subsidy stacking

Natural gas extraction
Natural gas extraction

My many years of criticizing fossil fuel subsidies aside, I still get asked fairly regularly whether there might just be some good times and good places where fossil fuel subsidies would make sense. 

It is not useful to dismiss the question, as it often comes from serious and well-intentioned people.  Government officials, for example, face legislation with the intent or effect of subsidizing fossil fuels with great regularity.  And, as one representative recently described it to me, when that legislation does arrive, they have to push either the “red” or the “green” button on the bill as written.

At that point, options to improve or eliminate the legislation might be limited.  But careful attention to these details ahead of time can help avoid the most egregious of giveaways, and even refocus legislation to pathways that achieve the same goal at both lower cost and lower pollution.

Common arguments for public support need to be carefully tested

There are some common justifications for subsidies that are put forth almost regardless of the sector.  These include supporting regional development, job creation, and the development of technologies that will supposedly drive economic growth in the future.  While these objectives are clearly important to voters as well as elected officials, too often the justifications are presented simplistically.  Simply stating a noble endpoint is far from sufficient to justify supporting a particular policy; any such claims need to be carefully tested.   

Yes, your subsidy will create jobs… So?  All  spending, after all, creates jobs.  There’s nothing special about government largesse to energy industries in this respect.  And since all subsidies need to be financed through higher tax burdens on other industries and people, they can also destroy jobs by reducing returns in those other areas.  And job claims too often are vaguely stated.  The actual number of jobs created may not be properly measured and never reality-checked later to see if the promised jobs actually materialized.   Raw numbers are tossed about, rather than normalizing the claims to job-years (many jobs are short-term, and there would often have been some job growth in the baseline anyway).  Job gains are often not netted either, to account for the job losses on other industries from having to fund the subsidies.  Finally, even in the few cases may subsidies are subject to recapture if the promised jobs don’t actually materialize, it may be infeasible or impossible to recover the money. 

Many pathways to the same end-goal.  Subsidies are often justified within the context of a specific constituency, and in isolation of alternative, more efficient policies.  There are usually many pathways for regional development, for example, or to achieve a particular social goal.  Even if one wants to provide government support, it is important to compete these options against one another to achieve them at the lowest subsidy cost per benefit attained. 

A tunnel vision view of policy options frequently results from mis-defining the end-goal – though beneficiary industries prefer this narrow approach in order to boost their chances of capturing the government support.  Subsidies to lower carbon transport fuels, for example, ignore that less expensive ghg reduction can be had in other sectors; it also subsidizes fuel supplies and ignores the many potential improvements via higher load factors in passenger and freight transport.  Targeted support for nearly every step of the nuclear fuel cycle similarly undermines the many other ways to reduce ghg emissions across an economy that are quicker, cheaper, and more certain to materialize.

Your state-level subsidy is not likely to trigger a world-class mega-employer.  Efforts to jump-start new technologies and industries are exceedingly difficult to achieve, and visions of a “little boost” giving rise to a global industrial powerhouse minting jobs for locals is close to fantasy. 

Governments often focus on one or two parts of a very complex competitive system, and therefore miss the trade-offs that real companies need to make on access to skills, supply networks, and markets.  Subsidies to domestic manufacturing of solar panels in the United States are a case in point (Evergreen Solar and Solyndra come to mind), despite production economics heavily favoring countries such as China. 

In some cases, large, sustained federal subsidies may result in breakthroughs – though how long those advantages accrue to domestic producers only is an open question.  State or provincial subsidies are sometimes directed at propping up or growing local industries -- but these governments rarely have the scale to be successful over the mid- to long-term.

Additional claims used to lobby for subsidies to extractive industries

Within oil and gas exploration, there are a couple of additional justifications often put forth for subsidies.  These include energy security and field life extension. 

Think holistically about energy security.  Energy security is a real concern for nations, but should also not be viewed too narrowly.  Are there other ways to boost supplier diversity, domestic production levels, or reduce the demand for specific fuels that require lower subsidies (or none at all) to achieve the same levels of energy security?  Do users have to pay for the energy security services a state provides, so that prices support efforts to boost security in other ways?  Are the subsidies being proposed going to make a material difference to the energy supply equation within the country, or not?  If not, the support is likely more about local political horse-trading than real national benefits.

