Ivanpah Solar Plant: The Money

No doubt you have read concerns that the Ivanpah Solar Electric Generating System down at the Nevada-California state line is an environmental disaster. You may even have heard some recent news that the plant is producing far less electricity than promoters promised. Today, I focus instead on whether it is a financial haircut for all Americans.

It’s not uncommon to find learned folks talking about the Ivanpah Solar Plant as though it was paid for with loans that the federal government “guaranteed”. Here’s the San Jose Mercury News… here’s Wikipedia… it’s was even reported that way by Associated Press reporter Michael R. Blood last week. But that’s the definition of politics – different people observing the same world coming to different conclusions.

It turns out that the Ivanpah project was so risky that nobody would make the loan. In fact, one of the three original partners, Google, quit making its investment payments partway through after calling “for a fundamental rethinking of the technology“.

By digging into the fine print within the financial statements and disclosures filed with the Securities and Exchange Commission by NRG Energy, we can see what happened.

On page 22 of NRG’s 2010 annual report form 10-K, here’s how NRG Energy described the project:

Ivanpah — On October 27, 2010, the Company executed a Letter of Intent to partner with BrightSource Energy, Inc., or BSE, to construct, finance and operate the largest solar thermal technology project in the world, the 392 MW Ivanpah Solar Electric Generating System in southeastern California’s Mohave Desert, or the Ivanpah Project. NRG plans to become the lead investor in Ivanpah, investing up to $300 million in the Ivanpah Project over the next three years. The investment is subject to definitive documentation (including the satisfaction of several conditions precedent), which is anticipated to be executed by the end of first quarter 2011. The Ivanpah Project is composed of three separate facilities — Ivanpah 1 (126 MW), Ivanpah 2 (133 MW), and Ivanpah 3 (133 MW), and all three facilities are expected to be fully operational by the end of 2013. The Ivanpah Project has received a $1.375 billion conditional commitment from the U.S. DOE for a loan guarantee, and has obtained all necessary permits and approvals. Power generated from the Ivanpah Project will be sold to Southern California Edison and Pacific Gas & Electric, under multiple 20-25 year PPAs, each of which have been approved by the California Public Utilities Commission. Ivanpah is located approximately 50 miles northwest of Needles, California, about five miles from the Nevada border on federal land managed by the U.S. Department of Interior’s Bureau of Land Management.

So in 2010’s annual report, NRG had lined up a loan guarantee. If it was unable to make the payments required to pay back the loan, then the federal government would step in and cover any shortfall, collecting the unfortunate surprise from US taxpayers. NRG sounded excited, and positive that with the guarantee it would find a willing lender.

One year later, On page 21 of the 2011 Annual Report form 10-K, here’s how NRG Energy described the project:

Ivanpah On April 5, 2011, NRG acquired a 50.1% stake in the 392 MW Ivanpah Solar Electric Generation System, or Ivanpah, from BrightSource Energy, Inc., or BSE. BSE maintained a 21.8% interest in Ivanpah and the remaining 28.1% was acquired by a wholly-owned subsidiary of Google. Ivanpah is composed of three separate facilities – Ivanpah 1 (126 MW), Ivanpah 2 (133 MW), and Ivanpah 3 (133 MW). Operations for the first phase are scheduled to commence in the first quarter of 2013, with the second and third phases expected to reach commercial operations in the second and third quarters of 2013, respectively. Power generated from Ivanpah will be sold to Southern California Edison and Pacific Gas and Electric, under multiple 20 to 25 year PPAs. Ivanpah has entered into the Ivanpah Credit Agreement with the Federal Financing Bank, or FFB, which is guaranteed by the United States Department of Energy, or U.S. DOE, to borrow up to $1.6 billion to fund the construction of this solar facility. On June 10, 2011, the U.S. Fish and Wildlife Service, or FWS, issued a revised biological opinion allowing the Bureau of Land Management to lift its temporary suspension of activities order with respect to the Ivanpah Project, thus allowing those aspects of the project which were delayed to proceed.

Who is this Federal Financing Bank who had enough cash on hand and chutzpah to lend the money? Complete with an extra $225-million to cover shortfalls even before breaking ground?

Here is the FFB’s website, where heaps of bureaucratese confuse even the most diligent reader. Wikipedia, expressing its institutional tilt toward energy statism and global warming alarmism, regularly scrubs its FFB entry of everything not on the government website. But Fox has published some long analysis. And here’s what the Center for Public Integrity offers.

As you can see, the FFB is owned by taxpayers. It borrows freshly counterfeited dollars directly from the Federal Reserve Bank and “gets them into the economy” in a damaging and incomplete expression of ideas made famous by World War I British economist Maynard Keynes (incomplete because Keynes’ theories called for governments that stimulated a sluggish national economy by borrowing money to pay it back quickly after the economy was stimulated)..

