Guest Post by Willis Eschenbach
Sounds like a scam, huh? But it’s real. Let me explain how people (no, not you or me, don’t be foolish) can make a guaranteed 29% return on their investment. However, to make it clear, I’ll need to take a short digression. I ran across a National Geographic article on where the world gets its electricity. Here are their figures:
Figure 1. World electricity production by fuel type. Renewables (defined by AGW activists as solar-, geothermal-, wind-, and biomass-generated electricity, but not hydroelectricity) are 2.7% of the total electricity use. Data from National Geographic
You can see why the AGW supporters’ heads are exploding as the Durban climate party approaches. It is obvious from the chart that years and years of subsidies and tax breaks and IPCC reports and various urgings by well-meaning but clueless pundits and billions in wasted taxpayer dollars have not succeeded in getting renewables up to even 3% of the total electricity generated. Less than 3%. It must drive them round the twist to contemplate their stunning lack of success at making water flow uphill.
Despite that history, you know how they say on those TV commercials, “But wait! There’s even more!”? In this case, it’s “But wait! There’s even less!”
The reason that its even less is that Figure 1 just shows electricity. It doesn’t show total energy consumed, which is a much larger number. Total global energy consumption is shown in Figure 2.
Figure 2. World energy consumption by source. “Renewables” are solar, geothermal, wind, and biomass. Note that the traditional use of firewood for cooking is not included. Data from the BP Statistical Review
So although renewables have (finally) gotten to 2.7% of the electricity production, they still only represent 1.3% of the global energy consumption. And this is with heaps of subsidies.
And I don’t mean just a bit of money to get them over the hump. Huge subsidies. Because of the total failure of renewables to penetrate the market, the AGW supporters are desperately throwing money at renewable technologies. The New York Times showed a graphic for one such power plant in California. Their graphic is reproduced below as Figure 3.
Figure 3. Federal and State Subsidies for the California Valley Solar Ranch.
Unfortunately, the Times didn’t really discuss the business implications of this chart, so let me remedy that omission.
First, how much money did the investors have to put in? Since the project will start earning money once the key is turned and the market is guaranteed, the investors only had to put up the total capital outlay of $1.6 billion. Less, of course, the generous government grant of nearly half a billion dollars. Total invested, therefore, is $1,170 million dollars.
On that money, the investors stand to make a net present value of $334 million dollars … which means that due to the screwing of the taxpayers and ratepayers, a few very wealthy investors are GUARANTEED A RETURN OF 29% ON THEIR INVESTMENT!!!
How is this fair in any sane universe? AGW supporters talk about the 1% having too much money, and here the same folks are shoveling the money into the one percenters’ pockets. The 1% weren’t rich enough already, so I have to foot the bill for them to get a GUARANTEED 29% RETURN on their investment?
Note also that a huge part of the money, some $462 million dollars, is coming from the California electricity ratepayers, including yours truly, through increased charges for electricity. This means that these solar scam artists are being allowed to sell their power at 50% ABOVE MARKET PRICES!!! Not just a little bit above market. Fifty percent above the market price! Where is the California Public Utilities Commission whose job is to protect the consumer? Oh, I see … the are the ones who agreed to the 50% above market rate hike … for shame.
Pardon my screaming, but this insanity angrifies my blood mightily. Ripping off both the consumer and the taxpayer to allow millionaires to make a guaranteed 29% return on a not-ready-for-market technology, and charging ratepayers 50% above market for the electricity? That is reprehensible and indefensible. In particular, the rate hikes hit the poor much harder than the wealthy, so we are billing the poor to line the pockets of the 1% … and all this in the name of enlightened carbon fears.
A few last numbers to consider. Without the layers and layers of subsidies, the investors would have had to put in $1.6 billion, and they would have suffered a loss of $1.1 billion dollars. The investors wouldn’t lose just a little, they’d lose their shirts, their pants and their ties … and seventy percent of the money they put in. That’s how far this technology is from being marketable. Not just a little ways short of profitability. A long, long, long ways from being marketable, more than a billion dollars short of making a profit.
Finally, the total subsidies for this plant were $1,430 million dollars. So this single “successful” green project will cost the consumer three times what Solyndra cost. And in return … we get energy priced at 50% above the market. Thanks, Energy Department, glad to know you have my back.
