The high-profile and controversial collapse of Solyndra and Beacon Power has led critics to question the integrity and merit of DOE’s loan guarantee program. Energy Secretary Steven Chu was asked to respond to these criticisms before a House Energy and Commerce subcommittee on 11/17/11. Rep. Stearns (R-FL), chairman of the subcommittee, said “it is readily apparent that senior officials in the administration put politics before the stewardship of taxpayer dollars” [NYT].
Dr. Chu denied this, arguing that a tough global market was to blame, that struggling loan recipients “got caught in a very, very bad tsunami.” He defended the value of the loan program, stating that “when it comes to the clean energy race, America faces a simple choice: compete or accept defeat.” On 11/21/11 USA Today released an analysis showing that many companies that received funding under the same program experienced strong growth.
Not every investment will bear fruit. But you need expertise on both the investment decisionmaking and on the monitoring, which must have early warning indicators and the ability to react quickly.
The program was designed to account for failures. It was budgeted for losses to occur. The idea was making capital available to evolving technologies, that would otherwise not have been available (or available at economically viable costs in any event) for these technologies. Solyndra’s failure was unfortunately, both in scale and positioning, situated in an ideal manner to make it more valuable politically to attack every aspect of the program than to use the event as a catalyst for finding a better approach to supporting innovations in energy.
The argument could certainly be made that the risk profile for some selected projects didn’t match the risk-reward profile for traditional debt instrument. The perception of ‘chosen’ technologies and that the program execution was weak are also easy to understand, especially if viewed only through the lens of the Solyndra and Beacon bankruptcies.
With that said, providing a financial bridge for new technologies that otherwise would likely go unfunded due to a competitive imbalance created by sunk costs in pre-existing infrastructure and regulatory regimes built around the status quo of energy and transportation – technologies which could enhance the competitive position of the United States in the global marketplace – seems like exactly the sort of role the government should play.
A productive discussion in Washington would be how to build on the lessons of the Loan Guarantee Program to design a better mechanism for accelerating the development of a broad range of energy technologies on which America can build its foundation to compete in the 21st century. It may mean an altogether different programmatic approach, but to abandon the notion that government can play a vital role in building the necessary financial bridges for America to control the energy technologies of the future based only on the political storm created by a small corporate failure seems disastrously shortsighted.
Loan guarantees are not necessarily the best instruments for certain energy projects. By and large, Congress encourages their use because they “score” lower than other incentives, eg 10 cents on the dollar. Policymakers tend to use them because they are cheap, not because they are effective.
No question that loan guarantees are not the best mechanism, but in the current political environment (with a laser like focus on cost to the government and potential near-term cost to consumers) I think it may represent the type of policy tool we have been reduced to using.
Well that’s not very high praise for the instrument!