A moment's insight is sometimes worth a lifetime's experience.
Oliver Wendell Holmes Jr.
Shedding a Little Light on Crony Capitalism and Green Energy
A few days back I read a passing indirect reference in a finance newsletter to a Bloomberg news item nearly 18 months back of suspected fraud of Spanish solar energy plants, delivering 4500 megawatts of energy between midnight to 7AM. (When I checked a few days back, the original Bloomberg item was no longer available, but I believe a reprinted published here.) The bottom line is that the system paid multiple times more (11 times in Spain) for solar-generated power vs. conventional fossil fuel (e.g., coal), which creates a perverse incentive for fraud. Some have suggested that artificial light (say, generated by diesel generators) was used to generate the solar electricity although industry observers dismiss this as an urban legend, arguing low efficiency and tariff multiples wouldn't make it worthwhile. "It has been suggested that some plants in the regions of Castilla-La-Mancha, Canarias and Andalucía have been using diesel generators connected to their solar panel arrays to illegally benefit from government subsidies." Others note that there are some commercial storage technologies which would make it possible to drive turbines into the night, e.g., ABB's technology using liquid salt tanks. Spain cut the number of eligible hours to reduce the subsidies (which cost more than energy production for the country!) Note that Spain has had other examples of solar energy fraud in its past, including installations claiming to be online when they weren't to get a premium rate.
Of course, counterproductive government policies are not restricted to green energy boondoggles. Ota Sik, a prominent reform economist during the Prague spring in 1968, reportedly discovered what I regard as a prototypical example of dysfunctional state planning. Luboš Motl wrote: "Ota Šik, who was from Pilsen just like myself, found a pair of a coal mine and a power plant near Ostrava. The mine produced the coal needed by the plant – and the plant produced as much electricity as the mine consumed."
Any faithful reader knows I've been sharply critical of crony capitalism, industrial policy, etc. I've written time and again about the problems of government guarantees in terms of banking, mortgages--and don't get me started on the trillion dollar student loan bubble (a future commentary)
Hats off to MJ Perry whose Carpe Diem blog brought to my attention a fascinating New York Times story late last week on the modern-day gold rush on "clean energy" where corporations have found progressive Democrats at the federal and/or state level, led by Barack Obama, virtually throwing money at them, all but guaranteeing a decent profit. How? Let's provide some examples:
- guaranteed purchases of all solar power produced at a substantial premium (say, 50% over natural gas) in long-term contracts (throwing ratepayers under the bus)
- US Treasury financing at bargain basement rates, say, half the commercial interest rate
- upfront balloon grant of tax credits over the life of a project
- property tax exemptions on solar panels
Here are a few notable take-away quotes:
- "'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."
- "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 [NRG's California Valley Solar Ranch] project’s equity investors, according to Booz."
- "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... By 2015, NRG expects to be earning at least $300 million a year in profits from all of its solar projects combined."
- "GE Energy Financial Services, Goldman Sachs, Morgan Stanley and other financial firms [have] large investments in several of these projects. G.E., for example, lobbied Congress in 2009 to help expand the subsidy programs, and it now profits from every aspect of the boom in renewable-power plant construction."
In contrast, when most businesses invest, they take on consider risk; they can't predict competitive moves, they have to raise capital, they struggle to contain costs and earn a reasonable return. Consider, for example, what happened when Calpine built a series of natural gas powered plants in the 1990's, only to find the price of natural gas shooting through the roof: it went bankrupt.
Obama Punts on Keystone XL Pipeline Project:
Thumbs DOWN!
Late Development...
Obama does what he always does in dealing with any difficult decision: he procrastinates, dithers, punts off to future administrations. No short-term risks. How many times have we seen this? The handling of the BP oil spill? The disparate House and Senate approaches to so-called healthcare reform? The Afghanistan surge? The disposition of the Bush tax cuts? The negotiations over raising the debt ceiling? It takes me back to 8 years of college teaching, watching a plurality, if not majority of students waiting until the day before to study for an exam or to start on a computer assignment until 2 or 3 days before its due date...
Obama is stuck between the devil and the deep blue sea of his own constituencies over the Keystone XL pipeline, intended to deliver Canadian oil sands oil to the refinery-rich Gulf Coast region and so he postponed the decision until, of course, after next fall's election. There has been strong opposition to the project by environmentalists, particularly its proposed route around the Nebraska Sandhills and the Ogallala Aquifer, and union labor, which correctly sees a number of well-paying American jobs. (I saw a late-breaking report, cited above, which indicates that Trans Canada is willing to divert its pipeline away from the Sandhills.)
The environmentalist fear-mongering is par for the course; the fact of the matter is that pipelines have extensively criss-crossed the states for decades with very good safety records and few if any leaks; pipeline technology continues to improve over time. (A pro-pipeline group's webpage does a good job of rebutting false or misleading claims by the environmentalists and their allies, and I will leave it to the interested reader to review a more comprehensive account of salient issues.)
I've heard some early Canadian reactions to Obama's political inertia, suggesting that other customers (say, CHINA) would be more than willing to take the oil, leaving us, of course, more vulnerable to Middle East oil shocks, hardly something I expect from a legitimate leader.
Presumably rerouting the pipeline entails more costs or Trans-Canada would have routed the pipeline around the Sandhills from the get-go. I'm not sure I like the fact that Obama gets a face-saving way out, not to mention being rewarded, because he stonewalls a decision; there are a lot of supporters whom went all out to support the original pipeline design. Let's see if Obama goes along; of course, the environmentalists will NEVER be convinced.
Musical Interlude: My Favorite Groups
Foreigner, "I Don't Want To Live Without You"