You can see why I’m screaming … the inmates have taken over the asylum. Steven Chu, the Secretary of Energy, says we need more successful green projects in order to survive the depression … me, I fear we won’t survive Secretary Chu.
I know we won’t survive if we follow Chu’s brilliant plan for ‘successful green projects’ that do nothing but line the pockets of the 1% with billions in subsidies. That path is the poster child for the concept “unsustainable”, and Secretary Chu is the poster child for the brilliant idiot. He is undoubtedly a genius in his scientific field, but whoever unlocked his ivory tower and let him loose on the business world has some serious explaining to do.
Here is the problem with Energy Secretary Chu. His failures are bad enough. But his successes are lethal.
w.
DMarshall says:
November 18, 2011 at 8:46 pm
@temp Can you support that claim? It flies in the face of just about every study on subsidies to energy companies, although you only mention oil and not coal.
In any case, seel link below for a study on US gov’t subsidies to energy companies from 2002-2008
http://www.elistore.org/Data/products/d19_07.pdf”
I’m going to read the whole thing but from the 3rd page they already are merging and hiding what a subsidize is… Subsidies are direct payments not tax deductions… The fact that the whole number (1) listed is not subsidies already makes me question this study and number (2) Looks to be doing everything to merge green subsidies, R&D, etc as fossil fuel subs with the green subs
“The subsidies examined fall roughly into two categories: (1) foregone revenues, mostly in the
form of tax expenditures (provisions in the U.S. Tax Code to reduce the tax liabilities of particular
entities), and lost government revenue from offshore leasing (through the under-collection of royalty
payments); and (2) direct spending, in the form of expenditures on research and development and
other programs.”
The report looks to be classic green propaganda playing on people’s lack of knowledge about the tax code and that oil companies spend billions on green tech and thus get millions in funding from government.
Something is off. It maybe the NYT. My understanding is thaT NPV of the project is the TOTAL profit expressed in current dollars. It does not take into account that it is earned over a number of years. If the operational life of the solar plant was mentioned, I missed it. Assuming 25 years, the annual return on investment is just over 1%. This is a bad deal even with all the subsidies. Even at ten years, this project makes sense only if someone is scammin; kickbacks or something.
Manfred makes a valid point.
What is the market value of this renewable power. Much of the time its close to zero, because its power no one wants because the infrastructure can’t handle it.
The best use I can think for solar and wind energy is heating underground shale oil and gas to increase flows, because there is no time criticality.
Willis, I commend you on ferreting out something of the truth about this project. The whole truth is much worse than your figures indicate because of leveraging, The actual discounted, after tax cash flow for this project produces an astronomical I.R.R. for its politically connected equity investors. As near as I can determine, the project is *80% or so financed by a bank loan that is guaranteed by the U.S. government. That means equity investor put up 20% of capital costs. That guarantee means the bank has no “skin in the game” and has no vested interest in the long term financial viability of the project.
Equity investors really have no “skin in the game” once the plant achieves “commercial operation”. That’s because those investors receive a tax credit (or optional cash from the U.S. Treasury) equal to 30% of their share of the entire capital cost of the project, including the financed portion. That, in turn, means the lucky investors receive $150 back for every $100 dollars they invested THE DAY THE PLANT ACHIEVES COMMERCIAL OPERATION.
Then it gets even better. Thanks to accelerated depreciation, that same investor receives a share of depreciation on the plant of $250 for every $100 invested DURING THE FIRST YEAR OF PLANT OPERATION. If this heavy-hitting investor is in a 50% marginal tax bracket (state and federal), that first year depreciation amounts to an additional $125 in his pocket of every $100 invested. First year return in such case is ($150 tax credit + $125 reduction in personal tax bill =) $275 dollars return for every $100 invested.
Finally, here’s the really ominous part. First, the bank has no financial interest in seeing to it the plant continues to operate at any time, thanks to the federal loan guarantee. Second, the equity investors receive nearly all the return on their investment they will ever receive during the first five years of plant operation, thanks to a the investment tax credit and the five-year depreciation schedule. Since there is no provision in the federal tax code for recapture of either the investment tax credit or the depreciation benefits equity investors have received at any time after the plant achieves commercial operation, no one has any vested interest in seeing to it the plant continues to operate after five years, other than possibly the plant operating personnel who do not have financial resources to pour into the project in the event of almost inevitable problems.