Natural resources aren’t the only industry with perishable assets.  Field life extension is the argument behind reductions in royalty rates in older fields as well as special tax deductions for restarting old wells or for keeping lower-output wells operating.  The claim is that you might as well get something for the uneconomic reserves because otherwise they will simply be left in the ground. 

These are not directly exploration subsidies, although they may support some new activity adjacent existing locations.  The challenge here is also to look at the economic trade-offs more broadly because "lost" reserves may again be economic to recover if prices increase or technology improves; and the idea that productive resources may be lost forever due to changing economic conditions is hardly limited to natural resources. 

It is extremely common for many production processes, particularly with a concentration of capital-intensive fixed assets, to become less efficient and lower margin as they age.  The products are no longer cutting edge; plant maintenance may get much more expensive; leverage over price points may decline with the novelty of the output and the rise of competition.   With commodity outputs, economic cycles can also wreak havoc on capacity utilization rates and profitability.

There are sectors with much faster product cycles than oil and gas (microchip fabrication, for example), yet the governments don't go in and reduce tax rates or provide massive new subsidies to keep the old production process operating. 

Patents or other intellectual property may be at least as perishable as natural resource reserves, and it is not clear that the societal return to propping up existing production sites is higher in oil and gas than in other sectors of the economy.   One area that has been of interest to me, for example, are the lines of medical research that get discontinued when pharma firms get bought out.  I would expect that the opportunity cost to society from this economic shift are often larger than the losses from shutting down and oil well as output drops. 

For commodity cycles, producers often ride out the downturns through closures (some of which are temporary) or consolidation.  Governments may assist via existing (sector-neutral) benefits for unemployed workers; but most developed economies no longer dump in public money to keep the plants cranking out the goods.

Even subsidies to “cleaner” extractive industries can generate sub-optimal outcomes 

Recently I was asked whether natural gas deserved government support because it is so much cleaner than coal and oil, and a bridge fuel during the transition to even lower carbon forms of power.    

The externalities associated with oil and gas production make exploration subsidies much more difficult to justify than industrial support in a different sector might be.  Efforts to push the development of new reserves -- be they Canadian tar sands or Arctic oil and gas -- generally involve a large array of supports to exploration, production, financing, transport links, regulatory oversight and sometimes environmental cleanup as well. 

In combination (sometimes referred to as “subsidy stacking”), these subsidies create competitive impediments to even cleaner energy resources, may unlock enormous amounts of carbon from locations that would not otherwise have been economic to develop, and, as with the Arctic,  can put at risk fragile ecosystems and other industries that depend on a clean environment (e.g., fishing).  Sloppy operations even for the cleaner natural gas can result in high fugitive emissions of methane, undermining even the ghg reduction benefits.

Specifically with respect to natural gas, implementing a carbon tax would be an inherently better strategy than politically-directed subsidies to expanding the natural gas industry in a particular region.  A carbon tax would reward natural gas for its lower ghg footprint, but without penalizing even cleaner options.  And it would raise revenues for the state in the process.

This particular query was in reference to state supports – but many questions from the recent boom (though now stalled) in US fracked gas remained unanswered. 

For example, as fracking operations have been exiting the market (often through bankruptcy), how big are the liabilities being dumped on the state from their discontinued operations and improper site closure?  Has the boom in natural gas production generated any revenue gains to the state, net of these liabilities and other costs to oversee the industry to date?  Has the state properly developed a sovereign wealth fund with the windfalls that high natural gas prices should have offered them, enabling them to be less dependent on fossil fuel extraction in the future? 

The bigger the financial burden these operations have left, and the smaller the degree to which producing regions successfully created net gains and secured them in a “rainy day” fund, the worse the case for future subsidization of natural gas extraction looks. 

While politics may be, to a large degree, local, it is important that oil and gas fields not be evaluated in isolation, with policy makers trying to boost support enough to make a specific project or region viable to development.  Rather, people need to look at their energy resources as a system.  They should not subsidize one field over another; should not subsidize any high cost fields that have large detrimental environmental impacts if developed; and should force oil and gas reserves to compete without subsidies against alternative fuels and demand-side options to boost energy efficiency.  

