Thursday, October 13, 2005

Tilting at windmills

Perhaps "economically illiterate" is too harsh, but the President should know better than to believe a political leader can bring about reduced fuel consumption by an "order."

No, not George W. Bush, though he's done the same. I'm referring to Gloria Arroyo, President of the Philippines, who received her Ph.D. in economics from Georgetown (where she was a classmate of Bill Clinton). And if I may mention it again, when they were young my mother played mahjong with Arroyo (née Macapagal, daughter of the beloved Diosdado Macapagal).
Giant windmills energize northern Philippines

When enormous windmills began appearing on a desolate stretch of the northern Philippines coast, locals were overjoyed rather than alarmed.

The steel contraptions, standing 23 storeys high, were unlike anything impoverished families from Bangui Bay had ever seen. But they were enthusiastic nevertheless.

The 15 "giant electric fans" were bringing electricity to their homes for the first time.

"It was a joy to watch them being built," said 72 year-old Rosita Ridun, whose family earns less than two dollars a day collecting pebbles on Bangui beach for sale to construction companies.

"My grandchildren described them as giant electric fans."

Standing in an arc in wind-lashed scrubland, the windmills, which started supplying electricity to 40 per cent of Ilocos Norte province in May, are the first source of clean energy introduced in the Phillipines, a nation with 84 million people reliant on oil and gas.

Costing more than 48 million dollars, the windmills, built by a private company with interest-free loans from the Danish government, can harness winds the strength of Hurricane Katrina which devastated the US Gulf Coast last month.

And as crude oil prices spikes above 70 dollars, interest in the windmills is growing. President Gloria Arroyo has ordered a reduction in fuel consumption and an investigation into possible alternative energy sources.

Consequently, government and state-owned power company officials are requesting the head of the Bangui Bay project, a Danish engineer, try and help them replicate these windmills throughout the country.

"Everybody wants to be a wind developer now," said engineer Niels Jacobsen, president and chief executive of the Northwind Power Development Corp.

Jacobsen started work on the 24.75-megawatt project in 1999 after meeting Ilocos Norte provincial governor Ferdinand Marcos Junior, who was intent on fixing the patchy and low-voltage power supply to his region which lies on the northern tip of the country's electricity grid.

Marcos was well aware of the potential of wind because his father and former president, also Ferdinand Marcos, ordered a study into alternative energy in the 1970s amid the first global oil crisis.

The project itself was a logistical and engineering feat.

Each of the three rotor blades and its base, called a nacelle, weighs 104 tonnes with a diameter wider than the wingspan of an Airbus.

Three piers were built to land these structures and the tapered towers of steel measuring 4.2 meters thick (4.6 yards) at their base, which were shipped direct to Bangui Bay from Europe.

Piles were driven 12 meters (13.12 yards) into the leased land to support a 17-meter (18.6-yard) diameter base plate made up of 300 cubic meters (10,593 cubic inches) of concrete on which each tower stands.

A substation and 57 kilometers (35.3 miles) of transmission lines were also built to deliver the electricity to the province's local power cooperative. The cooperative buys this electricty at a discounted rate rather than sourcing more expensive electricity from a state-owned company.

But it's not just the cooperative and locals who have benefited from the windmills. Northwind earnt carbon credits from the project - and will sell 1.5 million dollars worth of them over 10 years to the World Bank which manages a carbon credit fund as part of the Kyoto protocol to reduce greenhouse gases.

"We only sold a portion because, upon the advice of the World Bank, those carbon credits that we are still entitled to may be sold at a higher price later," said Ferdinand Dumlao, Northwind board chairman and treasurer.

Dumlao said the project cost translated to two million dollars per megawatt of power generated, which is more than double the start-up cost of a normal power plant running on coal, oil, or other conventional fuel.

Without the interest-free loans from the Danish International Development Agency (Danida), the project would have been unviable.

Danida provided 30 million dollars in loans, payable over 10 years, and more than 10 million dollars in grants, with the rest of the project cost coming from shareholders' equity, including loans provided by the windmill and other equipment manufacturers.

"It's not really going to make anyone rich," said governor Marcos, adding that Northwind investors would need between 20 and 25 years to earn money.

"Frankly, if there's money to be made the province would have involved itself."


However Marcos does think the windmills will have other spinoffs, such as perhaps becoming a permanent drawcard for tourists.

"Ilocos Norte is not really the spot where you would expect to see a high-tech operation like the windmill, so the people can hardly believe it. I can barely believe it myself," Marcos said.

"You even have tourists visiting the site which is great. It would make people more conscious about the availability of alternative power sources."
I reproduced the entire article because it'll eventually disappear from Yahoo's servers, and because I found all details important.

Arroyo disappoints me. Perhaps it's the quality of economics taught at Georgetown, but her education should have told her that "ordering" reduced fuel consumption doesn't work. As Capital Freedom so succinctly put it, all the advertisements and government policies won't make people conserve gas. Prices will. When I asked last August what government should do about the high price of oil, the simple answer was: nothing. The power of markets will balance supply and demand, as they always have throughout history, and government intervention promises only the shortages of the 1970s.

It's a shame that the Philippines, already a very poor country, is trying to assert unnecessary independence from imported oil. The article briefly admits but ignores the economic foolishness of the windmills: based on output, their startup costs are twice as much as a conventional power plant. But they've found some Dutch suckers "investors" who are acting more like philanthropists. There's nothing wrong with them using their money so that poor Filipinos can have electricity for the first time in their lives; it in fact is a noble thing. But the Dutch shouldn't kid themselves: they're effectively engaging in charity.

Considering it's the Philippines, I'd expect it will take 15 to 20 years to repay the loan instead of the planned decade. Significant investment returns may never materialize. Yes, I'm pessimistic about the economic and political future of my mother's home country. There's still a great deal of corruption and graft, and no matter who's in power, the government is always trying to control the economy in one way or another. (I'll elaborate some other time.)

Even the World Bank is getting involved, artificially skewing markets from their optimal state: the "carbon credits" are a false incentive with no economic basis. A great part of the World Bank's money comes from American taxpayers, but somehow I don't feel pleased about having been coerced into subsidizing needlessly expensive "clean" electricity for these Filipinos. Poor people don't have luxuries like "environmentally friendly" energy sources, and the poorer they are, the more their only concern is having enough resources to survive. They could produce more energy with the same amount of money (or the same amount with less money) by burning fossil fuels, and that's of higher importance to their everyday lives than a clean atmosphere. As (if) Filipinos grow wealthier, then they can afford to incorporate higher-order value judgments into their economic decisions: a cleaner environment, refusing to do business with a company whose policies they disagree with, etc.

I'm not aware where Ferdinand Marcos, Jr., was educated, but he had it exactly right: if these windmills had been profitable, the private sector would have already built them. That's why I opposed the West Side Stadium proposed for Manhattan, and the same principle applies to other government "investment." Beware the politican who wants to spend tax dollars on "job creation," "promoting clean energy" and other benevolent-sounding goals.

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