Energy Policy:

Heritage Foundation's Kreutzer says government should not offer loans to energy companies

Should Congress make significant changes to the Department of Energy's loan guarantee program in light of the Solyndra investigation? During today's OnPoint, David Kreutzer, senior policy analyst in energy economics and climate change at the Heritage Foundation's Center for Data Analysis, explains why he believes the U.S. government should not give loans to the energy sector.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is David Kreutzer, a senior policy analyst in Energy Economics and Climate Change at the Heritage Foundation's Center for Data Analysis. David, thanks for coming on the show.

David Kreutzer: Thanks for having me.

Monica Trauzzi: David, following the Solyndra scandal, the focus here in Washington is now turning to the future of the loan guarantee program. What do you believe the lessons learned are for the U.S. government when we're looking back at the Solyndra scandal?

David Kreutzer: The lessons here is that the political process is a bad way to allocate capital, because they allocate it according to political rates of return and not economic rates of return. We're going to get investment where we shouldn't have investment or we're going to be subsidizing investment that would take place anyway and give firms additional profit at the expense of taxpayers. But more likely, we're going to get bad projects also at the expense of taxpayers.

Monica Trauzzi: So, to elaborate a little further, one of the things that you argue is if a technology is commercially viable, it should have no problems getting funding from the private sector and the government really shouldn't be stepping in, in those instances.

David Kreutzer: Correct, the loan program that lent the money to Solyndra had, among this criteria, two; one that the project had to be commercially viable and the second one, that it had to demonstrate it couldn't get private financing. Well if the first is true, the second can't be true. And we have examples of Solyndra where apparently the first wasn't true, it wasn't commercially viable. They had a product that was expensive when they started out, it required a set of conditions, higher polysilicon prices, laws that were going to change and so on for it to even break even. We have other examples where there's a consortium of firms whose parent companies include state oil, market capitalization of 200 billion, BP 120 billion, Chevron another 200 billion, that claim that they can't get financing for a $1 1/2 billion project. That's just not believable if it's a great project. But they got a loan from this source.

Monica Trauzzi: Under what circumstances then should the government be giving loans?

David Kreutzer: I don't think the government should be giving loans. That should not be a business. They're not venture capitalists. They've proven over and over that they're not good at this and it pulls capital away from real venture capitalists. It pulls capital away from other parts of the economy and it gives preferences to those that have better facility working the political system, not firms that have a better product necessarily.

Monica Trauzzi: But if a technology does show promise, why shouldn't the government get in on that and try to help out?

David Kreutzer: Because the government is not good at picking out the ones that really show promise, that we have venture capitalists who have skin in the game and, therefore, they're going to be discriminating to pick out the projects that really are commercially viable, that really do have promise. Even if they're risky, they're going to make the investment if the expected value of the investment exceeds the cost. The government, again, is looking at political pressure. The Solyndra example was great. We see these e-mails, you know, we want to have something showy that shows that our program is moving forward. In spite of all the warning signs that it was a bad investment, they still got the money. They accelerated the investment. We wouldn't have seen that as likely from private venture capitalists.

Monica Trauzzi: Why then do we hear from these companies that they need government assistance? Take cellulosic ethanol for example. The industry insists that without government assistance it will falter.

David Kreutzer: Well, then maybe it should falter. Maybe they have a product that's no good, that's one. Another is, if I can get money at 3 percent instead of at the market rate of 5 or 6 percent, I'd rather get it for 3 percent. So it's no surprise that firms are partitioning the government for special loan rates. You know, it could be that it is a good project and they just don't want to pay as much as everybody else pays or, two, it's risky in the sense that maybe it will pay off and if we get the government to give us this loan guarantee, it does payoff, we can all the profits. If it fails, the government takes care of the costs.

Monica Trauzzi: But it doesn't always fail. I mean there have been examples where the government has given loans and technologies have done quite well.

David Kreutzer: Clearly, the case I mentioned earlier, it was Bright Source Energy, the one that the investors are subsidiaries of BP, Chevron and state oil and some other companies. They've already presold the electricity from their solar plants, solar thermal plant that they're putting together. So the question there is, OK, if you've presold it, you're really going to have to mess up not to make it go through, still a possibility. But why did they need the government to lend them the money? These people have market capitalization of over half a trillion dollars, all right? They want it because it's cheaper. If I can get the government to give me something, why wouldn't I ask? That doesn't mean it's a good idea.

Monica Trauzzi: Does the U.S. government have an obligation to help renewables compete with fossil fuels as Secretary Chu recently argued?

David Kreutzer: I don't think so. Why? Some renewables makes sense. We see places where solar installations work on a fairly small scale, isolated locations, low-power needs, and they're already commercially viable. The utility scale ones don't seem to make much sense right now and so why should we give a leg up to something that doesn't make sense?

Monica Trauzzi: What you're suggesting is pretty aggressive, a pretty aggressive revamp of what we currently have on the books. What are your expectations for how Congress may address this?

David Kreutzer: I don't think there's going to be a whole lot of stomach for expanding loan guarantees beyond what we have because of the Solyndra debacle. I don't know that they're going to go back and undo the projects that are already in place. I don't think they could do that or even undo much of the funding. I think there will be calls to say, look, the stuff you haven't lent out yet, OK, is not a good idea. Let's stop that, especially given the deficit that the federal government has been running.

Monica Trauzzi: All right, we're going to end it there. Thank you for coming on the show.

David Kreutzer: Thank you for having me.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

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