Energy Subsidies

  • Chris Edwards
December 15, 2016

The federal government has subsidized the energy sector for decades. Subsidies originally stemmed from atomic energy research efforts in the 1950s. Further subsidies were added in response to the energy crisis of the 1970s. And in recent decades, concerns about energy conservation and climate change have prompted the government to expand its efforts further.

Today the Department of Energy (DOE) and other federal agencies run an array of spending programs in support of the conventional and renewable energy industries. The government also provides about two dozen special breaks for energy activities under the income tax. This study focuses on the DOE’s spending record, and highlights some of its misguided and mismanaged projects over the years.

Looking at the DOE’s budget of $27 billion for 2016, the largest activity was nuclear weapons research, development, and security, which cost $11 billion.1 The second largest activity was environmental cleanup of nuclear weapons sites, which cost $6 billion. Most of the rest of the DOE budget was for nondefense activities, as follows:

  • Science. $5.4 billion on physics, fusion energy, computing, and other basic research.
  • Renewable Energy. $2.2 billion on solar and wind power and other green activities.
  • Nuclear Energy. $939 million on civilian nuclear programs.
  • Fossil Energy. $640 million on coal, oil, and natural gas programs.
  • Advanced Research Projects. $382 million on various energy technologies.
  • Electricity Delivery. $250 million on electricity transmission programs.

DOE spending on these sorts of subsidy activities has been fraught with failure. Billions of dollars have been wasted on ill-advised and mismanaged projects, as discussed in the nine case studies below. From the Clinch River Breeder Reactor failure in the 1970s to the recent Solyndra scandal, DOE projects have often turned into boondoggles.

DOE subsidy programs and applied research should be ended as an unneeded intrusion into private business activity. American businesses spend billions of dollars a year on research into conventional and renewable energy sources. One problem with subsidies is that they can steer those private resources in the wrong direction, away from the most efficient energy solutions.

Policymakers often support subsidies to further a grand vision, such as creating a “green economy” or making America “energy independent.” But top-down visions ignore marketplace realities and consumer preferences, and the DOE would be incapable of implementing them with competence anyway, as the following sections illustrate.

Clinch River Breeder Reactor

The Clinch River Breeder Reactor was an experimental nuclear fission power project in Oak Ridge, Tennessee, that cost taxpayers $1.7 billion and produced nothing. Upon its launch in the early 1970s, Clinch River was hailed as a way to create energy independence, as it would produce an inexhaustible energy supply, like a perpetual motion machine.2 The project lasted 12 years until it was finally killed as a result of technical problems, cost escalation, and environmental opposition.

The project was authorized in 1970, and Congress first appropriated funds in 1972. In 1971, the Atomic Energy Commission, which pushed the project, estimated that it would cost $400 million. The next year the cost estimate jumped to $699 million. The costs kept rising over the years, and by 1983 the cost estimate had ballooned to more than $4 billion.3

Management of the Clinch River project was hampered by disagreements between Congress and the DOE over the project’s objectives.4 Also, the economic viability of the project was based on uranium price projections that ended up being off-base, and supporters failed to rethink the project after market conditions changed.5

In the end, the combination of bad economics, environmental problems, and cost overruns gave the upper hand to project opponents, and Congress cut off funding by a narrow vote in the Senate. The total cost to taxpayers was $1.7 billion, which is equivalent to more than $4 billion today.6

The politics of Clinch River were interesting, given that people often think of the Democrats as the party of big government and Republicans the party of spending restraint. Clinch River was supported by the Reagan administration and by Republican Senator Howard Baker of Tennessee, who was majority leader in the 1980s. The project was opposed by President Jimmy Carter, but he did not have enough political support to kill it in the 1970s.  

Synthetic Fuels Corporation

Congress created the Synthetic Fuels Corporation (SFC) in 1980 to develop alternatives to imported fossil fuels.7 The SFC was to be a huge $88 billion effort that invested taxpayer money into private projects to develop oil shale, tar sands, and coal gasification technologies. When he launched the SFC, President Jimmy Carter called it a “keystone” in U.S. energy policy, and Congress initially authorized $20 billion in spending.8 The Reagan administration was initially supportive of the SFC, but that support eroded over time as it became clear that the project was a wasteful dud.

