Monday, May 15, 2006
Director, Communications & Information Systems
Beacon Hill Institute at Suffolk University
profits: Cape Wind project spins on generous public subsidy
A study released today by the Beacon Hill Institute
at Suffolk University finds that a proposed wind energy plant
for Nantucket Sound would confer above-average profits on
its developer thanks to hundreds of millions of dollars in
public subsidies. In its analysis, the institute found that
the developer, Cape Wind Associates, would receive a 25% return
on equity, 2.5 times the historical average for all corporations.
David G. Tuerck, Executive Director of the Beacon Hill Institute:
"We knew that the project was in line to receive massive
subsidies. The purpose of our study was to determine how large
the subsidies would be and how much Cape Wind would benefit
from them. What we found was quite remarkable. Cape Wind stands
to receive subsidies worth $731 million, or 77% of the cost
of installing the project and 48% of the revenues it would
generate. The policy question that this amount of subsidy
raises is whether the projects benefit is worth the
huge public subsidies that the developer gets."
wind plant planned by Cape Wind calls for the installation
of 130 wind turbines in Nantucket Sound, each 426 feet in
height and visible from Cape Cod, Marthas Vineyard and
Nantucket. The project, which would cost $950 million to build,
would generate about 2.5% of the electricity used by Massachusetts,
equivalent to 1% of that used by New England.
2008, if, as planned, the wind plant is nearing completion,
Cape Wind would be looking forward to three subsidies that
it would receive at different stages over the 25-year lifespan
of the project: (1) Federal production tax credits, (2) Massachusetts
green credits and (3) a tax break through the accelerated
depreciation feature of the federal tax code.
these subsidies vary in size and timing over the lifespan
of the project, it is necessary to compare them in "present-value"
terms, i.e., according to their value to the developer in
2008, discounted to account for the time-value of money. Thus,
for example, subsidies received over the first 10 years of
the project through the Federal production tax credit would
total $337 million but would be worth $180 million in present-value
terms. Massachusetts green credits, totaling $1.7 billion
over the entire 25-year lifespan, would be worth $487 million.
The accelerated depreciation feature of the tax code would
be worth $65 million in present-value terms. Adding these
amounts leads to the estimated total subsidy of $731 million
(except for rounding).
Cape Wind would pay taxes to federal, state and local governments.
The taxes that it would pay over the lifespan of the project
would have a present value of $151 million in 2008. Subtracting
this amount from the $731 million in subsidies leaves a "net
subsidy" of $581 million. Yet, it is the $731 million
gross subsidy (subsidy before taxes) that seems
most germane to the question what Cape Wind would cost taxpayers
and electric ratepayers. Businesses that generate average
or above-average profits for their investors ordinarily pay
taxes on those profits without the benefit of any subsidies.
Had the $950 million that Cape Wind would invest in this project
been invested elsewhere, there would have been a similar contribution
to the tax rolls without the need for any public subsidy.
wind plant is currently under review by the Minerals Management
Service of the U.S. Department of Interior. "Before the
project gets approval, taxpayers and ratepayers should know
what they will have to pay in subsidies so that Cape Wind
can provide for a very small fraction of the regions
energy needs," said Tuerck. "We suspect that they
will be surprised to discover just how much they have to pay."
Beacon Hill Institute received no financial support for this
release in PDF format
May 15, 2006
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