Before Solyndra, a long history of failed government energy projects

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    Nov 13, 2011 12:58 AM GMT
    At what point will governments stop attempting to produce industrial policies that almost always consistently fail and let markets find their own way?

    http://www.washingtonpost.com/opinions/before-solyndra-a-long-history-of-failed-government-energy-projects/2011/10/25/gIQA1xG0CN_story.html

    Solyndra, the solar-panel maker that received more than half a billion dollars in federal loans from the Obama administration only to go bankrupt this fall, isn’t the first dud for U.S. government officials trying to play venture capitalist in the energy industry.

    The Clinch River Breeder Reactor. The Synthetic Fuels Corporation. The hydrogen car. Clean coal. These are but a few examples spanning several decades — a graveyard of costly and failed projects.

    Not a single one of these much-ballyhooed initiatives is producing or saving a drop or a watt or a whiff of energy, but they have managed to burn through far more more taxpayer money than the ill-fated Solyndra. An Energy Department report in 2008 estimated that the federal government had spent $172 billion since 1961 on basic research and the development of advanced energy technologies.

    What does Washington have to show for these investments? And should the government even be in the business of promoting particular energy technologies?

    Some economists, executives and financiers — as well as Energy Secretary Steven Chu — argue that the government must play a role because certain technologies have non-financial benefits, such as producing fewer greenhouse gas emissions or easing U.S. reliance on foreign oil. The semiconductor industry is often held up as a model of how government money can help build a new type of economy.

    But others argue that the history of government attempts to reach for the holy grail of new energy technology — a history that features both political parties — is not inspiring. “We’re making very large bets, and the decisions seem to be more grounded in politics and geography than in engineering and science,” said Michael Graetz, a professor at Columbia Law School and the author of “The End of Energy.”

    Consider the saga of the Clinch River Breeder Reactor.

    In 1971, President Richard Nixon set a goal of building an experimental nuclear power plant. The Clinch River reactor was supposed to be a sort of perpetual motion machine, producing power as well as plutonium that could be used in other plants.

    Private utilities agreed to kick in $175 million, less than half of the $400 million that the Atomic Energy Commission estimated it would cost to build. As expenses ballooned, the government covered all the overruns. The project was criticized by activists and scientists worried about the risk of nuclear weapons proliferation. Cheap uranium undercut it.

    After President Ronald Reagan was elected, Clinch River survived the first round of his spending cuts, in part out of deference to Senate Majority Leader Howard Baker (R-Tenn.), a strong supporter of the reactor, which was in his home state. But finally, in 1983, with the Congressional Budget Office saying the cost might exceed $4 billion, Congress terminated the program. Blueprints had been drawn up, modeling done, components ordered and some ground cleared, but the reactor was never built. The price tag for the federal government: $1.7 billion ($3.9 billion in today’s dollars).
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    Nov 13, 2011 3:28 AM GMT
    Government policies and efforts often fail because they are human efforts and human efforts often fail. The failure rate of business start-ups in the US runs around 50%, and is much higher in some areas such as restaurants. We wouldn't find successful business admirable if everybody who started a business was automatically successful.

    So the failure of government sponsored, or government-supported types of business is not by itself an indication that the government should not choose to encourage certain types of activities.

    When it comes to energy, it's almost impossible to imagine how the US government could adopt a neutral policy at this point since it grants leases to drill on public lands. The government is already a player in the market and has long been making choices between things such as generating the greatest revenue from the sale of a public asset and encouraging the greatest amount of domestic production.

    There are all kinds of technologies, from highly accurate clocks and canned food to radar, which were the result of decisions by governments to reward and encourage their development. They all generated many failures before someone succeeded.

    So I think it is highly unlikely that you'll get your wish.
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    Nov 13, 2011 3:55 AM GMT
    Kobaltjak saidGovernment policies and efforts often fail because they are human efforts and human efforts often fail. The failure rate of business start-ups in the US runs around 50%, and is much higher in some areas such as restaurants. We wouldn't find successful business admirable if everybody who started a business was automatically successful.

    So the failure of government sponsored, or government-supported types of business is not by itself an indication that the government should not choose to encourage certain types of activities.

    When it comes to energy, it's almost impossible to imagine how the US government could adopt a neutral policy at this point since it grants leases to drill on public lands. The government is already a player in the market and has long been making choices between things such as generating the greatest revenue from the sale of a public asset and encouraging the greatest amount of domestic production.

    There are all kinds of technologies, from highly accurate clocks and canned food to radar, which were the result of decisions by governments to reward and encourage their development. They all generated many failures before someone succeeded.

    So I think it is highly unlikely that you'll get your wish.


