Should the government have made more money off Tesla?

May 30, 2013

Over at Slate, Scott Woolley argues that the Department of Energy messed up when it loaned $465 million to Tesla Motors in 2009. Why? Because the government isn't reaping a large profit now that the electric-car company's stock is soaring:


Paul Sakuma/AP - Shares of electric car maker Tesla Motors zipped past $110 on Tuesday.

The government made the key mistake of loaning money to Tesla without insisting on receiving stock options, options that could have allowed the Department of Energy to pay for the Solyndra losses several times over.

Essentially, Woolley is arguing that the federal loan programs for clean energy and advanced vehicles should act more like venture capital outfits. That is, the government should lend money to promising solar or electric-car start-ups and take a financial stake in them. Some bets will go sour (like Solyndra) while others will succeed (like Tesla). If done well, the gains will outweigh the losses.

But this is a fairly unusual view of how the government's clean-energy programs should work. Over on Twitter, Jonathan Silver, who until recently directed the Department of Energy's loan program office, sharply disagreed with Woolley. (See here, here, here, here, here, and here for the highlights.)

In an interview, Silver points out that Congress didn't create the various loan programs to turn a profit for taxpayers — the point was to correct existing market failures and promote cleaner sources of energy that weren't getting funded by the private sector. "Our goals were to help get the technology into the marketplace, to jump-start new industries by bringing private capital off the sidelines, to meet public-policy objectives like enhanced energy security, and to get repaid," he says.

It's true that in Tesla's case the Department of Energy negotiated for options on 3 million shares of the automaker's stock as part of the original loan. But Silver notes that those were penalty options that would only kick in if the company failed to repay its loan — they would not be "worth" any specific amount today. The penalty options did, however, achieve their goal: Tesla has since repaid its federal loan nine years ahead of schedule (with interest).

Silver, who has worked as a hedge fund and venture-capital investor, notes that it would be problematic if the government began taking stakes in companies. "If the government started taking equity, it would need to behave just like an equity investor," he says. "It would try to grow the company as fast as possible, kill off the competition, dominate its space, cut costs by reducing headcount, and raise prices if possible. Which of those are in the government's interest? None of those things."

So why does any of this matter? In recent years, there's been a lot of debate among experts and policymakers about whether government loans and loan guarantees for specific companies are the best way for the country to develop new and cleaner sources of energy.

Some experts have argued that the government should get involved only in basic R&D and in pricing externalities like carbon pollution, while leaving the rest to the private sector. Others, like David Victor and Kassia Yanek, argue that bringing novel clean-tech ideas to the market often requires "government agencies to work alongside private actors without undermining market competition.”

There's likely to be a lot of discussion about whether to continue these loan programs and how best to structure them. But the specific programs that were set up between 2007 and 2009 weren't designed to make a profit. And there were reasons for that.

Further reading:

-- A more detailed breakdown of the various energy loan programs and subsidies that have been enacted since 2007. Note that the vast majority of companies and projects funded are still up and running — Tesla isn't the only one.

-- Here's Steven Mufson's look at Tesla's recent success and why some analysts worry it might be a bubble.

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Brad Plumer · May 30, 2013