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September 7, 2011

Political Entrepreneurship: The Case of Abengoa

September 7, 2011
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We at IER have made the generic case for free energy markets. We have also explained why specific government interventions—whether cap-and-trade, an explicit carbon tax, so-called “green jobs” programs, or higher fuel economy mandates—will raise prices for consumers and stifle job creation.

Correct as these arguments may be, the defender of the free market is often at a rhetorical disadvantage in such debates. The proponent of some new government intervention appears to “have good intentions,” while the free-market critic comes off as a do-nothing stick-in-the-mud. Worse still, the free-marketeer can appear as the paid shill for corporations that would be harmed by the proposed interventions.

In the present post we’ll try to correct that rhetorical imbalance by focusing on the dark side of government intervention into energy markets. Here too we’ll see that it is corporate interests (often originating outside the United States) that stand to benefit from political favoritism.

The massive regulations, taxes, and subsidies—which we already know make consumers worse off—don’t just fall out of the sky, or from an academic’s blackboard. Often they are designed and lobbied for by corporate special interests. The more one studies the actual processes by which government policies are created, the uglier the whole thing looks.

In today’s post we’ll focus on a Spanish firm, Abengoa, which through its subsidiaries specializes in solar and bioenergy.

Abengoa, S.A.

Abengoa started out in 1941 as an engineering company founded primarily by Javier Benjumea Puigcerver and José Manuel Abaurre Fernández-Pasalagua in Seville, Spain. The company today is a multinational corporation with almost 600 subsidiaries (see page 20 of this report). Two subsidiaries, Abengoa Solar and Abengoa Bioenergy, have benefited from the renewable energy movements in Spain and in the US.

Abengoa Solar has various projects in Spain and the US. In the past two years they received $2.65 billion dollars in loan guarantees from the DOE. In July 2010 Abengoa Solar received a $1.45 billion guarantee for the Solana project, while in June 2011 it received a conditional commitment of a $1.2 billion guarantee for the Mojave Solar project.

Job-Creation Bang for the Buck?

It is instructive to see just what the federal government hopes to achieve with its generous offer of a taxpayer-backstop to Abengoa Solar’s borrowing spree. President Obama himself, in a July 2010 video address, touted the Solana project (at 2:15 in the video) as part of his “solar recovery.” So how many jobs do these loan guarantees (allegedly) create—using the government’s own figures?

Well, the DOE’s own fact sheet claims that the Solana project has created 1,700 temporary construction jobs, while yielding a permanent 60 jobs “created or saved.” Simple division shows that the $1.45 billion guarantee therefore works out to $824,000 per job (when we include the temporary construction ones), and a whopping $24.2 million per permanent job “created or saved.”

The numbers are similar for the more recent Mojave Solar project. For a guarantee of $1.2 billion, the DOE estimates it will create 830 permanent construction jobs, and will “create or save” 70 permanent jobs. This works out to $1.33 million per job (including permanent ones), and $17.1 million per permanent job.

Now it’s true, a loan guarantee is not the same thing as an explicit subsidy. So long as Abengoa Solar doesn’t default on its loans, the US taxpayer hasn’t kicked in anything. Nonetheless, the whole reason Abengoa Solar had to get the guarantee from the government, is that no private lender thought the risk was worth it. It is not “costless” for the US taxpayer to be on the hook in this fashion. If any reader doubts our claims, we’ve got some personal loans we’d like co-signed.

Tax Credits

Beyond reliance on federal loan guarantees, Abengoa Solar also receives government assistance in the form of investment tax credits (ITC). In 2008 CEO Santiago Seage said that the company would start construction on the Solana solar plant in 2009 if Congress extended the ITC. (Presumably Seage should have also mentioned he would need, in 2010, a $1.45 billion loan guarantee for the Solana project.)

Lobbying Efforts

Say what you will about Seage, he didn’t just rely on the grapevine to get his request up the chain of command. Abengoa hired Cornerstone Government Affairs to lobby Congress on the issue. Later that year Congress extended the ITC.

Abengoa’s most credentialed conduit to policymakers and the scientific community is Dr. Fred Morse, their Senior Advisor on US operations. Morse served in senior-level positions in the DOE under Nixon, Carter, and Reagan working on solar energy. He currently sits on the board of various solar industries groups.

In 2011 CEO Santiago Seage and other leaders of renewables companies sent a letter to Congress asking them to extend DOE loan guarantee funding. Abengoa hired O’Neill, Athy & Casey P.C to lobby the House and Senate on the issue. Senator Dianne Feinstein wrote a letter to the DOE on behalf of Abengoa asking the DOE to speed up the permit process for assessing private land for DOE loan guarantees. (Fred Morse gave $1000 to “Feinstein for Senate” on June 15, 2011, as the reader can ascertain using the search function at the FEC’s website.)

