turbine. However, farmer- owned wind projects tend to be smaller, because farmers generally do not have the financial resources of an energy development company to establish larger projects with more turbines.

Whatever the lease arrangements, the income farmers receive from wind projects located on their land is relatively stable compared with the income they derive from crop and livestock production, according to some farmers and other sources. Although the income from wind projects may be modest, these individuals said, it serves as an important hedge against possible fluctuations in income from crop and livestock production. Furthermore, income from wind turbines located on a farmer’s land generally does not fluctuate significantly, although higher or lower average wind speeds from one year to another can affect the amount of royalty payments a farmer receives. Royalty payment rates—for example, 4 percent of gross revenues for electric power generated—are generally negotiated for a period of years. In addition, contracts between a landowner and a wind project owner often have a provision for minimum payment per turbine per year to protect a landowner’s income in cases of unusual low-wind periods or if a turbine is out of operation because of weather-related damage or maintenance. In some cases, a farmer said the additional income from the wind project helps keep the farm solvent and the farmer’s family on the farm.

Wind Power Benefits Rural Communities by Providing Additional Investment, Employment Opportunities, and Tax Revenues

The construction and operation of a large wind project in a rural county is likely to increase the county’s general level of economic activity and wealth. Constructing a large wind power project with several dozen turbines requires the services of multiple businesses and scores of skilled and unskilled workers, as well as the purchase of equipment and material, such as turbines, towers, asphalt, cement, concrete, and electrical cables. In these activities, wind power project developers and operators have directly benefited rural communities by hiring local people and purchasing locally some of the goods and services needed to construct and operate a project. Furthermore, according to DOE, increasing the proportion of the nation’s energy generation attributable to wind power to 5 percent by 2020 would add about $60 billion in capital investment in rural America; provide an estimated $1.2 billion in new income to farmers, Native Americans, and rural landowners; and create approximately 80,000 new jobs. (To determine the overall economic benefits of increasing wind power to farms and rural communities, any losses to the fossil fuel industry need to be counted as an offsetting factor.)

In general, a county with a larger, more diversified economic base can more likely provide these services and supplies, thereby retaining more of the project’s direct economic benefits. For example, according to the developers of a large wind project—High Winds in Solano County, California—they obtained much of the services and supplies needed to construct this project within the county, which has over 400,000 residents and a diversified business community. However, if a county cannot provide some of the services and supplies needed, other nearby counties or cities that can provide these services and supplies may benefit. In Pipestone County, Minnesota, for example, wind power developers purchased some supplies locally, such as concrete, but had to contract with a firm in Fargo, North Dakota, for a crane large enough to erect the turbines and with a firm in Minneapolis to do the electrical wiring. Pipestone County, located in southwestern Minnesota, has about 9,800 residents and a small business community.

Furthermore, businesses and individuals directly employed by the wind project are likely to spend part of their income at local businesses, such as restaurants, hotels, and gas stations, and hardware, clothing, and food stores. In some cases, the benefits from these activities may exceed the level of a project’s direct benefits. For example, according to the Fort Stockton Economic Development Corporation in Pecos County, Texas, the county experienced a 10 percent increase in gross sales during the construction of several wind power projects.

The property tax revenues resulting from the establishment of a wind power project in a county creates additional revenues that support schools, hospitals, fire protection, and other public services. Following are some examples: Lincoln County, Minnesota, with a population of about 6,200, obtained about $470,000, or 18 percent of its property tax revenues, in 2003 from local wind power projects with a combined capacity of 156 MW.

Pipestone County, Minnesota, obtained about $660,000, or 8 percent of its property tax revenues, in 2001 from wind projects with a combined capacity of 113 MW.

In Pecos County, Texas, with a population of about 16,000 the school districts received about $5 million in 2002 from property tax revenues directly associated with wind power projects in that county. For example, the Iraan-Sheffield School District, obtained one-third of its property tax revenues from wind power projects that year. These projects also added about 30 to 35 full-time permanent jobs to operate and maintain the projects.

For some counties, tax benefits may have to be deferred to attract wind power developers. These counties have offered generous tax abatements, forgoing part or much of the tax revenues that would have otherwise been collected for the period covered by the abatement. For example, to attract wind power developers, Texas’s Upton County offers a tax abatement of 10 years, waiving all property taxes during this period with the exception of taxes collected for schools.

In terms of other taxes, counties that have sales taxes or that receive a share of state sales tax revenues are likely to realize income from the sale of taxable goods and services connected with the construction and operation of a wind power project. In addition, in states that have a personal or corporate income tax, the increased employment and business opportunities associated with a wind power project are likely to increase these tax revenues, which are then shared with counties in the state or used for public projects that benefit county residents.

To better gauge the significance of general increases in economic activity, we asked NREL to use its Wind Impact Model to estimate these benefits, as well as direct benefits, for the counties we visited. NREL developed a number of estimates, varying the size of the wind project but otherwise keeping key model assumptions constant. In general, the results of NREL’s analysis confirm our observations from our site visits. For example, NREL estimates that the operation of a 150 MW project located in Alameda County, California—a county with a large population and diversified economic base—would result in the creation of 65 new jobs in the county and increase total income in the county by $5.4 million. However, the same size project located in Upton County, Texas, which has a much smaller population and economic base, would result in only 47 new jobs and an increase in total county income of $2.75 million. This is because in the case of Upton County, more of the staff needed to operate the project would be hired from outside the county. Nevertheless, the impact of the local hires on employment in Upton County may be greater than in Alameda County because the population of Upton County is so much smaller. A detailed discussion of this model and NREL’s analysis is contained in appendix III.

Leasing Land for Wind Power Projects Is Easier Than Owning, and Most Farmers Do Not Qualify for Tax Credit

Ownership of a wind power project may be more profitable to a farmer than leasing, based on our fieldwork and analysis. For example, whereas lease payments per turbine may provide several thousand dollars a year to the farmer, ownership may double or triple that income per turbine as the profits are not shared with an energy company. On the other hand, a farmer may only be able to afford to construct 1 or 2 turbines, as the cost per MW of installed capacity is about $1 million. In contrast, leasing land to an energy development company could result in the installation of a dozen or more turbines. In the latter case, although the farmer’s income per turbine is less, the total income received by the farmer would be substantially greater. In addition, farmers and other small investors generally lack sufficient tax liability to take full advantage of the federal renewable energy production tax credit. However, some states offer incentives that help landowners develop wind power projects.

Farmers Find Leasing Is Easier Than Owning Wind Power Projects

Nationwide, farmers and other landowners own less than 1 percent of utility-scale wind power capacity. We found that farmers generally find leasing their land for wind power projects to be easier than owning projects because of the complexity of, and risk associated with, developing a wind power project. In general, development of a project may take 2 years or more from conception to completion, especially when multiple turbines are involved. Table 1 summarizes the major steps in project development. These steps are also discussed in greater detail in appendix V.

The associated capital costs for a wind power project could also be daunting to an individual landowner—approximately $1 million per MW of generating capacity installed. Thus, even purchasing just one or two utility- scale wind turbines can be a substantial investment for even a large farm or ranch.

Leasing land to a wind power developer relieves a farmer of many of the formidable challenges of developing a wind power project, but the benefits of leasing may depend on the type of the lease arrangement offered. Table 2 summarizes information on lease payment options.