The SFC was created in a crisis atmosphere of spiking energy prices. Congress assumed that the high oil prices of 1980 would last over the long term. But oil prices fell as the 1980s progressed, which made the expensive projects backed by the SFC uneconomic.9 Private energy firms became unwilling to invest their own money in partnership with the government on SFC projects.

Another problem was that the Synthetic Fuels Corporation was horribly mismanaged. There was staff dissention and high employee turnover in the project. Congress lambasted the SFC’s top brass for its poor leadership, and the SFC president was ousted in 1983 amid complaints about conflicts of interest and the awarding of no-bid contracts to his business associates.10 The Associated Press noted that complaints about the SFC included the agency’s “excessively high salaries, cronyism in appointments, and lethargy.”11

The SFC also suffered from frequent political interference in its decisionmaking. As one example, the National Academy of Sciences noted that “fuel cell projects under the SFC … were allotted to each of the 50 states, regardless of economic viability.”12

By 1983, a coalition of fiscal conservatives and environmentalists were actively opposing the project.13 Recognizing that it was headed for termination, there was a mad dash by the SFC to hand out subsidies before Congress shut the project down. The SFC was finally closed in 1986 with little to show taxpayers after spending about $2 billion.14

Superconducting Super Collider

A Department of Energy panel in 1983 recommended building the world’s largest particle accelerator. With Ronald Reagan’s approval in 1987, the Superconducting Super Collider (SSC) project was launched.

Development of the SSC at a site near Dallas, Texas, was mired in mismanagement. All of the major contracting businesses fell behind schedule and ran overbudget. The department had no functioning cost-tracking system and provided little oversight for the poorly performing contractors.15

At the SSC’s launch in 1987, the Secretary of Energy estimated that it would cost taxpayers $4.4 billion.16 By 1989 the cost estimate had jumped to $5.9 billion, and by 1991 it had jumped to $8.2 billion.17 Adding to these problems, the project received almost none of the $1.7 billion planned foreign contributions that had been budgeted.18

In the end, Congress decided that the SSC was consuming a large amount of funds relative to the probability that it would produce useable knowledge or technology.19 After the total estimated cost had almost tripled to $11.8 billion, Congress finally killed the SSC in 1993 after spending about $2 billion.20 Taxpayers were also on the hook for expenses of more than $700 million related to shutting down the project.21  

Yucca Mountain

The federal government has struggled with the issue of storing waste from commercial nuclear reactors and defense-related nuclear activities. The government has spent billions of dollars in preparation for nuclear waste disposal, but the creation of a permanent storage site is years behind schedule, and many issues are unresolved.

The Nuclear Waste Policy Act of 1982 aimed to create a permanent disposal site for radioactive waste by 1998. After many studies, Yucca Mountain in Nevada was chosen in 1987 as the single national disposal site, and engineers and construction crews went to work building the facility. The project has cost $12 billion so far.22 The Yucca Mountain project was put on hold during the Obama administration, but if it proceeds in the future, it would still be a decade or more before it became operational.

To fund the project, the 1982 Act created a fee on all nuclear electric utilities, charged on the basis of kilowatt hours generated. The fee raised about $750 million annually for the Nuclear Waste Fund until the collection was halted by legal action in 2014.23 The fund has an accumulated balance of $31 billion, but this is just an accounting entry, as the government has spent the money on other activities, not on the storage of nuclear waste.24

In other words, electric utilities and their customers had long paid a $750 million annual tax to store nuclear waste at Yucca, but that storage will not happen for years to come, if at all. Utilities are not happy with the situation, and they have sued the government. Federal taxpayers are liable for at least $23 billion in repayments to the nation’s electric utilities.25

The Yucca Mountain project experienced many cost overruns, which is typical of federal construction projects. Between 2001 and 2007, for example, the project’s estimated life-cycle cost increased from $70 billion to $96 billion, measured in 2007 dollars.26 The problem of nuclear waste is technically challenging, but federal mismanagement has added to the costs of Yucca Mountain.

Despite having already spent $12 billion on Yucca Mountain, policymakers led by Nevada’s former Senator Harry Reid had the project mothballed during the Obama administration. The Wall Street Journal said, “Mr. Reid promised Mr. Obama that he would do the President’s dirty work on Capitol Hill if the President blocked the Yucca project. Mr. Obama named Reid aide Gregory Jaczko as chairman of the Nuclear Regulatory Commission in 2009, and a year later Mr. Jaczko shut it down.”27

However, Jaczko later resigned, Reid is leaving the Senate, and there will soon be a new president in the White House. Furthermore, “a pair of D.C. Circuit Court of Appeals rulings have since rebuked the [Obama] Administration for violating the law in relation to Yucca, and in 2014 a government study found that the Yucca design for waste is environmentally safe.”28 The Yucca Mountain nuclear waste site may get a new lease on life.