Finally, please note that the guaranteed power sale rate of between 15 and 18-cents at the fence being touted as “only” 50% above fossil rates is misleading. It is based on the assumption that fossil rates will escalate madly over the next few years. Note that the spot wholesale rate quoted at the Palos Verde trading hub this morning was 3.38-cents per Kwh. The whole thing is a recipe for failure at enormous expense to tax payer and rate payers.
So reviewing the doc about the only thing that maybe considered a sub would be
Strategic Petroleum Reserve ($6,183)
and thats questionable at best… Plus alot of the subs were costing the oil companies money.
They count Black Lung Disability Trust Fund ($1,035) as a sub but yet its really a tax on the coal companies… they in some twisted logic say because the coal companies are not fully taxed on the fund that its a sub… its a tax and a fund setup from that tax and has nothing to do with the coal companies.
The other very very retarded argument they make is that heating homes
The Low Income Home Energy Assistance Program (LIHEAP) ($18,309) this isn’t a sub for coal, oil etc I’m sure a good amount goes to “green” energy as well. This shouldn’t be listed along with most other stuff they have listed is questionable at best.
I’ll also note for say ethanol they don’t list farm subs or anything along that line or countless other subs.
Basically it throws everything and then some as a “fossil fuel” sub and nothing for the green tech like forced usage or any of a host of other subs along with the reduced loan interest rates and a host of other things.
Think the NPV reasoning has gone a little off. If a project has an NPV of 30 and capital costs of 100, it does not follow that it is giving a 30% return.
The NPV formula takes the cash in and out, and discounts them by the applicable interest rate. The result is the amount that a rational investor would pay now for the cash flow stream forecast. You cannot take this amount, divide it into the total capital, and then say that the result is the percentage return on the capital investment.
You could figure payback in years. That is, take the cash out and then figure out how many years it takes to get to breakeven. Not very illuminating because it leaves out interest. You could do IRR. Better, but you have to know the timing of the cash flows to take account of interest.
Need to look up the formulas.
The point is still entirely valid in one sense: the subsidies are huge, the success of them even at these levels in converting power generation to anything but conventional sources is minimal. The write who cites the UK is correct, their tariffs and those of their European counterparts are truly insane, because what they are doing is to favor small scale inefficient production. In the UK for example, you are paid 43p per kWh generated from the smallest sort of solar power installation, whereas the going rate for wholesale electricity is one tenth of that. The larger your installation, the lower the rates. By the way, you are paid in the UK for generating, not for actually supplying. Generate power which no-one wants, you still get paid. This is total madness.
Social engineering at its best.
Surprisingly, the US has a trade surplus in solar energy, exporting manufacturing expertise and importing mass-produced products. Manufacturing expertise developed overseas has in turn been imported back into the U.S. in the most recent manufacturing plants.
On the whole, government subsidies to energy development are not large compared to the earlier subsidies, and ongoing subsidies, to aircraft development and airlines. At policy level, the betting is (so to speak) that continuous development will drive down the cost of the alternatives, and reduce demand on the fossil fuels sufficiently to prevent them rising in price too much. When the govts of the world had been subsidizing aircraft manufacturers and airlines for 30 years, most people (99%) still traveled by boats and railroads.
I am happy to see more development of coal, oil and natural gas, but they are gradually becoming more expensive (with alternations of price declines and price inclines), and if they last longer than 2100, even at high cost, it will mean that economic growth has slowed considerably and all the poor people of the earth will have remained poor.
So, yes it’s a bite, and it’s a big bite. And like all previous human progress it is messy and haphazard. As always, a few people benefit first. Neither the free market nor the government has all the successes and all the failures. These homilies are as true now as always.
Willis
I wrote a long post, went off the check the NYT source and came back to find that michael has said more or less the same thing I wanted to say. Your first two charts are fine. Keep em around. You’ll probably need them from time to time. The third chart (from the NYT) looks to be not so great. It depends on a lot of unstated assumptions about future interest rates, electric rates, etc. It is unclear what timespan it projects over and that’s important because electricity generation projects tend to have a very long lifespan. The biggest assumption — a 1.6B project will be built at estimated cost. It’s hard to tell because the chart is kind of a mess, but I think that a 20% cost overrun in construction would probably make that 334M NPV zero or less — assuming that the “NPV” is actually Return On Investment — which is anything but clear. Hardly a guaranteed profit.