A landowner may need expert advice—from an attorney to ensure the lease protects the landowner’s interests and from a financial adviser to understand the income and tax implications of various lease payment options. For example, University of Texas officials indicated that legal and technical resources available to the university were critical to negotiating a favorable lease agreement for a wind project on university property.

Landowners may also face other problems in leasing land for wind power projects, as illustrated in the following examples: A Minnesota wind developer went bankrupt before completing the project. Unable to collect from the developer, the construction contractor that poured the concrete foundations for the turbines placed a lien on the farmer’s land. In the end, the farmer assumed responsibility for completing the project.

In California, a landowner who leased land to wind developers for 200 turbines had to renegotiate leases with the tenant farmers who also use this land. These farmers charged that they were disadvantaged by the wind power project because (1) the turbines prevented them from using aerial crop dusting; (2) the project created obstacles, such as the turbines, substations, and access roads, that the farmers had to drive their equipment around, causing their fuel costs to rise; and (3) the turbines and associated structures had reduced the acreage available for cultivation (by approximately 40 to 50 acres out of a total of 1,100 acres). Although he lost some revenue from the renegotiated lease agreements with the tenant farmers, the landowner indicated he had more than recouped these losses from the income associated with the lease agreement for the wind turbines. The landowner also said the tenant farmers ultimately benefited by the adjusted (lower) rents for the land they farm.

During our fieldwork, some farmers indicated it was difficult to make informed decisions about owning a wind power project or leasing their land to a commercial wind power developer because of a lack of readily accessible information. One farmer also noted it would be helpful to have a forum in which farmers could exchange relevant information and experiences. A number of entities offer information on wind power, including the pros and cons of ownership versus leasing. These include AWEA, NREL, the Union of Concerned Scientists, Wind Powering America, and Windustry. They also include state-based groups such as the California Wind Energy Collaborative, Iowa Policy Project, Minnesota Sustainable Energy for Economic Development Coalition, Oklahoma Wind Power Initiative, and Texas Renewable Energy Industries Association. However, federal and industry officials said that while access to information is important, it is not enough. According to these officials, given the complexity of owning a wind project or leasing land to a wind power developer, farmers and other rural landowners should seek legal, financial, and technical advice, as appropriate, before making a commitment to a project.

Farmers Generally Cannot Use the Production Tax Credit

Farmers generally cannot use the federal renewable energy production tax credit, which many stakeholder groups view as crucial to making wind energy projects economically viable for project owners because of these projects’ high capital costs. According to Department of Treasury officials, for a farmer who does not materially participate in a wind power project to make use of the production tax credit, the farmer must have tax liability attributable to passive income (e.g., rental income or income from businesses in which the farmer participates only as an investor) against which to claim the production tax credit. Passive income does not include income from the farmer’s active farming business, wage income, or interest and dividend income. Unless a farmer materially participates in the production of wind power, the production tax credit cannot offset tax liability attributable to income from these sources. Since many farmers do not have passive income and do not materially participate in wind power production, this passive versus nonpassive income distinction limits the number of farmers that are able to take advantage of the renewable energy production tax credit. Furthermore, even in a case where a farmer materially participates in and operates a wind project, the value of the tax credit is usually greater than the income tax on the revenue earned by the project for wholesale electricity generation as well as from other relevant sources, such as revenue from the farming business and wage income related to off-farm employment.

Although an individual farmer may not be able to use the full amount of the production tax credit, farmers can benefit from this tax credit in other ways. For example, in Rock County, Minnesota, some farmers interested in wind power have formed two limited liability companies, pooling their individual passive incomes and associated tax liabilities in order to make use of the production tax credit. These arrangements have led to the establishment of two wind power projects, Minwind I and II. Each company has rules similar to a traditional farmer cooperative, although legally they are not cooperatives. Each company sold stock to more than 30 individuals and required that 85 percent of the shares be owned by farmers; the remaining 15 percent of the shares are available to local residents and investors. No single person can own more than 15 percent of the shares. These projects started operating in late 2002, and each has a capacity of 1.9 MW. Furthermore, seven additional Minwind projects (III through IX) are under development in Rock County. When complete, these projects will have 200 local owners and a combined capacity of 12 MW.

In addition, some individual farmers in Minnesota have entered into equity partnerships with an investor in order to benefit from the production tax credit indirectly. In these cases, the investor owns nearly all of the interest in the project for the first 10 years, receiving most of the net cash from the project and the benefits of the production tax credit and accelerated depreciation. After this 10-year period, the ownership switches, or “flips,” to the farmer and the farmer receives most of the project income. For example, at one wind project we visited in Pipestone County, an equity partner owns a 99 percent interest in a 1.5 MW project (two 750 kilowatt turbines) for the first 10 years of the project’s operation. The farmer who provided the land for the project has the other 1 percent interest. The equity partner provided most of the up-front capital needed to establish the project, and the project’s assets provide the collateral for the remaining required debt. However, the equity partner also reaps most of the profits and the benefits of the federal production tax credit. During these first 10 years, the farmer receives lease payments of about $2,000 per year per turbine, plus management service payments of about $30,000 per year, based on a percentage of the revenues associated with the electricity production. After the 10th year, majority ownership of the project will be transferred to the farmer, who will start earning about $120,000 per year through the end of the project’s expected lifetime (an additional 10 years or more). Thus, beginning with the 11th year, the farmer’s annual income from the project will more than triple.

Minnesota Offers Renewable Energy Cash Payments and Other Incentives to Promote Landowner-Owned Wind Power Projects

In addition to the federal tax credit, landowners may benefit from state incentives. For example, Minnesota offers several incentives to promote farmer, rural landowner, and rural business ownership of small wind power projects. Federal and industry officials often cited Minnesota as being particularly proactive in this regard. Table 3 summarizes these incentives.

According to Minnesota and wind industry officials, the most important of these incentives is the state’s Renewable Energy Production Incentive program. As of December 2003, this program had benefited about 170 renewable energy projects in the state, including 130 wind power projects that are collecting incentive payments and another 43 that have secured eligibility but are not yet operational. According to a Windustry official, more than one-third of the beneficiaries have been farmers and rural small businesses over the life of the program. This official also said that because of current difficult fiscal conditions, it is uncertain whether Minnesota will expand the program beyond the 200 MW cap to assist additional projects.

USDA Can Do More to Promote Wind Power

USDA has not fully utilized all of the farm bill’s renewable energy provisions to promote wind power development on farms and in rural communities, although it has provided some funding through other provisions of the farm bill. In particular, USDA had not issued a regulation for loans and loan guarantees under the farm bill’s key wind power assistance program—the Renewable Energy Systems and Energy Efficiency Improvements Program (Renewable Energy Program). As a result, although grants are available, farmers and other applicants cannot obtain loans and loan guarantees under this program, which limits the ability of the program to promote renewable energy sources. In addition, USDA may be missing opportunities to leverage information, resources, and expertise available from EPA in implementing the Renewable Energy Program and to simplify the program’s application process.

Farm Bill Provisions Promote Renewable Energy Systems, Including Wind Power, but USDA Has Not Made Full Use of These Provisions

Among other things, the 2002 farm bill promotes the use of renewable energy systems, such as wind turbines, on the nation’s approximately 900 million acres of farmland and rangeland. According to USDA and other sources, these farm bill provisions will create economic opportunities in rural communities, give farmers a means to earn additional income, diversify the nation’s energy production, reduce its dependence on imported fossil fuels, and help protect the environment. Table 4 summarizes information on the farm bill provisions for promoting renewable energy systems, including wind power.

