cape wind: an offshore solyndra

7/28/2019 Cape Wind: An Offshore Solyndra

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Cape Wind: An Offshore Solyndra

Ed Puccerella Adjunct Fellow

July 10, 2013

Executive Summary

The Cape Wind project in Massachusetts depends on federal government support inthe form of loan guarantees, generous tax treatment, and government regulationsthat hamstring competing sources of energy such as coal and natural gas. Suchfavoritism is questionable on its face. Worse, however, is the fact that venturecapitalism, when performed by the government, is ripe for waste, fraud, and abuse.

In this paper we will discuss the comprehensive dead end that the Cape Wind

project represents for U.S. energy policy and the economic risks it poses for theAmerican taxpayer.

The prospects for wind power to seriously contribute to U.S. energy needs werenever strong. With a new energy revolution booming in the oil & gas industry, itsincreasingly apparent that wind is a niche player at best, whose broadest appeal isto people who know nothing about energy. Cape Wind is too economically marginalto merit even a place in that niche.


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Cape Wind: An Offshore Solyndra, Ed Puccerella, July 10, 2013

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Cape Wind: Off to a Slow Start

In 2001 a business consortium issued a proposal to create a wind farm on Nantucket Sound, off the coast of Cape Cod, Massachusetts. Twelve years later, the project isstill searching for investors and construction has yet to begin.

This could be the year that construction starts. Or it may not. The question of whether it should at all still needs to be resolved.

The first decade of the 21 st century looked promising for the wind power industry.In Washington, DC, politicians from both major political parties were increasinglysupportive of wind power and a national cap and trade system to reduce carbonemissions. In theory, capping carbon emissions and allowing a tradeable system of credits would drive investment into wind power if, for no other reason, thanindustrys need for carbon offsets under the new system.

In 2009 prospects for the wind power industry to secure a major share of the U.S.energy market seemed strong and growing. The House of Representatives passedthe Waxman-Markey climate proposal, which would have effectively mandated alarge-scale shift to renewable energy sources such as solar, certain forms of hydropower, and, of course, wind. The EPA was poised to implement that and otheredicts that would have forced a dramatic transformation of U.S. energy markets.

2009 also saw passage of the $787 billion stimulus legislation, with large sumsparceled out for green energy projects. It was a very promising year for the CapeWind project, even with the economy stumbling out of a recession and the 2008financial crisis. In April of 2010, Cape Wind received the final green light fromInterior Secretary Ken Salazar.

The good times didnt last. Whileclimate legislation was a toppriority for Democrats - incontrol of the House, Senate, andWhite House for the first timesince 1994 - it took a back seat tohealthcare. Following passage of health insurance reformlegislation Senate Democrats lost their appetite for any additionalcontroversial legislation ahead of the 2010 midterm elections.

From that point on, of course, theprospects for congressional action have dimmed significantly. The EPA has been onthe receiving end of substantial criticism, and in 2011 the Obama administration

A glorious future maybe? 1


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instructed the agency to put on hold a major ozone rule that could have beenextremely costly on its own for traditional fossil-fuel-based industry.

That wasnt the worst part of 2011 for the Cape Wind

project. That year the UnitedStates Department of Energydenied the projectsapplication for a substantialloan guarantee. The request is being reworked and mayyet be granted, but its worthwondering about thesequence of events. Given allthe opportunities and favorsgranted to green energy and

wind power specifically inrecent years, how has CapeWind failed over a dozenyears to take advantage?

Certainly, a significant chunk of the delay must be ascribed to local resistance,principally in the form of the Alliance to Protect Nantucket Sound. Cape Windmanaged to unite a broad coalition in opposition.

Loan Guarantees: A Pre-Planned Bailout

In one of the bigger setbacks for Cape Wind, the Department of Energy in 2011denied the project a loan guarantee of $1.97 billion - most of the $2.6 billion theproject needs to get off the ground. DOE is now considering a loan guarantee of some undisclosed lower amount.

A loan guarantee doesnt actually provide funding, but it makes it much easier for aproject to secure financing. Published reports indicate that the ability of the project to raise funds in the private investment arena may be contingent on the loanguarantee being approved, making it a no loss bet. The government assuresinvestors that, should the project collapse, they would be able to recoup that amount of money from the government, rather than having to fruitlessly pursue theproject managers through years-long bankruptcy proceedings.

In this way, government assistance takes a more insidious role distorting theability of the energy markets to determine which projects merit financing and whichdo not. It allows project directors to pitch their businesses to friendly government officials who may or may not have expertise in the area in question. Often, projects

Proposed Cape Wind site 2


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may be in the areas of new or unproven technologies where government officialsare essentially guessing without any skin of their own in the game whichprojects are worth taking a risk on. Taxpayers end up paying for failed bets.

