Saturday, September 05, 2009

Step Right Up. Free Money. Get It While It While It Lasts

The Emperor’s New Clothes

Editor's Note: What would you say to an investor willing to put up one-third of a new energy project's cost, gaining nothing in return? No dividends, no interest. No fuss, no muss.

I am referring to the government's $3 billion dollar cash grant renewable energy stimulus program to incentivizing private investment in the wind sector.

Investors are funding new projects in wind power and other alternative energy schemes because of direct public investments enacted in the American Recovery and Reinvestment Act (ARRA), also known as the stimulus bill. A Department of Energy and Treasury-funded cash grant incentive program is funding up to one third of new projects, particularly wind farms, slated to begin construction in 2009 or 2010. According to the WSJ, just four weeks into the program $800 million in grants have already been submitted and Wall Street bankers predict that figure to reach $10 billion by the end of 2010. Free money has a way of conjuring new projects.

Any banker will tell you that funding a project with one-third "free" money removes a certain percentage of the risk and increases yield to investors. While this is an excellent result in the short term - projects get funded - in the long term it is also true that many of these projects will fail, or disappear after the grants dry up.

Usually marketplace risk takes care of private ventures - some win - some lose. By printing $3 billion in government issued debt and injecting it into the alternative energy industry we distort an efficient capital market. Investments will be made that would not be made if one hundred percent of investors' capital were at risk. You cannot create demand by printing money. What you create instead is inflation.

Why would someone produce alternative energy absent a clear market contract for delivery? Why would someone invest in a project whose product cannot be efficiently integrated into the national electrical grid? Why would someone invest in an intermittent energy source without a cost-effective way to store energy?

These are normal questions any investor asks before committing capital. Our federal government just gave investors three billion reasons to forego these questions. So the question becomes, "Why would anyone go into the wind power business?" The answer is, "Because I'll take the taxpayers' money until it is all gone."

Richard L. Wottrich

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