During fiscal year 2003 and through August 2004, USDA has made limited progress in using the farm bill provisions to further the use of renewable energy systems. Table 5 shows the status of USDA’s efforts. As the table shows, in several cases these provisions have not been used yet. In other cases, the provisions cannot be fully used until USDA has developed relevant regulations. USDA officials told us that the newness of these provisions—the farm bill was enacted in May 2002—and the lead time needed to train its staff, disseminate information to the farm community, and develop regulations and publish them in the Federal Register for comment, as appropriate, has slowed the agency’s ability to fully use these provisions.

Many stakeholders consider the Renewable Energy Program as the key USDA program for promoting renewable energy sources, including wind power, on farms, ranches, or other rural lands. The program focuses on promoting renewable energy generation and energy efficiency improvements and was authorized a total of $115 million—$23 million yearly—for fiscal years 2003 through 2007 for its implementation. This funding can be used for loans, loan guarantees, or grants to farmers, ranchers, or rural small businesses. Eligible projects include those that derive energy from a wind, solar, biomass, or geothermal source.

Since passage of the farm bill, USDA has undertaken a number of actions to begin to implement the Renewable Energy Program.

In November 2002, USDA formed a rural energy working group—with representatives from several USDA agencies as well as DOE and EPA— to strengthen interagency relationships and to leverage information, resources, and expertise to assist in implementing the Renewable Energy Program. This group met again in December 2002 and January 2003.

In November 2002, USDA issued a Federal Register notice announcing a public meeting to solicit comments and suggestions from stakeholder groups on how to implement the Renewable Energy Program. This meeting was held on December 3, 2002.

In February 2003, the Under Secretary for Rural Development requested that all Rural Development State Directors designate a Rural Energy Coordinator to, among other things, coordinate the implementation of the Renewable Energy Program.

In April 2003, USDA issued a Notice of Funds Availability (NOFA) in the Federal Register inviting applications for grant assistance under the Renewable Energy Program for fiscal year 2003. According to this notice, $23 million was available for this program. Applications were initially due by June 6, 2003. In May 2003, USDA issued another NOFA extending the application deadline to June 27, 2003, and clarifying information regarding requirements for financial information and utility interconnection agreements.

In August 2003, USDA signed an Interagency Acquisition Agreement with DOE to obtain its assistance in implementing the Renewable Energy Program. Among other things, this agreement calls for DOE to assist USDA in evaluating the technical aspects of proposals submitted for renewable energy projects or energy efficiency improvements. In part, this agreement also helps to fulfill the farm bill’s requirement that USDA consult with DOE in implementing the Renewable Energy Program. USDA’s Rural Development mission area made about $162,000 available for this purpose.

In August 2003, USDA signed a contract with MACTEC Federal Programs (MACTEC), a consultant, to develop a regulation for the program, including proposed and final regulations to be published in the Federal Register. USDA’s Rural Development mission area made about $317,000 available for this purpose.

In May 2004, USDA issued a NOFA in the Federal Register inviting applications for grant assistance under the Renewable Energy Program for fiscal year 2004. According to this notice, $22.8 million is available for this program in fiscal year 2004. Applications were to be postmarked by July 19, 2004. As of August 2, 2004, USDA indicated that it received a total of 56 applications for wind projects totaling about $10.8 million.

In fiscal year 2003, wind power projects represented about one-third of the projects selected and grant funds awarded under the Renewable Energy Program, or 35 of the 114 grantees selected and $7.4 million of the $21.7 million awarded. The applicants selected for wind projects included four farmers and 31 rural small businesses located in eight states. Table 6 summarizes the grant assistance provided for renewable energy projects, including wind power, under the program in fiscal year 2003.

Notwithstanding the above actions, USDA’s implementation of the Renewable Energy Program in fiscal year 2004 remains incomplete. Although USDA has issued a NOFA, it will again offer only grants, as was done in fiscal year 2003. According to USDA officials and documents, the Rural Business-Cooperative Service (RBS)—the USDA agency responsible for implementing the program—had planned to issue proposed and final versions of the program regulation during fiscal year 2004 and to make awards of loans and loan guarantees, as well as grants, during the year based on the final regulation. However, RBS was not able to hold to this schedule. According to RBS officials, they underestimated the time that would be needed to develop and process the regulation. In this regard, they cited several factors that have contributed to the time needed.

First, these officials said the Office of Management and Budget (OMB) designated the regulation as “significant” according to Executive Order 12866, as amended. A regulation designated as significant is subject to OMB review. Specifically, the executive order provides that significant regulations are subject to review by OMB’s Office of Information and Regulatory Affairs. This office may take up to 90 days for its reviews at the proposed and final regulation stages before publication of the regulation in the Federal Register. In addition, the executive order provides that agencies should afford the public a meaningful opportunity to comment on any proposed regulation, which in most cases should include a comment period of not less than 60 days.

Second, USDA has opted to apply the Administrative Procedure Act’s notice of proposed rule making and public comment requirements in certain instances where not required by law. This policy, promulgated by former Secretary of Agriculture Clifford Hardin, was published in the Federal Register in 1971. The policy is known informally as the “Hardin memo.” Specifically, this memo provides, in part, that the public participation requirements prescribed by the Administrative Procedure Act, 5 U.S.C. 553 (b) and (c), will be followed by all agencies of the department in rule making relating to public property, loans, grants, benefits, or contracts. Thus, while the act does not require notice and public comment for regulations related to these matters, USDA’s policy is to follow the public participation requirements of the act for these types of regulations as well. USDA officials noted that the Hardin memo is consistent with the recommendations of the Administrative Conference of the United States, and although the memo was promulgated more than 30 years ago, it remains in effect.

Third, delays occurred in contracting with MACTEC. This contract was signed in August 2003, about 15 months after the farm bill’s enactment (May 13, 2002). Specifically, delays occurred with GovWorks, a federal contract acquisition and administration office used by USDA to handle the contract solicitation and administration. According to USDA officials, GovWorks took longer than expected to complete the solicitation phase— including advertising the solicitation and performing the initial evaluation of applicants—due to staffing shortages and its responsibilities for other major federal contracts. The solicitation produced a number of applicants, from which four were selected for interview by RBS staff. USDA officials indicated that it took additional time to arrange these interviews. MACTEC was selected from among the final four firms.

Fourth, USDA officials noted that the draft proposed program regulation is a very large document—over 200 pages. Thus, the time needed for review is longer. In early June 2004, USDA officials noted that the draft had been under review within USDA since February and was now in final departmental clearance. Among other offices, the Rural Development mission area, the Office of General Counsel, and the Office of Budget and Program Analysis have reviewed the draft. USDA officials noted that as much as possible, the draft was reviewed concurrently by relevant offices and that the Office of General Counsel assigned one of its attorneys virtually full time to review the regulation in order to expedite that office’s review.

Finally, USDA officials described the Renewable Energy Program as a new and unique program. These officials said that neither USDA nor DOE had a grant or loan program similar to it before its creation in the energy title of the farm bill. Thus, USDA did not have an existing program to use as a model for developing the program regulation. In addition, these officials said that RBS staff were generally not familiar with renewable energy technologies and thus needed to reach out to other agencies, such as DOE and EPA, to obtain technical assistance. They also noted that consultation with DOE is required in section 9006 of the farm bill.

