Cape Wind's economics questioned
The cited study concludes that the Cape Wind Project will "receive a 25% return on equity, 2.5 times the historical average for all corporations" when the present value of federal production tax credits, Massachusetts green credits, and accelerated depreciation for tax purposes are included. Our elected officials passed these laws, and the market is responding as expected. I certainly don't blame Cape Wind's developers for seeking to pocket the tax credits being offered. Without those incentives, the U.S. would find itself even further behind Europe in developing alternative energy supplies (
see box on p. 39, which describes Germany's whopping 51 cents/kWh subsidy for photovoltaics). America's competitiveness at the dawn of a new era in electricity production should be a concern to all of us.
I try to keep an open mind about the economics and the degree to which subsidized technologies will ultimately enter the mainstream. In the case of wind, some utilities are really gung-ho, while others are less than lukewarm. The subsidies are temporary and are only meant to kick-start the market until it begins to mature.
As for the study, I find the results misleading, because they're based on averages, rather than market leaders. Developers that enter an uncertain market early can ask for premium prices in exchange for the risks they take. Although Cape Wind's developers have sunk $23 million into the project so far, all they have to show for it is a mountain of paper and the prospect of facing at least another year of environmental studies. Remember, during the 1990s, Dell Computer had a five-year run of return on equity (ROE) of 46% and Intel's ROE was above 30% when those companies ruled their markets. Today, Dell and Intel's ROEs have fallen back into in the single digits as a result of intense competition.
We have several articles in the works that will take an in-depth look at the growing pains that the wind power industry is experiencing. Remarkably, they're not unlike the problems encountered by original equipment manufacturers at the birth of the gas turbine industry 35 years ago.
—Jamie Markos, consultant
When good subsidies go bad
I also oppose the Cape Wind project, but not for the reasons cited in your June 2006 editorial. My opposition is based on poor economics and the project's reliance on tax subsidies.
I'm not alone with regard to the first issue. I recall an op ed article in The Wall Street Journal a month or two ago by a top officer of a major U.S. energy company who said that he passed on investing in Cape Wind due to poor economics.
As for the second issue, government subsidies may be OK to nurture promising new technologies. However, they invariably take on a life of their own long after the need for them has passed. Wind power has been subsidized for years.
A good example of the adverse impact of government subsidies is ethanol. If ethanol is so good and important, why won't Congress repeal the ethanol import tax? Could it be because legislators don't want to increase competition for agribusiness giants, which are among America's biggest campaign contributors?
—Dr. Bert Zauderer, Sc.D., President, Coal Tech Corp. (Merion, Pa.)
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