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Unleashing Energy Winners

Michael Hogue

An election that shook up the country can also shake up Washington. An agency that particularly needs shaking up is the Department of Energy, which is far too deep into the business of picking winners and losers in the energy field. And it isn’t very good at it.

Take, for example, the famous Solyndra scandal, in which the Obama administration pumped $535 million in loan guarantees through the DOE to a solar-panel company with political connections in Washington. The idea was to employ taxpayer money and government clout to stimulate the economy and jumpstart renewable-energy technologies. Unfortunately, Solyndra went bankrupt, and taxpayers got nothing for their money. Worse, private investors, thinking the government loan guarantees meant ultimate success, sank more than $1 billion into the venture. Poof, that private money disappeared too.

But the DOE doesn’t seem to learn from experience. Four years after the Solyndra debacle, and just days after the DOE’s inspector general issued a damning report on that governmental failure, the Energy Department announced plans to use the same loan program to funnel $1 billion into distributed-energy projects such as rooftop solar.

Solyndra was just part of the Obama administration’s 2009 economic “stimulus’’ bill, which diverted billions of dollars to politically preferred energy technologies such as electric cars and energy-efficient products, with story after story trickling out about abuse of funds and taxpayer liability. And President George W. Bush’s record doesn’t merit praise either. Between 2002 and 2012, federal spending on energy exploded by 2,400%.

Over the years, government intervention through the DOE has promoted various pet projects—advanced nuclear power plants, for example, and clean coal. But the overwhelming theme of the Obama administration has been to use the DOE to intervene in the research, development, demonstration, and commercialization of “green” energy resources and technologies.

Even when an energy technology or product emerges from a DOE program as a success, there’s still the problem of special favors and an tilted playing field. In today’s Washington, a great spawning ground for crony capitalism, choosing which projects to invest in and which mix of technologies to fund is inherently a political game.

In backing a particular technology or company, the DOE shifts financial risk to the taxpayer and quite literally diverts private investments, human ingenuity, and physical capital away from projects that don’t have the blessing of Washington but may actually have more commercial promise. The result can be that entrepreneurs and innovators with genuine prospects for success may never get the chance to develop their ideas.

Thus does the DOE, by playing investment banker, doom the energy industry to slow growth and technological stagnation. It favors political connections over innovation while hampering the ability of less politically favored companies and technologies to compete. It isn’t surprising, then, that the DOE’s Advanced Research Projects Agency-Energy (ARPA-E) program has funded research backed by large financiers such as Google, Exelon, and Goldman Sachs, firms that certainly don’t need help from from the government but whose political clout gets them access to taxpayer funds nonetheless.

But here’s the kicker: the incentive for companies and entrepreneurs to invest in energy research and development is massive. Americans used an average of almost 820 million gallons of oil per day in 2015. Americans used 404 billion kilowatt hours of electricity that same year for lighting alone. The market incentive to supply affordable electricity or competitive transportation fuel is enough to spur private investment without any preferential treatment or a helping hand from the DOE. This is not a “valley of death” where taxpayer help is needed. It’s a valley of wealth waiting to be captured by our best innovators and business risk-takers.

The problem here is what some people call “the Tang Fallacy,” referring to that famous powdered excuse for orange juice that millions of Americans erroneously believed was a spinoff of the U.S. Space Program. The fallacy goes like this: if the government is involved at any point in the supply chain of a technology, no matter how small, the government is responsible for its success. Thus, advocates for government intrusion into the economy believe that we have the government to thank for Tang—not to mention the internet, hydraulic fracking, the touch screen, and more. And if we want something that politicians deem good for our future, like alternative energy sources, then the taxpayers need to double down.

But often the government role is much less than advertised. Tang, for example, wasn’t developed by the Space Program at all, but was formulated by General Foods Corporation food scientist William A. Mitchell in 1957, long before any manned space flight. It later was used by astronauts, generating the false view that it had been developed by government. That false impression was the product in part, no doubt, of the zeal with which some pro-government partisans seize on what they consider to be positive governmental activity.

President Obama is such a pro-government partisan, as evidenced by his words when he stood before a crowd in Roanoke, Va., and declared, “You didn’t build that. Somebody else made that happen. The internet didn’t get invented on its own. Government research created the internet so that all the companies could make money off the internet.”

This kind of thinking is pervasive in the DOE, under both Republican and Democratic administrations. Take, for example, the shale revolution in the United States. In his State of the Union address following reelection in 2012, Obama attributed credit to the DOE for the hydraulic-fracturing boom that has unlocked vast amounts of oil and gas resources in the United States and consequently lowered the cost of living and of doing business for many Americans. The president said, “And by the way, it was public research dollars, over the course of 30 years, that helped develop the technologies to extract all this natural gas out of shale rock—reminding us that government support is critical in helping businesses get new energy ideas off the ground.”

Not entirely true. Starting in the 1970s, the DOE partially funded research that proved there were natural-gas resources in shale rock and research for microseismic technology used for mapping. The federal government also offered tax credits. However, fracking technology existed as far back as the late 1800s, and Stanolind Oil and Gas Corporation patented elements of the technology in 1949. It was Mitchell Energy, which spent decades and millions of private dollars on research and development, that found an economical way to access these resources and ushered in the modern fracking boom. The oil and gas industry was already well on the way to a breakthrough, but our lives, according to President Obama, would be much the poorer had it not been for DOE investment. Dan Steward, former geologist at Mitchell Energy, reflected: “George [Mitchell] probably could have done it without the government. The government would not have done it without George.”

How can the Trump administration get beyond the Tang Fallacy and create more room for the energy entrepreneur? A good place to start would be the drastic downsizing or outright elimination of DOE offices that push politically preferred energy technologies to market. These include the offices of Fossil Energy, Renewable Energy and Energy Efficiency, Electricity Deliverability and Reliable Energy, Nuclear Energy, Loan Programs, and Advanced Research Projects Agency-Energy.

The key is to terminate the government’s push to identify and promote technology winners. Resources should be focused instead on research to achieve a specific, narrow governmental objective (like a particular national-defense challenge) or basic scientific research with no determined application other than the pure advancement of human knowledge. Commercial applications should be left to the private sector.

An object lesson is President Obama’s celebration of the internet as a government success story. The truth is that government projects that have become commercial winners, such as the internet or GPS, did not start as government programs to help you find the best restaurant in Omaha and the quickest way to get there. The government developed them for national-security purposes. Entrepreneurs then adapted these defense technologies to create the products we enjoy today. This is an excellent model for DOE. The agency should conduct research to meet government objectives and create a system that allows the private sector, using private funds, to tap into that research and commercialize it. The DOE’s role in this scientific research and development, most notably through its 17 national labs, should be minimal, fiscally responsible, and apolitical.

Energy is a dynamic, multi-trillion-dollar global industry in which the United States is “the world’s most attractive market,” according to the Department of Commerce. The next administration should embrace what history has shown: innovation in the market is better served by free enterprise. When politics are removed from the equation, American businesses and families are free to make the energy choices that suit their needs. And because their decisions are based on what matters to them—for instance, affordability, reliability, and convenience—instead of D.C. politics, everyone will be better off.

Katie Tubb is a policy analyst for energy and environment issues at the Heritage Foundation.

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