Cape Wind is the leading offshore wind energy project in the United States. In 2001, more than 12 years ago, Jim Gordon, the project founder, started the process of promoting his vision of a building a 430 MWe (peak capacity) field of 130 massive (rotor diameter – 110 m, hub height – 80 m, nacelle weight – 100 tons) turbines. Gordon chose his location, a shallow water area in Nantucket Sound off of the coast of Cape Cod, because it was one of the best available areas in US waters for a wind installation. It has reasonably predictable winds, close proximity to a large concentration of electricity customers, and shallow enough water to minimize the cost of building tower foundations.
After a dozen years worth of marketing and sales pitches, Mr. Gordon has managed to obtain the necessary permits for his project and to receive commitments for approximately three quarters of the power that the facility might produce at weather-dependent times. As a direct result of Renewable Portfolio Standards (mandates) in the New England area where the power will be sold, the committed customers have agreed to pay $207 per megawatt-hour for the first year’s worth of power, with a guaranteed escalation of 3.5% per year for the first fifteen years worth of operation.
Aside: Since March of 2003 there have only been three brief spikes in New England when monthly wholesale electricity prices exceeded $100 per megawatt-hour. Monthly wholesale prices in New England have never exceeded $120 per megawatt-hour. End Aside.
Even with advantageous site attributes and monopoly utility customers that are willing to commit their captive rate payers to pay more than twice as much per unit of power as they have ever paid, Mr. Gordon’s vision remains stuck at the financing stage.
Taxpayer money forms a key pillar in the complex project financial structure. Mr. Gordon and his backers are counting on the US government to hand them $780 million to help pay for the cost of construction and to enable them to make a substantial profit on the effort.
Of course, we want to make a profit. We want to make money because it’s important that people in this industry see that it’s not just coal and petroleum coke people that can make money, but renewable energy developers can also make money. Because if they don’t, we’re not going to have innovation in this industry. We’re not going to have projects 2, 3, and 4. I certainly make no apologies about that, about recognizing that in order for this industry to be successful, developers have to make a profit. Developers need certainty. Developers need a realistic time frame. One of the things we take a little bit of pride in is that we’re making it easier for the people who come after us. But there has to be that first project. Whether we’re No. 1 or whether it’s Fisherman’s in New Jersey or Deepwater that’s No. 1, that’s not the important thing. Because as I said the other day at the conference, we’re going to be No. 56 in the world.
(Jim Gordon interview April 9, 2013 Commonwealth Magazine)
Aside: It is worth pointing out that $780 million is 1.7 times as much money as the $452 million that Congress has authorized to be appropriated during a six year period to defray the cost of obtaining a Nuclear Regulatory Commission design certification for small modular reactors (SMR). The SMR program is often touted as proof that the current administration supports nuclear energy. End Aside.
Mr. Gordon and his backers believe that we owe them more than three quarters of a billion dollars as a result of the current law authorizing a 30% Investment Tax Credit (ITC) in lieu of a $23 per megawatt-hour Production Tax Credit (PTC). If Cape Wind promoters fail in their attempt to qualify for our money, the $207 per megawatt-hour that their customers have agreed to pay will be insufficient to compensate for the construction, interest payments, operations and maintenance costs of their project. Instead, the project sales people will have to go back to their customers and ask them to increase their promised payments to at least $227 per megawatt-hour for the first year with the same 3.5% per year escalation clause.
Mr. Gordon and his fellow offshore wind energy cheerleaders are facing a December 31, 2013 deadline in order to qualify for the taxpayer gift. As a result of closed door negotiations in 2012, the wind energy PTC and the wildly popular — for investors — ITC in lieu of PTC option were extended until the end of 2013 with a significant change from previous PTC extensions. Instead of requiring project completion and entry into service by a deadline, Congress gave its Big Wind donors a loophole large enough to drive a wind turbine blade-carrying truck through.
As long as projects “begin construction” by the end of 2013, they will qualify for the credit. The IRS looked at the opening that Congress provided and decided it was insufficiently large for an offshore project like Cape Wind, where meeting the “physical work of a significant nature” standard for establishing the date of beginning construction means making some serious initial investments in special purpose marine infrastructure that has few, if any, alternative uses. For projects like Cape Wind, the IRS determined that promoters can qualify for the 30% tax credit by incurring 5% of the total project cost by the end of 2013. The rules give the entity that applies for the tax credit the ability to claim to have incurred expenses as long as they have signed a binding written contract for qualifying equipment before the deadline.
(See IRS Notice 2013-29 – Beginning of Construction for Purposes of the Renewable Electricity Production Tax
Credit and Energy Investment Tax Credit and IRS Notice 2013-60 – Clarification of Notice 2013-29 for details.
See also PTC, ITC, or Cash Grant? An Analysis of the Choice Facing Renewable Power Projects in the United States for analysis that supports the assumption that a high capital cost project like Cape Wind would invariably select the nearly immediate 30% ITC instead of the PTC, which pays out over a ten year period based on actual production.)
Knowing most of this background already, I was not surprised by the December 23, 2013 announcement that Cape Wind had apparently signed a binding contract with Siemens to supply 130 of its 3.6 MWe (peak capacity) wind turbines, to arrange for the supply of an offshore Electric Service Platform and to commit to providing turbine maintenance support for 15 years after the project is completed.
Cape Wind has selected turbines that are a proven design that is well-established in the offshore market; the Siemens press release about the contract describes them as “the ‘workhorse’ of the global offshore wind industry”. The turbines will be manufactured in an experienced turbine factory in Denmark. Siemens, a company that employs about 60,000 people in the US, has promised that it will hire local people to fill the majority of the 50 permanent Cape Wind facility jobs that will be established in a local operations and maintenance center. It did not make any statements about the people who will be involved in the construction project, which will temporarily employ between 600 and 1000 people.
