Competitive Enterprise Institute | 1899 L ST NW Floor 12, Washington, DC 20036 | Phone: 202-331-1010 | Fax: 202-331-0640
As the Department of Energy considers a loan guarantee for the Cape Wind Project in Massachusetts, it should learn from Europe's failed wind energy experiments – and from its own troubled experiences with renewable energy projects.
Germany and Spain are waking up to the inevitable truth about renewable energy, especially offshore wind. They are now realizing the projects cannot survive without subsidies and that they make energy much more expensive to households and businesses. In an age of austerity, they are a luxury even Germany, Europe's economic powerhouse, cannot fully afford any more.
When Germany decided to close down its nuclear power stations after the Fukushima disaster in Japan, the original plan was to replace most of the lost generating capacity with wind power. However, wind power is expensive, and the growing size of the industry has meant that subsidies – and energy bills – have surged. The German subsidy is paid for by a surcharge on household electricity bills. The growth in wind power meant that in January the surcharge increased to over 5 cents (euro) per kilowatt hour, representing 14% of all electricity bills.
In Germany, Chancellor Angela Merkel, realizing that wind power is economically unsustainable, has proposed capping the subsidy until the end of 2014 and capping further rises to 2.5%, with the probability of further significant reform after the federal elections this year. It's a similar story in Spain, where subsidies have been cut so much that the chairman of the country´s Association of Renewable-Energy Producers said recently: "Spain's government is trying to smash the renewable-energy sector through legislative modifications."
President Obama has repeatedly said we should look to Spain and Germany for the lead on renewable energy policy. He is right, but not in the way he thinks.
Furthermore, he should look to the Cape Wind project in Nantucket Sound. The project will cost $2.6 billion, and it has secured funding for $2 billion of that from a Japanese bank. But this is believed to be subject to the project gaining a loan guarantee from the U.S. Department of Energy. And there is every reason to believe that this would be as bad a bet as its loan guarantee to Solyndra.
The contracted cost of the wind farm's energy will be 23 cents a kilowatt hour (excluding tax credits, which are unlikely to last the length of the project), which is more than 50% higher than current average electricity prices in Massachusetts. The Bay State is already the 4th most expensive state for electricity in the nation. Even if the tax credits are preserved, $940 million of the $1.6 billion contract represents costs above projections for the likely market price of conventional power. Moreover, these costs are just the initial costs, and like in Germany, they are scheduled to rise by 3.5 percent annually for 15 years.
This massive increase in energy costs is bad news for Bay State businesses and may well drive some of them out of the state entirely. That's a disaster for jobs and for tax revenue.
The likelihood that businesses will not be willing to pay the bill means that the burden will fall increasingly on households. Yet, in all probability, this will be politically unsustainable, and the cost will therefore fall back on taxpayers across the nation, via the loan guarantee.
That's just the economic argument. When you consider the environmental arguments, the case becomes a no-brainer. As the Alliance to Protect Nantucket sound points out, "Cape Wind threatens the marine environment and would harm the productive, traditional fisheries of Nantucket Sound."
The Alliance also notes that, "Cape Wind would not make a significant contribution to the effort to reduce pollution emissions, and, in fact, could aggravate the problem by causing dirty power plants to run more often in order to be ready to generate power instantly when the wind stops blowing."
For the Department of Energy to grant the loan guarantee to Cape Wind would be a triumph of blinkered ideology over real economic and environmental concerns. The president, true to his word, should learn from Germany and turn down the loan guarantee to Cape Wind.