How Government Saps Our Energy

Well, that didn’t work out so well. Despite $535 million in federal loan guarantees, Solyndra declared bankruptcy 16 months later.

The idea of “green energy” — energy from natural, renewable sources such as sunlight, wind, and rain — has been a bright, shining dream of environmentalists for decades. Its viability always seems just over the horizon.

Oh, you can find plenty of headlines like “Further Dramatic Fall in Price of Solar Energy Forecast for 2018” and “Renewable Energy Will Be Consistently Cheaper Than Fossil Fuels By 2020, Report Claims.” But here’s the thing: Those headlines and reports are usually produced by interested parties: environmentalist groups or industry associations or government agencies. They don’t hold up to scrutiny.

Government as Energy Investor

We have decades of experience with the federal government trying to subsidize and encourage new sources of energy. A Department of Energy report in 2008, before the massive expenditures of the Obama “stimulus” package, estimated that the federal government had spent $172 billion since 1961 on basic research and development of advanced energy technologies. Consider some of the big-ticket items:

• The Clinch River Breeder Reactor was an experimental nuclear fission power project in Tennessee that cost taxpayers $1.7 billion — more than $4 billion in today’s dollars — before being abandoned in 1983.
• The Synthetic Fuels Corporation was created in 1980 to develop oil shale, tar sands, and coal gasification technologies to wean us off imported oil. Congress authorized $20 billion, but eventually it was closed in 1986 after spending “only” $2 billion.
• George W. Bush spent $1.2 billion on a fruitless effort to develop a hydrogen-powered car.
• Presidents since Jimmy Carter have tried to develop “clean coal,” a method to burn domestic coal in an environmentally friendly way. From the Healy project in Alaska to the Kemper plant in Mississippi, these efforts have overspent and underperformed. As Steven Mufson of the Washington Post wrote in 2014, “The only thing the Kemper power plant is burning now is money.”

Indeed, Mufson wrote in an earlier article, “Not a single one of these much-ballyhooed initiatives is producing or saving a drop or a watt or a whiff of energy.”

The Solyndra Debacle

When President Obama took office, with the stock market crashing and unemployment rising, his first order of business was the American Recovery and Reinvestment Act, which he called stimulus and Tea Partiers called “porkulus.” It was an $800 billion package of federal spending that was supposed to restart the economy and create jobs. Economist Steven Horwitz called it the Democrats’ Patriot Act, an opportunity to enact a whole variety of programs that they had wanted to pass for years but couldn’t get through Congress in the absence of a crisis.

Clean energy was a big part of the stimulus bill – about $90 billion. A “ginormous” clean energy package, said journalist Michael Grunwald. And as Obama’s factory visit demonstrated, Solyndra was a crown jewel.

Heavily subsidized government projects don’t always fall apart as fast as Solyndra. But the president of the United States made it a centerpiece of his economic and environmental policies, so it’s worth a closer look.

Solyndra was founded in 2005 to make solar photovoltaic systems for commercial rooftops. By 2009 it had $100 million in revenue and a market cap estimated at up to $2 billion in an anticipated IPO. In March of that year, it received a $535 million loan guarantee as part of the ARRA. It also received a $25.1 million tax break from California’s Alternative Energy and Advanced Transportation Financing Authority.

In May 2010, President Obama took his victory lap at Solyndra’s new factory and declared that “companies like Solyndra are leading the way toward a brighter and more prosperous future.” But in fact, as the New York Times reported later, “behind the pomp and pageantry, Solyndra was rotting inside, hemorrhaging cash so quickly that within weeks of Mr. Obama’s visit, the company canceled plans to offer shares to the public.”

Partly because of the rapidly declining cost of a competing solar technology, Solyndra announced it was filing for Chapter 11 on August 31, 2011.

Why did the government pour so much money into a failing company, even as it spiraled downward? Certainly the environmentalist impulse to find something, anything, that could replace widely demonized fossil fuels was important. But when governments pick winners, politics usually rears its ugly head. Official investigations and reporters dug into the story and found that, as the Washington Post reported, “Obama’s green-technology program was infused with politics at every level… Political considerations were raised repeatedly by company investors, Department of Energy bureaucrats and White House officials.”

The family funds of Oklahoma billionaire George Kaiser, a big Obama fundraiser, owned a third of Solyndra. As the company was failing, Kaiser wrote to a Solyndra board member, “Why don’t you pursue your contacts with the WH?” Two months later the board member wrote Kaiser, “The DOE really thinks politically before it thinks economically.” Solyndra’s lobbyists met at least three times with an aide to top White House official Valerie Jarrett.

