The project is 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 — loan guarantees, cash grants and contracts that require electric customers to pay higher rates — largely eliminated the risk to the private investors and almost guaranteed them large profits for years to come.
The beneficiaries include Goldman Sachs, Morgan Stanley, General Electric, utilities like Exelon and NRG — even Google.
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 power 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's chief executive, David W. Crane, put it to Wall Street analysts early this year, the government's largesse 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," he said in a recent interview. "It is just filling the desert with panels."
Too much?
From 2007 to 2010, federal subsidies jumped from $5.1 billion to $14.7 billion, according to a recent study. Most of the surge came from the economic-stimulus bill and was promoted as a way to create green jobs.
States like California sweetened the pot by offering their own tax breaks and by approving long-term power-purchase contracts that, while promoting clean energy, will also require ratepayers to pay billions of dollars more for electricity for as long as two decades.
An Energy Department loan-guarantee program expired Sept. 30. A Treasury grant program is set to expire at year's end, although the energy industry is lobbying Congress to extend it. But other subsidies will remain.
The windfall for the industry 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.
Administration officials argue that the incentives, which began on a large scale late in the Bush administration but were expanded by the Obama stimulus legislation, make economic and environmental sense. Beyond the short-term increase in construction hiring, they say, the cleaner air and 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 subsidies:
• Construction: The plant is expected to cost $1.6 billion to build. The Energy Department agreed to guarantee a $1.2 billion construction loan, with the Treasury Department lending the money at about 3.5 percent — far below the 7 percent interest executives say they would have had to pay.
That alone is worth about $205 million to NRG over the life of the loan, according to Booz & Co., an investment-consulting firm.
• Upfront money: When construction is complete, NRG is eligible for a $430 million check from the Treasury Department — part of a change made in 2009 that allows clean-energy projects to receive a third of their cost as a cash grant instead of taking other tax breaks gradually over several years.
• State support: Under a California law passed to encourage solar projects, NRG will not have to pay property taxes to San Luis Obispo County on its solar panels, saving an estimated $14 million a year.
Another state law mandates that California utilities buy 33 percent of their power from clean-energy sources by 2020, so local utility Pacific Gas & Electric agreed to buy the plant's power for 25 years.
PG&E, and ultimately its electric customers, will pay NRG $150 to $180 a megawatt-hour, according to a person familiar with the project, which at the time was about 50 percent more than the expected market cost of electricity in California from a newly built gas-powered plant, state officials said.
That amounts to a $462 million subsidy, according to Booz.
Additional depreciation tax breaks for renewable-energy plants could save the company another $110 million.
Investment payback
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, according to Booz.
Crane, of NRG, disputed the Booz estimate, saying the company's return on equity was "in the midteens."
NRG, which initially is investing about $400 million of its own money 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 at least $300 million a year in profits from all of its solar projects combined.
Mandates, high rates
NRG is not the only company getting subsidies. At least 10 of the 16 solar or wind projects that secured Energy Department loan guarantees intend to also take a Treasury Department grant, and all but two of the projects have long-term agreements to sell almost all of their power.
These projects benefit from legislation in about 30 states that pushes local utilities to buy power from renewable sources. In Washington state, utilities must get at least 15 percent of their electricity from renewable energy by 2020.
These mandates often have resulted in contracts with above-market rates and a guarantee of a steady revenue stream.
"It is like building a hotel, where you know in advance you are going to have 100 percent room occupancy for 25 years," said Kevin Smith, chief executive of SolarReserve. His Nevada solar project has secured a 25-year power-purchase agreement with the state's largest utility and a $737 million Energy Department loan guarantee and is on track to receive a $200 million Treasury grant.
Good for Google
Even companies whose business has little to do with energy or finance benefit from the 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 it can use to offset its profits.
Industry executives say the public money was vital because financing dried up during the recession. They also note that more-traditional energy sectors, like oil and natural gas, get heavy subsidies of their own. For example, in fiscal 2010, oil and gas producers got federal tax breaks of $2.7 billion, according to an analysis by the Energy Information Administration.
"These programs just level the playing field for what oil and gas and nuclear industries have enjoyed for the last 50 years," said Rhone Resch, president of Solar Energy Industries Association. "Do you have to provide more policy support and funding initially? Absolutely. But the result is more energy security, clean energy and domestic jobs."
Skin in the game
But even proponents of the subsidies say the administration may have gone overboard.
Concerns that the government was being too generous reached all the way to President Obama. In an October 2010 memo prepared for the president, Lawrence Summers, then his top economic adviser; Carol Browner, then his adviser on energy matters; and Ronald 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."
But Energy Department officials said they had carefully evaluated every project. "They were rejected if they looked too rich or too risky," said LaVera, the Energy Department spokesman.
In at least one instance — NRG's Agua Caliente solar project in Yuma County, Ariz. — the Energy Department demanded that the company agree not to apply for a Treasury grant it was legally entitled to receive.
The government was concerned the extra subsidy would result in excessive profit, NRG executives confirmed.
In other cases, the agency required companies use most of the Treasury grants they would get when construction was complete to pay down the government-guaranteed construction loans instead of cashing out the equity investors.
"The private sector really has more skin in the game than the public realizes," said Andy Katell, a spokesman for GE Energy Financial Services.
GE claims a win-win
But there is no doubt the deals are lucrative for the companies involved.
GE, for example, lobbied Congress in 2009 to help expand the subsidy programs, and it now profits from every aspect of the boom in renewables.
It is an investor in one solar and one wind project that have secured about $2 billion in federal loan guarantees, and it expects to collect nearly $1 billion in Treasury grants. And it has also won hundreds of millions of dollars in contracts to sell its turbines to wind plants built with public subsidies.
Katell said companies are simply "playing ball" under the rules set by Congress and the Obama administration. "It is good for the country, and good for our company," he said.
Satya Kumar, an analyst at Credit Suisse, said there is no question the country will see real benefits.
"But the industry could have done a lot more solar for a lot less price, in terms of subsidy," he said.
Source: http://seattletimes.nwsource.com/html/nationworld/2016748711_cleanenergy12.html
No comments:
Post a Comment