By Eric Lipton and Clifford Kraus, The New York Times, November 11, 2011
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| The California Valley Solar Ranch under construction near Santa Margarita. The desert is, of course, an ecosystem |
WASHINGTON —
Halfway between Los Angeles and San Francisco, on a former cattle ranch and
gypsum mine, NRG Energy is building an engineering marvel: a compound of nearly
a million solar panels that will produce enough electricity to power about
100,000 homes.
The project is also
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 — which includes 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 financial firms like Goldman Sachs and Morgan
Stanley, conglomerates like General Electric, utilities like Exelon and NRG —
even Google.
A great deal of
attention has been focused on Solyndra, a start-up 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 largess 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.”
From 2007 to 2010,
federal subsidies jumped to $14.7 billion from $5.1 billion, according to a recent
study.
Most of the surge
came from the economic stimulus bill, which was passed in 2009 and financed an
Energy Department loan guarantee program
and a separate Treasury Department grant program that were promoted as important
in creating 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. The federal loan guarantee program expired on Sept.
30. The Treasury grant program is scheduled to expire at the end of December,
although the energy industry is lobbying Congress to extend it. But other
subsidies will remain.
The windfall for
the industry over the last three years 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.
Obama
administration officials argue that the incentives, which began on a large
scale late in the Bush administration but were expanded by the 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
government subsidies available to the owners of a renewable-energy plant.
The first subsidy
is for construction. The plant is expected to cost $1.6 billion to build, with
key components made by SunPower at factories in California and Asia. In late
September, the Energy Department agreed to guarantee
a $1.2 billion construction loan, with the Treasury Department
lending the money at an exceptionally low interest rate of about 3.5 percent,
compared with the 7 percent that executives said they would otherwise have had
to pay.
That support alone
is worth about $205 million to NRG over the life of the loan, according to an
analysis performed for The New York Times by Booz & Company, a strategic
consulting firm that regularly performs such studies for private investors.
When construction
is complete, NRG is eligible to receive a $430 million check from the Treasury
Department — part of a change made in 2009 that allows clean-energy projects to
receive 30 percent of their cost as a cash grant
upfront instead of taking other tax breaks gradually over several years.
Californians are
also making a big contribution. Under a state law passed to encourage the
construction of more solar projects, NRG will not have to pay property taxes to
San Luis Obispo County on its solar panels, saving it an estimated $14 million
a year.
Assisted by another
state law, which mandates that California utilities buy 33 percent of their
power from clean-energy sources by 2020, the project’s developers struck lucrative contracts with the local utility,
Pacific Gas & Electric, to buy the plant’s power for 25 years.
P.G.& E., and
ultimately its electric customers, will pay NRG $150 to $180 a megawatt-hour,
according to a person familiar with the project, who asked not to be identified
because the price information was confidential. At the time the contract was
awarded, that was about 50 percent more than the expected market cost of
electricity in California from a newly built gas-powered plant, state officials
said.
While neither state
regulators nor the companies will divulge all the details, the extra cost to
ratepayers amounts to a $462 million subsidy, according to Booz, which
calculated the present value of the higher rates over the life of the
contracts.
Additional
depreciation tax breaks for renewable energy plants could save the company an
additional $110 million, according to Christopher Dann, the Booz analyst who
examined the project.
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.
Mr. Crane of NRG
disputed the Booz estimate, saying that 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 to be earning at least $300 million a year in profits from all of its
solar projects combined, making these investments some of the more lucrative pieces in its sprawling
portfolio, which includes dozens of power plants fueled by coal, natural gas and oil.
NRG is not the only
company gobbling up subsidies. At least 10 of the 16 solar or wind electricity
generation projects that secured Energy Department loan guarantees intend to
also take the Treasury Department grant, and all but two of the projects have
long-term agreements to sell almost all of their power, according to a survey
of the companies by The Times.
These projects, in
almost all cases, benefit from legislation that has been passed in about 30
states that pushes local utility companies to buy a significant share of their
power from renewable sources, like solar or wind power. These mandates often
have resulted in contracts with above-market rates for the project developers,
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.
Because the
purchase mandates can drive up electricity rates significantly, some states,
including New Jersey and Colorado, are considering softening the requirements
on utilities.
Brookfield Asset
Management, a giant Canadian investment firm, will receive so many subsidies
for a New Hampshire wind farm that they are worth 46 percent to 80 percent of
the $229 million price of the project, when measured in today’s dollars,
according to analyses for The Times performed by Booz and two other two
industry financial experts. (The wide range reflects a disagreement between the
experts on the future price of electricity in New Hampshire.)
Richard Legault,
the chief executive of Brookfield Renewable Power, the division that
oversees the Granite Reliable
project in New Hampshire, declined to discuss his profit expectations in
detail, but said the project might not have happened without government
assistance.
“When everything
has come together, it is a good investment for Brookfield, it is no doubt,” Mr.
Legault said. “We are quite happy with it.” (Brookfield is also the owner of
the small park in Manhattan that is home to the Occupy Wall Street protesters.)
Even companies
whose business has little to do with energy or finance, like the Internet giant
Google, benefit from the public 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 that it can use to offset its profits from Web
advertising.
Industry executives
and other supporters of the subsidies say that the public money was vital to
the projects, in part because financing for renewable energy projects 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 the 2010 fiscal year, the 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.”
Michael E. Webber,
associate director of the Center for International Energy and
Environmental Policy at the University of Texas, Austin, said renewable energy
subsidies were a worthy investment. “It is a form of corporate welfare that is
consistent with other social goals like job creation, clean air and boosting a
domestic source of energy,” he said.
Overflowing
Breaks
Obama
administration officials said the subsidies were intended to help
renewable-energy plants that were jumbo-sized or used innovative technology,
both potential obstacles to getting private financing. 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 H. Summers, then his top economic adviser; Carol M. Browner, then his
adviser on energy matters; and Ronald A. 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.”
Officials involved
in reviewing the loan applications said that Treasury Department officials
pressed the Energy Department to respond to these concerns.
Officials at both
agencies declined to discuss the anticipated financial returns of the
clean-energy projects the federal government has agreed to guarantee, saying
the information was confidential.
But Energy
Department officials said they had carefully evaluated every project to try to
calculate how much money the developers and investors stood to make. “They were
rejected, if they looked too rich or too risky,” Mr. LaVera, the Energy
Department spokesman said.
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 that companies use most of the Treasury grants that they would
get when construction was complete to pay down part of 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, which like Goldman Sachs, Morgan
Stanley and other financial firms has large investments in several of these
projects.
But there is no
doubt that the deals are lucrative for the companies involved.
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.
It is also an
investor in one solar and one wind project that have secured about $2
billion in federal loan guarantees and expects to collect nearly $1 billion in
Treasury grants. The company has also won hundreds of millions of dollars in
contracts to sell its turbines to wind plants built with
public subsidies.
Mr. Katell said
G.E. and other companies were simply “playing ball” under the rules set by
Congress and the Obama administration to promote the industry. “It is good for
the country, and good for our company,” he said.
Satya Kumar, an
analyst at Credit Suisse who specializes in renewable energy companies, said
there was no question the country would see real benefits from the surge in
renewable energy projects.
“But the industry
could have done a lot more solar for a lot less price, in terms of subsidy,” he
said.
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