Earth Track Blog Post

1)  Corporate happy talk 1:  Hamming it up with frack water and earthquakes

Tracking and quantifying the side-effects of particular energy fuel cycles is always challenging.  If you do it wrong, or ignore the external costs entirely, particular fuels get a free ride.  Other forms of energy, most often renewables or energy efficiency, get hurt.  Bloomberg Business has been busy filing freedom of information requests in the state of Oklahoma to map out meetings between oil industry representatives, including Harold Hamm, and state regulators and researchers examining the relationship between disposal of fracking wastewater and more earthquakes. 

The e-mails suggest a steady stream of industry pressure on scientists at the state office. But oil companies say there's nothing wrong with contact between executives and scientists. "The insinuation that there was something untoward that occurred in those meetings is both offensive and inaccurate," says Continental Resources spokeswoman Kristin Thomas. "Upon its founding, the Oklahoma Geological Survey had a solid reputation of an agency that was accessible and of service to the community and industry in Oklahoma. We hope that the agency can continue the legacy to provide this service."


2)  Corporate happy talk 2:  Too Soon to tell

Willie Soon, of Harvard-Smithsonian Center for Astrophysics, has every right to challenge climate science or any other science he wants, so long as he does so objectively and rigorously.  He's been portrayed as a lone and resolute defender of right against the supposedly "junk" science of the masses of researchers who find convincing and growing evidence that not only is our climate changing, but humans are playing a big role.

Alas, his stature began to crumble when it was discovered that nearly all of his work has been funded by fossil fuel interests; and, of particular importance, Soon had not disclosed his source of funding. 

Look, in the real world, dollars naturally chase viewpoints most likely to align with the funders -- so it is not surprising that anybody doing work that challenges climate change will attract funding from the parties with the most to lose from carbon constraints.  This is no different from how groups on the other side get funded -- though are frequently attacked for bias even though they forthrightly declare their funding sources. 

Ineed, it is Soon's lack of transparency that is most inexecusable, and that should result in discliniplinary action against him.  His lack of disclosure is far from the norm, as this review of published papers indicates. Peter Dykstra has a nice summary of the situation, and of Soon's disclaimers and defenders, in a post in the Desmogblog.

The whole thing brought back memories of this encounter with another climate change skeptic at Harvard.


3) Subsidy stacking, Georgia style

Different government agencies and different levels of government often have overlapping incentives for similar activities.  When a single person, corporation, or product can dip into multiple programs at multiple levels of government, this is called "subsidy stacking."  Many small subsidies can coalesce into an big pile of political pork.  This may induce more development or consumption of the subsidized product.  Alternatively, where federal subsidies drive overall production, the state and local largesse may end up simply directing more of that production towards specific geographic areas which little incremental boost to the market development of the subsidized activity. 

The proliferation of all-electric vehicles in Georgia may be an example of this, according to The Economist.  The state has more electric vehicles (total, not per capita) than any other state but California. The magazine notes that "..savvy Georgians are driving all the way to the bank in nearly-free electric cars.  Nissan sells more of its Leaf models in Atlanta than in any other city..."

Maybe it's just part of a broader strategy by the state to boost demand for the too-cheap-to meter nuclear-fueled electricity from the under-construction Vogtle reactors that will someday grace Georgia's electric grid.  That project, Vogtle 3 and 4, is now estimated to cost $17 billion to build. 

Oh, and for fun -- and to provide a bit more of a feel for just how much money $17 billion really is -- here is a sampling of but a few of the companies you could buy at today's market capitalization for less than the cost of Vogtle's two new reactors:  Continentental Resources, Ryanair, Alcoa, Whirlpool, ConAgra Foods, Nordstrom, Dr. Pepper Snapple Group, First Energy Corp, Wynn Resources, Harley-Davidson, Burger King Worldwide, Japan Airlines, and Ralph Lauren.

Maybe those electric cars won't be so cheap to refuel in Georgia after all...

