White House memo and wasteful handouts

The American Wind Energy Association (AWEA) is on a mission to keep its members fat and happy as they bloat up at the public trough. The goals are simple:

1) Create a set-aside power market that pays a premium for wind energy and eliminates competition from lower-cost, more reliable fuel options;

2) Encourage policies that pave the way for wind-related transmission development at the expense of rate- and taxpayers; and

3) Make permanent the free-flow of public subsidies for renewables and shield the funding spigot from changing political and economic tides.

In the last two years, AWEA's had some success. On the power market front, more than half the States have RPS programs mandating that a percentage of their electricity needs be met with renewable energy. Senator Bingham (D-NM) introduced a bill seeking the same non-compete set-aside for the entire country that he hopes will be acted on during the lame-duck session. On transmission, the Federal Energy Regulatory Commission (FERC) issued a notice of proposed rulemaking (NOPR) that considers amending transmission planning and cost allocation processes to facilitate broader public policy goals -- i.e. a national grid system to deliver wind power. This deviates from current rules that look mainly at grid reliability. And Obama's $787 billion stimulus passed in February 2009 authorized billions be spent on renewable energy and energy efficiency initiatives which kept the wind industry from collapsing when the big investment banks needed bailing out.

The debates surrounding a national RPS policy and FERC's transmission priorities are not settled and will likely come down to cost. But the stimulus programs that spent lavishly on pet wind projects -- while a success for AWEA members -- are proving to be a waste for the public.

Under the stimulus, we saw the investment tax credit (ITC), which was popular back in the 1980's, brought back again. The ITC enables developers to obtain direct cash outlays from the government for up to 30 percent of their costs. Any company or person who qualifies and applies for the money can get a grant. (Greenwire October 14), The qualification criteria are not onerous, the grant amounts are unlimited, and the Treasury Department which doles out the cash is prohibited by law from ranking the projects.

Between direct cash payouts, federal loan guarantees, existing state tax credits and State RPS policies that assure premiums for renewable energy, wind developers can't fail.

Spanish energy giant Iberdrola Renewables, Inc., who received nearly a billion in cash grants alone, argues the money helped create more development which led to jobs and economic opportunity but according to Gilbert Metcalf, a Tufts University professor who teaches energy economics and tax policy: "Any time you use subsidies to encourage new investment, you're always going to end up giving money to people who would have done the project anyway." (Greenwire October 14) And that appears to be exactly what happened.

A preliminary evaluation of the ITC grant outlays published earlier this year by the Lawrence Berkeley National Laboratory found that 61% of the grant money distributed through to March 2010 "likely would have deployed under the PTC [production tax credit] if the grant did not exist." In many cases, money went to projects that were already under construction and, in others the wind facilities were already producing electricity.

So what did the public receive in return for all the money spent? High risk and overpriced carbon reduction benefits.

That's according to an October 25 White House memo penned by chief economic aide Larry Summers and senior policy aides Carol Browner and Ron Klain. The memo uses the 845-megawatt Shepherds Flat wind energy facility in Oregon to illustrate the problem. Shepherds Flat will be the largest wind plant in the country consisting of 338 GE wind turbines. According to Summers, the $1.2 billion in governmental subsidies covered 65% of the cost and risk for the project while its equity sponsors incurred only about 11% with an estimated return on equity of 30%. That's a hefty return for a project where the American public is absorbing the bulk of the risk.

Summers makes clear in the memo that the project would likely have "moved without the loan guarantee" since the "economics are favorable for wind investment given the tax credits and state renewable energy standards". Examining the carbon reduction benefits, the memo concludes that the reductions "would have to be valued at nearly $130 per ton CO2 for the climate benefits to equal the subsidies (more than 6 times the primary estimate used by the government in evaluating rules)".

The Wall Street Journal published an informative editorial on the memo that's well-worth reading.

The White House memo enumerates several options for reining in the free spending and shifting risk back to developers, but frankly, tweaks made at this level are misguided.

It's time for Capitol Hill to take a hard look at the renewables feeding frenzy underway and adopt policies that better suit the public's needs. For starters, let the funding programs set to expire this year do just that -- expire! Remaining programs (i.e. PTC) should be adjusted to reward projects that can deliver energy according to time of day or seasonal demand requirements and that are built close to load centers.

There are cheaper, much more effective opportunities for achieving clean energy goals without coddling the wind industry -- an industry that peddles a low-value electricity product and which, after decades of public handouts, has yet to show it can survive on its own.