The Great Gadfly

MMS DEIS DOA – Disaster on Arrival

MMS DEIS DOA – Disaster on Arrival

By Peter Kenney

The long-awaited Draft Environmental Impact Statement (DEIS) on the Cape Wind application to place 130 wind turbines in the waters of Nantucket Sound is finally out. Written by the United States Department of Interior's Minerals Management Service (MMS), it endorses the project.

The report totals 2,000 pages of text, maps, and charts/graphs. It contains five appendices where the real substance of the report is to be found. After wading through this document completely three times -- and in sections many more -- I can only say it is embarrassing that such a document is actually credited to a U.S. government agency.

Whether one supports or opposes the Cape Wind proposal this DEIS is a disaster. More important, for those who know little of the Cape Wind proposal, or of the history of the project's public comment and government review, the MMS does not present a compellingly complete analysis of the Cape Wind proposal.

Although the MMS DEIS seems to clear the way for Cape Wind to build its Nantucket Sound wind farm, CapeCodToday.com will be printing remarks made by experts in the wind-energy/finance fields that identify many serious flaws in the DEIS and in the methods and information used to paint a healthy picture of the Cape Wind project. MMS's own peer review raises serious questions about how MMS arrived at the conclusions their report contains.

When down is up

Let us start with Appendix F, which deals with the economics of the project. It is authored by Robert S. D. Mense of the Economics Division of the MMS and is dated May 25, 2007. (The report was released in January of 2008.)

Mense begins by telling how he developed a Microsoft cash-flow spreadsheet to accomplish his economic analysis. In layman's terms, Appendix F is intended to be a thorough cost/benefit analysis. It should be noted that the project's proponent, Jim Gordon of Boston, said early and often in his presentations in support of the wind farm that one of the main reasons for supporting it was the fact that it would save money for electric consumers in New England.

His original claim was that Cape Wind would save $25 million across New England, or twelve cents per month per household. As the permit review process wore on, Gordon's costs predictably rose until now we see a very different forecast. When it became clear two or three years ago that Cape Wind's cost escalation had cancelled out its production savings, the new Cape Wind position became the "downward pressure" the wind farm would exert on regional and local energy prices.

Page one of Appendix F in the MMS report says in its fourth paragraph: "Economic performance was measured in terms of cost of energy…" This is a devastating statement in light of the fact that, on page 17 of Appendix F, Mense writes that Cape Wind electricity will cost 12.2 cents per kilowatt hour  (KWH) but that the average price for a KWH of electricity from the New England grid for January of 2007 was 5.87 cents. In other words, Cape Wind's electricity will cost more than twice what it claims to be able to compete with. In order to read this cost data one must go to the last full page of text in Appendix F.

The simple fact is that, even according to MMS, Cape Wind's electricity will raise New England electric rates.

How is that for "downward pressure?"
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A Jury of Your Peers 

What happens when your own experts say you are wrong?

By Peter Kenney

Jim Gordon, head of Cape Wind associates, wants to erect 130 wind turbines on Horseshoe Shoals in Nantucket Sound. He tells us that these 440-foot tall industrial power plants will be good for all of us and that the project is economically viable as well as environmentally beneficial. However, the recently released federal report touted by Cape Wind as proving its contentions, takes serious issue with the economics of the project as presented by Cape Wind. The two objections are that Gordon's financing projections are both unrealistic and not fully supported by hard facts and that his projected costs far exceed his projected income.

The expert’s view

Appendix F of the Minerals Management Service (MMS) Draft Environmental Impact Statement (DEIS) on the Cape Wind application could keep a few people busy for some time wrestling with its mass of information. BCR has been grappling with this mass one-on-one. Most interesting to us were the comments made by two experts MMS hired to conduct a peer review of the draft before it was made public.

The complete text of two peer review reports is included in Appendix F. BCR is presenting here an overview of the several dozen pages of Appendix F. This section of the MMS DEIS is densely packed with information and analysis; it is definitely served “straight up.” So, this BCR (part three) will look at how the peer review conducted by Lessly Goudarzi, CEO of OnLocation, Inc./Energy Systems Consulting (Herndon, Virginia) views the MMS DEIS.

