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 in the form of loan guarantees, generous tax treatment, and government regulations that hamstring competing sources of energy such as coal and natural gas. Such favoritism is questionable on its face. Worse, however, is the fact that venture capitalism, 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 the American taxpayer. The prospects for wind power to seriously contribute to U.S. energy needs were never strong. With a new energy revolution booming in the oil & gas industry, its increasingly apparent that wind is a niche player at best, whose broadest appeal is to people who know nothing about energy. Cape Wind is too economically marginal to merit even a place in that niche.

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

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 is still 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 21st century looked promising for the wind power industry. In Washington, DC, politicians from both major political parties were increasingly supportive of wind power and a national cap and trade system to reduce carbon emissions. In theory, capping carbon emissions and allowing a tradeable system of credits would drive investment into wind power if, for no other reason, than industrys 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 passed the Waxman-Markey climate proposal, which would have effectively mandated a large-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 other edicts that would have forced a dramatic transformation of U.S. energy markets. 2009 also saw passage of the $787 billion stimulus legislation, with large sums parceled out for green energy projects. It was a very promising year for the Cape Wind project, even with the economy stumbling out of a recession and the 2008 financial crisis. In April of 2010, Cape Wind received the final green light from Interior Secretary Ken Salazar. The good times didnt last. While climate legislation was a top priority for Democrats - in control of the House, Senate, and White House for the first time since 1994 - it took a back seat to healthcare. Following passage of health insurance reform legislation Senate Democrats lost their appetite for any additional controversial legislation ahead of the 2010 midterm elections. From that point on, of course, the prospects for congressional action have dimmed significantly. The EPA has been on the receiving end of substantial criticism, and in 2011 the Obama administration 2
A glorious future maybe? 1

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

instructed the agency to put on hold a major ozone rule that could have been extremely 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 United States Department of Energy denied the projects application for a substantial loan guarantee. The request is being reworked and may yet be granted, but its worth wondering about the sequence of events. Given all the opportunities and favors granted to green energy and wind power specifically in recent years, how has Cape Wind failed over a dozen years to take advantage?

Proposed Cape Wind site 2

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 Wind managed 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 2011 denied the project a loan guarantee of $1.97 billion - most of the $2.6 billion the project 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 a project 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 loan guarantee being approved, making it a no loss bet. The government assures investors that, should the project collapse, they would be able to recoup that amount of money from the government, rather than having to fruitlessly pursue the project managers through years-long bankruptcy proceedings. In this way, government assistance takes a more insidious role distorting the ability of the energy markets to determine which projects merit financing and which do 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 3

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

may be in the areas of new or unproven technologies where government officials are essentially guessing without any skin of their own in the game which projects 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 times the $535 million granted to the failed Solyndra experiment. However, DOE may be poised 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 wind power would expire at the end of 2012. Advocates have long insisted that the tax credit was training wheels for an industry in its infancy3, and that wind might eventually graduate to a position of economic viability on par with other forms of energy production. However, the American Taxpayer Relief Act tax deal that Congress struck on January 1 extended the PTC for another year4 even as the bill was a net tax increase on U.S. taxpayers. Wind industry spokesmen suggested that extension of the PTC alone would decide the fate of nearly half the jobs in the industry a staggering proportion to be so dependent on a single tax provision. So while millions of Americans were getting hit with higher taxes, Cape Wind received a carveout for a special-interest tax break. While it would be inaccurate to An industry overly reliant on a single tax break 6 say the tax break made Cape Wind competitive with other energy sources, it kept Cape Wind viable enough to continue to seek additional investments, particularly with a new federal loan guarantee likely to be granted this year. Inland wind farms do exist in the U.S., generating more than 60,000 megawatts5. The industry should be mature enough to survive without special tax treatment, and 4

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

indeed in some places is a legitimate interest just not at Cape Wind. As David Dismukes 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 from just eight MWs installed in 1980 to over 50,000 MW as of August 2012wind generation is no longer an infant industry in need of training wheels, but instead is one ready to compete on its own with conventional energy resources and other types of renewable energy. For this reason alone, the federal wind PTC should be allowed to expire.