I also agree with michael that the one thing the chart does accomplish is to show that the subsidies involved are very large compared to the scale of the project, and are probably a bad idea.
I see that Claude Harvey has done what I couldn’t, and possibly made some sense out of the economics. He seems to think that the project as proposed is more or less a scam. He could well be right.
But do keep in mind that the costs of solar have been dropping over time which is not true of other energy sources. And solar does not have wind’s unfortunate impacts on the (inadequate) power grid. This year’s dubious investment may well look pretty good in a decade or three even without the probably ill advised subsidies.
I am very much against windfarms and solar in Northern latitudes due to their high cost and inefficient returns, I am against subsidising these industries so no doubt whilst I desire to be objective, it may be that I am biased.
It seems to me that the position is far more complicated.
The investors invest $1.1billion but are able to write down a substantial percantage of this over 5 years and of course they get a low interest loan. Both of which act as sweetners.
But the real issue is over what period of time do the investors earn $334million? Is it over 5 years (the tax write down period) or over 25 years? or over some other period?
The period over which the investors make their net profit makes a substantial difference to the assessment of the real return on their initial outlay of $1.1billion. That is the question that needs to be addressed, although I agree with the political comment that the poor are being forced to subsidise the investment returns of the rich. In the UK this is doubly unfair since the poor never really get a shot at getting their hamds on any of the subsidies that are available. First, by definition, they are poor so do not have the financial means to invest in expensive solar equipment and hence cannot get subsidies on their own energy bills or get the inflated feed in tarriffs. Second, since they are poor they tend to live in rented accomodated so cannot make the property changes required to fit solar to the property (the landlord could but not the tennant) or they live in flats and therefore do not have the roof space etc for solar. Morally, the subsidy system is very wrong and unfairly works against the less well off and unfairly enriches the the landed rich or ootherwise wealthy citizens. It is about time that governments stopped this scam.
Fascinating considerations, Willis. But in this case the main conclusion is not showing the whole picture. The NET PRESENT VALUE of 334 million is not the PROFIT for the investors.
I think this post is closer to the reasoning of the investors: Claude Harvey – November 18, 2011 at 10:55 pm
“The whole truth is much worse than your figures indicate because of leveraging. … That means equity investor put up (only) 20% of capital costs.” They get huge tax deductions for the whole 100% of the the debt.
That is the reason why it is attractive to invest in a project that is directly burning 675 million $ or 42% of the invested capital. If tax credits are taken into account the project is probably burning close to 70% of the invested capital over it’s lifetime.
Actually the capital is not all destroyed. Most of it is recycled. It is taken from tax payers and rate payers and funneld into the pockets of the investors. We all now recycling is good…
Whenever reality is shrouded, there’s always big bucks to be made for those who can see through. What are we waiting for? Electricity powered solar cells, anyone?
In the UK we have Chris Huhne an equally stupid Secretary for Climate Change and Energy, neither of which he knows anything about, who stated that to keep warm we all need more insulation in our houses. He forgets that insulation will keep out any warmth on the outside, which might be vital given that you can’t heat your house at all. Any building at 0C inside will remain at 0C if well insulated. And insulation only delays heat loss so heating is still required. If you can’t afford the minimum heating, as many in the UK can’t, you will probably die.
Where the British will get their energy from according to Chris Huhne, the Huh who spoilt Christmas…
http://fenbeagleblog.wordpress.com/2011/11/15/the-huh-who-spoilt-christmas/
Same in the UK, prices going crazy and subsidies being given out left right and centre, although there are signs on a pullback, prices for electricity generation are going to only be about 50% above going rate guaranteed 25 years. These policies are going to kill people as they turn off the the heat & power at home. Perhaps that is the idea, cull the old and infirm, quietly. Genocide by green inflation, thats a tag if I ever saw one.