4)  Corporate happy talk 3:  Arctic drilling needed now because fracking won't last

The National Petroleum Council, an advisory body to the US Secretary of Energy that is comprised primarily of energy company representatives, reached the highly surprising conclusion that that

To remain globally competitive and to be positioned to provide global leadership and influence in the Arctic, the U.S. should facilitate exploration in the offshore Alaskan Arctic now.

Who could have guessed?  The study was requested by Secretary of Energy Ernest Moniz.

In related news:

  • Arctic drilling moving ahead.  The Obama administration approved drilling in Arctic waters and Shell prepares to resume drilling.
  • Regulations might be tightened.  Regulatory proposals that would make requirements for drilling in the region by US-licensed firms somewhat more stringent have been proposed; chance of passage is not known.
  • Subsidies to Arctic oil operations remain poorly characterized; receive support from surprising quarters.  The Center for America Progress advocates socializing one of the key infrastructure costs of Arctic drilling -- an ice breaker fleet.  They list a litany of reasons and justifications (including a graphic showing that Russia already has far more ice breakers than we do), but the bottom line is that any cost to police, manage, or oversee Arctic drilling operations needs to be paid by the beneficiary companies and not by taxpayers.  And regulations aside, liability and insurance requirements for operators in difficult and environmentally-sensitive regions need to be cranked way up.  If making these firms fiscally responsible for the costs and risks of their operations happens to slow development, boost the sophistication of operators able to succeed, or increase the breakeven on development, isn't that what markets are supposed to do?  CAP is on the wrong side of this one.  Rather than advocating for subsidizing ice breaking to Arctic oil operations, maybe we ought to be filing trade cases against other countries that are providing subsidized ice breaking services to their own domestic natural resource champions. 

5)  French model of nuclear not looking so good

Large losses and a continued bleak market prospect is leading France's energy minister to push for a broad overhaul and restructuring of state-controlled nuclear firms.  Areva, in particular, was reporting losses in excess of its market value, "suggesting that the troubled company, plagued by cost overruns and write-downs, may need new funds to continue operating." Translation?  "Give us more state subsidies."

Of course, the problems with the French model of nuclear development aren't really that new.  They just keep taking slightly different forms.

Earth Track Blog Post

Eric Lipton and Clifford Krauss are winning no friends in the renewable energy industry with their article "A Gold Rush of Subsidies in Clean Energy Search."  I understand some of the upset.  After all, even with the most positive interpretation possible of the negligence that led to vast amounts of publicly-owned oil and gas in the Gulf of Mexico being taken for zero royalties, we are still talking a loss to the Treasury of $53 billion over the next 25 years (and quite well described in this link in the Economist).  That is, shall we say, quite a lot of solar panels.  Yet, this legislative and policy implementation ineptitude has not gotten nearly the level of scorn as the Solyndra default; in fact, attempts to role back the resource giveaways have been blocked in Congress.   Lipton and Krauss have singled out a solar facility even though nuclear plants, coal with CCS, ethanol plants, or all sorts of other subsidized industrial infrastructure have similar subsidy stacking attributes, conflicts of interests, and policy shortfalls, and could have selected instead.  These are critical points to remember, because too often libertarian and fiscal conservative groups who weigh in forcefully on subsidies to solar or ethanol remain uncomfortably silent when polite conversation shifts to decades-old subsidies to fossil fuels.

But content-wise, I think Lipton and Krauss did a nice job.  Given the secrecy that often surrounds the acquisition of subsidies at all levels of government like treats on Halloween eve, I would not have expected any reporter to be able to get everything right.  But there were lots of things they did get right, some of which are rarely captured in subsidy reviews.  If their detractors are angry at their selection of solar subsidies, I'd encourage them to direct their energies to applying a similar approach to uncover the full range of subsidies to selected conventional energy facilities.

