Senator Schumer's Blowhard Moment?
"American taxpayer dollars should not be used to finance those Chinese jobs."
Who could disagree with Senator Schumer's statement, which accompanied his recent call for cancellation of $450 million in federal stimulus funds for a new $1.5 billion wind park in Texas—on the grounds that it would utilize 240 wind turbines made in China?
As with the "buy American" furor earlier in the year when the stimulus bill was enacted, the Senator's claim that American taxpayers should not support jobs programs overseas has an undeniable political appeal.
The problem is that Senator Schumer has misdiagnosed the situation and jumped to premature conclusions on the Texas project. In fact, his proposal would undermine one of the few recent instances where carefully engineered tax policy has produced a larger public good. The Senator's press release, while getting him some good publicity, was another example of how a politically appealing claim, combined with Congress's murky legislative maneuvering, can damage a sensible cause.
The target of Mr. Schumer's ire is one of the biggest wind farm projects in the country. It is also a joint venture between the US Renewable Energy Group (REG), a private equity firm that plans to put up 51 percent of the investment in partnership with the Chinese company Shenyang Power Group (SPG), which is putting up 49 percent .1 The Texas-based wind project developer and wind farm operator Cielo Wind Power is also involved as a subcontractor.2 A letter from Senator Schumer to Energy Secretary Steven Chu cites "news reports" that the funding sought for this venture would come from the federal stimulus program, also known as the American Recovery and Reinvestment Act (ARRA) of 2009, enacted in February.
His contention is correct technically. In fact, however, the funding comes from the accident that Congress used ARRA as a "funding vehicle" for extending existing tax incentives available to energy companies investing in "green technologies," most importantly the multiyear extension through 2012 of the "production tax credit" (PTC) for wind energy projects.3 Hence a set of hitherto separate tax incentives aimed at promoting green technologies in America irrespective of where they are manufactured, are now suddenly funded through a law on the books since 1992 that is explicitly aimed at generating jobs in America.
The Texas project, according to its officials as quoted in the press after the Schumer statement, is not planning to get project financing directly from the federal stimulus program. Indeed the relevant 6-F filing with the Securities and Exchange Commission (SEC) by the majority-owner of SPG, a NASDAQ-listed company called A-Power Generations Systems, indicates that stimulus money will not likely be directly involved in this project. Rather it says that Shenyang (the joint venture's Chinese partner, which is 20 percent owned by the Shenyang regional government) would make "reasonable efforts to introduce potential Chinese lending sources" and that the project "may also apply for a US Department of Energy renewable energy project loan guaranty and seek out non-Chinese financing sources."
Thus the project financing for this Texas wind farm seems likely come from Chinese lenders, with a possible Energy Department loan guaranty, rather than from the ARRA stimulus package.4
Once the Texas project is operating, its owners will likely take advantage of the generally available tax incentives to promote US wind power that are now funded through ARRA.
Beyond the issue of from where and when the government assistance comes in, Senator Schumer seems a little astray on his fixation with China.
The turbine in question—A-Power's 2.5 megawatt turbine—is German technology, not Chinese, produced by the German company Fuhrländer, from which A-Power licensed it in 2007. The wonders of globalization make it even more complicated than that. In March, A-Power entered into another joint venture, that one 75 percent owned by none other than the US company GE Drivetrain, to operate a wind turbine gearbox assembly and testing plant in Shengyang.
Therefore, the gearboxes going into A-Power's Chinese-made turbines that are heading to Texas will be produced by an entity majority-owned by the US corporation GE Transportation and hence US technology.
On the always explosive issue of job creation, Senator Schumer's letter asserts that the Texas wind farm project would create 2,000 to 3,000 manufacturing jobs in China. But this number is itself dubious. US-REG, the American private equity partner, has cited estimates of job creation based on so-called Job and Economic Development Impact (JEDI) models produced by the National Renewable Energy Laboratory (NREL).5
But the JEDI models suppose that wind turbine manufacturing jobs are temporary, lasting only for the production of the 240 wind turbines in question. According to the US-REG press release and conference, turbine shipments will last from March 2010 to March 2011. Manufacturing employment in wind power is correspondingly only sustained though the continuous construction/renewal of wind parks.
In a larger sense, Senator Schumer's alarm highlights some broader policy issues about American reliance on foreign-made technology to achieve the goal of greener energy production. The Texas wind park project is the first to be supplied with turbines manufactured in China. But US wind farms have for years had to import wind turbines because US domestic production capacity withered away during the late 1980s and 1990s.
Ironically, California pioneered the wind sector in the early 1980s,6 but after initial support for American manufacturers, manufacturers in Denmark, Germany, and Spain seized the initiative and accounted for up to 80 percent of US wind turbine content from 2001 to 2006.7
More recently, taking advantage of the obvious benefit of manufacturing heavy and bulky wind turbines close to where they would be used, American manufacturers have made the United States the biggest regional recipient of wind industry foreign investment, with a total of about $850 million invested and over 2,000 sustained long-term jobs created at seven different US locations according to FDi-Intelligence8 in 2008 alone.
As a result, the share of local content in US-installed wind turbines has grown from as little as 20 percent in 2001–06 to 50 percent by 2008.9 As the US wind power market has grown, so has the US domestic production capacity, as all wind turbine producers benefit from being close to their customers (and political benefactors).
Contrary to the gist of Senator Schumer's intervention, the stimulus package is creating energy-related jobs in America. The surge in foreign investment in the domestic wind turbine and wind park sector suggests that there is a bright future for the wind industry and the jobs it can create. Senator Schumer's insistence on "buy American" provisions is unlikely to help the trend. Recently, for example, China agreed to remove local content requirements for its own Chinese-made wind turbines, a welcome step that would give foreign manufacturers a chance to compete.
It would be ironic if China opens up its market just as the United States talks about closing its market. If Senator Schumer were interested in generating more wind-related jobs in America, he should stop trying to resurrect "buy American" provisions for stimulus funding, which will only slow the US transition to green technologies, and instead push legislation to help the rapid long-term expansion of renewable energy in America.
1. Given Senator Schumer's intervention, it is noteworthy how US-REG is managed by four "insiders in the Democratic Party": Cappy McGarr, a managing partner, currently serves on the Democratic National Committee National Advisory Board and was a member of National Finance Committee for Obama for President; Ed Cunningham, the US-REG renewable portfolio manager, even ran unsuccessfully for democratic senator in Texas in 2002; Moses Boyd, another managing partner, is the former Democratic Chief Council for the Senate Committee on Commerce, Science, and Transportation, and; John O'Hanlon was the Finance Chairman for the Democratic National Committee's Presidential Gala in 2003.
2. See A-Power Energy Generation Systems 6-F Filing with the SEC November 4, 2009.
3. The PTC runs for a 10-year period beginning on the date the project is originally placed in service, is indexed for inflation, and is 2.1¢ per kilowatt hour for 2009." See the American Wind Energy Association website for an overview of ARRA-related wind stimulus measures.
4. See Bloomberg, November 6 "A-Power's Texas Windfarm Doesn't Involve U.S. Funds" for comments by A-Power's management for this view. See also the project press conference video, part 2.
5. The JEDI model for wind can be downloaded here. See the project press conference video, part 2, here. The Wall Street Journal website on October 28 further cited Cabby McGarr for an estimate of a total 2,800 jobs created of which 15 percent would be in the United States.
7. Based on analysis in Peterson Institute/WRI (forthcoming in 2009) research.
9. Based on analysis in Peterson Institute/WRI (forthcoming in 2009) research.