On page 157 of the 2011 NRG Annual Report form 10-K, you’ll find this summary:

On April 5, 2011, NRG acquired a majority interest in Ivanpah, as discussed in Note 3, Business Acquisitions and Dispositions. On April 5, 2011, Ivanpah entered into the Ivanpah Credit Agreement with the FFB to borrow up to $1.6 billion to finance the costs of constructing the Ivanpah solar facilities. Each phase of the project is governed by a separate financing agreement and is non recourse to both the other projects and to NRG. Funding requests are submitted to the FFB on a monthly basis and the loans provided by the FFB are guaranteed by the U.S. DOE. Amounts borrowed under the Ivanpah Credit Agreement accrue interest at a fixed rate based on U.S. Treasury rates plus a spread of 0.375% and are secured by all the assets of Ivanpah. Ivanpah intends to submit an application to the U.S. Department of Treasury for a cash grant; any proceeds received will be utilized to repay the borrowings that mature in 2014.

That bit about “non-recourse” means if the company welshes on the loan, us taxpayers are out of luck. We won’t be able to foreclose on any of NRG’s bank accounts or conventional power generation plants.

That last sentence, by the way, is where this year, Americans are being asked to write off the first third of the FFB loan – that’s the “cash grant” NRG references in the last sentence.

My conclusion is that the Ivanpah plant was not built with money borrowed under a federal government loan guaranty – it was built with taxpayers’ money, loaned by a bunch of administrators who don’t have any heartburn about loans going bad.

Ruminating on Science

Science (from Latin  Scientia, meaning “knowledge”) is a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe.[1]

So begins Wikipedia’s definition of science on August 22, 2012. Remember – Wikipedia is subject to change by anyone at any time, both the secret of Wikipedia’s brilliance, and its Achilles’ Heel. I’ve been a licensed CPA for more than 20 years. But my subscription to Science News is even older than that. I guess that gives me an unusual perspective on the debate that drives today’s issues.

Wikipedia’s definition the day I looked it up turns out to be a thoughtful paraphrase of J. L. Heilbron‘s introduction to the 2003 The Oxford Companion to the History of Modern Science, in which he describes Science as a meld of established and theoretical explanations of the physical world. The two parts are purposefully distinct: “established” explanations (tennis balls and all models of Estes model rockets go up into the atmosphere and fall back to the ground so consistently I can predict the outcome of a given launch) and “predictions” (each of which lives apart until its last advocate quits or until it becomes an “established” explanation). They are very different halves of a sphere. As J.L. initially said,

“… modern science is a discovery as well as an invention. It was a discovery that nature generally acts regularly enough to be described by laws and even by mathematics; and required invention to devise the techniques, abstractions, apparatus, and organization for exhibiting the regularities and securing their law-like descriptions.”

Coming from an accountant’s perspective as I do, I think of the “testable explanations about the universe” portion of Science as a sort of balance sheet. It’s the state of affairs on a given day, at a particular moment. You can measure it, take pictures of it, and gather independent observers around you who can agree they saw the same thing you did.

The other part – the “predictions about the universe” a.k.a. “invention to devise…” – is much more fuzzy. It’s the most attractive theories, at any given moment, about things we don’t understand.

At times, this category has included:

  • Thinking the Manhattan Project would incinerate the atmosphere over six seconds. Instead it saved millions of today’s grandparents’ life and limb, in Japan and America.
  • Imagine: If we can just kill all the witches, imagine all the people living life in peace.
  • These astrophysicists claiming to be honing in on the Science of galaxies are idiots. They’ve been predicting their stupid Higgs bosun for decades, and can’t prove a thing.
  • Understand the shape of the skull, predict anti-social behavior.
  • Bleeding will cure George Washingtion’s cold or flu.

To be fair, at times this category has also included:

  • Pasteurizing milk reduces food poisoning.
  • Beams of radiation will kill cancerous tissue faster than it will kill non-cancerous tissue.
  • The sun will rise tomorrow, I promise.
  • Administering insulin to dying diabetics will keep them alive for decades, until some other malady claims them.
  • No, we circle the Sun, not the other way around. I promise.
  • Beta is a better format than VHS (just kidding – that’s a joke thrown in for the grandparents out there)

The “predictions” are like an income statement. “Predictions” which eventually prove consistently “testable” are pluses; “Predictions” that eventually prove false are minuses. If more predictions this year turn out to be consistently testable than false, it’s a good year and the balance sheet grows. The income statement is positive. If it’s the other way around, it’s a bad year, the income statement shows a loss, and the balance sheet shrinks.

The years just before Science figured out that bleeding flu victims was a bad idea was a time when Science probably moved humanity backwards. Sadly, those years included the year George Washington had the flu. He was retired, so his medical murder did not interrupt the course of the development of the United States of America, back when their separate consensuses were considered. But let there be no doubt: America’s best medical Scientists killed our first President.

My late friend and colleague Bill Raggio often described aggressive policy-makers as being “too far over their skis”.  Bill grew up in Reno, less than an hour’s drive from the mid-60’s winter Olympics. He was referring to how far forward a skier should lean over their skis, to make themselves go faster. The reckless pursuit of fastest can leave a skier too far over their center of gravity. It doesn’t last long, and is usually followed by “Wild World Of Sports” caliber video of tumbling skier.

Can society get too far over its skis when it takes scientific theory as fact?