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July 9, 2014

DOE Provides Cape Wind with $150 Million Loan Guarantee

July 9, 2014
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Even though Massachusetts has a law mandating renewable energy production[1], offshore wind generation has had a problem getting off the ground there due to its high cost. So, 13 years since the Cape Wind project was first proposed, it needs to be saved by the government. The Department of Energy (DOE) has come to the rescue with a $150 million loan guarantee. That loan guarantee, which Energy Management Inc., Cape Wind’s developer, first applied for in 2009 – when combined with its other project financing – will only give Cape Wind 58 percent of the $2.5 billion it needs to construct 130 wind turbines offshore in the Nantucket Sound.  Nevertheless, the DOE says the project has reached a point where it is likely to be constructed because a large portion of the financing is in place, regulatory approvals have been obtained, and most legal challenges have been resolved.[i] DOE expects construction to start in 2015. If the project is really “a go,” this would be the nation’s first offshore wind farm, and it will end up providing expensive, unreliable electricity to the residents of Massachusetts.

Cape Wind

The two largest utilities in Massachusetts have agreed to purchase 77.5 percent of the electricity generated by Cape Wind at a starting price of 18.7 cents per kilowatt hour, well above wholesale prices of electricity. The Energy Information Administration estimates the cost of offshore wind power will average 20.41 cents per kilowatt hour and could be as high as 27.1 cents per kilowatt hour – over 3 times the cost of a new natural gas combined cycle unit.[ii] Although Cape Wind’s starting price is less than EIA’s prediction, the price of Cape Wind’s power will end up 50 percent higher than EIA’s prediction, as the price is set to increase at 3.5 percent per year according to the terms of a 15-year deal signed originally with National Grid, the state’s largest utility.

NStar, the state’s second largest utility, was holding out for less expensive onshore renewable energy to fulfill its state renewable mandate, but appears to have been pressured into buying power from Cape Wind. NStar agreed to pay the excessively high price for power from Cape Wind in order to gain state approval for its merger with Northeast Utilities. In January, however, the Town of Barnstable, three Cape Cod businesses, and the Alliance to Protect Nantucket Sound filed a lawsuit in the U.S. District Court in Boston, contending that the state had discriminated against out-of-state utility companies by putting pressure on NStar to buy the offshore wind power in an agreement it had brokered in 2012. But, in May, a federal judge dismissed the lawsuit, finding that the plaintiffs were constitutionally prohibited from suing the Commonwealth of Massachusetts in federal court. The Alliance to Protect Nantucket Sound said they plan to appeal and wage other challenges related to the project’s environmental impact.[iii]

Another issue is that the lucrative production tax credit for wind power has expired and it is unclear whether Congress will renew it.  The tax credit is worth at least 2.3 cents per kilowatt hour to wind developers and in many cases is the only reason investors build wind farms. As Warren Buffett recently said, “For example, on wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.”[iv]

But, despite the excessive cost and opposition, Cape Wind has been locking down financing and construction contracts for the last six months:

  • In December, it completed an agreement to purchase turbines from a subsidiary of the German conglomerate Siemens AG.
  • In late February, it secured a $600 million loan from the Danish Export Credit Agency, EKF[v].
  • In March, it signed contracts with two firms for the cables needed to transport power generated by the project, and secured $400 million in financing from several foreign financial companies.

While DOE feels that the Cape Wind project is on its way to fruition, it has been opposed by organizations and individuals citing the following problems: ruining ocean views from homes and beaches, lowering property values, hurting the fishing and yachting industries and marine life, being too close to shipping lanes, privatizing of public property, and ruining the ancient religious rituals of the Wampanoag Indian tribes.[vi]  Alternative energy proponents are beginning to understand that they are not immune to the delays and red tape that have slowed all energy production proposals in the United States: when it comes to energy projects, there is a lot of “NIMBYism” (not in my back yard).

Conclusion

The federal loan guarantee for Cape Wind is an attempt to help reach the Obama Administration’s goal of 10 gigawatts of offshore wind by 2020 and 54 gigawatts by 2030—a goal set in 2011 that is an enormous stretch for such high cost electricity. Proponents of offshore wind technology like to point to European offshore wind projects as examples, but residential electricity rates in Europe are about 3 times higher than they are in this country, making such high-cost projects more profitable across the Atlantic than they are here. The federal government in its loan and grant guarantees certainly has not learned from the Solyndra and A123 debacles, where taxpayer funds were lost due to guaranteeing very risky projects.

 

[1] Massachusetts has a state mandate of obtaining 15 percent of its power from renewable energy by 2020.

 

[i] Boston Globe, Cape Wind gets $150m boost, July 1, 2014, http://www.bostonglobe.com/business/2014/06/30/feds-promise-million-for-cape-wind/j1U3p10vGnra1dvQAeGh5J/story.html

[ii]Energy Information Administration, Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2014, April 17, 2014, http://www.eia.gov/forecasts/aeo/electricity_generation.cfm

[iii] Boston Globe, Federal judge dismisses lawsuit to block Cape Wind project, May 4, 2014, http://www.bostonglobe.com/metro/2014/05/03/district-court-judge-dismisses-suit-block-cape-wind-project/hiMjvDh22jsc10fqRPNV3N/story.html

[iv] Daily Caller, Warren Buffet: I Build Wind Turbines to Lower My Corporate Taxes, May 6, 2014, http://dailycaller.com/2014/05/06/warren-buffett-i-build-wind-turbines-to-lower-my-corporate-taxes/#ixzz36oOjPJ5D

[v] Boston Globe, Cape Wind secures a $600m loan, developer says, February 26, 2014, http://www.bostonglobe.com/business/2014/02/26/cape-wind-says-has-secured-loan/7CnQlFOU6dQ2HlhL7s4olO/story.html

[vi] Associated Press, Wanted: Buyer for controversial Cape Wind energy, December 19, 2010, http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2010/12/19/national/a081715S27.DTL

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