Calling Sancho Panza...

On January 22, 2010, the Akron Beacon Journal ran a story put together by staff writer Marilyn Miller which told of the request by a local man, Michael Karder, for government help to build wind turbines. In the article there is an implication -- "some companies inherit patents that create walls that stop new people from promoting their products" -- that his business cannot gain traction because someone else owns the technology.

Just a bit over a week earlier (January 13), Beacon staff writer Bob Downing wrote a column about Karder's agreement with a European firm to assemble and market its wind turbines in the US. The windmill parts would come from China, the generators from Korea, and the assembly would be done in the Akron area. The major drawback, he claimed, was lack of financing, which he blamed on a tight credit market.

All he needs is $60,000,000 to build the plant. (Ever hear the Kingston Trio song, "Tijuana Jail"?) The January 13 story states that there are 7 competing factories in the United States, with several more under construction and which are to open soon. Ultimately, he anticipates producing 600 wind turbines per year, with installation of about 1,700 of them offshore in Lake Erie.

The articles paint glowing pictures of a future filled with new jobs for the Akron area, but as is typical of such populist fodder, they are light on details. Let's explore some rabbit trails.

At 600 per year, and a reasonable lifespan for the project of 30 years (we will not at this point go into the details of why businesses are allowed to depreciate their assets, but suffice it to say that most of the time, when a factory is sold, it requires extensive renovations and modifications before the new owner can use it), the lifetime output of the factory can be anticipated to be about 18,000 windmills. One tenth of them are to go in Lake Erie, if various governments approve. Of course, Mr. Karder expects that he will also be able to manufacture parts for smaller wind turbines for the home electric generation market. Realistically, though, one would think the market for such turbines is limited, not because people don't want to try them out, but because of the layer of restrictions that exist now and will exist into the future. Try going to your local building department with a request to put one in your back yard and you will get a quick lesson in local government.

Mr. Karder would like to borrow $60 million. For the sale of argument, let us say that he is allowed by a generous lender to amortize and pay off the loan over 30 years, like a home loan. Let us also assume that he would be able to borrow the money at 4% (current large portfolio 30 year commercial mortgages amortized at 30 years are at about 8.25%, but we will assume a green investor...). The total cost of the factory would then be about $103 million (and if he actually has to pay the market rate, $162 million).

One other thing : Mr. Karder has purchased the patent rights for the wind turbines designed by his European partner -- "I have patent rights in North America, primarily the Great Lakes area." Does that mean that someone else owns the distribution rights in other parts of the country, and he is limited to the Great Lakes region? If so, his market is truly limited.

If Mr. Karder's factory can actually produce the large turbines he envisions (2.5mW and up), he will face competition which ranges in price from $1 million to $2 million per mW installed. If he cannot successfully break into that market, and instead has to compete in the residential or small commercial market with the 100kW-900kW machines he plans to begin with, he will be competing at about $1,000 - $2,000 per kW installed.

[It can be argued that the return on a wind turbine currently is somewhat better than break-even, with generation running in the neighborhood of $0.10/kW, and my current electric bill at just over $0.11/kW delivered. At that price, with an average annual consumption of 9800kW, I could save $98/year by buying a $25,000 wind turbine (I could probably get by with 25kW/day, but then I don't have an all-electric home). Some people prefer to concentrate on how much they will save regardless how much they spend.]

There are some other factors which will also come into play -- the NIMBY factor (why don't the Kennedy's want a nice, clean, green windfarm blocking their view of Cape Cod?), licensing and zoning restrictions, air rights (if my windmill blocks your windmill and devalues your property, can you sue me?), and so on.

The articles do not mention these things. They simply bring to the fore the fact that an entrepreneur wants the government to step in and help him set up a business. The POTUS, as reported by Ms. Miller, blamed the banks and the patent laws.

What would really be helpful would be an explanation, by a banker, of the reasons why Mr. Karder, with $60,000 down, cannot get a $60,000,000 loan to build his factory. Is it that the bankers have examined the costs and determined that the risk is too great? Is that why he needs Federal dollars?

For my part, I'd go nuclear. Our Navy has had nuclear powered ships cruising the globe for a half-century now, and each ship's power plant can easily provide enough electricity for a small city. At Las Alamos, the Hyperion Power Module was developed and will soon be deployed in Third-World communities around the world. Why Third-World? I will let you guess why Americans will not get the benefit of American technology.

A year ago, I posted in another place,

Hyperion Fast Facts

• Small -1.5 meters across, approx size of a residential “hot tub”
  
• Produces 70 MWt or 25 MWe, enough to power 20,000 average American homes or the equivalent
  
• Buried underground out of sight and harm’s way
  
• Transportable by train, ship, truck
  
• Sealed module, never opened on site
  
• Enough power for 5+ years
  
• After 5 years, removed & refueled at original factory
  
• Uniquely safe, self-moderating using a natural chemical reaction discovered 50 years ago
  
• No mechanical parts in the core to malfunction
  
• Water not used as coolant; cannot go “supercritical” or get too hot
  
• No greenhouse gases or global warming emissions
  
• Think: Large Battery!

Think nuclear. (Nucular in some parts of the country.)

I would be willing to bet that any American city, or even a savvy investor, who wanted to borrow $60,000,000 to set up two power plants that would power 40,000 homes for $300/year would find a lender. Crunch the numbers. Reporters don't seem to know how to use calculators.