Small wind on the farm: a capital budgeting case study

Abstract

PurposeAs the interest in renewable energy increases and the number of federal and state incentives to support renewable energy has also grown in recent years, it seems worthwhile to explore the economics of using small wind energy systems to offset electricity costs on farms. The purpose of this paper is to explore the economics of small wind turbine installations on a dairy in Michigan through case study analysis.Design/methodology/approachAn Excel‐based capital budgeting model is developed that contains two sub‐modules: one that estimates the value of the wind energy based on the measured wind resource, and an investment module that includes factors such as investment cost, financing parameters, sales of electricity; grants and tax credits and tax information. Cases using 20 and 50 kW turbine systems are analyzed.FindingsThe results of the case studies show that in a favorable wind resource, the federal tax and United States Department of Agriculture incentives as well as state policies such as net metering can make wind turbines a good investment with an internal rate of return of 12.5 percent in this example. However, if the wind resource is not sufficient, even favorable renewable energy policies will not offset the lost value of the power generation, and thus a wind turbine will be a poor investment decision. Farm businesses should carefully consider all factors before investing in a wind turbine.Originality/valueThis paper is the first in recent years to combine capital budgeting analysis, wind resource data and the implications of federal and state policies to determine if small wind turbines are a sound investment decision for farm businesses.