    That's a ridiculous comparison. There are good reasons that governments shouldn't play venture capitalist not the least of which is because they are highly inefficient when they do so and crowd out other private firms. Yes, governments can reward and encourage development - and that's why prizes work - but when they award or seek to pick winners in the market - far more often than not, they fail and they fail spectacularly.
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    Nov 13, 2011 4:39 AM GMT
    I'm not sure what you found ridiculous. Certainly prizes for an achievement are different from loans to develop an emerging (or possible failing-to-emerge) technology. One rewards success, the other encourages attempts.

    But the reason that governments of many ilks do both is that they see a need and they are attempting to fill it. You apparently feel one approach is very worthwhile and the other is a huge mistake.

    My point is not that you are wrong or mistaken in this belief, but that the impulses that cause politicians to create such policies are not likely to disappear. They get enough encouragement from the successes they have to keep trying. You may hope that governments will operate logically and efficiently, but they are human institutions and therefore they will often not do so.
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    Nov 13, 2011 9:40 AM GMT
    Kobaltjak saidI'm not sure what you found ridiculous. Certainly prizes for an achievement are different from loans to develop an emerging (or possible failing-to-emerge) technology. One rewards success, the other encourages attempts.

    But the reason that governments of many ilks do both is that they see a need and they are attempting to fill it. You apparently feel one approach is very worthwhile and the other is a huge mistake.

    My point is not that you are wrong or mistaken in this belief, but that the impulses that cause politicians to create such policies are not likely to disappear. They get enough encouragement from the successes they have to keep trying. You may hope that governments will operate logically and efficiently, but they are human institutions and therefore they will often not do so.


    To be clear, which do you suppose rewards success and which encourages attempts? Prizes are specifically for emerging technologies or else they wouldn't be necessary.

    Governments that seek to choose winners are often only rewarding those that are politically connected or those who have the dollars to jump through all the requisite hoops. This is the biggest problem with Solyndra. If you think for instance that this research wouldn't happen you would be sadly mistaken. Look up Vinod Khosla and his views on making solar and other clean energy technologically feasible. If anything, subsidies have actually caused other technologies to be overlooked with their well connected competitors getting hundreds of millions of dollars.

    And it is useful to consider who actually got the money here, it isn't small firms or startups but largely big utilities and firms. If there is one legacy of the Obama Administration and to a lesser degree the Bush Administration it is that of crony capitalism - politicians rewarding their wealthy benefactors.

    http://www.theatlantic.com/business/archive/2011/10/who-besides-solyndra-got-loan-guarantees/246637/

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    On that note however on human nature, what successes do you speak of? The returns to government "investing" have almost always been consistently dismal. And obviously if you spend a billion dollars somewhere you hope at least someone is happy about it. It's just like earmarks. The problem was never the actual dollar amounts on earmarks but that earmarks were often used to bribe politicians into spending in much larger programs. But that changed with the tea party. I would also suggest that the willingness of governments to gamble money as VCs is falling because there isn't nearly as much money to spend. But that doesn't mean we shouldn't roundly criticize them when they do - and scrutinize every penny for corruption when it happens - and especially when it fails.
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    Nov 13, 2011 11:51 AM GMT
    Prizes reward success; guaranteed loans or direct subsidies encourage attempts. (This is a simplification since the prospect of winning a prize functions as a carrot, but the money only goes to the first success. Loans and subsidies don't wait for results but work on the assumption that encouraging a variety of efforts will lead to some successes. Failures, too).

    I am not disputing The Atlantic's findings about how DOE money was allocated. I am not saying the allocations were just, wise, or prescient. And I certainly agree that in any budgeting process where huge amounts of money are involved, a lot of horse trading goes on, which leads to decisions to spend money on things that might otherwise never be earmarked for a dime.

    I'd also say that the kind of exposure The Atlantic provides is very valuable because it acts as a restraint on politicians who dispense rewards to friends or donors.

    But treating public resources as something to be divvied up for the benefit of one's allies is irresistible to politicians. While most people are easily outraged about the allocation of billions of dollars to large corporations, they're less outraged when some of that money is being spent to hire people in their community.

    And that's why I think this kind of spending is not really likely to go away. It may shrink. It should shrink. But it will remain with us.
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    Nov 13, 2011 2:15 PM GMT
    Kobaltjak saidPrizes reward success; guaranteed loans or direct subsidies encourage attempts. (This is a simplification since the prospect of winning a prize functions as a carrot, but the money only goes to the first success. Loans and subsidies don't wait for results but work on the assumption that encouraging a variety of efforts will lead to some successes. Failures, too).

    [...] And that's why I think this kind of spending is not really likely to go away. It may shrink. It should shrink. But it will remain with us.


    I'd agree on your last point. But things do change - as the move to quash earmark spending shows.