Environmental Mismanagement

For decades, the federal government’s nuclear weapons facilities across the country had been despoiling the environment with little notice taken by Congress.29 But that started to change in the 1980s, and since then Congress has spent a huge amount of taxpayer money cleaning up the government’s toxic nuclear legacy.

In 1985, a government report called the DOE’s environmental, health, and safety shortcomings a “disgrace.”30 In 1987, a department undersecretary testified to Congress that there was an “enormous legacy of misuse of the environment” within DOE’s nuclear weapons activities.31 In 1988, the National Research Council estimated that it would cost $100 billion or more to clean up the DOE’s contaminated nuclear weapons sites.32 In 1989, continuing revelations caused then Energy Secretary James Watkins to declare that the “chickens had come home to roost” with regard to decades of DOE’s environmental mismanagement.

An enormous cleanup effort was launched, which is still going on today. Between 1990 and 2016, Congress spent a stunning $152 billion on environmental cleanup of federal nuclear sites, and taxpayers continue to pay $6 billion annually on the effort.33

The cleanup costs have been high partly due to DOE mismanagement. In 1994, Senator Bennett Johnson called DOE’s efforts “a grand and glorious mess … no function of government has been as mismanaged as our waste cleanup.”34 A 2003 Government Accountability Office (GAO) report found that “DOE’s past efforts to treat and dispose of high-level waste have been plagued with false starts and failures.”35 A 2008 GAO report concluded that nine out of 10 major cleanup projects “have experienced cost increases and schedule delays in their life cycle baseline, ranging from $139 million for one project to more than $9 billion for another, and schedule delays ranging from 2 years to 15 years.”36

Here is the situation at some of the cleanup sites:

  • Brookhaven National Laboratory. This facility in New York State operated the High Flux Beam Reactor between 1965 and 1996, when it was discovered that radioactive tritium had been leaking into the groundwater. The reactor has closed and taxpayers are paying for the site’s estimated $144 million of cleanup costs.37
  • Hanford Site. This is the “once-secret government reservation in eastern Washington State where much of the nation’s plutonium stockpile originated. Engineers have struggled for years to come up with a safe method for disposing of Hanford’s millions of gallons of high-level radioactive waste, much of which is stored in leaky underground tanks.”38 One waste treatment plant at the site almost tripled in cost from $4.3 billion in 2000 to $12.2 billion by 2008.39 The Hanford cleanup is expected to cost $107 billion by the time it is completed in 2060.40 A former DOE official said that the department “has proven to be incapable of managing a project of this magnitude and importance… The agency has shown a long-standing intolerance for whistleblowers while conducting faith-based management of its contractors regardless of poor performance. This has bred a culture in which no safety misdeed goes unrewarded.”41
  • Idaho National Laboratory. This facility near Idaho Falls was involved in key developments in atomic energy, but environmental cleanup has been costly. A centerpiece of current cleanup efforts, the Integrated Waste Treatment Unit, has risen in projected cost from $461 million to $715 million.42
  • Rocky Flats Plant. This Colorado site was a key location for nuclear weapons production. In the 1980s, executives at DOE were accused of covering up and lying about the dangerous and illegal toxic waste practices at Rocky Flats.43 During the cleanup in the 1980s and 1990s, the DOE awarded large bonuses to poorly performing contractors.44 The Rocky Flats cleanup was completed in 2005 at a cost of $7 billion.45 In 2016, after years of litigation, an agreement will provide $375 million to individuals who lived near Rocky Flats for harm caused by the facility’s plutonium releases.46
  • Savannah River Site. This site in South Carolina was built for nuclear weapons refinement. The facility had a negligent safety culture, and environmental issues such as water contamination plagued it for years.47 Cleanup costs have soared. The construction of a mixed oxide fuel facility at the site was supposed to cost $5 billion, but the price tag has soared to $17 billion.48 About $5 billion has already been spent on the mixed oxide facility, but the DOE is considering whether to scrap it altogether as unworkable.