Though I am not a tax lawyer, it seems to me that there is still room to question whether or not the contract with Siemens will be sufficient to qualify for under the lenient IRS rules. Here is the relevant section of IRS Notice 2013-29 that give grounds for questioning, especially since Cape Wind decided to use a very common type of turbine:
If the facility’s wind turbines and tower units are to be assembled on-site from components manufactured off-site by a person other than the taxpayer and delivered to the site, physical work of a significant nature begins when the manufacture of the components begins at the off-site location, but only if (i) the manufacturer’s work is done pursuant to a binding written contract (as described in section 4.03(1)) and (ii) these components are not held in the manufacturer’s inventory (as described in section 4.02(2)). If a manufacturer produces components for multiple facilities, a reasonable method must be used to associate individual components with particular facilities.
Not surprisingly, Siemens representatives have expressed little doubt that their efforts will help Cape Wind qualify for the tax credit.
Construction of some components has already begun, meeting the requirements for the investment tax credit, said Markus Tacke, chief executive officer of Siemens Energy’s wind power division.
The project has been in the works for 12 years, and has faced opposition from fishermen, American Indian groups and the Kennedy family, whose compound of homes overlooks Nantucket Sound. It would become the first U.S. offshore wind farm if built.
“They are doing significant work,” Tacke said in a phone interview. “There are some foundations being built and developments being done. I’m convinced it will” qualify for the credit.
I hope many of you recognize the snide tone I have purposely chosen to use in constructing this piece. I am having a difficult time understanding the benefit for American taxpayers of spending $780 million to help New England obtain the “majority” of 50 new green jobs, an uncertain amount of expensive electricity, some well-proven foreign equipment manufactured in foreign factories, the construction related damage to a sensitive ecosystem in an abundant fishery and the disfigurement of one of our most scenic bodies of water. If anyone thinks they can help me understand why anyone should support this expenditure, please feel free to leave a comment.
I’ll let Mr. Gordon have the first opportunity to comment – here is a link to his explanation for why he believes his project deserves our support.
PS Some readers might wonder why I have chosen to attack an offshore wind energy project. Like many nuclear energy advocates, I like ultra low emission, non hydrocarbon energy sources. Wind energy has been sold as just such a power source; many of my friends believe we should not spend our time fighting against other fossil fuel alternatives.
However, even though offshore wind cannot directly replace nuclear energy because it will never be dependable without help from coal, oil or natural gas, it competes for mind share and resources among people that favor actions and investments to reduce our consumption of fossil fuel. Another motivation for me is the fact that Jim Gordon was a natural gas plant developer in New England before he started selling his current offshore wind project.
In April 2013 he was the subject of an interview with Commonwealth Magazine that ended with the following intriguing exchange:
CW: Bill Koch says you are building a natural gas peaking plant to back up Cape Wind when the wind doesn’t blow. That isn’t true, is it?
GORDON: No, but if I was, what’s his issue?
CW: He raises it as part of an economic argument against Cape Wind. He also said climate change is happening but the earth is constantly adapting. He mentioned the Gaia Theory by James Lovelock, who basically argues that the earth and its inhabitants are constantly adapting to sustain life. Lovelock says climate change is happening and what’s coming will be very hostile to mankind. He recommends moving to higher ground, He doesn’t think wind power is a feasible answer.
GORDON: Does he want to put more coal in the air?
CW: No, he wants to go totally nuclear because nuclear can generate large amounts of electricity with no carbon emissions.
GORDON: Does he believe that emitting carbon into the atmosphere causes climate change?
CW: I think he does. I didn’t ask him that directly.
CW: What about Lovelock’s contention that the world is so badly damaged that we need to move to abandon wind projects, focus on nuclear, and move to higher ground?
GORDON: The choice of heading for higher ground is not one that I’m willing to accept. I have three children. One is six, one is nine, and I have a 24-year-old. That’s not an option for us. This is the greatest environmental threat. Looking at Cape Cod being a low-lying coastal community, it’s most susceptible to the impacts of climate change. My mother can’t get insurance on her house. She lives a quarter-mile from the water. She’s got a little three-bedroom ranch house. She has to be on the Massachusetts Fair Plan, subsidized insurance. So people from Holyoke and Brockton are subsidizing her insurance and the insurance for many of the big waterfront estates. There’s a biblical irony here. For someone like Bill Koch to fight this project, it is a biblical irony. Because no matter how much money somebody has, they can try to stop the tide by fighting what the Natural Resources Defense Council says is the largest single greenhouse gas displacement project or I hope one day that I can enlist Bill in trying to help solve the problem as well as everybody else. I want to try to inspire other energy developers to look at this and to try to do something and make a difference.
Please notice that he did not address the question about nuclear energy. However, earlier in the interview, Gordon made the following comment that leads me to believe he is competitively opposed to nuclear energy:
Gordon: Folks, every energy project has an impact, including the Cape Wind project. But what we believe is that the impacts from this project will be a lot less than if you choose a coal plant or a nuclear plant or even a natural gas-fired power plant.
That comment qualifies this post as a smoking gun.
New York Times (December 25, 2013) Wind Power Developers Race Clock to Secure Subsidy by Diane Cardwell and Matthew Wald
Commonwealth Magazine April 2013 interview with Bill Koch, one of the principal funding sources for the Alliance to Protect Nantucket Sound. Highly recommended!
New York Times (October 22, 2013) Koch Brother Wages 12-Year Fight Over Wind Farm