When it comes to dubious lobbying, however, Abengoa Bioenergy is literally award-winning, as this article explains:

BRUSSELS, Dec 10, 2008 (IPS) – An unconventional awards ceremony was held in Brussels Dec. 9. The ‘Worst EU Lobbying Awards’ gave recognition to those corporate interest groups that have resorted to deceptive tactics while seeking to shape legislation in their favour.

Following an online poll which generated over 8,500 votes, the top prize went jointly to three firms that have been striving to convince policy makers that biofuels are ecologically benign.

Abengoa Bioenergy (the U.S. subsidiary of a Spanish firm), the Brazilian sugar industry association Unica and the Malaysian Palm Oil Council (MPOC) were lambasted for the content of their advertisements.

One ad by Abengoa attributed a quote to the European Federation for Transport and Environment (T&E), a green campaign group, which suggested that ethanol made from crops such as sugar was the only solution to addressing society’s “addiction to oil”. Not only did T&E never make that claim, it has been critical of the EU’s efforts to use the increased consumption of biofuels as a pretext for avoiding measures to boost the energy efficiency of cars.

Abengoa Bioenergy hasn’t restricted its lobbying to Europe. Vice President Chris Standlee was head of the Renewable Fuel Association (RFA). The RFA has repeatedly pushed for the VEETC, a tax credit for ethanol blenders. On Abengoa’s website they say that one of the reasons why the reopened their plant in Portales, New Mexico was the favorable legislation and administration conditions. Additionally their CEO said the plant could not have been reopened without the help of the New Mexico Senators who supported the VEETC.

Abengoa: A Creature of the State

To underscore the reliance of the solar industry on government assistance, an article on the 2010 loan guarantee award to Abengoa began this way:

In 1969, the Nixon White House asked a young assistant professor of engineering at the University of Maryland whether solar energy made sense for America. Absolutely, he replied.

Four decades later, Fred Morse is still trying to persuade the government to put its muscle behind solar. Last week, he scored a big victory.

The same article explains that in addition to the extension of the investment tax credit and the $1.45 billion loan guarantee, Abengoa Solar needed another set of training wheels for its Solana project, namely a government-mandated customer base:

[Arizona Public Service] has agreed to buy $4 billion worth of electricity from the [Solana] plant over the next 30 years, in part because to comply with a state law requiring utilities to generate  at least 15 percent of their electricity from renewable sources.

But don’t take our word for it. Abengoa Solar itself acknowledges its reliance on government assistance:

Despite the prevailing financial uncertainty and the constraints on debt markets, the sector’s development was bolstered by governmental support, including the confirmation in December of the current regulatory framework in Spain, the establishment of the Federal Loan Guarantee (FLG) program in the US, and the publication of stable and attractive regulatory frameworks in new markets.

The website of Abengoa Bioenergy is even more candid about its dependence on government:

At present, Abengoa Bioenergy ranks as one of the leading biofuel producers in Europe, the United States and Brazil…

The Bioenergy business unit is currently reporting excellent levels of business, reflecting its standing as one of the world’s leading bioethanol producers and marketers…

There is now a clear need for a change of practices and policies and various governments have already begun to act accordingly. Business performance depends largely on favorable legislation that facilitates the development of new technologies while enabling biofuel culture to expand and combat the obvious signs of climate change. 2009 turned out to be a very fruitful year in this respect.

Two new legislative acts were enacted on June 25th 2009 in order to consolidate and kick-start the biofuel market over the coming ten-year horizon. European Directive 2008/28/EC on renewable energy sources dictates that at least 10% of transportation fuel within EU member states must be produced from renewable energies by 2020. The amendments made to Directive 2009/30/EC on fuel quality include an additional incentive for using biofuels by ushering in a compulsory reduction in greenhouse gas emissions during gasoline and diesel life cycles between 2011 and 2010.

Working in tandem, these two directives ensure the future of existing biofuel production plants and those currently under construction. At the same time, they provide a platform for long-term growth within the biofuel sector by harnessing current commercial technologies, and also offer special incentives and support for those attempting to develop the next generation of lignocellulosic technologies. All in all, they provide the market platform and the outlook for the coming decade that the sector was hoping for.

The true irony in all this is that, even with all of the government assistance documented above, Abengoa Solar has been losing money: €10.8 million in 2010, €60.2 million in 2009, and €8.7 million in 2008. It’s thus not accurate to say Abengoa Solar is profiting at the expense of taxpayers and consumers—it’s losing at their expense.

Conclusion

There is a charming naïvete among many of the rank-and-file supporters of government “renewables” policies. Even when particular projects experience outrageous cost overruns and fail to deliver their promised benefits, the supporters chalk it up to an honest mistake by people with the right intentions.

Unfortunately, the world is full of business leaders who have no problem turning to the government to ensure them market share at the expense of taxpayers and consumers. We can find such leaders even within the so-called clean-energy industries. Abengoa is one prominent example, but there are others, as we will explain in future posts.

 


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