A great deal of us find ourselves struggling financially. It gets really old living paycheck to paycheck. Must be a better way. We already work 40 hours or more a week just to stay afloat. Well, there are alternative money-makers than what you’re probably used to.
http://www.squidoo.com/is-amazon-losing-money-on-the-kindle
Bio-mass makes up a significant portion (40%) of the graph’s 3.3 percent “electricity produced.” The total “electricity consumed” from renewables is 1.3 percent – only 40%. Wind and Solar are inherently intermittent, variable and unpredictable. Bio-mass is consumed as a hydrocarbon boiler fuel and the electricity it produces is reliable and constant. Geo-thermal likewise. The numbers in the graph probably indicate only a tiny fraction of the 1.3% “renewables – electricity consumed” is from wind and solar. On the face of it the numbers indicate wind and solar at <ZERO. Amazing.
Which is why 2012 will be a horrible econ year for the Western democracies. No way to reverse things to get cheap energy – even breaking even. For the non-econs, it means as the economies “improve”, energy becomes a huge throttle sucking income away from all other sectors.
Get used to it. Check lead times for building anything.
PaulH says:
November 18, 2011 at 4:05 pm
Here in Canada, the provinces of Quebec and Manitoba have huge hydro-electric generating capacity. With more hydro electric generation capacity planned for the Maritime provinces, there could be more than enough (renewable) electricity for most of Canada and the USA. No need for these silly politically correct science projects.
____________________________________
Here in the USA we are tearing out the hydro electric dams thanks to the eco-nuts.
http://mcclintock.house.gov/2011/09/klamath-claptrap.shtml
I just do not like the word ‘renewable.’ In a sense everything is renewable, even the solar system, somewhere, sometime. Perhaps ‘sustainable’ would be a better term indicating, in the case of energy, that a given resource was either available in such abundance that it could never be exhausted or that it is being continuously replaced at our rate of usage. Also, this term implies that the continuous use of that resource would not make our world uninhabitable.
Ralph Nadir has declared that nuclear power is ‘poison power,’ which would eventually contaminate the planet with deadly radioactive waste, also a former vice president of the United States has declared a scientific consensus now exists that the burning of carbon has reached a point where the climate is about to spin out of control, boiling away the oceans and make the Earth a twin of Venus.
For those who accept these proclamations, solar, bio-solar, wind, and hydropower are the only politically correct, sustainable sources of energy, even though these energy sources would only support a small fraction of today’s population living a Charles Dickens era lifestyle.
I am not quite ready to say that these views have been promoted because of some plot, as I believe the simplest explanation is a bias and sensitive concern caused by environmental indoctrination. Perhaps some have, unknowingly, reverted to an atheonic worship of Nature after losing faith in a traditional religion.
However, there is at least one undeveloped source of energy on this planet that does appear to be indefinitely sustainable at current usage rates.
At some point, someone has to invent a technology which more efficiently converts solar photons into additional electron energy. The problem is, they are two different things – photons versus electrons.
The subsidies are given on the basis that economies of scale and continued small incremental improvements in the solar panels will eventually make them efficient enough.
But that looks to have been a false assumption. They will NEVER be efficient enough.
Mother nature did invent an efficient method billions of years ago. Solar photons get converted into chemical potential energy allowing plants to grow and reproduce. Some of that chemical potential energy got buried, transformed chemically again and it resulted in fossil fuels. Now we are converting that chemical energy into electricity and heat by burning it with oxygen. It is 10 times more efficient, because the plants carried out most of the work hundreds of millions of years ago.
Some kind of new process or new methodology looks like it will be needed since the current technologies, solar panels and reflective mirrors concentrating the solar radiation, just doesn’t look like it will ever be efficient enough.
The money should be going into research of new methods which will be efficient enough rather than continuing to use this assumption that economies of scale and small incremental improvements will reach the goal – because it won’t.
Just for “the hell of it” I googled in the question: “Is 1 billion 1000 million or is it 1 million – million.” – The answer came back as follows:
“Long scale is the English translation of the French term échelle longue. It refers to a system of large-number names in which every new term greater than million is 1,000,000 times the previous term: billion means a million millions (1012), trillion means a million billions (1018), and so on.[1][2]
Short scale is the English translation of the French term échelle courte. It refers to a system of large-number names in which every new term greater than million is 1,000 times the previous term: billion means a thousand millions (109), trillion means a thousand billions (1012), and so on.[1][2]“
“”
Maybe it is possible to ‘hide the cost” as well as the decline?
