April 16, 2007 – 6:58 p.m.
The last time the Energy Department put up taxpayer dollars to commercialize a major energy venture in the name of national security, it wound up owning a coal-gasification plant in North Dakota.
Billed as a way to promote energy independence after the 1970s oil crisis, the Great Plains Synfuels Plant, near Beulah, is a lesson in what happens when federal loan guarantees go wrong. The government assumed ownership after energy prices crashed in 1985. It sold the facility three years later and remains $330 million in the red today — despite an ongoing revenue-sharing agreement with the current owner.
Two decades later, buffeted by renewed concern over oil imports and the threat of global warming, the government again is aiming to nudge the energy industry in a new direction with billions of dollars in loan guarantees for advanced technologies. In the next fiscal year, the Bush administration wants Congress to more than double the amount of money authorized for such guarantees.
Sensing opportunity, lenders and business executives are angling not only for bigger and better loan guarantees but also for subsidies, tax incentives and, in some cases, outright price supports. Concerns are growing, however, that Congress and the Bush administration might inadvertently endorse technologies that are bound to fail 10 years down the line.
Some experts fear that expensive new technologies won’t be able to compete with conventional energy, creating a long-term drain on the Treasury as lawmakers prop them up with subsidies and incentives. Fossil fuels are cheaper, partially because their prices do not include associated environmental or security costs.
“The dream is that green power will turn out to be so cheap that it will actually beat out fossil fuels, but that is not realistic over the next decade,” said Severin Borenstein, director of the University of California Energy Institute. If the fundamental economics don’t change, he said, government assistance for alternative-energy production is “headed towards failure.”
The loan-guarantee program authorized in the 2005 energy law (PL 109-58) has attracted huge interest, with 143 applicants requesting more than $27 billion in guarantees, according to the Energy Department. The law did not specify a funding level for the loan program, but Congress authorized the department to guarantee up to $4 billion in loans in fiscal 2007 (PL 110-5).
The administration has requested authority for $9 billion in fiscal 2008, and some lawmakers are pushing for more.
Both Democrats and Republicans have repeatedly criticized the administration for moving too slowly on implementation.
“This is a step in the right direction, but a much bigger step is needed to make a real difference in the development of clean-energy technologies,” said Sen.
A big question is whether Congress and the Bush administration can avoid past mistakes and truly help new energy technologies move from the development stage into the broader marketplace. Experts call it “the commercialization gap.”
Federal dollars tend to support basic research and development efforts, leaving venture capitalists to prepare new technologies for prime time. Start-up energy companies are currently awash in money because of high energy prices and renewed interest from Washington, but commercialization requires big dollars — as much as $2 billion for a climate-friendly coal plant.
“The United States has definitely done very well fostering new cutting-edge companies in energy technologies,” said Ethan Zindler, who heads up North American research for the British firm New Energy Finance. “But once some of those companies are ready to hit the big time, there hasn’t been that level of investment to scale up.”
Government assistance is intended to address Wall Street’s reluctance to put money on the table before a technology has proved its mettle in the marketplace.
Given that early movers necessarily take on more risk when they showcase a new technology, “everyone wants to be the first one to build the fifth plant,” said John Ward, vice president for marketing and government affairs at Headwaters Inc. The company is working to develop plants that would convert coal into transportation fuels.
Jerome Peters, senior vice president of TD Banknorth Inc., says loan guarantees are only meant to get the first several projects over the hump, at which point the economics become clear and traditional lenders step in. The other option is to wait until alternative technologies become sufficiently cheap that the transition takes place on its own.
Peters warns, however, that loan guarantees will not be enough to make some technologies competitive in the current market. Operating an advanced coal plant that captures and pumps carbon dioxide underground, for instance, will always be more expensive than a conventional plant that pumps its greenhouse gases into the air.
That reality is one of the driving forces behind proposals to regulate greenhouse gases with market-based mechanisms. By putting a price on the cost of carbon emissions, traditional coal-fired plants become more expensive to operate and cleaner technologies gain an economic edge.
“If you don’t recognize global warming and you don’t recognize cleaner energies and the contribution they make to the quality of life, then we may as well be China,” Peters said. “I like to think we are more advanced than that.”
The White House remains opposed to any kind of mandatory carbon regulations. Instead, the president wants to increase research funding, provide incentives for clean energies and push demonstration projects that will help commercialize these technologies.
“First we have to demonstrate that we can do it,” Energy Secretary
Democrats will have a difficult time getting a global warming bill through in the next two years, but the politics could change. Leading presidential candidates in both parties support climate controls. Against that backdrop, the University of California’s Borenstein said loan guarantees might be a good “third, fourth or seventh” alternative, but he warns that subsidies and incentives can only accomplish so much.
“You are taking what is fundamentally a permanent problem, which is the underpricing of fossil fuels, and addressing it with a temporary solution, which is subsidies for green power,” he said. “Fundamentally, that is a mismatch.”