National Ignition Facility

Congress approved construction of the National Ignition Facility (NIF) in 1993. The project researches nuclear fusion by focusing high-power laser beams at a small point to generate a huge release of energy. The NIF is housed in a large facility at the Lawrence Livermore National Laboratory in California.

The NIF project has been poorly managed. It is years behind schedule, and by 2000 the estimated cost had ballooned from $2.1 billion to $4.2 billion.49 That year, the GAO concluded that the “NIF’s cost increases and schedule delays were caused by poor management and inadequate DOE oversight.”50 Senior NIF officials did not have adequate experience, and some officials had deceived DOE and Congress about the progress they were making. The project’s cost estimate has now risen to about $7 billion.51

An editor of IEEE Spectrum noted, “Years ago, when the energy rationale for laser fusion began to look a little implausible and the projected cost of NIF already had ballooned from $2 billion to $4 billion, its promoters began to sell it to Congress and the Department of Energy as a means of simulation-testing nuclear weapons.”52 But that new purpose did not seem very plausible to outside experts either, and so “the lab’s leaders now are back to selling it as an energy machine.”53

The project started running tests in 2009, but the facility may not be fully operational for years to come. A 2016 report by the DOE’s National Nuclear Security Administration found that ignition of the NIF lasers is “uncertain” in the next five years.54 An article in Physics Today says that the DOE report is essentially an admission that the project will never work.55

Clean Coal

Congress has been funding “clean coal” subsidies for decades, and every president from Jimmy Carter to Barack Obama has supported them. Unfortunately, clean coal subsidies have been a costly and unproductive exercise with little environmental benefit.

The aim of clean coal subsidies is to promote the burning of domestic coal in an environmentally friendly way. But over the decades, most clean coal projects have been either mismanaged or outright duds. In 2001, the GAO found that many clean coal projects have “experienced delays, cost overruns, bankruptcies, and performance problems.”56 The agency examined 13 projects and found that “8 had serious delays or financial problems, 6 were behind their original schedules by 2 to 7 years, and 2 projects were bankrupt.”57

One boondoggle was the Healy Clean Coal project in Alaska. It gobbled up $117 million of federal funding during the 1990s, as well as more than $150 million from the State of Alaska.58 But the project never worked as planned, it cost too much to operate, and it was finally closed down as a failure. 

A more recent failure was FutureGen. It was launched in 2003 with the aim of building a low-emission coal power plant that would use carbon capture technologies. In 2007, the DOE chose a site in Illinois for the plant. FutureGen was originally estimated to cost $1 billion, but by 2008 the cost had ballooned to $1.8 billion.59 That increase and other concerns prompted the DOE to cancel the project in 2008 after $176 million had been spent. 

However, that was not the end of FutureGen. Senator Dick Durbin and other Illinois politicians lobbied to revive the project.60 It was restarted under the Obama administration as FutureGen 2.0 with $1 billion in funding from the 2009 stimulus bill. Private investors were supposed to chip in a share of the funding, but they showed little interest. The estimated costs started rising again, from $1.3 billion to $1.65 billion. The Obama administration decided to reverse course, and it cancelled the project in 2015. All in all, FutureGen ended up costing taxpayers $378 million.61

Another recent clean coal boondoggle is the Kemper plant in Mississippi. It is supposed to demonstrate that electricity from coal could be produced with less pollution, but the plant is behind schedule and far overbudget. In 2013, the Wall Street Journal reported:

Mississippi Power Co.’s Kemper County plant here, meant to showcase technology for generating clean electricity from low-quality coal, ranks as one of the most expensive U.S. fossil-fuel projects ever—at $4.7 billion and rising. Mississippi Power’s 186,000 customers, who live in one of the poorest regions of the country, are reeling at double-digit rate increases. And even Mississippi Power’s parent, Atlanta-based Southern Co., has said Kemper shouldn’t be used as a nationwide model.
… Kemper has been such a calamity for Southern that the power industry and Wall Street analysts say other utilities aren’t likely to take on similar projects, even though the federal government plans to offer financial incentives. Southern recently took $990 million in charges for cost overruns approaching $2 billion.62

In 2014, the Washington Post reported: “The only thing the Kemper power plant is burning now is money. The plant has suffered almost every kind of cost overrun, beset by bad weather, labor costs, shortages and inconsistent quality of equipment and materials, and contractor and supplier delays. Southern said in April that it was raising the projected cost of the plant by $235 million, to a total of $5.5 billion, more than double the original estimate.”63

By 2016, the Kemper plant was $4 billion overbudget and two years behind schedule.64 The federal government “committed nearly $700 million for the Mississippi Power plant, though part of that was the $133 million that the utility will forfeit because of delays.”65

In sum, federal subsidies for Kemper have not only cost taxpayers money, but also encouraged a utility to waste billions of dollars on an apparently misguided project. Subsidies cause broader damage than just higher taxes because they also induce misallocations of private business investment.

