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!
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