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Defining Success Downward?

business loanIn his letter of resignation as Secretary of Energy, Steven Chu pointedly rebutted those who have focused attention on the bankruptcies of Solyndra and several other companies given large loans by the Department of Energy. He wrote: “While critics try hard to discredit the program, the truth is that only one percent of the companies of the companies we funded went bankrupt. That one percent has gotten more attention than the 99 percent that have not.”

So let me get this straight: the test of government funding success is that a company manages to avoid bankruptcy after receiving government grants.

It seems a very low bar.

How about this test instead: how much of the support for the remaining companies has actually resulted in products that have been successful in the marketplace without ongoing subsidies?

There is little in the letter about that. Instead, Chu touts efforts in wind and solar (both heavily supported) and the “first all-electric vehicle manufacturing plant in the world in Tennessee.”

While an all-electric vehicle production facility may be newsworthy, it is not clear who will actually buy the output. Electric vehicle consumption continues to lag despite subsidies at every level. A number of manufacturers have decided there’s little promise in all-electrics.  As a recent news headline about Toyota put it, “Demand for 100% Electric-Powered Cars is so Low, Toyota Has Basically Given Up on Them.”

If the efforts of the DOE under Chu have resulted in, as he says, “many successes,” then I have a modest proposal.  Free them from subsidies, from feed-in tariffs, from mandates, and all the rest of the government support architecture of the past four years and let them compete on their own.  Then we can see whether these companies are successes or just wards of the state, whether there have been real useful technological advances or only the inevitable switch of production from the wishes of consumers to the whims of politicians and bureaucrats.

As a historical footnote, there were “successes” with government-supported alternative energy technologies in the late 1970s and early 1980s. But successes in solar, to note that example, nearly destroyed the industry. Companies focused on producing what government incentives dictated not on what consumers demanded.  When the incentives were lifted (and that had been the plan from the outset) the industry crashed.

Would that happen to alternative energy industries now? I suspect so; electric vehicles seem an especially vulnerable market segment. Nevertheless, let’s give it a try. I’d be willing to admit I was wrong if Nissan Leafs start flying off showroom floors.

In the meantime, let’s not pretend like Steven Chu that success lies in businesses that manage—whew—not to go bankrupt, but stay afloat primarily because of government largesse.

 

Discussions

John Miller's picture
John Miller on Feb 22, 2013

Secretary Chu may have been an outstanding researcher in physics (Nobel Prize Laureate), but his experience and performance in renewable energy research and development or business development was less than exceptional.  His resignation and defense of his DOE Administration’s performance appears to understate the number and level of failures.   Although his Administration Cabinet superiors may have dictated some of the obvious decisions to support their political crony’s, trying to defend these poor decisions and actions does not improve the perception of his DOE legacy.

Solyndra was an extreme example of the DOE’s inability to apparently identify projects destined to failure.  The innovation and novelty of the Solyndra patented solar panels may have initially impressed some individuals.  The Solyndra PV rods-panels were 10-20% more efficient than average market solar PV flat panels at the time, but cost twice as much.  In addition, oversupply was tanking the market for conventional solar PV panels during the period when the DOE was evaluating Solyndra's funding request.  These factors should have been a clear indication of Solyndra's project development risk.   How much the final approval decision was influenced by the Administration's pressure to issue the funding allotted by the ARRA 2009 before it expired is uncertain.  However, when the Solyndra Federal loans were subordinated (an unprecedented action for any Federal agency) to political detoners, the poor project evaluation became a disaster that should have gone through a thorough legal review to identify any conflict-of-interest.  No follow-up was carried out.

I agree with Margaret Harding that research projects should be expected to have significant failures.  This is the nature of developing new and innovative technologies.  This factor, however, does not justify the DOE continuing to fund projects well beyond the research stage and support building high-cost industrial manufacturing facilities, before any reasonably marketing research and development has been completed.  This process is a critical final step before most free market commodities manufacturing facilities are built or expanded to meet test-market and more reasonable (less risky) sales projections.

Peter Grossman's picture
Peter Grossman on Feb 11, 2013

I agree that R&D leads to many dead ends and that it is within the scope of government to fund R&D.  And I endorse the idea that the DOE should "encourage early stage R&D projects" and maintain continuity of funding.  But I think John Miller expresses the problem well in his comment above.

So much of recent energy policy has been aimed not at research but at commercialization. As Larry Summers admitted in an email the government is poor at venture capital but all too many of the billions spent have gone to making commercial successes of alternative energy technologies that are not commercially viable.

  • A mandate for 36 billion of biofuels is not R&D; in fact the current mandated level is not R&D eitther
  • A tax credit of $7500 for electric cars is not R&D
  • The all-electric car production facility in Tennessee that Sec. Chu touted is not R&D
  • Production subsidies for wind are not R&D
  • RPS mandates are not R&D; indeed a mandate is itself antithetical to real research but the administration is all for upholding the ethanol mandate and seeks a national RPS, and so on

I have heard various arguments about why the government needs to support commercialization of new energy technologies.  Often the claim is market failure, but for the last forty years (including the last four) government failure with respect to energy has been far more evident.

 

Bobbi O's picture
Bobbi O on Feb 12, 2013

 If one is investing in high risk high reward technology companies, only one or two winners out of ten can mean hugh finnancial success . This discussion seems to ignore that potential with DOE investments. Why persist on looking backward at failure or modest  gains as the measure of viability instead of the exciting possibility of the next new industry that could power the economy. Think nuclear power, the internet, cellphones .

James Thurer's picture
James Thurer on Feb 14, 2013

I am reminded of a comment a cynical friend of mine made when Chu was first nominated as Secretary of Energy:

"Dr. Chu is clearly an individual of great intellect, the utmost integrity, and a sincere desire to serve the American people and the nation.  In short, he is wholly unsuited to a cabinet position in contemporary Washington."

I would say that my friend has proven to be correct.  When Secretary Chu assumed his position the nation had no energy plan.  It still doesn't. 

Peter Grossman's picture

Thank Peter for the Post!

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