The developer of a proposed “wind farm” off the Massachusetts coast dodged a bullet recently when Congressional leaders removed a provision from a Coast Guard reauthorization bill that would have granted Massachusetts Gov. Mitt Romney (R) veto power over the project.
Romney opposes developer Jim Gordon’s Cape Wind project, which would erect 130 giant electricity-generating wind turbines in Nantucket Sound. Romney has said he would veto the plan if given the chance.
Cape Wind needs permits from 17 federal and state agencies, under the National Environmental Policy Act and the Massachusetts Environmental Policy Act, before construction may begin. Company plans call for operation to begin in 2009.
Although the project recently overcame a political hurdle, financial and economic ones remain. Despite high oil and gas prices, questions remain about the financial viability of the wind power project.
Condemned As ‘Giant Boondoggle’
Writing in The Wall Street Journal recently, William Koch, noted energy industrialist and 1992 winner of the America’s Cup yacht race, explained his decision not to invest in the project. He said Gordon’s numbers do not add up.
“When you do the math, it is clear that every other form of power generation would be cheaper to build, produce more electricity and at a consistent rate, and save consumers more money,” wrote Koch, whose Oxbow Corporation operates a number of alternative power plants. “When you consider the costs and risks of an offshore wind farm, and the fact that New England does not need more power, the project becomes nonsensical, a giant boondoggle for the benefit of one developer.”
Would Exploit Huge Subsidies
If energy-savvy private investors like Koch are questioning Cape Wind’s financing, why does the developer think he can succeed? The answer lies with federal and state governments eager to subsidize alternative energy projects.
A study released in May by the Beacon Hill Institute at Suffolk University finds Cape Wind’s wind farm would confer above-average profits on its developer thanks to hundreds of millions of dollars in public subsidies.
In its analysis, the institute found the developer, Cape Wind Associates, would receive a 25 percent return on equity, 2.5 times the historical average for all corporations, due entirely to the subsidies.
David G. Tuerck, executive director of the Beacon Hill Institute, noted, “What we found was quite remarkable. Cape Wind stands to receive subsidies worth $731 million, or 77 percent of the cost of installing the project and 48 percent of the revenues it would generate. The policy question that this amount of subsidy raises is whether the project’s benefit is worth the huge public subsidies that the developer gets.”
Multiple Subsidies Offered
If, as planned, the wind plant nears completion in 2008, Cape Wind would be looking forward to receiving three subsidies at different stages over the 25-year life of the project: federal production tax credits, Massachusetts “green” credits, and a tax break through the accelerated depreciation feature of the federal tax code.
Because these subsidies vary in size and timing over the life of the project, it is necessary to compare them in “present-value” terms, their value to the developer in 2008 discounted to account for the time-value of money, according to Tuerck.
Thus, for example, subsidies received over the first 10 years of the project through the federal production tax credit would total $337 million but would be worth $180 million in present-value terms. Massachusetts green credits, totaling $1.7 billion over the entire 25-year project lifespan, would be worth $487 million. The accelerated depreciation feature of the tax code would be worth $65 million in present-value terms. Adding these amounts leads to the estimated total subsidy of $731 million (except for rounding).
Money Better Used Elsewhere
While it would not pay royalties for generating electricity on public land, as do offshore oil and gas producers, Cape Wind would pay taxes to federal, state, and local governments.
Taxes over the lifespan of the project would have a present value of $151 million in 2008. Subtracting this amount from the $731 million in subsidies leaves a “net subsidy” of $581 million. Yet it is the $731 million “gross subsidy” before taxes that seems most germane to the question: What would Cape Wind cost taxpayers and electric ratepayers?
Businesses that generate average or above-average profits for their investors ordinarily pay taxes on those profits without the benefit of any subsidies. Had the $950 million that Cape Wind would invest in this project been invested elsewhere, there would have been a similar contribution to the tax rolls without the need for any public subsidy, Tuerck notes.
“Before the project gets approval, taxpayers and ratepayers should know what they will have to pay in subsidies so that Cape Wind can provide for a very small fraction of the region’s energy needs,” said Tuerck. “We suspect that they will be surprised to discover just how much they have to pay.”
Frank Conte ([email protected]) is director of communication and information services at the Beacon Hill Institute at Suffolk University.