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Will Cape Wind Save Billions? Challenging a Study by Charles River Associates

[Editor note: Glenn Schleede wrote this letter-to-the-editor in response to  a news report published in the Cape Cod Times, "Cape Wind Savings Pegged in Billions".]

Dear Editor:

Thanks for the article in your February 11, 2010, edition, but electric customers in New England should not believe the claim that the Cape Wind project will save them “Billions” on their electric bills.

Frankly, the numbers in the slick 9-page “consultant” study released by the developer of the Cape Wind project of $4.6 billion in savings over 25 years just don’t add up for at least four major reasons:

1. Huge Cost of Cape Wind electricity. The true cost of electricity from wind – particularly offshore wind — is huge. No one who is paying attention expects the price that Cape Wind charges for its electricity to be cheap. In fact, over 25 years, the wholesale cost to New England utilities for electricity from Cape Wind apparently will be well over $5.75 billion and probably much more.

The arithmetic is simple: The CRA “study” (table 1, page 6), shows that the developer expects to produce about 1,150,000,000 kilowatt-hours (kWh) of electricity per year. If utilities are forced to pay even $0.20 per kWh, the utilities cost over 25 years would be $5.75 billion. [1] The cost would be $6.9 billion if utilities have to pay the $0.24 per kWh that NatGrid apparently agreed to pay for electricity from the planned Rhode Island offshore “wind farm.”
Does anyone in New England seriously expect that the WHOLESALE price of non-Cape Wind electricity in New England will average $0.20 or $0.24 per kWh over the next 25 years (up from about $0.08 per kWh in 2008. [2]

You would have to believe that it would be well above $0.20 to $0.24 per kWh to believe that electric customers would SAVE $4.6 billion if Cape Wind is built.

2. The CRA “study” used old data. For some reason not explained in the “study,” CRA used the Energy Information Administration’s (EIA’s) 2009 energy forecast (AEO2009 revised) rather than its 2010 forecast (AEO 2010) that has been available since last December. The fact is that a lot has changed since EIA’s 2009 report, particularly on US natural gas resources. As a result, the prices now expected by EIA for natural gas, electricity, and oil are dramatically lower than the outdated forecast used by CRA. [3] Using current data would lower significantly the CRA-Cape Wind claim for savings.

3. Doubtful Assumptions. The “savings” shown by the CRA report are driven by assumptions, including the assumption that Federal legislation will impose a $30 to $60 per ton charge for carbon emissions. Because of the high uncertainty, an objective analysis would have shown results both with and without this dramatic assumption.

4. Missing Costs. The CRA report is silent on who would bear the cost of the transmission capacity that would be needed to bring the electricity from the Cape Wind project to New England customers. Unless Cape Wind is going to absorb those costs within the price it charges, those costs undoubtedly will be passed along to New England’s electric customers and hidden in their monthly bills.
Not mentioned at all – probably because it doesn’t affect electric bills – is the fact that the owners of the Cape Wind project would enjoy huge tax breaks if they build the project, and taxpayers in New England, as well as the rest of the US, will share in the tax burden that would be escaped by Cape Wind owners. These tax breaks are in addition to the income the owners would receive by selling electricity to New England utilities and selling “green energy” credits. For example: 

a. Production tax credit (PTC). The Cape Wind project owners would be eligible to receive a federal tax credit, currently $0.021 per kWh for electricity produced during the first 10 years of the project life. Using the production apparently expected by Cape Wind (1,150,000,000 per year) a $0.021 per kWh credit (which is adjustable for inflation), would permit the owners to avoid federal corporate income taxes of $24,150,000 per year or $241,500,000 over 10 years.

The recent federal “stimulus” legislation– The American Recovery and Reinvestment Act of 2009–gives “wind farm” developers the option of selecting an investment tax credit in lieu of the PTC or electing to receive from the US Treasury a cash grant equal to 30% of eligible capital costs! Again, ordinary taxpayers pick up the tab.

 b. Accelerated depreciation. “Wind farm” owners are also permitted by the IRS to use the lucrative “5-year double declining balance accelerated depreciation” (5-yr; 200%DB) to recover the capital costs from their otherwise taxable income.[4] Depreciation deductions would permit the owners to avoid $490 million in federal corporate income taxes – in addition to the Production Tax Credit – again shifting the tax burden to ordinary taxpayers.

c. Additional tax breaks and subsidies. The above does not include other federal or Massachusetts tax breaks and subsidies that could be available to the Cape Wind owners.