Although USDA officials maintain that the agency’s development in early 2004 of an emergency pilot program for developing renewable energy systems from the use of diseased livestock as a process raw material for energy generation was not a source of delay, it may have been a contributing factor. This pilot program was announced in a NOFA published in the Federal Register on May 18, 2004. According to the NOFA, this program is a further action to support USDA’s efforts to address the risks associated with bovine spongiform encephalopathy (BSE), also known as mad cow disease. The NOFA states that RBS expects projects to be constructed that will produce energy through the destruction of diseased cattle.

Under the pilot program, USDA plans to provide guaranteed loans totaling up to $50 million for up to three project proposals. USDA estimates the cost of the pilot to be about $3.1 million, needed to fund the credit subsidy costs. According to USDA officials, these funds will come from the fiscal year 2004 appropriation for the Renewable Energy Program, reducing the funds available to make grant awards under this program by an equivalent amount. Although it will use funds from the Renewable Energy Program, these officials said the pilot program is a distinct 1-year program that will not be addressed in the regulation for the Renewable Energy Program. Instead, the NOFA indicates that the program regulation for USDA’s Business and Industry Loan Guarantee Program is being used as the basis for the delivery of the pilot program, with certain provisions of that regulation revised to accommodate the pilot’s purpose. For example, changes to the guaranteed fee and the percent of guarantee were made to provide a further incentive to lenders to participate in the pilot program.

MACTEC, the same contractor that USDA is using to develop the proposed regulation for the Renewable Energy Program, was also used to develop the NOFA for the pilot program. The original contract with MACTEC was modified for this purpose. Specifically, a contract amendment signed in February 2004 provided for additional payments of about $25,000 for this purpose, increasing the total value of the contract to about $342,000. According to the amendment, MACTEC was to begin work on the NOFA in late February 2004. USDA officials indicated that MACTEC had delivered the draft proposed program regulation for the Renewable Energy Program to USDA for review prior to beginning work on the pilot program, and thus the work on the pilot did not delay the work on the proposed program regulation. However, progress reports prepared by MACTEC in March and April 2004 indicate that there was overlap between the two efforts, although the reports do not make clear whether work on the pilot delayed progress on the program regulation.

USDA’s Inability to Offer Loans and Loan Guarantees under the Renewable Energy Program Limits This Program’s Potential

USDA’s continuing inability to offer loans and loan guarantees under the Renewable Energy Program, as specified in the farm bill, limits the agency’s ability to achieve a much higher program level. For example, according to USDA’s fiscal year 2005 Budget Summary, the Consolidated Appropriations Act for 2004 and the administration’s budget proposal for 2005 provide sufficient funding for the Renewable Energy Program—about $23 million in 2004 and about $11 million in 2005—for $200 million in program level each year, based on a combination of loans, loan guarantees, and grants. This is possible because for direct loans and loan guarantees, program funds would be needed only for the credit subsidy cost. Otherwise, direct loans are made from funds borrowed from the U.S. Treasury, and guaranteed loans are made by private lending institutions. Thus, a greater number of renewable energy projects could be financed. In addition, providing loans or loan guarantees in conjunction with grants could provide individual recipients with a greater level of assistance. That is, while grants can be used to pay up to 25 percent of the eligible project costs, a combination of grants and loans or loan guarantees may be used to pay up to 50 percent of the eligible costs. In addition, loans may be a more cost-effective way to provide federal assistance than outright grants, as the funds used for loans are repaid by the recipient.

USDA’s continuing inability to offer loans and loan guarantees under the Renewable Energy Program also limits the program’s potential benefits and the agency’s ability to achieve one of its performance goals: to increase economic opportunity in rural areas. For example, USDA’s fiscal year 2005 Budget Explanatory Notes indicate that the $21.7 million in grant awards made in fiscal year 2003 under the Renewable Energy Program resulted in an estimated 736 jobs created or saved and 100 million kWh of electricity generated. However, the agency estimates that the addition of loans and loan guarantees in fiscal year 2004 would result in (1) a program of about $200 million, (2) an estimated 7,169 jobs created or saved, and (3) 888 million kWh of electricity generated. Jobs created or saved and electricity generated are identified as key performance measures in the Budget Explanatory Notes.

USDA’s ability to offer loans and loan guarantees is also important because of uncertainty regarding the Renewable Energy Program’s future funding. Although the program was fully funded in fiscal years 2003 and 2004, the administration’s budget proposal for fiscal year 2005 provides only $10.77 million of the $23 million authorized in the farm bill. If enacted as proposed, this level of funding would represent less than 50 percent of the resources authorized for the program. Since direct loans and loan guarantees require appropriations for only the credit subsidy cost, not their full face value, they may result in making more financing available at less cost to the government than outright grants. Also, the ability to leverage greater amounts of private financing with loan guarantees would take on added importance. Many stakeholder organizations, including AWEA, the Environmental and Energy Study Institute, the American Council for an Energy-Efficient Economy, and the Environmental Law and Policy Center, have expressed concerns regarding this proposed cut.

USDA’s Ability to Offer Loans and Loan Guarantees under the Renewable Energy Program in Fiscal Year 2005 Is Uncertain and Questions Remain

In June 2004, USDA officials indicated that they anticipate publishing the final regulation for the Renewable Energy Program in late spring 2005. Specifically, documentation related to the agency’s contract with MACTEC indicates that the final regulation will be published in the Federal Register on May 31, 2005. Assuming this schedule is met, only 4 months in fiscal year 2005 would remain for (1) USDA to issue a notice in the Federal Register announcing the availability of funds for loans, loan guarantees, and grants; (2) program applicants to prepare project proposals and applications, including obtaining professional assistance from an engineer, financial adviser, or environmental consultant; and (3) USDA to receive and analyze program applications and to consult with DOE or EPA, as appropriate, regarding the technical merit of the proposals. USDA officials acknowledged that this would be a very tight schedule, but expressed the view that they could offer loans and loan guarantees in fiscal year 2005 if this schedule is met.

However, questions remain as to when the proposed and final program regulation will be published. The proposed regulation completed final departmental clearance on June 23, 2004, and was sent to OMB for review. As noted, OMB may take up to 90 days for its review. USDA must then make revisions to the proposed regulation to address OMB’s comments before its publication in the Federal Register for public comment. USDA has already revised its target date for publishing the proposed regulation several times—from November 17, 2003, to May 24, 2004, to the fall of 2004. Similarly, it has revised its target date to publish the final regulation from June 7, 2004, to May 31, 2005.

USDA officials said that 60 days would be allowed for public comment on the proposed regulation after its publication. In addition, they said they expect a large volume of comments and that it will take time to review these comments and consider revisions to the regulation. These officials said they would consider options to speed up the agency’s review, including detailing additional staff to assist with this work. Once USDA has completed its review of the comments and revised the regulation, as appropriate, the agency will submit the final regulation to its internal clearance process and then to OMB for review. Regarding its internal clearance process, USDA officials said they would consider doing concurrent reviews to speed up this process. However, these officials noted that RBS lacks the authority or control to compel other offices in USDA to expedite their reviews of the program regulation. These officials noted that USDA’s Office of Budget and Program Analysis is responsible for overseeing the timely completion of this clearance process. Regarding OMB’s review, this agency again may take up to 90 days for its review.

