CAPE WIND: PUBLIC MONEY FOR PRIVATE PROFIT

A Billion here, A Billion there....

Everyone admits that offshore wind energy will not be developed in this country without substantial federal subsidies. Currently there are two, the Production Tax Credit and the 30% ARRA rebate. One pays 1.9 cents per kilowatt hour of energy produced and one pays up to 30% of the capital cost of a project, $300 million against a $1 billion project, for example. The rebates are just that; tax free cash payments of public funds to private energy developers. The Cape Wind project, with capital costs headed toward the $2.5 billion mark stands to reap a rebate of up to $750 million. As expensive as offshore wind is, costing two-to-three times what a conventional kilowatt costs, the additional cost of the subsidy money to taxpayers, the rebate, seems to escape disclosure in the glowing articles appearing generally in the American press, articles and stories singing the praise of Cape Wind. After all, this is government money. It does not come out of anyone's pocket. It is free!

Really?

No one in the world has the capital to build a commercial scale offshore wind facility without subsidy. Every offshore wind farm in Europe involves heavy subsidies and so will those planned for the United States. Under the American Reinvestment and Recovery Act (ARRA) any wind facility that is under construction by the end of 2010 and is producing energy by the end of 2012 may apply for a tax free rebate of up to 30% of the project's total cost. the production tax credit, on the other hand, pays 1.9 cents per kilowatt hour of energy generated. One subsidy pays for capacity and one pays for production.

Of course, wind is a temperamental fuel. It is free, but it is fickle, unpredictable. Who can say when it will blow or for how how long or if it will blow not too softly and not too hard? Wind turbines are also finicky, requiring some wind but not too much. Since the day-to-day capacity of wind turbines cannot be projected with any accuracy a subsidy which pays for energy produced does not satisfy the need of the wind developer to pay his loans or his partners/ investors. It seems inevitable that wind developers will opt for the ARRA rebate.

No matter how poorly a wind facility performs the 30% rebate will be paid as long as the facility is in production. So a wind facility that produces only half the energy its developer projected will receive the same 30% cash payment as one that meets its projected capacity. That sounds fair, doesn't it? In a sense, I suppose, nothing could be more fair because even for a local project such as Cape Wind every U.S. taxpayer will pay his or her share of that 30%. In this way the risks and burden are diluted so that no one person is harmed if wind flops.

Many sectors of our economy are subsidized, some heavily. Subsidies may take the form of loan guarantees, outright grants and rebates, tax incentives and use of public lands. Agriculture, transportation and energy are certainly among those sectors of the American economy that have benefitted for some time from government subsidies. For the sake of avoiding confusion, this piece will refer to such subsidies as government subsidies, although in fact they are nothing of the sort. Every penny paid out in subsidies or forgiven as a tax credit/deduction is taken from the wealth of the general population. Our government has no money of its own save what we contribute to it with our taxes and fees. Government subsidies are more accurately defined as redistributed wealth with the government as the agent of that redistribution.

Now comes the issue of subsidies for renewable energy generally and wind energy specifically. It has been determined by consensus in the halls of power that we must generate up to 20% of our national energy load, if not more, from renewable energy sources by the year 2020. There are many reasons stated for this and most if not all are valid. However, we intend here to discuss costs, not whether global warming is real. It is a certainty that the costs of renewable energy are both high and real and offshore wind energy is among the most expensive

Wind energy projects whether land based or offshore are very site specific. This makes using hard and fast costs difficult, potentially inaccurate. However, there are generally accepted costs for both. Land based wind energy costs approximately $2.5 million per installed megawatt (MW) while offshore costs twice as much. This means that at a 30% rate a rebate under ARRA for offshore wind will be as much as $1.5 million/MW. Solar energy is eligible for the same subsidies and its costs are higher than those of wind.

If Cape Wind is built, and if it is under construction by the end of 2010 and producing energy by the end of 2012, and if it costs $2.5 billion to build, its ARRA rebate will total $750 million. In its negotiations with National Grid for a Power Purchase Agreement both sides will deduct this subsidy from the project's total cost and use the lower number as the basis for calculating the PPA's cost per kilowatt to retail customers. This is a neat trick; 30% of the project's costs simply disappear....or does this 30% simply hide or show up somewhere else? Of course the cost remains the same, but it is paid partially by the retail electric customers who buy Cape Wind energy and partially by the rest of the country.

Here comes the scary part: the U.S. Department of Energy's National Renewable Energy Laboratory estimates that there are 1000 gigawatts (GW) of wind energy to be developed offshore in the United States. Cape Wind will account for a mere 46.8% of one gigawatt (1,000 megawatts equal one gigawatt). At $5 million/MW one gigawatt will cost over $5 billion to construct offshore. 1,000GW will cost over $5 trillion in today's money. If the 30% ARRA subsidy remains in place the United States will pay private energy developers more than $1.5 trillion to develop offshore wind, plus enormous tax incentives such as accelerated depreciation on trillions of dollars in hard assets and who knows how much in income tax breaks from the energy they will sell?

Jim Gordon, the CEO of Cape Wind Associates LLC and his throngs of fans are fond saying the wind is free. And, they are correct. But, capturing it is very, very expensive.


Copyright  2010 By Peter A. Kenney

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Comments 6 comments

JohnInMA 6 years ago from Amherst

Although you got the math correct, you are missing some pieces of information that, at least to me, balance things out somewhat, but not completely.

Even today, subsidies exist for most all utility scale generation projects as well as technology advancement depending on stage. Without going into all the details, the point is that the practice, whether good or bad, is not unique. It may be argued that such federal incentives are necessary to "keep up" with the other means of generation.