Alternative Fuel Vehicles

The federal government has been subsidizing the develop of alternative fuel vehicles for years. The Clinton administration handed out $1.5 billion to U.S. automakers in the Partnership for a New Generation of Vehicles (PNGV) program, which aimed at developing hybrid cars. The program was a failure: U.S. automakers made only marginal advances that probably would have been made without the subsidies.66 Meanwhile, Japan-based Honda and Toyota pulled ahead of the U.S. companies with their very successful Insight and Prius hybrid models.

The PNGV subsidies may have actually backfired by reducing Detroit’s sense of urgency about bringing hybrids to market.67 Once businesses are on the federal teat, they try to milk the subsidies as long as they can, and their incentive to earn returns in the marketplace is reduced. The PNGV subsidies to U.S. automakers may have also inspired the Japanese automakers to speed their own efforts to introduce hybrids.

The George W. Bush administration canceled PNGV. Then it launched its own vehicle subsidy program, FreedomCar, which the administration said would work better. Bush’s 2003 federal budget said that while PNGV had a “misguided focus,” FreedomCAR would have “clear goals” and an “accountable manager.”68 That was wishful thinking.

FreedomCAR subsidized U.S. automaker research into hydrogen and fuel cell technologies. FreedomCAR and the related Hydrogen Fuel Initiative consumed $1.4 billion of taxpayer funds between 2003 and 2008.69 Like PNGV, FreedomCar was also a failure, and it was scrapped by the Obama administration after it came into office.

The New York Times reported, “Cars powered by hydrogen fuel cells, once hailed by President George W. Bush as a pollution-free solution for reducing the nation’s dependence on foreign oil, will not be practical over the next 10 to 20 years, the energy secretary said Thursday, and the government will cut off funds for the vehicles’ development.”70

Regarding alternative fuel vehicles in general, the New York Times found that “the history of federal help for Detroit is not good.”71 One reason is pork barrel politics. A substantial share of the funding under FreedomCar was earmarked to particular congressional districts, rather than being allocated by DOE experts to the most promising ventures.72

More importantly, making technical advances that are cost effective and demanded by the public is not something that the government does well. Besides, government subsidies are not needed to make such advances in automobiles. When companies and investors come across promising technologies, and they see marketplace opportunities, they will plough their own resources into development.

Unfortunately, policymakers have not learned their lesson from past vehicle subsidy failures. In recent years, the government has handed out subsidies in the Advanced Technology Vehicles Manufacturing (ATVM) program. It was authorized in 2007, and started providing loans in 2009. Under the program, DOE can provide up to $25 billion in loans to automakers and parts suppliers for vehicles with high fuel efficiency.73

The ATVM program has provided loans to large corporations, including Ford and Nissan. Such loans make no sense because these firms can fund their own research into promising technologies. ATVM has also provided loans to risky start-up companies, but that does not make sense either because it is gambling with taxpayer money. The DOE gave Fisker Automotive a $192 million loan in 2010. Vice President Joe Biden championed Fisker’s facility in his home state. Fisker went bankrupt and ceased operations in 2013. The DOE recovered $53 million of the loan, leaving taxpayers with a $139 million loss.74

Another company, the Vehicle Production Group of Michigan, received $50 million under the ATVM program in 2011. But the company’s effort to produce natural gas powered vehicles was also a failure, and the firm went bankrupt and ceased operations in 2013. The DOE was able to recoup just $8 million of its loan, leaving taxpayers with a $42 million loss.75

Stimulus Bill and Solyndra

The 2009 American Recovery and Reinvestment Act (ARRA) included a large boost to energy subsidies. The ARRA, or “stimulus bill,” provided $28 billion for DOE to spend on renewable energy, energy efficiency, and related activities.76 The bill also included the Section 1603 program, which provided the Department of Treasury with $24 billion to hand-out in grants for energy projects.77