Alan says:
November 18, 2011 at 4:13 pm
Isn’t hydro renewable?? Greenies only seem interested in wind for some reason
Alan says:
November 18, 2011 at 4:13 pm
Isn’t hydro renewable?? Greenies only seem interested in wind for some reason
_______________________________________
Hydro might hurt the little fishes. Also the USA passed the scenic rivers bill
Never forget that the actual plan is to “De-develop the USA”
“de-development presents our economists with a major challenge. They must design a stable, low-consumption economy in which there is a much more equitable distribution of wealth … Redistribution of wealth both within and among nations is absolutely essential”” John Holdren, Obama’s Science Czar – Human Ecology: Problems and Solutions (1973)
President Bush’s pal Maurice Strong stated at the Rio Conference, Earth Summit II, in 1992:
“It is clear that current lifestyles and consumption patterns of the affluent middle class — involving high meat intake, consumption of large amounts of frozen and convenience foods, use of fossil fuels, appliances, home and work-place air-conditioning, and suburban housing — are not sustainable. A shift is necessary toward lifestyles less geared to environmentally damaging consumption patterns.”
What they both forgot to tell you is this ONLY applies to the poor and the middle classes (serfs) and not to the “Master Class” You do not see them leading by example now do you????
The other part is the “Save the environment for the children” Again they left out something. It should be “Save the environment (and resources) for OUR children not yours.” Obama’s Science Czar makes that clear in the book Ecoscience (1977)
They are summerized :
The follow-up is the recent USDA funding of Epicyte to develop a spermicidal corn by inserting into corn the gene manufacturing a class of human antibodies that attack sperm. Epicyte has folded and was bought out by a company in Pittsboro NC.
Prohibited Gene-Altered Corn [StarLink] Found in Latin American & Caribbean Food Aid Shipments: http://www.organicconsumers.org/ge/caribbean21705.cfm
The Roots of Racism and Abortion An Exploration of Eugenics by John Cavanaugh-O’Keefe
Table of Contents:http://www.eugenics-watch.com/roots/index.html
Chapter 10: Eugenics after World War – IIhttp://www.eugenics-watch.com/roots/chap10.html
US Sterilization Program: http://www.ratical.org/ratville/sterilize.html
Note that it is the WEALTHY who are the power behind this movement. As they are always the power behind most “grass-roots” movements that catch on in the modern world. Maurice Strong is sometimes credited with coming up with the idea of international NGOs thanks to his work with YMCA international in his early days.
“Very few of even the larger international NGOs are operationally democratic, in the sense that members elect officers or direct policy on particular issues,…. Arguably it is more often money than membership that determines influence, and money more often represents the support of centralized elites, such as major foundations, than of the grass roots.” ~ Hofstra University law professor Peter Spiro http://www.bibliotecapleyades.net/sociopolitica/sociopol_tavistock04b.htm
Anthony somehow you manged to become the exception. I do not think very many really appreciate just how rare that makes you or how much we owe you. ~ Thanks again.
O H Dahlsveen says:
November 19, 2011 at 5:39 am
Just for “the hell of it” I googled in the question: “Is 1 billion 1000 million or is it 1 million – million.”
Here’s the real logic:
Bi means two
Tri means three
Bi-illion is two lotts of 6 zeros tri means three lots of 6 zeros.
As Mr spock would say I can see no logic in the The American system in which bi- illion means a thousand million?
****
PaulH says:
November 18, 2011 at 4:05 pm
Here in Canada, the provinces of Quebec and Manitoba have huge hydro-electric generating capacity. With more hydro electric generation capacity planned for the Maritime provinces, there could be more than enough (renewable) electricity for most of Canada and the USA. No need for these silly politically correct science projects.
*****
It would be nice, but unless the required new transmission systems could decrease line losses (by upping the voltage, converting to HV DC, etc) by a significant amount over current designs, it becomes problematic transmitting electricity more than (guessing) ~1000 miles — too much line loss and mounting KVARS (reactance) to deal with.
And, at least in the east US, state applications for any new transmission lines are always targeted by organized & funded Eco-zealots for denial, and at the very least they deliberately tie-up the legal process for many years. Not sure about Canada…..