Cash for the Chosen

I've just posted the slides from a presentation I gave at the New America Foundation in December.  The discussion provides some additional detail on why I am so critical of the Obama administration's push for massive loan guarantees to energy facilities. 

There are three main issues here.  The first, as illustrated in the chart reproduced below, the scale of lending is far larger than other similar programs the federal government has undertaken in the past.  Title XVII of the Energy Policy Act of 2005, in combination with stimulus spending, is now well over $100 billion in authorized credit support.  The Clean Energy Deployment Administration (CEDA) -- thankfully still only a proposed law -- could be even larger.  The idea that experience from existing export credit agencies or subsidized loans to rural energy facilities can serve as a sound model for running these much larger programs is, in my view, misguided.  Steps to boost review, staff skills, and incentive alignment appropriate for a program of this scale do not seem to have been taken.  In fact, the information I've received from people more closely linked than I to the agencies involved with assessing the risks of the loan guarantees indicates that political pressure to minimize the estimates of financial risk (and hence any required credit subsidy prepayments) continue unabated.

The second important issue is that the lending programs are focused primarily on energy technlogy development, with the mistaken assumption that if you build it, they will come.  Yet, experts such as Innosight, LLC (Clayton Christensen's firm) that focus on disruptive transformation of industries, identify the technology as only one of four key attributes needed for success (see slide 4).  In fact, when a political process drives capital allocation, the most heavily funded groups tend to be the most politically powerful, not the sectors most able to deliver carbon reductions at low cost (slide 5). 

Finally, the presentation identifies a number of key program attributes that are likely to contribute to a higher or a lower chance of success.  When the CEDA program is evaluated against these criteria (slides 6-8), the deficits in program structure and control become all too evident.

With federal guarantees already on the table for up to 100% of project debt for new reactors ($18.5 billion) and front-end enrichment investments ($2 billion), the Obama administration's decision today to push for an additional $36 billion in loan guarantees to new reactors is puzzling.  Taxpayer investments in a single reactor could approach $8 billion based on recent cost estimates.  While such an amount may seem unspectacular given recent bailouts to insurers and banks, it is actually an unprecendented stake in a single-asset private commercial entity. 

There is more than just the scale of investment at play here; program structure is also quite weak.  In fact, basic lessons on poor incentive alignment so evident in the mortgage industry meltdown are going unheeded in this latest foray of "free" money to private nuclear firms.  Subsidies to new reactors are large enough so taxpayers will actually be putting more capital at risk in the new plants than the owners themselves.   Alas, should the risky investment into new reactors prove successful, taxpayers will not share in the upside.  In addition, the handful of decision makers selecting the nuclear lottery winners within DOE have no private capital at risk and no financial stake in the ultimate long-term success or failure of their decisions.

The Wall Street Journal quotes DOE Secretary Steven Chu as stating that "I personally think that nuclear power has a place" because "it is carbon-free."  Having a "place" in the future of energy is hardly the issue at hand.  I'm all in favor of nuclear having a place -- but not with me footing the bill.  Let them pay for their own investments and bear the risks of those investments -- financial and otherwise -- rather than dumping them on the taxpayer.

What is really at stake here is whether we will have an energy industry that rewards technological innovation and prudent risk taking as we seek to innovate our way towards lower carbon; or whether we allow the federal government to increasingly socialize our energy investments based on their own personal views of the best way forward.  More on the importance of pricing here. 

Somewhere inside of DOE there must be a model looking at the expected total cost (private investment plus public subsidy) per mt CO2e abated; and hopefully the timing and certainty of those abatements as well. Perhaps Secretary Chu ought to look at it, and focus on building a neutral policy environment that forces carbon mitigation solutions to compete against one another rather than filling one trough after another with cash for the chosen.  More on how to use government effectively in energy markets here.