The View From 1776

An editorial from the November 11, 2010, Wall Street Journal:

Wind Jammers at the White House
A Larry Summers memo exposes the high cost of energy corporate welfare.

President Obama continues to advertise the $814 billion stimulus and its green energy subsidy programs in particular as unqualified successes. But a remarkable memo from Mr. Obama’s own advisers tells the real story, neatly illustrating what happens when his anticarbon agenda meets the political allocation of capital.

The eight-page October 25 memorandum to the President was written by soon-to-depart chief economic aide Larry Summers and senior policy aides Carol Browner and Ron Klain, and it’s been kicking around Capitol Hill and industry circles for the last week. The trio walks through an interagency dispute about Energy Department subsidies for wind, solar and other forms of “renewable” power, which DOE claimed were being held up by the joint Treasury and White House budget office (OMB) reviews.

Recall that the stimulus transformed the government into the world’s largest private equity firm. The many tools now at DOE’s disposal include $6 billion to guarantee loans and another dispensation so that the department can convert an energy investment tax credit equal to 30% of a project’s cost into a direct cash grant to green developers.

The Summers memo notes that these two provisions alone reduce “the cost of a new wind farm by about 55% and solar technologies by about half relative to a no-subsidy case.” So taxpayers are more than majority partners in these private projects, except they get no upside.

DOE wanted the White House to cut OMB and Treasury out of deal-by-deal approval oversight so it could get the money out the door quicker. The department was coming under political attack “from Hill supporters and stakeholders for slow implementation,” according to the memo, and impatient Democrats had already raided the $6 billion fund to pay for cash for clunkers.

But OMB and Treasury found severe problems with “the economic integrity of government support for renewables.” Developers had almost no “skin in the game,” meaning that their equity in projects was well below ordinary standards in the private market. They were also “double dipping,” obtaining loan guarantees for projects that “would appear likely to move forward without the credit support” in the stimulus because of other subsidy programs. The reason for the roadblock was “an insufficient number of financially and technically viable projects.”

Treasury and OMB singled out an 845-megawatt wind farm that the Energy Department had guaranteed in Oregon called Shepherds Flat, a $1.9 billion installation of 338 General Electric turbines. Combining the stimulus and other federal and state subsidies, the total taxpayer cost is about $1.2 billion, while sponsors GE and Caithness Energy LLC had invested equity of merely about 11%. The memo also notes the wind farm could sell power at “above-market rates” because of Oregon’s renewable portfolio standard mandate, which requires utilities to buy a certain annual amount of wind, solar, etc.

But then GE said it was considering “going to the private market for financing out of frustration with the review process.” Anything but that. The memo dryly observes that “the alternative of private financing would not make the project financially non-viable.”

Oh, and while Shepherds Flat might result in about 18 million fewer tons of carbon through 2033, “reductions would have to be valued at nearly $130 per ton CO2 for the climate benefits to equal the subsidies (more than 6 times the primary estimate used by the government in evaluating rules).”

So here we have the government already paying for 65% of a project that doesn’t even meet its normal cost-benefit test, and then the White House has to referee when one of the largest corporations in the world (GE) importunes the Administration to move faster by threatening to find a private financial substitute like any other business. Remind us again why taxpayers should pay for this kind of corporate welfare?

The memo’s tone suggests that Messrs. Summers and Klain and Ms. Browner are on the side of the adults at Treasury and the budget office, and they propose several reforms. But they also say that “Failing to make progress on renewables loan guarantees could upset the Hill ([New Mexico] Sen. [Jeff] Bingaman, Speaker Pelosi)” and changes could “signal the failure of a Recovery Act program that has been featured prominently by the Administration.”

Well, that answers our question. Meanwhile, the loan guarantee program continues apace.