But as energy journalist Amy Harder asked, which would be worse, crony capitalism infused with politics, or an administration that actually believed so strongly in its commitment to green energy that it ignored all the signs of looming disaster? “By denying politics was involved, the administration is saying that its top officials genuinely and continuously thought Solyndra was a good bet—despite numerous warnings raised both inside and outside of the administration—and that the loan-guarantee program was being carefully managed despite oversight reports and an internal West Wing memo that said otherwise.”

Former Treasury secretary and Obama adviser Larry Summers might say that crony capitalism and boneheaded government economics are both part of the same problem. Brad Jones, a venture capitalist with an investment in Solyndra, told Summers the government’s spending on clean energy was “haphazard,” citing Solyndra as an example. “While that (loan) is good for us, I can’t imagine it’s a good way for the government to use taxpayer money.” Summers responded, “I relate well to your view that gov is a crappy vc [venture capitalist] and if u were closer to it [government] you’d feel more strongly.”

By the way, on the same day that President Obama spoke at the Solyndra plant in California, an official of his administration participated in a groundbreaking ceremony for Nissan North America’s new advanced battery manufacturing facility in Smyrna, Tennessee, made possible by a $1.4 billion loan from unsuspecting taxpayers. In 2017, Nissan announced plans to sell that plant and its entire electric battery operations to GSR Capital, a Chinese firm partly funded by the government. The sale fell through in 2018, but Nissan is still looking for a buyer.

Politics and Energy

The connections between government, politics, and energy go way back, of course. Coal in the 19th century, the oil depletion allowance, nuclear power, and the Price-Anderson Act — “clean energy” is certainly not the first industry to be entangled with government favoritism. Robert L. Bradley Jr. wrote 1,992 pages (not a typo) on Oil, Gas, and Government: The U.S. Experience.

Most people figured out that the Clinch River Breeder Reactor was a money sink by the time Ronald Reagan took office, 10 years after its creation, but Senate Majority Leader Howard Baker (R‑Tenn.) kept the Tennessee project in business for a few more years. I’m old enough to remember the wailing and gnashing of teeth when Reagan was elected, and the entire Washington establishment worried that he would actually cut the budget. And I remember clearly the front-page story in The Washington Post about the first firm stand congressional Democrats took to preserve essential government services. On February 10, 1981, under the headline, “House Democrats Unify Against Synfuels Cuts,” the Post reported:

“The entire Democratic leadership in the House joined yesterday in warning the Reagan administration to keep its budget-cutting hands off the synthetic fuels subsidy program Congress created last year.

As the list of spending cuts proposed by the new administration circulated on Capitol Hill, including a big cutback in the federal underwriting of a massive synfuels development program, House Majority Leader Jim Wright (D‑Tex.), who led the fight for the program in the last Congress, sprang into action.”

In the Solyndra aftermath, Michael Graetz, a professor at Columbia Law School and the author of The End of Energy, said, “We’re making very large bets, and the decisions seem to be more grounded in politics and geography than in engineering and science.”

Switching parties doesn’t seem to stop that process. Recently, Energy Secretary Rick Perry proposed subsidizing nuclear and coal plants, helping those fuel sources compete with cheaper natural gas. The plan was opposed by a broad coalition of the natural gas industry, renewable energy providers, environmentalists, and free-marketers, and was blocked by the Federal Energy Regulatory Commission. But in June, Bloomberg reported on a draft plan to “use emergency authority under two federal laws to order grid operators to buy electricity or generation capacity” from a list of coal and nuclear plants designated by the Department of Energy.

Is Green Energy Viable?

We keep reading those stories about the falling cost of renewable energy, and there’s some truth to them. But as Peter Van Doren, an energy specialist at the Cato Institute, notes, “a closer examination of the characteristics and costs of electricity systems demonstrates that current renewable technologies are not economically competitive.”

Particularly in California, pricing and regulatory schemes have been set up to encourage the use of solar energy. Without price subsidies, consumer-generated solar power wouldn’t be viable. Large-scale solar generation and onshore wind generation might be competitive with natural gas. But it’s hard to store and transmit solar and wind energy, so we can’t replace conventional energy with them.

The basic point is simple: If solar, wind, or other “renewable” energy sources were economically viable, companies would produce them at a profit. They wouldn’t need subsidies.