Let's leave the solar element aside for a moment, and focus instead on the article as a case study for what is wrong with the US' competitive marketplace today.  First, it is clear that absent a major investigation by skilled analysts (in this case, the NYT even brought in the energy group at Booz & Company to estimate some values), nobody outside of the boardroom knows all of the subsidies flowing to any particular industrial facility.  This is not a useful way to run what is supposed to be a market economy.  Second, industry claims on job creation or economic contributions to the local economy are not vetted at the outset of a project and verified over time.  Rarely are at least some of the subsidies held in escrow pending delivery of these promised benefits. Escrows or other forms of guarantees that promised benefits will be realized are commonly used in all sorts of less expensive transactions; they ought to be a central part of these deals as well.  Third, the authors point out some of the problems that can arise if investors have little of their capital at risk, or can pull that risk off the table too quickly.

All of this is bad policy, whether applied to solar or to nuclear.  It leaves taxpayers more or less in the dark on how much they've put into a facility, and how much of this was above the minimum incentive needed to get the project off the ground rather than simply a transfer to investors or plant owners in the form of reduced risk or increased return.  Finally, when so many government entities are offering subsidies, we can enter a twilight-zone like scenario where one jurisdiction is merely bidding against another for who can give out the bigger slice of incentive pie.  The original goal of providing the smallest boost possible for a risky project with significant public benefits to tip from non-viable to viable is lost.

The Lipton and Krauss article brings to the forefront the issue of subsidy stacking, a term that appears to go back at least to the 1980s (thanks to Ron Steenblik for this link), but is finally entering the realm of routine policy evaluation.  Too often subsidies are evaluated based on national numbers for a single incentive.  Looking at the pool of incentives to specific projects is extremely important, however, as it is at the project level that the subsidies alter production decisions and distort markets for competing providers of goods and services. 

A good way to look at the difficulty in shining the light on subsidies is to review the rebuttal on the NYT article put out by NRG, the current owner of the California Valley Solar Ranch project.  I've reprinted it in its entirety below, along with some of my own commentary.

NRG’S LARGE SCALE SOLAR PROJECTS: GETTING THE FACTS STRAIGHT

For those of you who have read the New York Times’ November 11 (online) article, “A Gold Rush of Subsidies in Clean Energy Search,” below are some of the facts that the article got wrong or didn’t include at all. The California Valley Solar Ranch (CVSR) is an ambitious, important project with a national purpose and NRG is proud of our efforts to help put people back to work building a more sustainable energy future.

The NYT says: “When construction is complete, NRG is eligible to receive a $430 million check from the Treasury Department — part of a change made in 2009 that allows clean-energy projects to receive 30 percent of their cost as a cash grant upfront instead of taking other taxbreaks gradually over several years.”
The Facts: $380mm will go to repay the DOE loan and the American taxpayer, and only $50 million flows to NRG as the equity investor in the project.

Commentary:  While it is nice that most of subsidy "B" is being used to repay subsidy "A," it is correct that these are two separate (and generous) subsidies going to the project.  The terms of the DOE's Title 17 loans (section 609.10) normally give the borrower the lesser of 30 years or 90% of the expected life of the asset to repay the government.  There is nothing in the statutory language or final rule that mandates accelerated pay-off as NRG has stated they are required to do.  Since they received their loan just before the program expired, it is possible they accepted repayment terms like this.  Another possibility is that they are defining the payment of a credit subsidy fee associated with the loan commitment as though it were repayment of the actual loan.  This seems unlikely, since multiple sources say that Congress appropriated the funds (from taxapyers) to cover the credit subsidy fee on the section 1705 loans -- another subsidy to the recipients.  Because the agreements are sealed, so we have no way to know. DOE's credit is generally believed to be inexpensive relative to other funding sources, so it would be in NRG's interest to delay loan repayment as long as possible.


The NYT says: [Lawrence H. Summers warned of] “’double dipping’ [of government incentives] that was starting to take place. They said investors had little ‘skin in the game.’”
The Facts: The Government protected itself against this concern by ensuring that most of the money from the treasury grant received by the project has to be used to pay down the DOE loan. On the CVSR project, almost 90% of the proceeds from the cash grant will go to pay down the DOE loan.

The NYT says: “PG&E, and ultimately its electric customers, will pay NRG $150 to $180 a megawatt-hour, according to a person familiar with the project, who asked not to be identified because the price information was confidential.”
The Facts: The exact price is confidential, but the number quoted is significantly higher than the actual power price in the CVSR agreement is overstated in the article by a significant amount.