    That said I disagree on the first point. Prizes both reward success and encourage attempts. By increasing the incentives, prizes bring both awareness and widen the potential participant pool.

    The problem with loans and subsidies is that it presumes the government or an agent of the government can know the "winners". Let's ignore for a moment any hint of corruption and assume that those who allocate resources are pure as driven snow. There remains the problem that governments are bad VCs.

    You make the comparison of failures in business as if a business failure is similar to what happens when governments fail. I would highlight some of the differences:

    1. When governments fail, their experiments often live on.
    2. What governments define as success is not always the same as what is economically successful
    3. When governments "invest" in technologies over others, it starves competing firms of capital making it more difficult for them to compete because of the subsidized capital.
    4. Invested firms often lack similar fiscal discipline to achieve the desired result versus the management and pressure placed on them by private investors to generate a return.
    5. By the very nature of nascent technologies, you don't know what you don't know. The best way to generate ideas is to widen the field. You are doing the exact opposite when you award funds to specific firms.

    Thus even by these measures the costs of these investment far exceed the potential benefits of which to date there are sadly few - and in fact largely negative (and grossly negative when taken in aggregate). If need be, create the prizes to encourage attempts as investors themselves will fund whomever they believe to be closest - and in turn mobilize a lot more capital.

    Look at the X-Prize - which directly resulted in a number of firms that now are looking to build commercial aerospace tourism firms - even though they didn't win the prize. That's the same for solar and other energy technologies - it's not as if the incentives don't exist - that's why most clean tech investors are there - not for the subsidies but for the ultimate reality that at some point it will be far cheaper than other alternatives which includes oil.
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    Nov 14, 2011 12:32 AM GMT
    I am more comfortable than you are with the idea that governments make mistakes. Some, perhaps the majority, of these bad decisions are based on venality or stupidity, and others are based on risk taking. I do think it's proper for the government to take some risks in the pursuit of the common weal.

    We could go round and round about the effect of federal loan guarantees in emerging technologies. I think loan guarantees are far less heavy handed than hiring, say, Lockheed Martin, to develop a specific technology. One billion dollars spent on direct investment with one company seems far less likely to produce a result than one billion dollars being used to guarantee roughly 8 billion dollars worth of loans which are used by companies supported by other, direct investment.

    But it's clear you strongly feel that this is not a wise use of money and I don't expect I will change your mind.




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    Nov 14, 2011 9:11 AM GMT
    Kobaltjak saidI am more comfortable than you are with the idea that governments make mistakes. Some, perhaps the majority, of these bad decisions are based on venality or stupidity, and others are based on risk taking. I do think it's proper for the government to take some risks in the pursuit of the common weal.

    We could go round and round about the effect of federal loan guarantees in emerging technologies. I think loan guarantees are far less heavy handed than hiring, say, Lockheed Martin, to develop a specific technology. One billion dollars spent on direct investment with one company seems far less likely to produce a result than one billion dollars being used to guarantee roughly 8 billion dollars worth of loans which are used by companies supported by other, direct investment.

    But it's clear you strongly feel that this is not a wise use of money and I don't expect I will change your mind.


    I think you miss my point entirely. First off, $1B in direct contracts does not equate to 8 billion in loan guarantees - if anything the Solyndra incident shows how reckless bureaucrats are with money - and how easy it is to do so with other people's money given the anticipated failures.

    You state: "I do think it's proper for the government to take some risks in the pursuit of the common weal."

    You have yet to show any evidence that there is a reasonable expectation of return from direct government interventions or any actual value created beyond what is spent - be they loans or subsidies - so are you saying that
    (a) good intentions are sufficient to spend billions of dollars
    (b) even when we know there is little probability of any sort of return
    (c) and worse that it can be more efficiently spent elsewhere and
    (d) may even harm development of competing technolgies?

    When governments choose even from 8 in a field, they also assume that the best solution is from these 8 and that's my point in terms of how limiting even this is. The better solution would be to offer $1b in prizes or even $500M in prizes which would have a substantially greater pool - that is if there's any spending at all.

    The downside? Substantially fewer opportunities for graft. I would allow myself to be convinced that these are good uses of public dollars but the evidence is not only woefully lacking but show quite the opposite.
  • GQjock

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    Nov 14, 2011 10:43 AM GMT
    Ahhhh Solyndra .......

    If you're so interested in it Rid Why don't you ask the previous administration about it and the republican congress at the time who initiated the loan and gave it the greenlight in 2007 ?

