John Farrell: On renewable energy, go local

  • Article by: JOHN FARRELL
  • Updated: August 15, 2007 - 4:32 PM

A focus on output in gallons and megawatts leads to large-scale ethanol plants and wind farms. Such facilities aren’t the most beneficial, nor even the most efficient.

In the past two years, renewable energy has catapulted to the forefront of the national agenda. As the policy discussion progresses, there are many unanswered questions. How will increasingly large ethanol plants and wind farms fit into the rural landscape? Who will own them? How can farmers become part of the renewable-energy revolution, rather than observing it?

In their desire to expand renewable-energy production, activists and policymakers focus almost entirely on “more,” rather than “better.” Twenty-seven states have renewable-energy standards, requiring utilities to produce or sell 10, 20, even 30 percent of electricity from renewable sources in the next two decades. The U.S. House just passed an energy bill with a national renewable-energy standards and a drastically higher biofuels mandate. This tunnel vision on “more” overlooks the substantial benefits of local ownership. Ten 30-million-gallon ethanol plants produce as much as three 100-million-gallon plants. But while the latter may foster a modest and short-term improvement in the local economy (and largely benefit the absentee owners), the former may have thousands of local owners and represent an enduring economic foundation.

Farmer-owners of ethanol plants receive 30 to 40 cents per bushel in dividend payments, and their plant has a 5 percent to 30 percent greater economic impact on the local economy than absentee-owned plants. The same dynamic powers wind-farm development. A farmer hosting a corporate-owned wind turbine may earn $100,000 over the 20-year life of the turbine. Farmers owning that turbine, on the other hand, could earn more than $1 million. The overall local and regional economic impact of that locally owned turbine is 25 percent to 300 percent greater than that of a corporate owned one.

A focus on megawatts and gallons inexorably leads to a policy preference for large wind farms and massive ethanol plants. Conventional wisdom suggests that this preference minimizes unit costs. However, a new report from the Institute for Local Self-Reliance shows that the size of cost savings is modest, perhaps undetectable in the retail price. Meanwhile, the benefits of local ownership are lost, since the cost of large production facilities outstrips the financing ability of most localities.

The average ethanol plant in 2002 produced 40 million gallons a year. Half were farmer-owned. Today, proposed ethanol plants typically will produce 100 million gallons annually. Nearly all will be corporate-owned. The larger plants will produce and sell ethanol for perhaps 2 cents per gallon less than smaller plants, shaving less than 1 percent off the wholesale price of ethanol. Minnesota has been fortunate to feature higher local ownership (over 80 percent) and smaller plants, but forthcoming in-state facilities will match capacities nationally.

Wind is also scaling up. The average wind farm under construction is 80 megawatts, three times bigger than the largest locally owned project. Over a dozen proposed projects exceed 200 megawatts. A large, 200-megawatt wind farm can produce electricity for 25 percent less than an otherwise equivalent local 10-megawatt farm, but large wind farms often need new transmission lines to send their power long distances. If a 200-megawatt project sends its power 500 miles, transmission costs and losses largely offset its economic advantage. On the other hand, twenty 10-megawatt projects injecting their electricity into the existing transmission system could produce the same power at close to the same cost while also providing substantial local economic benefits.

How can we move from “more” to “better”?

• By spreading Minnesota’s example. Our Community-Based Energy Development statute provides a favorable tariff for locally owned renewable-energy projects, requires 51 percent ownership by Minnesota residents and designates 51 percent of financial benefits to local owners. Since 2005, it has ushered in more than 150 megawatts of community-owned wind production and has made hundreds of rural residents into energy producers. As a result, Minnesota leads the nation in locally owned wind power, with close to 400 megawatts of capacity built or contracted. Its forthcoming wind development promises to balance community wind (21 projects) with large, absentee-owned ones (six projects).

• By changing federal tax policy. The federal production tax credit is the most substantial incentive given to renewable-energy producers, but it can be applied only to passive income (such as rental income), which few citizens have. Two Minnesota representatives, Tim Walz and Collin Peterson, have introduced a bill — currently before the House Ways and Means Committee — to allow the tax credit to be taken against ordinary income. This amendment would allow many more Americans to access the tax credit and become investors in renewable energy.

Activists and policymakers should embrace energy policies that encourage “better” rather than “more.” Blanket renewable mandates and incentives tend to favor large-scale facilities that subsidize a few, distant owners of renewable energy. Policies that encourage local ownership, however, strengthen rural economies by turning energy consumers into producers. We can do better.

John Farrell is a research associate at the Institute for Local Self-Reliance in Minneapolis.

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