The pseudo-debate over Solyndra
Ever since Solyndra went bankrupt in August, there’s been a pseudo-debate in Washington over loan guarantees for energy projects. It’s a pseudo-debate because neither party really believes that energy should be left to the whims of the free market. The GOP has long backed loan guarantees for nuclear power plants, and, as the New York Times reports today, key Republicans such as Sen. Mitch McConnell (R-Ky.) have been begging the Energy Department for loans for clean-energy projects in their own districts. In practice, the Solyndra squabble is more about scoring a political hit on the Obama administration than a genuine policy dispute. Still, it’s worth revisiting the underlying question: Why should the federal government back risky energy projects?
The main, glaringly obvious fact about energy is that we need it, lots of it — and, ideally, we want it to be as cheap as possible, as clean as possible and as dependable as possible. Our current mix of energy supplies arguably gets suboptimal scores on those fronts. Due to our heavy reliance on coal, electricity in the United States is fairly cheap, but it results in all sorts of nasty pollution externalities, and economists such as William Nordhaus have argued that those hidden costs outweigh the benefits. Oil is handy, but unreliable: The 2008 oil shock may have jolted the U.S. economy into recession.
Since we can’t drill our way out of this bind, innovation is the best avenue left. Trouble is, private firms do a lukewarm job of funding new energy technologies. As a percentage of sales, the energy sector spends much, much less on R&D than the auto, pharmaceutical or computer industries. (Graph on the right courtesy of this report from the American Energy Innovation Council.) Why? For one, there’s no market incentive to tackle many externalities, such as the toll that carbon pollution exacts on the atmosphere. And many electric utilities remain heavily regulated and capital-intensive: A power plant can last 50 years or more, while a patent for a new technology lasts just 20. And so on.
Energy wonks spend their days dreaming up policies to fix these problems, from slapping a price on carbon to deregulating the utility sector. But the simplest way to boost R&D is simply for the government to support innovation directly. Few people dispute the need to fund basic science research, given that companies under-invest in this stuff (it’s hard for one firm to capture all the gains from a broad breakthrough). That’s the logic behind programs such as ARPA-E, which is modeled after the Pentagon’s DARPA program and funds long-term, high-reward technologies like all-electron batteries. Supporters point to the government’s history of funding nifty innovations through programs such as NASA. They also note that the U.S. government spends far less on energy research than it does on defense and health R&D.
So where do loan guarantees fit in? Once a lab has announced a breakthrough, can’t the private sector just run with the new idea? Not quite. As a recent report by the Center for American Progress’s Sean Pool discusses, energy technologies have to go through several stages to go from novel idea to actual marketable product. The development and demonstration stages are typically still too risky to attract most investors, and so rely on a smaller pool of angel investors and venture-capital funds. That still leaves a growing backlog of projects that either can’t secure funding or are just too daunting for investors to take on (say, a new multibillion-dollar nuclear reactor).
Having the government step in will obviously entail some amount of risk. The Department of Energy wagers that 10 percent of its loans will eventually go bad (Solyndra made up about 1.3 percent of the program’s loan-guarantee portfolio). And plenty of critics have argued that the Energy Department itself is too clumsy and unwieldy to handle this financing — remember, this is a department whose main focus is overseeing our nuclear weapons stockpile. Back in 2009, the department was savaged for moving too slowly on energy loans. Now it’s getting flak for being too rash. Pool, for his part, suggests setting up some sort of independent clean-energy bank instead.
In any case, that’s the rationale for having the government support risky technologies. Now if, say, Mitch McConnell was genuinely aghast about the government picking winners and losers, he could lead an effort to scrap all energy subsidies — including oil and gas tax breaks and loan guarantees for nuclear. But he’s not doing that. Nor are the critics of loan guarantees touting alternate policies to promote innovation (a carbon tax, say). Instead, there’s a lot of carping and an implicit defense of the status quo. Fair enough. Lots of people like the status quo, particularly fossil-fuel producers. But that’s a very different argument from the one Congress is pretending to have right now.