Any unanticipated problems could affect USDA’s current plan to issue the proposed regulation by the fall of 2004 and the final regulation by May 31, 2005. As noted, many delays already have been experienced in developing this regulation. Further delays, possibly pushing the publication date for the final regulation beyond May 31, 2005, would likely preclude USDA from offering loans and loan guarantees in fiscal year 2005, as was the case in fiscal years 2003 and 2004. The Renewable Energy Program was authorized for 5 years—fiscal years 2003 through 2007. If USDA is unable to offer loans and loan guarantees again in fiscal year 2005, only 2 years will remain to utilize all of the financial mechanisms provided by the legislation. As noted, utilization of these mechanisms would increase the program level and benefits. In this regard, eight members of the Senate Agriculture Committee sent a letter to USDA in June 2004 noting that a third year without a final regulation in place could impede and undermine the full potential of the Renewable Energy Program. Accordingly, they urged USDA to issue the proposed and final rules as soon as possible.

Another concern is staffing. RBS’s Processing Branch has lead responsibility for implementing the Renewable Energy Program. This branch is also responsible for administering five other national grant or loan programs. According to USDA officials, the branch has been able to implement the Renewable Energy Program as a grant program to date without the need for additional staff. However, these officials said that once USDA starts to offer loans and loan guarantees under the Renewable Energy Program, staffing could become an issue. Currently, the branch has four program specialists in addition to the Branch Chief. According to the Chief, administering a loan program is more complicated than a grant program, and therefore a loan program requires more staff resources and time. For example, administering a direct loan program requires agency resources to handle loan origination, processing, and servicing functions.

USDA Has Taken Some Actions to Promote Wind Power through Other Programs

Aside from its actions to implement specific provisions of the 2002 farm bill to promote wind power, USDA has provided additional assistance for this purpose under several of its programs. For example: From May 1997 through March 2004, USDA provided about $13.3 million in grant and loan assistance to 25 rural electric cooperatives or small businesses to procure or manufacture small wind turbines for on-farm use.

In 2001, the Animal and Plant Health Inspection Service entered into an agreement with a local utility to purchase 25 percent of the electricity used at its National Wildlife Research Center in Colorado from wind- generated sources.

In fiscal year 2003, USDA provided a $2.5 million grant under its High Energy Cost Program to the Alaska Village Electric Cooperative to address high energy costs in Chevak, Alaska, an impoverished community of about 800 residents. Among other things, the funds will be used for a wind generation system.

In October 2003, USDA signed a memorandum of understanding with the National Rural Electric Cooperative Association to increase the use of renewable resources to generate electricity. The agreement provides for cooperation in conducting renewable energy technology research and for conducting education and outreach to promote the use of renewable energy resources, such as biomass, solar, and wind power, in rural areas.

The Agricultural Research Service conducts research and development to lower the costs of wind generation for isolated farms, ranches, and rural communities that lack access to affordable and reliable electrical energy. Currently, the service is conducting research with Sandia National Laboratories on lowering the costs of wind turbine blades, which account for more than 50 percent of the cost of new wind turbines.

USDA May Have Opportunities to Obtain Additional Assistance from EPA

In implementing the Renewable Energy Program, USDA may also be missing opportunities to obtain further assistance from EPA. USDA’s rural energy working group included a representative from EPA’s AgStar Program, but this program is focused solely on the production of power from the anaerobic digestion of biomass such as livestock manure. According to EPA officials, other EPA offices also may be able to offer information, resources, and expertise to assist USDA’s implementation of the Renewable Energy Program for other renewable sources, including wind power. For example, an official in EPA’s Office of Air and Radiation said that this office has extensive contacts with the electric power utilities through its Green Power Partnership Program, and could therefore help Renewable Energy Program applicants find buyers for the electricity they will generate and negotiate related power purchase agreements. In addition, this office could help answer applicants’ questions on project site selection and permitting for environmental impacts, where applicable.

USDA officials said they recognize that other EPA offices may be able to offer assistance and that they would welcome such assistance. However, these officials noted that the rural energy working group has not met since January 2003, having identified at that time the information, resources, and expertise available from the group’s participants to assist USDA’s implementation of the Renewable Energy Program. There are no plans for the group to meet again. More recently, USDA officials indicated that they are considering an interagency acquisition agreement with EPA to obtain technical assistance from the AgStar program in reviewing project proposals for anaerobic digestion. This agreement would be similar to the agreement USDA has with DOE regarding the review of project proposals for other renewable energy technologies. According to the Chief of RBS’s Processing Branch, he has had discussions with the lead EPA official for the AgStar program as to whether other EPA offices should be included in this agreement; as of June 2004, USDA officials said this matter was still under discussion.

Stakeholders Are Concerned about the Complexity and Short Time Frames for Submitting Applications under the Renewable Energy Program

Various stakeholders have expressed concerns about the complexity and short time frames for submitting grant applications under the Renewable Energy Program. For example, in the course of our fieldwork during 2003, we heard a number of concerns from farmers and others about the complexity of this application process and the short time frames for completing and submitting applications. The applications must include economic feasibility studies, tentative agreements with an electricity buyer, financial information demonstrating need under the program, and information for completing environmental assessments. USDA officials acknowledged some of these concerns and indicated they have been and continue to look for ways to simplify the application process. However, these officials also cautioned that renewable energy projects are, by their nature, legally, technically, and financially complicated ventures, and, consequently, it is not surprising that applicants might find the application process difficult and need the assistance of an attorney, engineer, or financial consultant.

Regarding the complexity of the application process, USDA officials noted they have applied lessons learned from the agency’s experience under the fiscal year 2003 grant program to the fiscal year 2004 program. The NOFA for the fiscal year 2003 program invited comments from applicants and other stakeholder groups. USDA officials said they considered these comments and other subsequent comments that have been received from various stakeholders over the past year. As a result, the NOFA for the fiscal year 2004 grant program is about three times as long as the one for the previous year. Among other changes, the 2004 NOFA contains specific application guidance for each renewable energy technology covered by the program.

Regarding time frames, USDA initially gave applicants 2 months to submit their applications under the fiscal year 2003 grant program. Specifically, USDA issued a NOFA in the Federal Register on April 8, 2003, with a requirement that applications be postmarked no later than June 6, 2003. However, in part because of complaints from applicants and other stakeholders regarding the short time frame, USDA issued a subsequent notice in the Federal Register on May 19, 2003, to extend the application deadline to June 27, 2003. As for the fiscal year 2004 program, USDA issued the NOFA on May 5, 2004, with a requirement that the applications be postmarked no later than 75 calendar days after the date of the published notice (July 19, 2004). Although USDA’s issuance of the 2004 NOFA fell a month later in the fiscal year than the 2003 NOFA’s issuance and the time frame allowed under the 2004 NOFA is shorter than that allowed under the 2003 NOFA (including the extension), USDA officials said they believed the time allowed in 2004 is sufficient. They noted that the guidance in the 2004 NOFA is more detailed than the 2003 NOFA. They also said that the agency’s rural energy coordinators encouraged potential program applicants to begin pulling together information needed for environmental assessments even before the 2004 NOFA was published.

In June 2004, USDA officials also said they expect to receive further detailed comments on the application process and other aspects of the program when the proposed program regulation is published in the Federal Register for comment later in 2004. These officials indicated they would use these comments to consider further refinements to the application process. Also in June 2004, we discussed with these officials the potential advantages of surveying program applicants, the agency’s rural energy coordinators, and other stakeholders, as appropriate, regarding their views as to how the application process could be improved and streamlined. We suggested that a survey would comprehensively document problems and related suggestions to better inform USDA as to the severity or extent of the problems cited and whether corrective actions are warranted. USDA officials indicated they did not think a survey is needed in addition to the comments already received and those expected after publication of the proposed regulation. They also noted the rural energy coordinators often provide information on problems or concerns related to the application process during monthly conference calls with USDA’s Rural Development state offices.

