Firms gobble 'green' subsidies
New York Times
Published Saturday, Nov. 12, 2011
WASHINGTON – Halfway between Los Angeles and San Francisco, on a former cattle ranch and gypsum mine, NRG Energy is building an engineering marvel: a compound of nearly a million solar panels that will produce enough electricity to power about 100,000 homes.
The project is also a marvel in another, less obvious way: Taxpayers and ratepayers are providing subsidies worth almost as much as the entire $1.6 billion cost of the project. Similar subsidy packages have been given to 15 other solar- and wind-power electric plants since 2009.
The government support – which includes loan guarantees, cash grants and contracts that require electricity customers to pay higher rates – largely eliminated the risk to the private investors and almost guaranteed them large profits for years to come. (That would be "speculative bullshit" according to some who post here. -- j)
The beneficiaries include financial firms like Goldman Sachs and Morgan Stanley, conglomerates like General Electric, (Notice any Obama buddies in that list? Yep. All of them. -- j) utilities like Exelon and NRG – and even Google.
A great deal of attention has been focused on Solyndra, a startup that received $528 million in federal loans to develop cutting-edge solar technology before it went bankrupt, but nearly 90 percent of the $16 billion in clean-energy loans guaranteed by the federal government since 2009 went to subsidize these lower-risk plants, which in many cases were backed by big companies with vast resources.
When the Obama administration and Congress expanded the clean-energy incentives in 2009, a gold-rush mentality took over.
As NRG chief executive David W. Crane put it to Wall Street analysts early this year, the government's largess was a once-in-a-generation opportunity, and "we intend to do as much of this business as we can get our hands on."
NRG, along with partners, ultimately secured $5.2 billion in federal loan guarantees plus hundreds of millions in other subsidies for four large solar projects.
"I have never seen anything that I have had to do in my 20 years in the power industry that involved less risk than these projects," Crane said in a recent interview. "It is just filling the desert with panels."
From 2007 to 2010, federal subsidies jumped to $14.7 billion from $5.1 billion, according to a recent study. Most of the surge came from the economic stimulus bill, which was passed in 2009 and financed an Energy Department loan guarantee program and a separate Treasury Department grant program that were promoted as important in creating green jobs.
States such as California sweetened the pot by offering their own tax breaks and by approving long-term power-purchase contracts that require ratepayers to pay billions more for electricity for as long as two decades.
The federal loan guarantee program expired Sept. 30. The Treasury grant program is scheduled to expire at the end of December, although the energy industry is lobbying Congress to extend it. But other subsidies will remain.
The windfall for the industry over the last three years raises questions of whether the Obama administration and state governments went too far in their support of solar and wind power projects, some of which would have been built anyway, according to the companies involved.
Obama administration officials argue that the incentives, which began on a large scale late in the Bush administration but were expanded by the stimulus legislation, make economic and environmental sense. Beyond the short-term increase in construction hiring, they say, the lower carbon emissions will benefit the country for decades.
"Subsidies and government support have been part of many key industries in U.S. history – railroads, oil, gas and coal, aviation," said Damien LaVera, an Energy Department spokesman.
A case study
NRG's California Valley Solar Ranch project is a case study in the banquet of government subsidies available to the owners of a renewable-energy plant.
The first subsidy is for construction. The plant is expected to cost $1.6 billion to build, with key components made by SunPower at factories in California and Asia. In late September, the Energy Department agreed to guarantee a $1.2 billion construction loan, with the Treasury Department lending the money at a rate of about 3.5 percent, compared with the 7 percent executives said they otherwise would have had to pay.
That support alone is worth about $205 million to NRG over the life of the loan, according to an analysis performed for the New York Times by Booz & Co., a strategic consulting firm that regularly performs such studies.
When construction is complete, NRG is eligible to receive a $430 million check from the Treasury Department – part of a change made in 2009 that allows clean-energy projects to receive 30 percent of their cost as a cash grant upfront instead of taking other tax breaks gradually over several years.
Californians are also making a big contribution. Under a state law passed to encourage the construction of more solar projects, NRG will not have to pay property taxes to San Luis Obispo County on its solar panels, saving the company an estimated $14 million a year.
Assisted by another state law, which mandates that California utilities buy 33 percent of their power from clean-energy sources by 2020, the project's developers struck lucrative contracts with Pacific Gas & Electric to buy the plant's power for 25 years.
PG&E, and ultimately its electricity customers, will pay NRG $150 to $180 a megawatt-hour, according to a person familiar with the project, who asked not to be identified because the price information was confidential. At the time the contract was awarded, that was about 50 percent more than the expected market cost of electricity from a newly built gas-powered plant, state officials said.
While neither state regulators nor the companies will divulge all the details, the extra cost to ratepayers amounts to a $462 million subsidy, according to Booz, which calculated the present value of the higher rates over the life of the contracts. Additional depreciation tax breaks for renewable energy plants could save the company another $110 million, according to Christopher Dann, the Booz analyst.
The total value of all those subsidies in today's dollars is about $1.4 billion, leading to an expected rate of return of 25 percent for the project's equity investors, Booz said.
Crane, the NRG executive, disputed the Booz estimate, saying that the company's return on equity was "in the mid-teens."
NRG, which initially is investing about $400 million in the project, expects to get all of its equity back in two to five years, according to a statement it made in August to Wall Street analysts.
By 2015, NRG expects to be earning at least $300 million a year in profits from all of its solar projects combined. The company also owns dozens of power plants fueled by coal, natural gas and oil.
Overflowing breaks
NRG is not the only company gobbling up subsidies. At least 10 of the 16 solar or wind electricity generation projects that secured Energy Department loan guarantees intend to also take the Treasury Department grant, and all but two of the projects have long-term agreements to sell almost all of their power.
Even companies whose business has little to do with energy or finance, like the Internet giant Google, benefit from the public subsidies. Google has invested in several renewable energy projects, including a giant solar plant in the California desert and a wind farm in Oregon, in part to get federal tax breaks that it can use to offset its profits from Web advertising.
Industry executives and other supporters of the subsidies say the public money was vital, partly because financing for renewable energy projects dried up during the recession. They note that traditional energy sectors, like oil and natural gas, get heavy subsidies of their own. In fiscal 2010, the oil and gas producers got federal tax breaks of $2.7 billion, according to the Energy Information Administration.
Obama administration officials said the subsidies were intended to help renewable-energy plants that were jumbo-sized or used innovative technology, both potential obstacles to getting private financing. But even proponents say the administration may have gone overboard.
Concerns that the government was being too generous reached all the way to President Barack Obama. In an October 2010 memo prepared for the president, Lawrence H. Summers, then his top economic adviser; Carol M. Browner, then his adviser on energy matters; and Ronald A. Klain, then the vice president's chief of staff, expressed discomfort with the "double dipping" that was starting to take place. They said investors had little "skin in the game."
Officials involved in reviewing loan applications said the Treasury Department pressed the Energy Department to respond to the concerns.
Officials at both agencies declined to discuss the anticipated financial returns of the clean-energy projects the federal government has agreed to guarantee, saying the information was confidential. But Energy Department officials said they had evaluated every project to try to calculate how much money the developers and investors stood to make.
"They were rejected if they looked too rich or too risky," said LaVera, the Energy Department spokesman.
Satya Kumar, an analyst at Credit Suisse who specializes in renewable energy companies, said there is no question that the United States will see real benefits from the surge in renewable energy projects.
"But the industry could have done a lot more solar for a lot less price, in terms of subsidy," he said.
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