Politics and Economics

Most proposals for government regulations and subsidies reflect a failure to understand Economics 101. The economic challenge is to use available resources — land, labor, capital, and ideas — to satisfy as many human needs as possible. But how do businesses or economic planners know what people need or want? This vitally important information about other people’s wants is embodied in prices. Prices don’t just tell us how much something costs at the store. The price system pulls together all the information available in the economy about what each person wants, how much he values it, and how it can best be produced. Prices make that information usable to both producer and consumer. Each price contains within it information about consumer demands and costs of production, ranging from the amount of labor needed to produce the item, to the cost of labor, to the bad weather on the other side of the world that is raising the price of the raw materials needed to produce the good. Instead of having to know all the details, one is presented with a simple number: the price.

Market prices tell producers when something can’t be produced for less than what consumers will pay for it. If a product needs to be subsidized in order to be produced, that tells us that consumers don’t value it as much as other goods that could be produced with available resources. If solar power or aging coal plants need subsidies, that tells us that they’re not economically viable. If consumers don’t want to purchase the product, and thus lenders don’t want to give such firms money, then there’s no good reason to force the taxpayers to do so.

Solar entrepreneur James Nelson testified on green business subsidies in 2012 before the House of Representatives Subcommittee on Regulatory Affairs and Federal Management. On the “Downsizing Government” website, Chris Edwards summarized his criticisms of subsidies:

• Firms that receive subsidies become spendthrift. Nelson contrasted his firm’s lean operations with Solyndra’s spendthrift ways. He noted that the “most powerful driver in our industry is the relentless reduction in cost.” But government subsidies tend to inflate costs.
• Subsidies are not driven by market demands. Nelson noted that U.S. adoption of solar energy at the time lagged behind some other nations. But “this should not bother us if it means that the other countries are investing in technology that is not economically viable.” Put another way, just because other countries may be misallocating resources, does not mean that we should also.
• Subsidies distort business decisions. Nelson noted that “giving companies money to set up manufacturing in the U.S. may doom them to failure by financing them into a strategically uncompetitive position.” If subsidies induce U.S. firms to set up production in higher-cost places, it will ultimately disadvantage them in the global marketplace.
• Venture capitalists have already funded the best projects, leaving the dogs for the government. If venture capitalists “reject a project, it is difficult to believe that the government could do a better job of picking a winner,” argued Nelson.

The argument for subsidies is that businesses are self-interested and short-sighted. Put the government in charge of handing out money, we’re told, and the decisions will be made by highly trained, public-spirited economists or lawyers, irrespective of political considerations.

But the reality is that people are people. Government employees are just as self-interested as corporate employees. And therefore, they are susceptible to political influence, persuasion by interested parties, outright bribes, and personal preferences.

The argument for keeping more of society in the private sector is not that there’s no self-interest or corruption in business; it is that the market system has more competition, more checks and balances, and more incentives to satisfy customers.

As Adam Smith suggested with his “invisible hand” metaphor, the competitive market system channels self-interest in a socially beneficial way — into the search for ways to attract customers — while the non-market system actually encourages unrestrained self-interest.

The Solyndra story is a classic case study. It has all the hallmarks of government decision-making:

• Officials spending other people’s money with little incentive to spend it prudently
• Political pressure to make decisions without proper vetting
• The substitution of political judgment for the judgments of millions of investors
• The enthusiastic embrace of fads like “green energy”
• Political officials ignoring warnings from civil servants
• Crony capitalism, the close connections between politicians and the companies that benefit from government allocation of capital
• The appearance — at least — of favors for political supporters
• The kind of promiscuous spending that has delivered us $21 trillion in national debt.

If you want government to guide the economy, to pick winners and losers, to override market investment decisions, then this is what you want.

Finally, we should just note that when government takes our money to subsidize one business or industry over another, it takes away our freedom. Most of us spend most of our waking hours trying to make money to give our families a better life. If that hard-earned money is taken away from us by force, it should be for some clear public good. Bailing out no-longer-profitable coal plants or never-yet-profitable wind and solar projects is not good enough.

President Obama’s energy secretary, Steven Chu, is a very smart man. He won the Nobel Prize in Physics in 1997 for his work to develop methods to cool and trap atoms with laser light. And perhaps he just doesn’t think we lesser intellects should be left to our own devices. He told Congress after Solyndra’s bankruptcy that “the final decisions on Solyndra were mine, and I made them with the best interest of the taxpayer in mind.” But he didn’t actually let the taxpayers decide which energy companies to lend their money to. Three months earlier, opposing a House bill to repeal the 2007 federal law that effectively outlawed incandescent light bulbs, Chu said, “We are taking away a choice that continues to let people waste their own money.”

Exactly. With paternalistic attempts at planning our lives, the government takes away a choice that lets millions of people choose how to spend their own money to achieve their own purposes.