Conclusions

USDA has yet to utilize all of the financial mechanisms of the farm bill’s Renewable Energy and Energy Efficiency Improvements Program. Among other things, USDA has not issued the final program regulation yet that would allow it to offer loans and loan guarantees, as well as grants. The addition of loans and loan guarantees would allow USDA to achieve a much higher level of program activity, potentially increasing the number of projects financed and providing benefits such as increased economic opportunities in rural areas. Loans may also be a more cost-effective way to provide federal assistance than outright grants. In addition, the provision of loans or loan guarantees in conjunction with grants would enable USDA to offer a greater level of assistance to program applicants.

While USDA has taken a number of actions to coordinate its efforts to implement the program internally and externally, it may be missing opportunities to leverage information, resources, and expertise that may be available from EPA, such as from EPA’s Office of Air and Radiation.

Finally, applicants and other stakeholders have raised concerns regarding the complexity of the application process for the program, as well as the limited time frame provided for submitting these applications. USDA’s continued collection and consideration of these concerns may identify ways to improve and streamline this process.

Recommendations

To ensure USDA’s timely and effective implementation of the farm bill’s Renewable Energy Systems and Energy Efficiency Improvements Program, we recommend that the Secretary of Agriculture direct the Rural Business- Cooperative Service to take the following actions: Work with other USDA offices, such as the Office of General Counsel and the Office of Budget and Program Analysis, to identify possible ways to accelerate the development of the program regulation to ensure that all of the funding mechanisms required by the farm bill, including loans and loan guarantees, be made available as expeditiously as possible.

Work with EPA to identify other EPA offices, such as the Office of Air and Radiation, which may be able to offer information, resources, and expertise to assist USDA in its implementation of this program.

Continue to examine ways to simplify, improve, and streamline the application process for the program, and as part of that effort, consider the views of program applicants, the agency’s rural energy coordinators, and other interested stakeholders.

Agency Comments

We provided a draft of this report to USDA for review and comment. We received written comments from USDA’s Acting Under Secretary for Rural Development, which are reprinted in appendix VI. USDA also provided us with suggested technical corrections, which we have incorporated into this report, as appropriate.

USDA agreed with our recommendations and provided information on how it planned to implement them. Specifically, the Acting Under Secretary for Rural Development stated that the agency is continuing to expedite the development of the program regulation, noting that it is in the best interests of all parties to expedite the rule making process. This official stated further that the agency would work with EPA officials to identify EPA offices that could provide USDA with information, resources, or expertise to implement the program and that a draft interagency agreement, which it planned to execute before the end of the fiscal year, would allow USDA to fund specific support activities provided by EPA. Finally, this official stated that the agency would continue to examine ways to simplify the program application process through consultation with DOE, EPA, and other interested stakeholders, including those commenting on the proposed rule making during its 60-day comment period.

We also provided a draft of this report to DOE and EPA for review and comment. These agencies provided us with suggested technical corrections, which we incorporated into the report, as appropriate.

As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. We will then send copies to interested congressional committees; the Secretary of Agriculture; the Secretary of Energy; the Administrator, Energy Information Administration; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at (202) 512- 3841. Key contributors to this report are listed in appendix VII.

Objectives, Scope, and Methodology

At the request of the Ranking Democratic Member, Senate Committee on Agriculture, Nutrition, and Forestry, we agreed to examine (1) the amount of wind power generation in relation to all U.S. electricity generation and the prospects for wind power’s growth, (2) the contribution of wind power generation to farmers’ income and to the economic well-being of rural communities in the 10 states with the highest wind power generation capacity, (3) the advantages and disadvantages for farmers and rural communities of owning a wind power project or leasing their land to a commercial wind power developer, and (4) the efforts of the U.S. Department of Agriculture (USDA) to promote the development of wind power on farms and in rural communities.

To determine the amount of wind power generation in relation to all U.S. electricity generation and the prospects for wind power’s growth, we interviewed officials or reviewed the documentation they provided at the Department of Energy’s (DOE) Energy Information Administration (EIA), Office of Energy Efficiency and Renewable Energy, National Renewable Energy Laboratory (NREL), and Wind Powering America program. We also interviewed officials or reviewed documentation from the American Wind Energy Association (AWEA), Bonneville Power Administration, Edison Electric Institute, Electric Power Research Institute, Environmental and Energy Study Institute, Interstate Renewable Energy Council, Windustry (a rural-based, wind stakeholder organization), Union of Concerned Scientists, Energy Foundation, California Wind Energy Collaborative, and National Corn Growers Association. From these sources we were able to determine the extent of wind power capacity installed in the United States, including a state-by-state breakdown, and information on the wind potential of various parts of the United States.

These sources also provided information on prospects for wind power’s growth, including factors that may either constrain or promote it. Regarding these factors, we also reviewed our own past work, relevant publications of the Congressional Budget Office and the Congressional Research Service, and applicable laws, regulations, and executive orders. Concerning one of these factors—production tax credits—we spoke with staff of the Congressional Joint Tax Committee and the Department of Treasury, as well as two tax lawyers and a certified public accountant who specialize in these tax issues. In addition, we reviewed relevant literature addressing the growth potential of wind power and discussed data related to these projections with DOE officials.

We also asked EIA to use its National Energy Modeling System to forecast wind power’s growth by 2025 under two scenarios. EIA uses this computer- based model to annually forecast future energy supply, demand, and prices, typically over a 20-year period. The model uses assumptions regarding economic growth; changes in world energy prices; technology, demographic, and other trends; and the possible changes to current laws and regulations. In short, the first scenario—EIA’s reference case— assumed that the authorization for the federal production tax credit would expire and not be available after December 2003. The second scenario assumed that authorization for the production tax credit would continue through December 2010. Other assumptions, including those for demographic and other trends, price increases for fossil resources, and current laws and regulations, were held constant in modeling these scenarios. In addition, EIA assumed that further design and technological improvements in turbines—known as the “learning effect”—would occur in both scenarios. However, the agency assumed that this effect would be greater in the second scenario due to the continued availability of the production tax credit. Specifically, the continued availability of this credit would lead to greater interest in wind power, spurring further design and technological improvements. These improvements would result in more efficient and productive turbines, making wind power more competitive with fossil fuels.

To determine the contribution of wind power generation to farmers’ income and to the economic well-being of rural communities in the 10 states with the highest wind power generation capacity, we started with the information collected above to identify the relevant states. In particular, we used data developed by DOE and AWEA to determine the 10 states with the largest amount of wind power generating capacity as of December 2002; these states represented about 90 percent of the nation’s wind generating capacity at that time. From this list of 10 states, we selected 5 states to visit: the 4 states with the largest generating capacity—California, Texas, Minnesota, and Iowa—and the state—Colorado—that had the 10th largest capacity. We chose Colorado as a point of contrast—unlike the top four states, Colorado had few state programs to promote wind power. For each state, we collected information on the number of farms; the types of agriculture crops produced; total farm income; farm, ranch, and rural lands acreage; wind energy generation sources; and state policies and financial and tax incentives designed to encourage wind power development. We obtained this information from a variety of sources, including USDA’s Farm Services Agency, Economic Research Service, and National Agricultural Statistics Service, and state and local taxing authorities.