In the case of Cape Wind, its instructive that not even the Department of Energy

was willing to take a flyer on granting the project a loan guarantee nearly four timesthe $535 million granted to the failed Solyndra experiment. However, DOE may bepoised to throw in a lower amount perhaps in the range of $300 million.

The Monster at the End of the Horror Movie:Preferential Tax Treatment Wont Die!

Most observers expected that the temporary Production Tax Credit for windpower would expire at the end of 2012. Advocates have long insisted that the taxcredit was training wheels for an industry in its infancy 3, and that wind might eventually graduate to a position of economic viability on par with other forms of energy production.

However, the AmericanTaxpayer Relief Act tax dealthat Congress struck onJanuary 1 extended the PTC foranother year 4 even as the billwas a net tax increase on U.S.taxpayers. Wind industryspokesmen suggested that extension of the PTC alonewould decide the fate of nearlyhalf the jobs in the industry astaggering proportion to be sodependent on a single taxprovision. So while millions of Americans were getting hit with higher taxes, Cape Windreceived a carveout for aspecial-interest tax break.

While it would be inaccurate tosay the tax break made CapeWind competitive with other energy sources, it kept Cape Wind viable enough tocontinue to seek additional investments, particularly with a new federal loanguarantee likely to be granted this year.

Inland wind farms do exist in the U.S., generating more than 60,000 megawatts 5. Theindustry should be mature enough to survive without special tax treatment, and

An industry overly reliant on a single tax break 6


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indeed in some places is a legitimate interest just not at Cape Wind. As DavidDismukes of the Louisiana State University Center for Energy Studies argued last year:

No one can reasonably claim that wind generation remains an infant

industry: wind generation development has expanded tremendously fromjust eight MWs installed in 1980 to over 50,000 MW as of August 2012windgeneration is no longer an infant industry in need of training wheels, but instead is one ready to compete on its own with conventional energyresources and other types of renewable energy. For this reason alone, thefederal wind PTC should be allowed to expire.

There are, however, several additional good reasons to allow the inefficient and uncompetitive federal wind PTC to expire. Two decades ago, when thefederal PTC was created, no states had renewable portfolio standards(RPS). Yet over the last five to eight years, 30 states and the District of Columbia have implemented renewable energy mandates or goals, affordingwind generation and other renewables a guaranteed and subsidized market. 8

Also objectionable about Cape Wind is that the off-again, on-again project encourages Congress to continue short-term extensions of PTC, without the sort of long-term policy clarity that the government should be providing for the market.The industry shouldnt need the PTC; only for marginal projects that cant seem toget off the ground could it make the difference. With U.S. energy productionexperiencing a renaissance, should marginal projects really be distorting U.S. taxpolicy?

Meanwhile, regarding those renewable portfolio standards

The wind power industry was nervous about losing the benefits of the PTC 7


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EPA and State-Level Regulatory Favoritism

Under the Clean Air Act as amended in 1990, the Environmental Protection Agencyhas been on a slow burn, gradually making clear its intention to impose draconiancurbs on U.S. emissions. Without going back to Congress for additional

authorization, the agency is preparing a complicated scheme for energy industrycompliance with carbon emissions targets, justified by fears over manmade globalwarming.

By making it effectively impossible to build new power plants based on coal (coalsupplies just under half of U.S. energy production), wind power advocates such asthe Cape Wind group hope to capitalize on higher prices forced on the market by theEPA.

However, neither wind investors nor government bureaucrats foresaw the massiveupsurge in production of natural gas in the U.S. Environmental regulators areproceeding with additional power plant mandates, but they are also eyeing naturalgas production with skepticism. Environmental activists are urging the EPA toimpose strict new regulations on hydraulic fracturing (a.k.a. fracking) thetechnique used to extract natural gas. Hollywood has even gotten into the act, with amovie starring Matt Damon entitled The Promised Land, about the evils of fracking.

Cape Wind typifies the rent-seeking mentality that is all-too-typical of a companythat is not competitive in the marketplace. Instead, investors in such projects work with environmental groups to agitate for government to impose complicated Rube

The economic costs required to turn this chart upside-down to advantage wind arestaggering. And to make flawed projects like Cape Wind competitive would be evenworse. The method used is irrelevant it would wreak havoc with the economy,whether the method is government taxes on coal and natural gas, draconianenvironmental regulations, or spending via government grants to favored projects. 9


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Goldberg schemes to distort U.S. markets. Not only does this result in higher pricesfor American families, it destabilizes the energy markets so that slack capacity fallsto almost nil, and creates the possibility of rolling blackouts.