An overall impression of the Goudarzi review is that Cape Wind has not provided sufficient information to MMS, has probably gilded the lily with aggressively optimistic projections of costs and profits and that MMS has not done as thorough a review as it could have and should have.

…has deficiencies and should be revisited

The last paragraph on page one of the report summary says, "As discussed in more detail in the conclusions to this review, the evaluation by MMS using the model and its assumptions has deficiencies and should be revisited. At a minimum, after fuller disclosure of the underlying data sources and a treatment of the relative risks associated with each site are recommended."

… purposely avoids observing this obstacle

Goudarzi states that Cape Wind's estimated production cost will be double the current market paid for electricity and, "...this is after the full benefit of tax and RPS incentives..." This, the review states, makes the likelihood of Gordon getting long-term power contracts "low." Throughout the economic evaluation of the project, though, MMS and its experts point out the fact that Gordon needs to have long-term contracts to sell his electricity in order to find lenders and investors, let alone to cover his costs. Then comes the coup de grace: "The analysis apparently purposely avoids observing this obstacle." In other words, the numbers and methods do not work. This is clear to any sensible person. But the MMS has avoided dealing with this issue in the correct way. In fact, they simply ignore it.

Other tidbits from this review:

1.    "References to the Energy Information Administration's Annual Outlook (AEO) are confusing." (p.3)

2.     "First, the math is confusing. How do you arrive at a weighted average cost of capital that is lower than either of the component costs (i.e., 5.24% compared to 7.0% and 10.5%)? (p.3)

3.     "Again, the target values appear on the low end for this type of project." (p. 4 speaking of Gordon's debt projections)

4.     "Similarly, there is no consideration for the potential impact of a severe storm on the operations of the period over a 15 year debt repayment period. These types of stress tests are standard in any risk assessment of the project and would be expected of any lending institution with a risk management program. To not discuss these exposures and the potential differences across the sites leaves the assessment incomplete at best." (pp 4 - 5)

5.      "The level of risks associated with this project at those investment levels should not be overlooked." (p. 5)

It’s just not clear

On page 6 Goudarzi asks, "Are the conclusions reached logical and supported by the evidence and analysis provided?" The answer given in this peer review is chilling. "It is not clear what the conclusion of the analysis is supposed to be." This is not a good sign for the MMS. In fact, it calls into question the validity of their entire report, of the very notion that anyone knows enough about the issues involved in the Cape Wind project even to think about granting approval for it. If one reduces the tens of thousands of pages of review and application documents and the past seven years of public comment and government review to a simple statement about this project, here is what we might say:

Jim Gordon says he can build and operate a 130-unit wind farm on Nantucket Shoals that will generate a reliable supply of clean energy using no fossil fuels and will save everyone in New England money and will pay his costs and yield a profit.

To prove this he has submitted reams of information to the MMS including assertions by an unnamed lender. Gordon's debt-to-equity ratio seems too risky to outside observers and his costs are projected to exceed his income, but he sticks to his claims of profitability. One of the two experts hired by MMS to evaluate the economics of Gordon's proposal and the quality of work MMS itself put into its evaluation closes a seven-page peer review with this comment:

"Support for the selection of the financial assumptions appears to rely extensively on an unnamed investment bank. If this bank were to provide an irrevocable set of terms consistent with these assumptions, then perhaps this is adequate. Absent that, a greater investigation into the financing of these kinds of projects would seem a key improvement to the analysis."

Appendix F gets an F

This very expensive term paper appears to get a failing grade from people paid to evaluate it. Since Jim Gordon has assured one and all that the Cape Wind project is economically sound, and since leading experts in such matters say differently, why should anyone even consider allowing this project to go forward? While Gordon's preferred location is in Nantucket Sound, his plan appears very unsound. This first of two peer reviews says, in a diplomatic way, that the MMS report is full of holes, unanswered questions and poor methodology. In part four, BCR will look at yet another critical review of the MMS report.
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