In the five states, we then visited nine wind projects in 10 counties to obtain information on specific wind power projects. In addition, we visited two other wind projects during the course of our work, but we did not obtain detailed information on these projects. To select the projects visited, we compared lists of wind projects for each state; we obtained these lists from AWEA, Windustry, and the states of California, Iowa, and Minnesota. From these lists we selected a mixture of leased, farmer-owned, and community-operated wind projects that also were geographically dispersed within a state. In addition to operating projects, we sought information on projects that may have failed in the past 5 years; however, federal, state, and local officials were unaware of any such failures in these states.

Our work focused on utility-scale wind power projects—projects that generate at least 1 megawatt (MW) of electric power (from one or more turbines) annually for sale to a local utility. Utility-scale wind power accounts for over 90 percent of wind power generation in the United States. In addition, we defined “community projects” as those operated by a municipal or rural utility or by a school district. At the project locations, we generally met with landowners, project owners and investors, state and local taxing authorities, community leaders, and electric utility officials. To some extent, our work was limited because we did not have access to cost and income data of a proprietary nature. In other cases, we were able to obtain this information but used it only to develop ranges.

In addition, we asked NREL to model the economic impact of wind power projects on the counties we visited. Specifically, we asked NREL to use its Wind Impact Model to assess the employment and income impacts of three hypothetical scenarios on the 10 counties included in our visits. The scenarios were (1) a 150 MW project that is owned by an out-of-state firm, (2) a 40 MW project that is owned by an out-of-state firm, and (3) several small projects with total capacity of 40 MW that are owned by county residents. This modeling work, including related assumptions, is discussed in greater detail in appendix III.

To determine the advantages and disadvantages for farmers and rural communities of owning a wind power project or leasing their land to a commercial wind power developer, we interviewed officials or reviewed documentation from DOE’s NREL and Wind Powering America program; AWEA; the Environmental and Energy Study Institute; the National Wind Coordinating Committee; Windustry; the Izaak Walton League of America; and the Union of Concerned Scientists. The documentation we reviewed covered issues such as wind project economics and development, research, technology, site selection, electricity transmission, economic and legal constraints, and various federal and state incentives. We also discussed these issues with farmers, landowners, wind project investors, state and local government officials, including local taxing authorities, and others during the course of our site visits.

To determine USDA’s efforts to promote the development of wind power on farms and in rural communities, we interviewed officials or reviewed documentation from USDA’s Agricultural Research Service, Economic Research Service, Office of Energy Policy and New Uses, Natural Resources Conservation Service, Rural Business-Cooperative Service, Rural Utilities Service, and Office of General Counsel. In particular, we reviewed USDA’s efforts to implement the Renewable Energy Systems and Energy Efficiency Improvements Program (Renewable Energy Program) provided for in section 9006 of the 2002 Farm Security and Rural Investment Act (farm bill). We also spoke with USDA officials and reviewed documents they furnished to determine the extent to which USDA provided assistance under other rural development loan or grant programs for wind project research, planning, or construction. In addition, regarding USDA’s implementation of the Renewable Energy Program, we discussed USDA’s consultation with DOE and the Environmental Protection Agency (EPA) with officials from all three agencies. Furthermore, during our site visits in the selected states, we discussed with farmers, ranchers, and rural small business officials the financial or technical assistance they may have received from USDA or other federal agencies in developing their wind power projects. We also discussed with them their experiences with the application process for seeking assistance under the section 9006 program, including obtaining information on the program and completing the application, as well as obtaining information and assistance from USDA or other sources on the factors—economic, technical, and legal—that need to be considered before embarking on a wind project. Finally, we reviewed written comments submitted to USDA in response to a December 2002 public meeting to solicit suggestions from interested stakeholders about USDA’s implementation of the section 9006 program.

Finally, to get a better sense of what the federal government is doing more generally to promote wind power generation and how these efforts may be coordinated with USDA’s efforts to foster its development on farms and in rural communities, we spoke with officials or reviewed documentation from DOE, USDA, the Department of Defense, the Department of the Interior, and EPA.

We conducted our review from February 2003 through August 2004 in accordance with generally accepted government auditing standards. We did not independently verify the data obtained from the sources noted above. However, as appropriate, we discussed with these sources the measures they take to ensure the accuracy of these data. These measures seemed reasonable. Appendix II provides further information on the sources used in our work.

Sources for Information on Wind Power Generation

Following are the names, addresses, and Web sites for sources of information on wind power generation used in our work.

Results of NREL Modeling on Potential Economic Impacts of Wind Power on Rural Communities

We asked NREL to model the economic impact of wind power projects on the counties we visited during our review. This appendix describes the model used for the analysis, including the key data inputs and parameters. It also describes the model results.

NREL has retained the services of MRG & Associates, a consulting firm (the firm) that specializes in energy economic analysis. The firm developed the Wind Impact Model (the model) to assess the impact of wind power investments on employment, earnings, and economic output at the state and local levels. Economic output as defined in the model is a measure of economic activity (value of production) on the state or local level that is similar to the measure of the gross domestic product on the national level. For simplicity, this appendix refers to economic output as “income.”

We asked NREL to assess the employment and income impacts of three hypothetical scenarios on 11 counties in the five states we visited. The scenarios are: (1) a 150 MW project that is owned by an out-of-state firm, (2) a 40 MW project that is owned by an out-of-state firm; and (3) several small projects totaling 40 MW of capacity that are owned by county residents. Table 7 lists the 11 counties for which the firm conducted the analysis. We selected these counties because we determined that the NREL analysis would be an appropriate complement to our visits. We also believed that our visits would give us some general sense of the economic conditions of the counties, helping us judge the differences in assumptions regarding the counties in NREL’s modeling.

The Wind Impact Model

The model provides a tool that can be used by wind power developers, decision makers, and others to identify the local economic impacts associated with constructing and operating wind power projects. The model, based on a spreadsheet, emulates, on a small scale, the basic function of an input-output model. It relies on input-output multipliers that, in this case, estimate how much a dollar of expenditures injected into an economy will generate in total employment or income. Employment and income multipliers for a given sector of a state’s or a county’s economy depend on the spending patterns and the specific economic structure of the jurisdiction in question. The source of the multipliers used in the model is Minnesota IMPLAN Group Inc., whose databases and modeling system are used by many government agencies, academic institutions, and other researchers worldwide for economic impact modeling and analyses.

Input-output models are used to trace supply linkages in the economy. For example, an input-output model of wind power would show how investments in wind turbines benefit turbine manufacturers as well as fabricated metal industries and others businesses supplying inputs to those manufacturers. An input-output analysis of local benefits generated by wind power project expenditures would depend upon how much of those expenditures are spent locally and the structure of the local economy.

Different levels of expenditures support varying levels of employment, income, and output, consistent with the spending pattern and local economic structure. “Inputs” into the model include cost data for a given wind power project and parameters that characterize the particular state- or county-level economy being analyzed. Multipliers are used on the input data to calculate the “outputs,” which are the estimated employment and income impacts of the project.

The model is designed to examine economic impact on the state or county levels, and it does so separately for the “construction period” and “operating years” of a wind power project. Construction phase impacts are reported as a 1-year equivalent of the incremental change to state or county employment, earnings, and income attributable to a new project. For example, if a project results in full-time employment of 200 workers for 6 months, the model will “see” this effect as 100 full-time jobs added for 1 year. On the other hand, a model output of 25 jobs for the operating years of a project means that this project is expected to employ (directly at the plant and indirectly) 25 full-time equivalent workers annually over its lifetime.