Projects like Cape Wind benefit from this situation, however, because the high costs

inherent in wind power production become competitive if prices rise high enough.Another way to say this is that if government makes it inordinately expensive forutilities to purchase power from more conventional, typically more efficient sources,those utilities will reluctantly turn to wind power.

Of course, turning to wind power may not be possible anyway, since wind is not auseful source of baseload power. Baseload refers to the minimum demand levelthat a utility must produce to meet basic expectations. Wind is an intermittent power source, however, due to the obvious fact that sometimes the wind doesnt blow.

At the state level, asimilar impositionof costs ontraditional energysources is takingplace. 30 stateshave in place sometype of renewableportfoliostandard whichrequires utilitiesto use renewableenergy asdefined by that state to supply achunk of theirpower typicallyaround 20%.Renewable energyoften refers towind and solarenergy, but mainlyis meant to excludecoal and naturalgas.

In this way, these state governments are hoping to replace cheap, efficient powerwith expensive renewable energy that middle-class consumers will have to foot the bill for.

number of states have acted on their own to require utilities to stock up onrenewable power production 10


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A Trojan Wind Horse

Even were large parts of the U.S. energy grid shifted towards wind power,

environmental activists would likely not be satisfied. Indeed, wind power oftenseems like a Trojan horse for the next round of demands to reduce humanitys levelof economic activity. Wind power, like any traditional part of the energy market, isuseless without a means of getting the power from the source into residentialhomes, commercial enterprises, and other end users.

A key aspect of any consideration of energy markets depends on T&D thetransmission and distribution of the power through the grid. Essentially,transmission refers to the long-distance cabling and towers that often run adjacent to highways, while distribution refers to the shorter-distance processing of energyfrom substations to the end user.

While grand plans for wind farms in the American Midwest and in certain offshorelocations may be interesting, the wind farms will do no good without T&D.Environmentalists tend to oppose any new infrastructure projects that support theenergy industry. 11

Conclusion

The Cape Wind project fails every reasonable test of a worthwhile infrastructureproject, for employees, government officials, and investors.

The project has enraged local residents and failed to secure necessary funding aftertwelve years. The wind industry itself has received millions of dollars in unjustifiedgovernment grants, but Cape Wind has not even been deemed worthy of suchassistance as other wind projects.

Its still possible that the federal government will refrain from awarding a loanguarantee this year to Cape Wind, and that the Production Tax Credit for windenergy will be allowed to expire on December 31 of this year. Reasonable observersshould hope that happens. Wind projects that satisfy the demands of basic

economics deserve a fair hearing in the marketplace of ideas, but ones like CapeWind that are unable to succeed even with undeserved government favors shouldbe discarded.


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Citations

1) Picture retrieved from here: http://www.betterfutureproject.org/cape-wind/

2) Overview of proposed Cape Wind site retrieved from here:http://www.wbur.org/2011/04/20/cape-wind-superspot

3) Using the Federal Production Tax Credit to Build a Durable Market for WindPower in the United States by Ryan Wiser, Mark Bolinger, and Galen Barbose -Lawrence Berkeley National Laboratory, published November 2007. Retrieved fromhere: http://emp.lbl.gov/sites/all/files/REPORT%20lbnl%20-%2063583_0.pdf

4) American Wind Energy Association press release dated January 1, 2013;retrieved from here:http://www.awea.org/newsroom/pressreleases/congressextendswindptc.cfm

5) AWEA webpage on industry statistics here:http://www.awea.org/learnabout/industry_stats/index.cfm

6) Chart on wind industry dependence on the PTC retrieved from here:http://newenergynews.blogspot.com/2012/02/quick-news-february-14-love-those-loan.html

7) Chart taken from page 11 of the pdf of the Wiser, Bolinger, and Barbose papercited in (3) above.

8) Removing Big Winds Training Wheels: The Case for Ending the FederalProduction Tax Credit by David Dismukes, Louisiana State University Center forEnergy Studies, released October 31, 2012. Retrieved from here, quote from page 6of the pdf document: http://www.americanenergyalliance.org/wp-content/uploads/2012/10/Dismukes-Removing-Big-Winds-Training-Wheels.pdf

9) Chart on U.S. Electricity Generation by Source retrieved from here:http://www.anthropower.com/chart-of-the-day-2

10) Chart taken from page 10 of the pdf of the Dismukes paper cited in (7) above.

11) Environmentalists Oppose Wind Power Line in Idaho, Wyoming by BonnerCohen of the National Center for Public Policy Research, published at Heartland.org,4-14-12. Retrieved from here: http://news.heartland.org/newspaper-article/2012/04/14/environmentalists-oppose-wind-power-line-idaho-wyoming

cape wind: an offshore solyndra

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