August 17, 2011
What Secretary Chu Should Be Asked Today… But Won’t
Energy Secretary Steven Chu will appear today before the House Energy and Commerce Subcommittee on Oversight and Investigation to answer questions on the DOE Loan Program Office. While there are important questions to answer regarding the role of government in technology investment and energy innovation, these questions are unlikely to be the main subject of today's hearing.
Instead of furthering the political circus that now surrounds the Solyndra bankruptcy, a valuable House investigation would seek testimony on how to optimize technological innovation and use federal dollars and resources most efficiently. Here are some of the questions that subcommittee members ought to ask Secretary Chu today (but probably won't):
What was the original purpose of the Section 1705 loan guarantee program, and what was the expected impact on federal budgets and taxpayers?
In 2009, Section 1705 was added to the DOE Loan Programs Office (LPO), established by the bipartisan Energy Policy Act of 2005. The program was originally appropriated $6 billion in federal funds to provide reserves to cover expected losses on a portion of the loans issued by the agency. This $6 billion would be leveraged to offer a significantly higher loan guarantee volume, unlocking substantial debt finance that would be supplied by private banks. The original $6 billion in funding was raided by Congress to provide funds for the Cash-for-Clunkers program in 2009, however, and ultimately 1705 ended up with a $2.5 billion pool to cover expected loan losses.
So the program was designed to absorb failing projects?
Yes. The originally authorization of the program projected that between 10 and 13 percent of the companies that received loan guarantees would fail. Solyndra and Beacon Power are the only companies to receive federal assistance from the program that have declared bankruptcy to date, amounting to less than 4 percent of the loan portfolio.
Why is the government subsidizing companies it expects might fail?
A major part of the Loan Programs Office's purpose is to invest in a portfolio of innovative clean energy technologies. The nature of tomorrow's energy technology is that it has yet to be proven and neither venture capital nor conventional banks are equipped with sufficient risk capital to fund innovative technologies, creating a "Commercialization Valley of Death" that traps many American energy entrepreneurs.
The Loan Programs Office effectively de-risks advanced energy technologies by backing conventional debt financiers with federal credit. The program's loan loss reserve is designed to cover losses to private investment banks should any discrete project fail. More successful investments make the Loan Programs Office a viable government creditor, allowing DOE to shepherd the portfolio and foster the broader clean tech markets.
More to the point, the Loan Programs Office is investing in companies that might fail because that's precisely what Congress designed it to do. The LPO passed in 2005 with wide bipartisan support, including the support of many House Republicans who are currently making political hay out of an outcome they themselves authorized.
Is the Loan Programs Office the optimal way to advance clean energy in the United States?
No. No one is arguing otherwise. But the Loan Programs Office seeks to tackle a central obstacle to commercializing and deploying clean, affordable, and reliable new domestic energy technologies: it reduces risks to help advanced energy bridge the Commercialization Valley of Death and allows private banks to invest in emerging and potentially lucrative technologies. The program effectively unlocks huge amounts of private investment and entrepreneurial activity, the backbone of American economic growth. As it has across history, from jet engines to microchips to cell phones and the Internet, the government is investing in technological innovation and supporting private sector entrepreneurs.
Is the Loan Programs Office the optimal way to foster energy innovation?
No. The Loan Programs Office falls short, in part because of the hand it was dealt by Congress in 2005. Loan guarantees are the only tools at the program's disposal, when a broader set of financial mechanisms--including direct loans, revolving investment funds, et cetera--would make the program more nimble and efficient.
What's more, there was some legitimately flawed messaging during the launch of the American Recovery and Reinvestment Act regarding the purpose of the LPO. Pitched to taxpayers as both a technology program and a jobs program, the Administration backed itself into a corner for when some of the jobs created by the program were ultimately lost. This isn't to say the jobs at Solyndra, or the company's operations in general, were worthless; they generated demand, tax revenues, construction, and supply-chain production that benefitted local and national economies alike. But clean energy investment is not employment welfare, and never should have been promoted that way.
In a set of briefs released today by the Breakthrough Institute, we argue for replacing the troubled Loan Programs Office with a new independent Clean Energy Deployment Administration, which would use multiple financial tools and operate outside the political machinations that have attracted such overwrought scrutiny to LPO in recent months. This new CEDA would take over the investment authority (and funding) now vested in the LPO.
If DOE wants to invest in energy innovation, why not do so through R&D and leave commercialization and deployment to the private sector?
Technological R&D is important, but beyond the lab, substantial obstacles remain for American clean energy entrepreneurs that the private sector is simply unsuited to handle without federal partnership. Incumbent fossil technologies eat up the majority of energy investment, while the unproven technologies of tomorrow have few options in equity markets for new projects. Demonstration, deployment, regulation, and infrastructure support are huge impediments to emerging technologies that are thus far unproven at grid-scale.
Furthermore, the biggest myth perpetuated in recent months is that the energy market has ever been anything close to a "free market" or solely private sector endeavor. Energy markets have always been intensely regulated and conventional energy technologies have long been the beneficiaries of federal subsidies since the Industrial Revolution in the 19th century. Incumbent technologies continue to receive production and distribution subsidies, despite 150 years of maturation. It is time to stop subsidizing yesterday's mature energy technologies and invest limited taxpayer resources to support American energy entrepreneurs and innovators develop the advanced energy technologies of tomorrow.
Why does the American economy need to invest in clean energy?
The global market for energy--already $5 trillion and expected to at least double by mid-century--is growing and diversifying. Virtually all of the growth in energy demand over the next 40 years is expected to come from non-OECD countries--the world's emerging nations--creating an enormous new customer base for the producers of 21st century energy technologies. If Americans want their entrepreneurs, manufacturers, researchers, contractors, and investors to share in the largest and most important growing sector of the global economy over the next century, then no more time can be wasted before we optimize and execute smart, effective public policy support for clean energy.