The model divides a state or county economy into 14 sectors. For each sector, the model has three sets of employment, earnings, and income multipliers. One set is for direct effects, another for indirect effects, and a third for induced effects. In the case of a 150 MW wind power project, for example, the construction period direct employment effect includes the on- site jobs of the contractors and crews hired to build the project and jobs at the manufacturing plants that produce the turbines. In the operating years, the direct employment effect includes all of the workers who are employed directly by the project (field technicians, administrative staff, and project managers) as well as employment directly supported by expenditures for goods and services used by the plant. The indirect employment effect includes employment that results because suppliers of goods and services to the project also procure goods and services from others. The contractor who builds the project, for example, procures goods and services from bankers, accountants, suppliers of construction and other materials, and others. Finally, the induced employment effects refer to the change in employment that occurs due to the spending of those persons directly and indirectly generating income associated with the project. Direct, indirect, and induced income effects follow the same logic.

Model Inputs

A major portion of the required “inputs” into the model are cost data, including the following: construction costs—for materials and labor, for example; equipment costs for such things as turbines, rotors, and towers; other construction period costs, such as for interconnection to the electric grid, engineering services, land easements, and permitting; annual operating and maintenance costs, including payroll of direct employees, material, and various services; and financing and lease costs and taxes.

Other inputs include estimates of “local share value” for certain dollar expenditures and labor. For example, a 10 percent local share value for construction material expenditures for Pecos County, Texas, means that, for a wind project being built in this county, the model assumes that only 10 percent of the value of project expenditures on construction materials accrues to local vendors. The relatively low number means that Pecos County has a limited economy and much of the construction material needed for the project would have to be obtained from outside the county—possibly from neighboring urban centers, such as the cities of Midland-Odessa and Lubbock, or from out-of-state locations. Similarly, for Pecos County, the model assumes that only 10 percent of the labor used for laying the foundations for the project’s turbines would be hired locally. In contrast, the corresponding percentages for Alameda County, California—a county with a much larger population and larger and more diversified economic base—would be 90 percent for the local share of construction material expenditures and 100 percent for the local share of labor used for foundation work.

The Interaction between Local Share Values and Multipliers

The local share values and multipliers used in the model determine how an expenditure of a particular type translates into employment and income impacts on a county’s economy. The interaction between the model inputs may be partly illustrated by comparing Rock County, Minnesota, with Weld County, Colorado.

For Rock County, the model assumes the local share value for construction expenditures is 4 percent. The model also uses a direct employment multiplier of 10.1 jobs for every $1 million spent on construction in the county.

For Weld County, the model assumes the local share value for total construction expenditures is 76 percent, and the direct employment multiplier is 8.3 jobs for every $1 million spent on construction in the county.

The differences in the local share values and multipliers for these two counties are attributable to the differing population and economic characteristics of these counties. Rock County is rural, with a small population and economic base, and thus the project developer must obtain much of the construction material, equipment, and labor needed from outside the county. In contrast, Weld County has a much larger population and economic base capable of fulfilling more of the developer’s material and labor needs.

On the other hand, the direct construction employment multiplier for Rock County, at 10.1 jobs per million dollars of expenditure, is somewhat higher than the corresponding multiplier of 8.3 for Weld County, reflecting a more labor-intensive local economy in the former.

The difference in local share values and employment multipliers for Rock County, Minnesota, and Weld County, Colorado, results in bigger employment impacts of a wind power project in the latter. For example, the model assumes that the construction of a 150 MW project will cost about $15 million in each county. However, in the case of Rock County, only about $600,000 of this amount will be spent within the county, while the corresponding local share for Weld County will be $11.5 million. Consequently, according to the model results, the $15 million construction project results in direct construction phase employment for Rock County of only 16 jobs compared with 141 jobs for Weld County.

Model Results

We have not summarized all model results—to do so would involve publishing 33 large tables. However, those we do include are illustrative of the results we found. Overall, the model results showed that employment and income impacts tend to be greater for counties that are more highly populated and have a larger economic base, and are considerably greater for projects that are locally owned than for projects that are owned by out-of-area firms.

As discussed, the model estimates economic impacts for the construction period separately from impacts during the years of the project’s operation. Tables 8 and 9 summarize the model’s estimates of economic impacts for the construction period, while tables 10 through 12 summarize the estimates for the years of operation. Estimates for the construction period are 1-year impacts.

Construction Period Impacts

Table 8 shows the economic impacts of constructing a 150 MW wind power project owned by an out-of-area energy company (a company headquartered outside the county). Table 9 depicts the impacts of constructing a 40 MW project owned by an out-of-area company. As depicted in these tables, the economic impacts during the construction period are bigger for counties that have a larger population and economic base. For example, the impacts of constructing a 150 MW project on Weld County, Colorado, would include the creation of the equivalent of 349 full- time jobs for 1 year. Weld County has a population of over 200,000. In contrast, the construction of a 150 MW project in Pecos County, Texas, would create the equivalent of only 36 full-time jobs for 1 year in the county. Pecos County has a much smaller population—about 16,000 people—and economic base. Thus, most of the labor and professional staff resources needed to construct the project would be hired from outside the county.

Tables 10, 11, and 12 provide annual estimates of the economic impacts during the operations period of various size projects. Table 10 shows the impacts of a 150 MW project owned by an out-of-area energy company. Table 11 depicts the impacts of 40 MW project owned by an out-of-area company. Table 12 shows the combined impacts of 20 small projects—each 2 MW—that are locally owned. Together, these 20 projects would constitute 40 MW of generating capacity. A comparison of tables 11 and 12 shows that local ownership can generate significantly higher economic impacts for a county. For example, a single 40 MW project built in Pipestone County, Minnesota, would generate about $650,000 in new income for the county annually. In contrast, 20 locally owned projects that are 2 MW each (40 MW total) would generate about $3.3 million annually in the same county.

Caveats to and Reliability of the Modeling Effort

We did not expect a high level of accuracy in the model results because data sources on costs and expenditures are limited, in part because companies may consider these data to be proprietary. Rather, we expected the model’s analysis to illustrate the differences between counties that have different economic structures. The cost data and assumptions for local share values seemed reasonable and consistent with what we found during our visits regarding economic conditions in these counties. The model’s results also generally conform to what we found during our visits, especially for employment effects.

Summary of Visits to Wind Power Projects in Five States

This appendix summarizes key information for the nine wind power projects we visited in 10 counties in five states (California, Colorado, Iowa, Minnesota, and Texas). At each site, we discussed the planning, development, construction, and operation of the project with landowners, project developers and owners, and local government officials.

Projects in California

Projects in Colorado

Projects in Iowa

Projects in Minnesota

Projects in Texas

The Wind Project Development Process

Comments from the U.S. Department of Agriculture

GAO Contacts and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

In addition to the individuals named above, Jacqueline Cook, Philip Farah, William Roach, and Carol Herrnstadt Shulman made key contributions to this report. Important contributions were also made by Carol Bray, Oliver Easterwood, Richard Kasdan, and Lynn Musser.

We also wish to give special recognition to our dear friend and colleague, Patricia Gleason, who passed away during the course of our work. Pat’s distinguished career with GAO was characterized by her strong desire to make government programs more effective and efficient. Furthermore, her courage, humor, and determination to keep working even as her health declined were an inspiration to her co-workers who held her in the highest esteem and miss her greatly.

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