Commentary: Since the NYT estimate came from somebody who supposedly knew the project economics, it would be interesting to understand why NRG's figure and that person's figure diverge.  Furthermore, the plant is delivering clean kWh, so one would want to benchmark its levelized cost to consumers versus other options for clean power.  From a public policy standpoint, we'd want to compare options on a pre-subsidy basis, not post (as this figure is) to evaluate total societal investments for different options to generate clean power.  Such an evaluation needs to include demand-side reductions, because not using energy is also quite "clean".  Most federal subsidies, however, are targeted towards increased supply.


The NYT says: “By 2015, NRG expects to be earning at least $300 million a year in profits from all of its solar projects combined,”
The Facts: NRG expects to make pretax profit of approximately $49MM (as disclosed on slide 40 of our 3rd quarter earnings call presentation.) The $300MM referenced in the article is actually EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization, not profits. The interest that we pay on the projects generates revenue for the American
Government.

Commentary:  EBITDA is often used as a way to evaluate the economics of an investment independent of the influences of capital structure or tax laws.  That is why NRG used that value, and not the net profits number, in its call with investors.  Among the influences of tax accounting, for example, are very favorable depreciation schedules for solar (up to a 100% write-off in one year, depending on when the plant goes into service).  This favorable write-off is both a subsidy, and one that would result in large differences between EBITDA and net profits -- particularly in the earliest years of an investment. 


Fact: The economic analysis reflects a failure to understand the facts behind the deal. The economic analysis of equity returns confuses after-tax and pre-tax returns and levered and unlevered returns. The analysis should include not only the tax benefits of the project, but also the income taxes that will be paid by the project over time. The analysis provided only includes the tax benefits with none of the costs. It is the equivalent of saying someone’s take-home pay is equal to their annual salary plus the standard IRS tax deduction, while ignoring the income tax paid by that person against which their tax deduction is credited! All of us know it doesn’t work that way for individual taxpayers. And it doesn’t work that way for solar projects in the California desert.

The operations and maintenance assumption is too low by more than half. It does not take into account additional operating costs of the plant such as: replacing inverters, lease payments, operational insurance, and asset management costs - among others.

Commentary:  All of these factors are relevant, sort of.  The fact that the NYT used input from Booz & Company suggests they may have integrated some of this to a greater degree than NRG alleges, as Booz analyzes many, many projects.  As noted above, if you have very large tax subsidies, the after-tax return may be a less accurate representation of project economics and returns than looking at pre-tax returns.  In terms of leverage, one would want to look at returns based on the capital structure of the project (mostly inexpensive debt because of the loan guarantee) and compare it to the capital structure and capital costs without the government subsidies to benchmark the level of government support.  Yes, income taxes paid by the project are relevant -- though may be less significant than the large subsidies through the loan guarantees and grants in lieu of tax credits.


Fact: Our projects will also help to put our country back to work. The CVSR project creates 350 high-paying construction jobs and combined, NRG’s large-scale solar projects will result in 3,840 direct and indirect construction jobs. Ivanpah, the largest solar thermal project in the world, enabled by the DOE loan guarantee program is an engineering and technological marvel and it is being built by more than 600 American pipefitters, laborers and construction workers—many of whom haven’t worked for up to two years prior to this job. They are proud of what they are building, confident in the future that they are creating and thankful to be gainfully employed.

Commentary:  The workers should be proud of what they are building, and having people back at work is a good thing.  But there are many ways to create jobs, and if jobs are the primary policy driver we ought to be looking for the most efficient ways to accomplish that goal.  Public statements on job creation by the recipient company are not a reliable indicator of the efficiency of job creation.  It is useful to point out as well that the authorizing language for 1705 in ARRA added a requirement that much of the labor used to build the plant be at prevailing (union) wage levels under the Davis-Bacon Act.  This drives up the cost of construction, and may also reduce the number of people employed as a result.


Fact: These projects are not possible without the DOE support. No solar PV projects of this scale, $1 billion and above, have gone forward without DOE assistance; these projects involve more capital than the private sector will finance.

