/* Google Analytics */

Thursday, July 9, 2009

Pickens Plan peters out

The New York Times, Wall Street Journal and others have reported that T. Boone Pickens has given up (at least for now) on his plans to to build a four-gigawatt wind farm in the Texas panhandle.

The stated (and undoubtedly important) reason was that his remote wind farm needed transmission lines. At one point he hoped to borrow $2 billion to build his own transmission line, but financing in today’s credit crisis made that impossible. A line is expected to be completed in 2013.

Of course, another reason is that wind power is less competitive due to declining fossil fuel prices — in this case natural gas, which produces about 21% of US electricity.

The 81-year-old oilman was so confident (or aggressive) of his plan that he ordered 687 (some say 667) wind turbines from GE for the first phase, and now has to find something to do with them — either place them in other wind farms or “put ’em in the garage.” With $2 billion tied up in these turbines, it’s quite possible that he’ll never see the turbines used.

Of course, this is a stark reminder of the dependence of wind and solar on transmission capacity, and also (as if we needed it) their vulnerability to shifts in the prices of substitute fuels. But more generally, this is an example of the Achilles heel of both technologies — their low operating costs come due to massive up front capital costs, magnifying the risk to private sector investors who might otherwise eagerly embrace these technologies.

California’s renewable power mandate is one way to reduce that risk, by providing a relatively predictable demand for those building plants and thus committing utility cash flow to keeping such plants open. However, as with all government interventions in the marketplace, there is the risk (in this case, with ratepayer dollars) that such mandates prove to be foolishly bone-headed distortions of the market (something we can’t know until we try).

California’s 33% mandate by 2020 seems particularly risky; a figure of 20-25% after the first decade would be more realistic, giving economists and policymakers a chance to access program success. Instead, the Sacramento politicians (including our governator) want to brag about their legacy to the voters, who will forget (a decade later) about who was responsible if it all turns out badly.

Still, this demonstrates the benefit of the US system of federalism and local policy initiatives: California can try its experiments while others watch. If it’s a great idea, California ratepayers benefit and all the other states will copy it. If it’s a terrible idea — or needs fine-tuning — other states can try something different and only Californians pay the price.

No comments: