Tilting at Windmills [WSJ Commentary]
By WILLIAM KOCH
May 22, 2006; Page A12
A project to put 130 wind turbines on 26 square miles off Nantucket Sound has generated a lot of hot air in Massachusetts -- and Washington. Contained in the arguments pro and con are partial facts, misconceptions, outright lies and hysteria. What we're not getting is a rational analysis of the Cape Wind project's effects on the supply of and demand for electricity in New England.
In the interest of full disclosure, my company has spent more than 23 years in the energy business owning and operating a number of alternative power plants. We are the world's largest seller of "petroleum coke," an alternative fuel, and produce a super-compliance coal and coal-bed methane, an alternative for natural gas. We have also explored wind farming in Kansas and California. Oh, and I own a summer house that overlooks Nantucket Sound.
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Nearly four years ago, Jim Gordon, founder of Cape Wind, approached me about investing in an offshore wind farm he wanted to build in Nantucket Sound. I was intrigued and decided to examine the economics and risks of the project.
Jim wouldn't share his economic model with us. So we made our own, to determine if the project was viable. At the time, we estimated that it would require $825 million to construct a 420 megawatt offshore wind farm. Our model assumed that the turbines would operate 40% of the time and Cape Wind would produce 1.5 billion kilowatt-hours of electricity per year. The operating costs were estimated at $27.5 million per year or 1.8 cents per kwh; at an estimated price of 6.6 cents per kwh, the project would generate an average after-tax cash flow of $53.6 million per year, or $1.1 billion over 20 years, at an internal rate of return of 20.1%. Jim confirmed with me the same numbers.
These calculations included a federal tax credit of 2.3 cents per kwh for the life of the project, totaling $37 million per year; an estimated 2.2 cents per kwh state credit of $35 million per year for alternative energy, and five years of accelerated depreciation. Altogether, taxpayers would subsidize Cape Wind to the tune of $72 million a year, passed on to the consumer as higher electricity rates. If it happened, Cape Cod residents' electricity bills would go up by $440 per year. Cape Wind needs the tax and energy subsidies in order to achieve a 20% rate of return, a requirement to secure financing for a high risk, new-technology offshore wind farm.
The more we examined Cape Wind's economic assumptions, the more the risks concerned us. If the political climate changed, the government could abolish tax and energy credits. Cape Wind's rate of return would drop to 7%. Moreover, the analysis did not include the estimated $50 million it would cost to upgrade the transmission lines from Mid-Cape to the Cape Cod Canal -- improvements needed to handle the expected increase of electricity. Furthermore, through skillful lobbying, Cape Wind managed to avoid federal lease bonus payments, royalties and deposits for demolition upon abandonment of the project, required by the Department of Interior for all offshore oil and gas projects to operate in federal waters. This loophole is worth hundreds of millions of dollars.
As I thought the project too risky, I declined Jim's offer to invest. |