The electric customers in New England – as well as the taxpayers – deserve a far more complete and objective analysis of the potential cost impacts on them of the proposed Cape Wind project than is provided by the 9-page “study” attributed to Charles River Associates (CRA) and released by Cape Wind.

Sincerely, Glenn R. Schleede (former Massachusetts resident)


[1] Arithmetic: 1,150,000,000 kWh x 25 years x $0.20 per kWh).

[2] NE ISO 2008 Market Report. http://www.iso-ne.com/markets/mktmonmit/rpts/other/amr08_final_061709.pdf, page 3.

[3] http://www.eia.doe.gov/oiaf/aeo/overview.html, Table 1.

[4] They could deduct 20% in the first tax year, 32% in the second tax year and the remaining 48% over the ensuing four tax years. If project capital costs turn out to be $1.4 billion,[vi] the deduction would be $280 million in the first tax year and $498 million in the second tax year and the remaining $672 million over the next four tax years. These deductions from otherwise taxable income would permit additional tax deductions at the corporate rate of 35%; i.e., $98 million in the first tax year, $156.8 million in the second tax year and the remaining $235.2 over the next four tax years. Note that depreciation deductions apply to both equity and debt, so the owners would probably recover all their equity investment in less than 2 years!

4 comments

1 John Droz { 02.13.10 at 11:59 am }

Glenn’s comments, as usual, are spot on.

Maybe I missed something in the “consultant’s” report, but it seems to have the same major flaws as those done for NY politicians.

The largest of these economic “savings” is due to an expected reduction in wholesale electricity costs, as wind will reportedly replace more expensive sources (e.g. oil in the Cape).

All that has some truth to it, of course, but it begs the real question.

If the government is considering subsidizing new sources of electricity to: 1) lower wholesale costs, and 2) reduce CO2 — then the only financial analysis of merit is to compare wind development TO ALL OTHER ENERGY OPTIONS.

This was NOT done.

The study assumes that it is Wind or nothing.

The reasons are obvious: other options (e.g. nuclear) would reduce the wholesale price just as much (if not more). Additionally nuclear would have numerous other benefits.

This selective comparison trick is one of many these clever marketers frequently use. We need to be aware of this purposeful strategy and to expose it when it happens.

See EnergyPresentation.Info for more information on this topic.

2 Tom Tanton { 02.13.10 at 12:07 pm }

Glenn, one minor point; under FERC rules the developer (in this case cape Wind) is responsible for the cost of gen-tie sections of transmission only; grid is responsible for “network upgrades”. FERC remains silent afaik, about induced/forced ramping costs (fuel and increased o&m) the wind (or any other) developer imposes on others.

3 Rich { 02.17.10 at 12:29 pm }

Review this document from EXXON. http://www.exxonmobil.com/Corporate/Files/news_pub_eo_2009.pdf
Note that on page 24, the foot note, “exclude additional costs for intermittency and transmission investments.” That means that because the wind is not there you need a COAL/OIL/NG power station to make electricity. This actually doubles the REAL cost of wind – but wind proponents neglect this fact. Further, all of these grand projections always use “name-plate” capacity of the wind generators for the wind farm output. In reality, wind farms produce LESS THAN 25% of name plate capacity per year. It also appears the EXXON data includs the federal subsidies in their price forcasts. In NE, the utilitys pay the windfarms more per KWh than I pay for electricity – how long can that go on?

4 Wind Energy, Offshore Case – Subsidies, Contribution to Massachusetts Electricity Generation | JHEverson Consulting { 06.06.11 at 2:29 pm }

[...] Subsidies: “The Cape Wind project owners would be eligible to receive a federal tax credit, currently $0.021 per kWh for electricity produced during the first 10 years of the project life. Using the production expected by Cape Wind (1,150,000,000 kWh per year), a $0.021 per kWh credit (adjustable for inflation), would permit the owners to avoid federal corporate income taxes of $24,150,000 per year or $241,500,000 over 10 years.” [...]

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