Tuesday, April 15, 2008

Taxes and Nuclear Power

Joe Somsel, a contributor and frequent commenter here on the blog, asked me to share this with our readers:

Since I'm posting on the day my US and state income taxes are due, let me expound a bit on relative tax treatments for nuclear generation compared to wind and solar generation.

In the US, the Internal Revenue Service allows accelerated depreciation (actually "Modified Accelerated Cost Recovery System" (MACRS)) that classifies assets into classes then gives the percent of first cost (basis) that can be deduced per year from taxable income. [Note - I'm not a tax accountant - I just took some classes!]

Solar and wind equipment used to make electricity is a five year asset class while a nuclear plant is a 15 year asset class. Both exclude the underlying land values which do not depreciate.

That means that the owner of two new $3000/kW plants, one wind (or solar) and one nuclear, could write-off $960 the first full year for his wind or solar plant but only $285 for his nuclear plant per kilowatt of capacity.

At the 39 percent top corporate tax bracket for 1,500 MWe installed, that's almost a $40 million a year difference to solar or wind in after tax earnings that can be used for dividends whether electricity is sold or not.

For perspective, with 50% equity and 6% ROE, total before-tax profits would be about $135 million if everything went well. The after-tax profits available for distribution or re-investment at the top rate would be about $83 million. This favorable tax treatment increases the cash available for dividends from wind or solar by almost 50% over nuclear for that second year of operation.

Again, I'm no tax or financial accountant but this is a reasonable ballpark estimate of the difference that tax treatments make in investment decisions for new generation. Specialists in taxation are welcome to correct or expound on this estimate in the comments.

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