    Solyndra: Advanced by Bush for 2 Years (Solyndra Timeline)
    http://cleantechnica.com/2011/09/15/solyndra-advanced-by-bush-for-2-years-solyndra-timeline/

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    Bush Admin. Advanced 16 Projects, Including Solyndra, Out Of 143 Submissions. The Department of Energy's Loan Guarantee Program was created by the Energy Policy Act of 2005 and expanded by the American Recovery and Reinvestment Act of 2009. At a congressional hearing, Jonathan Silver, the Executive Director of Department of Energy's Loan Programs Office, testified that the Bush administration's DOE [Department of Energy] selected Solyndra from 143 submissions to move forward in the process:

    SILVER: The 2006 solicitation resulted in 143 submissions. The loan program staff and others at the department reviewed those for eligibility, which is a thinner review than the full due diligence, and recommended 16 applications to file a full application. A dozen did so. Solyndra was one of those. And the department conducted due diligence on all of those 11. [House Energy and Commerce Committee, 9/14/11, via Nexis]
    Under Bush Admin., The Credit Committee Remanded The Project "For Further Development Of Information." During the final days of the Bush administration, the Department of Energy's loan guarantee credit committee, consisting of career officials, said that although the Solyndra project "appears to have merit," the committee needed more information in several areas before it could recommend approval of a conditional commitment. The committee "remand[ed]" the loan "without prejudice" for "further development of information." [Credit Committee, 9/9/09, via Huffington Post]

    DOE Under Bush Admin. Set Out Timeline For Completing Solyndra Review. After the credit committee remanded the project for further information, officials at the Department of Energy under the Bush Administration developed a schedule for due diligence on the Solyndra project, envisioning completion in March 2009. [Department of Energy, 9/14/11]

    In March, The Same Credit Committee Of Career Civil Servants Recommended Approval. As Climate Progress noted, in March 2009, "The same credit committee [consisting of career civil servants with financial expertise] approves the strengthened loan application. The deal passes on to DOE's credit review board - political appointees within the DOE issue a conditional commitment setting out terms for a guarantee." [Climate Progress, 9/13/11]

    DOE Official: "It's The Same Group Of Career Professionals That Were On The First Committee." In his testimony, DOE's Silver stated that the credit committee that remanded the project during the Bush administration "is also exactly the same credit committee that then approved the transaction several months later." He added that the loan guarantee "didn't close until September and so additional due diligence takes place from the conditional commitment through the close of the loan." [House Energy and Commerce Committee, 9/14/11, via Nexis]
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    Nov 14, 2011 12:14 PM GMT
    riddler78 said<

    I think you miss my point entirely. First off, $1B in direct contracts does not equate to 8 billion in loan guarantees - if anything the Solyndra incident shows how reckless bureaucrats are with money - and how easy it is to do so with other people's money given the anticipated failures.

    You state: "I do think it's proper for the government to take some risks in the pursuit of the common weal."

    You have yet to show any evidence that there is a reasonable expectation of return from direct government interventions or any actual value created beyond what is spent - be they loans or subsidies - so are you saying that
    (a) good intentions are sufficient to spend billions of dollars
    (b) even when we know there is little probability of any sort of return
    (c) and worse that it can be more efficiently spent elsewhere and
    (d) may even harm development of competing technolgies?

    When governments choose even from 8 in a field, they also assume that the best solution is from these 8 and that's my point in terms of how limiting even this is. The better solution would be to offer $1b in prizes or even $500M in prizes which would have a substantially greater pool - that is if there's any spending at all.

    The downside? Substantially fewer opportunities for graft. I would allow myself to be convinced that these are good uses of public dollars but the evidence is not only woefully lacking but show quite the opposite.


    I equate $1 billion in direct contracts with 8 billion worth of loan guarantees because the US govt capitalizes its loan guarantees at roughly this ratio. It can do this since the great proportion of loans it guarantees do end up being repaid. If a lower ratio were repaid, investors would demand higher capitalization rates.

    I think that by itself suggests that from a strict financial standpoint the loan guarantees provide a reasonable return on the public funds. It's certainly true that investor behavior in credit markets is not always 100% wise, but it is generally regarded as a solid indicator of the strength of an investment. Leveraging capital on an 8-1 ratio provides a potentially enviable rate of return. (My response to a, b, and c, above)

    As for d, I have avoided responding to certain other points you make because I believe that they are assertions of faith rather than fact. It's very difficult to prove negatives, but I am not aware of any great technologies which have been abandoned because government money went to a less effective technology. It's certainly possible that this happened at some point, but I don't know how one can demonstrate that it happens systematically, or with frequency. There are too, too many what-if's to imagine about an abandoned approach.

    Again, my intention is not to argue that all human actions are wise and efficient. I began this discussion with the assertion that there was no chance they could be.

    You asked when "will governments stop attempting to produce industrial policies that almost always consistently fail and let markets find their own way?" I argued that governments got enough positive results from things like loan guarantees that it is extremely unlikely that they would stop making them.