Commentary:  There are many reasons why this may be the case, not all of them supportive of an argument that the government should be financing them.  There may be high risk relative to other (even other clean) options, for example.  Or limited expectations that learning from the initial one or two plants will bring down installed costs for future facilities.  One nice element of Renewable Portfolio Standard approaches (assuming they are the only subsidy at play and not added to a slew of other subsidies) is that you can buy clean energy competitively.  Even if you need to pay a premium relative to conventional energy resources (perhaps even fair, given that conventional fuels cause large external damages not reflected in their prices), an RPS keeps the delivery risks of building and operating the new facility with the private sector.  Further, investors are forced to accept the smallest subsidy possible through a competitive bidding process -- a useful process for "discovering" the real amount they need to achieve target returns.  Other programs merely guess at this level, and through subsidy stacking often overshoot what's needed by a large margin.


Fact: NRG is investing more than $1 billion of our own capital as equity in these massive solar projects. It is important to remember that we are a business with a fiduciary obligation to our shareholders, and we do need to make a return on the investment. We are investing more than $1 billion of our own capital in solar projects to advance technologies, meet customers’ needs for renewable power, and create jobs. If we build and operate these projects in accordance with our
own expectations of cost and performance, we expect to realize solid equity returns on our investment on a risk-adjusted basis.

Commentary:  It is good that NRG is putting some of their own capital at risk, and $1 billion is a large number from the perspective of normal consumers.  However, in terms of industrial investments (this figure applies to multiple projects, not just CVSR), the gross number may not be that meaningful.  I'm more interested in what percentage of each project is long-term risk capital by NRG; and in ensuring that the subsidies that are paid out are given over time based on the successful completion and economic operation of a project rather than front-loaded in the project's life span.  Front-loading dilutes the incentives for careful investment and operation over the long-term.


Fact: These projects are good for the environment. NRG’s large-scale solar projects would displace 1.7 million metric tons of greenhouse gases annually and result in dramatically improved air quality compared to fossil fuel alternatives. Big solar projects represent the future for our company and for our society. Solar power represents a sustainable, inexhaustible, zero-emitting, domestic energy resource that can be installed on every rooftop and every parking lot in every city and hamlet across our great country. The International Energy Administration announced that, on our present course, climate change will be irreversible by the year 2017. The public and private sector need to work together to do more, not fewer, of these large renewable projects.

Commentary:  No argument that solar power is cleaner.  But as with jobs, society needs to buy the most of its desired product that it can with a limited budget.  One can agree with the premise that we need to reduce our carbon footprint dramatically (as I do) while not necessarily concluding that the particular investment evaluated by the NYT was an efficient way to do it.

Fact: These projects and government support are driving down the cost of solar energy. The cost of solar power is falling dramatically, in large part because innovation, deployment at scale and competition are forcing inefficiencies out of the supply chain, and government support for solar power across the federal, state and local level and across both political parties has been instrumental in achieving those declining costs.

Commentary:  There are many things that may be driving down the cost of solar energy.  If I had to pick the markets I think are most important for this to happen, it would be distributed solar PV and solar hot water.  It would not be large scale solar plants, though I recognize others may have a different view.  Scaling of production is a good thing, as is the pace of innovation.  But it is not clear that dumping so much money on one facility (NYT: "As NRG’s chief executive, David W. Crane, put it to Wall Street analysts early this year, the government’s largess was a once-in-a-generation opportunity, and 'we intend to do as much of this business as we can get our hands on'") is the way to get there.


Fact: The government loan guarantee program is a loan program. Loans received by these solar projects, such as the California Valley Solar Ranch, are indeed loans that will be repaid (with interest) for the benefit of the American taxpayer.

Commentary:  This is standard borrower rhetoric.  These firms have relationships with lots of banks, and borrow as well on capital markets through share issues.  They are choosing to borrow under this particular program because the terms are better than what they can get elsewhere.  This means that even if taxpayers get funds back, we will receive a below-market amount of interest, and sometimes even less than the Treasury's cost of borrowing.  And while we should take NRG's statement that this particular funding is "indeed loans that will be repaid..." as a sign of their goodwill, if the debt really were risk-free, they could have borrowed at attractive terms elsewhere.