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

There are, however, several additional good reasons to allow the inefficient and uncompetitive federal wind PTC to expire. Two decades ago, when the federal 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, affording wind 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 to get off the ground could it make the difference. With U.S. energy production experiencing a renaissance, should marginal projects really be distorting U.S. tax policy? Meanwhile, regarding those renewable portfolio standards

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

EPA and State-Level Regulatory Favoritism

Under the Clean Air Act as amended in 1990, the Environmental Protection Agency has been on a slow burn, gradually making clear its intention to impose draconian curbs on U.S. emissions. Without going back to Congress for additional authorization, the agency is preparing a complicated scheme for energy industry compliance with carbon emissions targets, justified by fears over manmade global warming.

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

By making it effectively impossible to build new power plants based on coal (coal supplies just under half of U.S. energy production), wind power advocates such as the Cape Wind group hope to capitalize on higher prices forced on the market by the EPA. However, neither wind investors nor government bureaucrats foresaw the massive upsurge in production of natural gas in the U.S. Environmental regulators are proceeding with additional power plant mandates, but they are also eyeing natural gas production with skepticism. Environmental activists are urging the EPA to impose strict new regulations on hydraulic fracturing (a.k.a. fracking) the technique used to extract natural gas. Hollywood has even gotten into the act, with a movie 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 company that is not competitive in the marketplace. Instead, investors in such projects work with environmental groups to agitate for government to impose complicated Rube 6

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

Goldberg schemes to distort U.S. markets. Not only does this result in higher prices for American families, it destabilizes the energy markets so that slack capacity falls to 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 for utilities 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 a useful source of baseload power. Baseload refers to the minimum demand level that 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, a similar imposition of costs on traditional energy sources is taking place. 30 states have in place some type of renewable portfolio standard which requires utilities to use renewable energy as defined by that state to supply a chunk of their power typically around 20%. Renewable energy often refers to wind and solar energy, but mainly is meant to exclude coal and natural gas.

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

In this way, these state governments are hoping to replace cheap, efficient power with expensive renewable energy that middle-class consumers will have to foot the bill for. 7

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

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 often seems like a Trojan horse for the next round of demands to reduce humanitys level of economic activity. Wind power, like any traditional part of the energy market, is useless without a means of getting the power from the source into residential homes, commercial enterprises, and other end users. A key aspect of any consideration of energy markets depends on T&D the transmission 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 energy from substations to the end user. While grand plans for wind farms in the American Midwest and in certain offshore locations may be interesting, the wind farms will do no good without T&D. Environmentalists tend to oppose any new infrastructure projects that support the energy industry.11

Conclusion
The Cape Wind project fails every reasonable test of a worthwhile infrastructure project, for employees, government officials, and investors. The project has enraged local residents and failed to secure necessary funding after twelve years. The wind industry itself has received millions of dollars in unjustified government grants, but Cape Wind has not even been deemed worthy of such assistance as other wind projects. Its still possible that the federal government will refrain from awarding a loan guarantee this year to Cape Wind, and that the Production Tax Credit for wind energy will be allowed to expire on December 31 of this year. Reasonable observers should hope that happens. Wind projects that satisfy the demands of basic economics deserve a fair hearing in the marketplace of ideas, but ones like Cape Wind that are unable to succeed even with undeserved government favors should be discarded.

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

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

3) Using the Federal Production Tax Credit to Build a Durable Market for Wind Power in the United States by Ryan Wiser, Mark Bolinger, and Galen Barbose Lawrence Berkeley National Laboratory, published November 2007. Retrieved from here: 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 http://www.awea.org/learnabout/industry_stats/index.cfm statistics here:

6) Chart on wind industry dependence on the PTC retrieved from here: http://newenergynews.blogspot.com/2012/02/quick-news-february-14-lovethose-loan.html 7) Chart taken from page 11 of the pdf of the Wiser, Bolinger, and Barbose paper cited in (3) above. 8) Removing Big Winds Training Wheels: The Case for Ending the Federal Production Tax Credit by David Dismukes, Louisiana State University Center for Energy Studies, released October 31, 2012. Retrieved from here, quote from page 6 of the pdf document: http://www.americanenergyalliance.org/wpcontent/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 Bonner Cohen of the National Center for Public Policy Research, published at Heartland.org, 4-14-12. Retrieved from here: http://news.heartland.org/newspaperarticle/2012/04/14/environmentalists-oppose-wind-power-line-idaho-wyoming