Also, with the exception of national interest (defense, for example) and mostly intangible benefit space programs, most all new technologies face nearly impassible financial barriers in a purely free market system. So, for example, waiting until a solution is totally on par with whatever existing technology or technologies may mean it never occurs. Either subsidies or regulation, or both, are needed at times. The larger the scale, the more that is true, to a degree. For example, the efficiency of modern engines for transportation would not have reached its current level just by market forces alone. Regardless of ones position or whether they have been too aggressive or too lenient, the CAFE standards for mileage had a large role along with consumer (free market) choice in promoting the development of efficiency.


P. A. Kenney profile image

P. A. Kenney 6 years ago from Cape cod, Massachusetts Author

thanks for the comment, John. I agree that subsidies are a way of life for us in many industries and in virtually all sectors fo the energy business. That said, why throw money at a loser? Why subsidize an intermittent and very expensive form of power solely for the benefit if private developers? Jim Gordon has not been straight with us from day one and for that alone he deserves to get nothing.

Again, thanks for reading and responding.

PAK


JohnInMA 6 years ago from Amherst

Isn't it a little early to be apply the label "loser" to offshore wind? After all, onshore wind in adequate locations is, for the most part, competitive in cost with other central generators. That's especially true when comparing it to nuclear, the only other "green" source for large scale generation. A theoretical benefit to offshore wind that is proven somewhat by measurement is that the source is not only greater (higher speed wind) but also more persistent. That overcomes one of the more signficant problems with onshore wind.

National Grid's position on their contracted approx. $0.20/kWh is that it is a hedge on future natural gas pricing and that they expect it to decrease quickly as new offshore farms are built. To whatever degree the cost reduction is real, one has to expect that the "climate catastrophists" (my term) given their number and wealth, will eventually win. In fact, we are getting closer to taxing carbon (ahem, "pricing" carbon) in this country. So, the question is less about investing in other sources of energy production, and more about how aggressively to do so in order to get future costs down.

Just my opinion.


P. A. Kenney 6 years ago

John -

Once again a thoughtful comment, thank you. howewver, the Operations and maintenance costs (O&M) for winf eqaul as much as 305 of the avaialbale time for generation and these costs are 5 tomes offshore what they are for onshore. this is based on operating expeience in northern zDEuropen offshore facilities. this throws genberation costs considerably higher than for , say, natural gas.

And, there is simply no way to overcome the known capital cost for wind: up to &5 miilion/MW installed vs. $1.1 million +/- for natural gas, In fact, the Cape Wind developer is also building a 400MW gas fired plant in western Massachusetts as we speak. Hmmm...............


JohnInMA 6 years ago from Amherst

You are right in the data, but consider how it all fits:

> Wind farm output is estimated using a capacity factor and availability factor, which are measures of how much is actually generated versus how much could be at 100% output. Both the volume of the wind and the turbines being ready are accounted for. For what it's worth, nuclear plants are the best, where on average they exceed 90% combined. Coal plants have been in the 70% range most recently, while gas-fired has been as low as about 50%. The bottom line is this gets factored into costs and power planning by utilities.

> The lifetime costs must be considered for any source in order to meet regulatory requirements to set rates, etc. So, not only would the above be factored in, but so would all the other real costs such as the purchase of fuel and the end of life removal costs, depending on state regulations, etc. This has been the biggest beef for nuclear because fuel costs have increased and the tear town of facilities has become wildly expensive. But, for example, with wind the fuel is free and the overall hard costs over a lifetime (some use 25 years) for purchase, maintenance and tear down balance out to be favorable over fossil fuel plants.

> Cape Wind has the added cost of all of the delays and real expenses in the fight to date. I'm not sure how much that adds to the bottom line electricity cost, but it's something. You and I will end up paying the final bill to the Wampanoag if that ever gets settled - so far it's in the low millions and the federal government may pony that up.

Other random things to consider are that most (realistic) plans for the next 40 or 50 years do not call for more than 50% of all electricity to come from renewable sources, and many nation's plans peak at 25% or 30%. A big reason has to do with the need to maintain a baseline of predictable and controllable power, adjusted within minutes or an hour as needed to meet demand. It is much more difficult, the higher the ratio of renewable. So, the argument to me isn't as much whether one is a "winner" or "loser", but what the best balance is to keep costs reasonable. And in order to get to better priced renewable sources some gambles must be made. Another bet to be made is exactly when carbon will become the next gold and how much it will cost, like I mentioned in the earlier post. Once that happens, Cape Wind might come out looking pretty cheap at some point.....


P. A. Kenney 6 years ago

John - If you look at the Betz Limit (Alfred Betz circa 1919, also see similar work by Lamchester and Zhoukowski 1915 - 1921)you will see that he reduces his absolute ideal capacity of a wind turbine from the maximum of 60% +/- to roughly 30%. No one in the world operates an offshore wind facility at 30% over a period of even a few years. 25% is cnsidered pretty good. Gordon claims now that Cape Wind will operate at around 37% (the capacity figure contained in the PPA). So, at 25% his energy will be a lot more expensive than what he now claims, and that number is low because it is based on 500KW hours per month for a residential customer when the actual Massachusetts monthly average is 700KWh. Payments to the Wamps are speculation at this point and Gordon claims to have spent $45 million to date.I think $30 million + is a lot closer to reality. Anyway, six months ago he made $125 million on a deal in Texas. Poor baby!

Offshore wind is a loser for everyone but the developers.

PAK

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