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White House advisors: Federal loans for renewable power projects going to the wrong projects

Michael Giberson's picture
Center for Energy Commerce, Rawls College of Business, Texas Tech University

Dr. Michael Giberson is an instructor with the Center for Energy Commerce in the Rawls College of Business at Texas Tech University. Formerly, he was an economist with Potomac Economics, Ltd., a...

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  • Nov 5, 2010
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\From news reports:

The federal loan guarantee program for renewable energy projects should either be fixed or scrapped, senior White House advisors wrote in a memo to President Barack Obama last week.

Obama’s top environmental advisor Carol Browner, top economic advisor Lawrence Summers and Vice President Joe Biden’s chief of staff Ron Klain identified in a memo dated 25 October what they see as shortcomings of the section 1705 Energy Loan Guarantee program.

The program has been criticized for moving too slowly to give final approval for a significant number of projects and could be at risk of failure, the advisors warn. Not only does it provide incentives for too few projects, it may be picking the wrong ones: subsidizing projects that may have happened without subsidies or projects with weak economics that would struggle to find private financing, they wrote.

The advisors note the political ramifications of dropping the program. It is part of last year’s big stimulus package, and shifting its money elsewhere might suggest the stimulus was less than a resounding success. (Politics is like this, it is so hard to learn from your mistakes because you never admit to making any.)

But on this question of picking the wrong projects, I’m wondering what other kinds of projects there might be. Projects with solid economics will happen without subsidies* and projects with weak economics will struggle to find private financing.  I guess the advisors are hoping for projects with “baby bear bed” economics: neither too hard nor too soft, but just right.**

For more, here is a Wall Street Journal story with an example of a project that was going to happen anyway:

President Obama’s top advisers recommended cutting off funding for a federal loan-guarantee program meant to spur the construction of wind and solar farms and other alternative energy projects, saying taxpayer dollars might be better spent elsewhere.

But the advisers, including Mr. Obama’s outgoing National Economic Council Director Lawrence Summers, energy policy czar Carol Browner and Ron Klain, chief of staff to Vice President Joe Biden, warned Mr. Obama that pulling money from the program would risk antagonizing powerful allies in Congress, and would “signal the failure of a Recovery Act program that has been featured prominently by the administration,” according to an Oct. 25 memorandum viewed by The Wall Street Journal.

The memo questions the logic behind subsidizing a big wind farm project in Oregon that Energy Secretary Steven Chu praised last month as “part of the administration’s commitment to doubling our renewable energy generation by 2012.” Mr. Chu said the federal government would provide, subject to conditions, a partial guarantee for a $1.3 billion loan for the project.

But Mr. Obama’s senior advisers wrote in their memo that the wind farm—sponsored by Caithness Energy LLC and General Electric Co.—”would likely move without the loan guarantee.”

“The economics are favorable for wind investment given tax credits” and state regulations that require electric companies to boost their use of renewable power, they wrote.

The memo adds that the project’s corporate backers “would provide little skin in the game (equity about 10%),” while the government would provide “a significant subsidy (65+%).”

The memorandum also questions the project’s environmental benefits, saying carbon dioxide emissions “would have to be valued at nearly $130 per ton for CO2 for the climate benefits to equal the subsidies (more than six times the primary estimate used by the government in evaluating rules).”***

*By “may have happened without subsidies” they mean “may have happened without Section 1705 federal loan guarantees (but already enjoying the production tax credit or investment tax credit and state renewable power mandates and other federal state and local benefits.”)

**Goldilocks did eventually find that “just right” baby bear bed, but that was not the end of her story. I suspect that these reports are not the end of the story on failing policy ideas that can’t be let go.

***I’m shocked, shocked to find it claimed that subsidizing renewable power projects is an expensive way to obtain climate benefits. (Actually, I am kind of surprised to find Obama White House advisors making this claim.  Maybe they could turn their powers of analysis on the proposed National Renewable Portfolio Standards or the existing production tax credits.)

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Dan Yurman's picture
Dan Yurman on Nov 5, 2010

Why am I not surprised.  The White House also killed the construction of Calvert Cliffs III nuclear reactor, which would have provided 1,600 MW at 90% uptime of carbon emission free electricity.  Compare that to wind which produces power at less than one-third of the time.

Geoffrey Styles's picture
Geoffrey Styles on Nov 5, 2010

Michael,

This is similar to a discussion I was having elsewhere on this site concerning the expiration of the stimulus grants (Treasury renewable energy grants, Sec. 1603).  It seems to me that allowing eligibility to end on 12/31/10 and forcing developers that can’t wait to receive the ITC at tax time to seek tax equity in the market would not just subject them to an unnecessary hurdle.  They might get more or less the same money from the govt. eventually, but it would expose projects to further investor scrutiny that could result in improving marginal ones and winnowing out the duds. Wouldn’t that reduce the cost to taxpayers and foster a healthier renewable energy sector in the long run? 

Jim Warden's picture
Jim Warden on Nov 8, 2010

First, I also believe nuclear is needed as part of the mix. After the 2014 peak (scientific american) people will be desperate for any source. Yes wind is 30% by itself but dont forget about GreenGas.cc as storage which is said to be able to double the usefullness of wind and solar. The people at GreenGas.cc say they have offered to do demos for more than 3 years, so it is both Democrat and republicans giving money to those who dont need it, thereby delaying new techs.??

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