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Cape Wind won’t save billions for New England electric customers  

Author:  | Economics, Massachusetts

February 12, 2010

The Editor
Cape Cod Times
319 Main Street
Hyannis, MA 02601

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 [i] released by the developer of the Cape Wind project claim 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. [ii] 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. [iii] ) 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 As a result, the prices now expected by EIA for natural gas, electricity, and oil are dramatically lower than the outdated forecast used by CRA. [iv] 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:

  1. 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 [v] 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.

  2. 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 . [vi] 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.
  3. 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.

Glenn R. Schleede (former Massachusetts resident)
18220 Turnberry Drive
Round Hill, VA 20141-2574

[i] http://www.capewind.org/downloads/Final%20Cape%20Wind%20Report%20%202-8-2010.pdf

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

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

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

[v] The American Recovery and Reinvestment Act of 2009.

[vi] 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!

This material is the work of the author(s) indicated. Any opinions expressed in it are not necessarily those of National Wind Watch.

The copyright of this material resides with the author(s). As part of its noncommercial effort to present the environmental, social, scientific, and economic issues of large-scale wind power development to a global audience seeking such information, National Wind Watch endeavors to observe “fair use” as provided for in section 107 of U.S. Copyright Law and similar “fair dealing” provisions of the copyright laws of other nations. Queries e-mail.

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