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Government Subsidies Have Wall Street Throwing Money Into Wind

Earlier, I wrote about how the government subsidizing the mortgage market through government-sponsored entities Fannie and Freddie contributed to the size and severity of the housing bubble. Today, the Wall Street Journal has an article that explains how Wall Street banks are flocking to yet another industry seeing substantial government subsidies: wind farms. Wall Street is savvy enough to know that it's generally a good idea to take advantage of free money from Uncle Sam. That has them chasing wind.

The WSJ explains:

Bankers say this is the beginning of an active pipeline of new wind-farm financing, as well as investment in large solar installations and geothermal facilities. Project developers and Wall Street appear to be viewing the federal cash grant program as such a good deal, industry experts say, it may grow much larger than its Washington creators expected.

Under the program, the government will give a cash rebate for 30% of the cost of building a renewable-energy facility, awarded 60 days after an application is approved. Investors are also given valuable accelerated depreciation deductions, which help offset taxes.

The Wall Street Journal says that the government expects to spend $3 billion on the subsidies, which will be available for 17 months. In the first four weeks of the program they had $800 million in grants requested. This sounds vaguely familiar, doesn't it? But don't worry: this won't be cash-for-clunkers 2.0. The government hasn't capped the program, so they can just keep spending more, and more, and more taxpayer money to help fund new wind energy projects.

So where does Wall Street come in? They're the ones with the capital to finance many of these projects. By the way, Wall Street expects the grant applications to grow to $10 billion, 333% higher than the government predicts. Since they're the ones making demand possible, I'd go with their estimate over the Treasury's.

Just how much does the government subsidy really matter to Wall Street? A lot. Check out this chart, from the Wall Street Journal's piece:

wind farm investment.gif

As you can see, the more government support, the more investors are willing to put on the line for wind energy. Since it's still a relatively new technology, it makes perfect sense that risk-adverse investors wouldn't be as comfortable hoping for the best with wind farms without being sure the return will be to their liking. After all, since Wall Street is funding many of these wind farms, it will also be cashing in on most of the returns. How much could they profit thanks to the subsidy? The WSJ reports:

But the new cash grants are offering the potential for attractive returns. Several bankers interviewed said they expected deals to provide an annual return of anywhere from 9% to 15%.

Yes, again, Wall Street will be making an awful lot of money thanks to taxpayers. If wind energy ends up being the savior for our energy needs, then that may be worth the cost. It's funny though, how Wall Street is always there to make sure it gets a generous piece of the government pie.