Defining, Encouraging Winners is Good National Energy Policy

by Dan Watkiss, McDermott Will & Emery LLP

Congressmen claim to have found reputed object lessons in Solyndra’s closure and Chapter 11 protection.

Among those object lessons: First, solar energy’s future is dim; second, governmental intervention in development of energy resources is bad. Learning from mistakes is to be encouraged. Learning the wrong lessons, however, risks compounding the consequences of the original mistake. The two lessons that the congressional critics ascribe to the Solyndra bankruptcy are unsupported and will cause national energy policy to continue to flounder.

Solar’s future is brighter than Solyndra critics believe. During the past 30 years, the cost of solar energy has declined consistently while efficiencies have improved. According to a 2010 paper by energy cost expert Ken Zweibel of The George Washington University, the levelized cost of a solar photovoltaic (PV) system over its useful life with no incentives or subsidies is 15 cents per kilowatt-hour, compared with 6.4 cents for natural gas combined cycle, 7.5 cents for a wind turbine, 8 cents for conventional coal and 10 cents for advanced nuclear generation.

Yes, as Republican Rep. Cliff Stearns of Florida complained in response to the Solyndra bankruptcy, solar energy still “is truly dependent on subsidies” in the form of tax credits or loan guarantees. Compared to what? Stearns and others are unaware or ignore that in magnitude and investment certainty, governmental support for solar and other clean energy sources such as wind, biofuels, geothermal and tides pales compared with governmental subsidies to fossil fuels and nuclear power generation.

A 2009 Environmental Law Institute (ELI) study quantified the measurable, direct and indirect federal subsidies provided to fossil fuels including carbon capture and storage (CCS) and renewable energy including corn ethanol between 2002 and 2008. The tallies were $72.5 billion for fossil fuels including $2.3 billion for CCS compared with $29 billion for renewables, of which only $12.2 billion went to noncorn ethanol biofuels–wind solar, other biofuels, biomass, hydropower and geothermal. Further skewing this distribution of federal support, the subsidies to fossil fuels are primarily permanent sources of revenue or cost reduction written into the tax code–such as the foreign tax credit or credit for production of nonconventional fuels–as opposed to episodic and time-limited tax credits afforded to renewables that often set too short a time to attract sufficient capital investment.

Although the ELI comparison did not look at commercial nuclear generation, that sector has been highly subsidized since its inception. The Price-Anderson Act limits an operator’s or owner’s liability to $10 billion. In addition, there are sizable Department of Energy loan guarantees to the United States Enrichment Corp. and billions spent in the failed search for permanent storage for spent fuel rods.

Returning to Stearns, whose takeaway from the Solyndra bankruptcy was, “So what I’m trying to do is say the government should not be picking winners and losers, let the private sector determine the winners and losers.” To the contrary, our elected officials should take responsibility at a minimum for defining which energy sources we want to win. What they define and encourage should have obvious attributes. The energy supply should come from domestically accessible, environmentally sustainable and economical sources. Those same elected representatives should encourage the development of those energy supplies through targeted investments in innovative technologies. The role of government is critical because the private sector–especially the utility industry–has a poor record of investing in the research and development required to produce the accessible, sustainable and economical energy supplies we need with an energy-intensive economy. Across all U.S. industries, private firms generally invest 3.5 percent of revenues in research and development. The private energy utility sector, however, invests 0.1 percent of revenues in research and development, according to a recent report of the American Energy Innovation Council. Solyndra went bankrupt because the Chinese government reportedly has invested some $30 billion in its silicon-based solar energy industry. The resulting price drop of Chinese panels made Solyndra’s nonsilicon technology no longer competitive. Without our elected representatives’ taking responsibility for defining and investing in the energy future, we won’t achieve that future. Our competitors will. Government energy programs can be improved. The balance between research and development should be revisited and the role of the government in the former strengthened. Development dollars must be targeted to clearly defined energy sources in payments that are transparent, easily understood and not buried in the tax code. Established energy sources that do not require technological innovation–which includes most of the fossil fuels on which we federally subsidized between 2002 and 2008–should be taken off the dole.

Even with improvements, some investments like Solyndra still will fail to provide long-term returns. That is inevitable when the point of government interventions is to propel innovation, produce new energy technologies and learn from our mistakes. Stearns should take these object lessons from Solyndra and federal investments in our energy future.

Author

Dan Watkiss is a partner in the law firm McDermott Will & Emery LLP and is based in Washington, D.C. He focuses on transactional and regulatory matters in energy and related infrastructure industries. Reach him at dwatkiss@mwe.com.

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