The early Obama administration thus enjoyed a gusher of funding for energy subsidies. Tens of billions of dollars was handed out in grants and loans to businesses. One of the problems that this created was cronyism: politics played a central role in the awarding of subsidies. In an investigation, the Washington Post found, “Obama’s green-technology program was infused with politics at every level.”78 The newspaper found that “$3.9 billion in federal [energy] grants and financing flowed to 21 companies backed by firms with connections to five Obama administration staffers and advisers.”79

A key part of the Obama effort was the Section 1705 loan guarantee program. DOE handed out $14 billion of loan guarantees under this program between 2009 and 2015, and another $8 billion under the Section 1703 loan guarantee program.80 The most famous recipient of the 1705 program was Solyndra, a maker of solar panels, which received a $535 million loan in 2009. Solyndra was spendthrift and its products were uncompetitive. As a result, it went bankrupt and closed its doors in 2011. Taxpayers footed the bill for the failed loan. President Obama had visited Solyndra before it collapsed and called the firm an “engine of economic growth.”81

Why did the DOE give Solyndra a big loan guarantee? The New York Times found that the company “spent nearly $1.8 million on Washington lobbyists, employing six firms with ties to members of Congress and officials of the Obama White House.”82 And the Washington Post found that the “main players in the Solyndra saga were interconnected in many ways, as investors enjoyed access to the White House and the Energy Department.”83 A key Solyndra investor was billionaire George Kaiser, who was also a major fundraiser for President Obama. The DOE was pressured by the White House to approve the subsidy.84

There were other failures from the Section 1705 program. Abound Manufacturing Solar received a $400 million loan guarantee in 2010. The company went bankrupt in 2012, and it left behind a number of polluted facilities in Colorado that cost millions of dollars to clean up. Beacon Power received a $43 million loan guarantee in 2009 for energy storage technologies, and it went bankrupt in 2011.85 However, the company was later revived under different ownership.

Many of the energy subsidies during the Obama years went to projects backed by wealthy investors and large corporations, including Warren Buffett and General Electric. Such individuals and companies are fully capable of funding energy projects with their own money. Indeed, billions of dollars of private funding has flowed to alternative energy projects in recent years, so there is no need to hijack taxpayer money for such venture investments.

Subsidies can induce private investors to put their money into bad projects, as we saw with Solyndra. In such cases, the subsidies create damage not just from the needed higher taxes, but from distorting markets and wasting private business resources as well.86 Many green energy projects have received subsidies from multiple federal and state sources, which has further divorced business decisionmaking from marketplace realities.

In other cases, subsidies have gone to projects that wealthy investors and big corporations would have funded anyway. In these cases, subsidies have simply allowed private interests to earn higher returns at taxpayer expense. The New York Times described the gusher of energy spending in recent years as a “banquet of government subsidies,” and wondered whether “the Obama administration and state governments went too far in their support of solar and wind power projects, some of which would have been built anyway, according to the companies involved.”87

The Times further notes: “The government support—which includes loan guarantees, cash grants and contracts that require electric customers to pay higher rates—largely eliminated the risk to the private investors and almost guaranteed them large profits for years to come. The beneficiaries include financial firms like Goldman Sachs and Morgan Stanley, conglomerates like General Electric, utilities like Exelon and NRG—even Google.”88

Here are some projects that have received DOE subsidies in recent years:89

  • Abengoa Bioenergy. The U.S. subsidiary of Spanish conglomerate Abengoa received a $132 million DOE loan guarantee and a $97 million DOE grant for an ethanol plant. In 2016, Abengoa Bioenergy filed for bankruptcy protection, and its U.S. ethanol business was sold.
  • Agua Caliente. This solar project in Arizona is owned by NRG, which is a large energy utility. It received a $1 billion DOE loan guarantee in 2011. Warren Buffett’s Berkshire Hathaway purchased 49 percent of the project in 2012. Buffett is one of the richest people in America, with wealth of about $60 billion in 2016.
  • Alamosa. This solar project in Colorado received a $91 million loan guarantee in 2011 and a $35 million Treasury 1603 grant in 2012. The project had been owned by Goldman Sachs, and today it is owned by one of the largest private equity firms in the world, the Carlyle Group.
  • Ivanpah. This solar project in California received a $1.6 billion loan guarantee in 2011. The project is partly owned NRG and Google. So far it is only generating two-thirds or less of the power that it was supposed to produce, and it burns substantial natural gas to heat up the facility each day.90 The power it produces is very expensive, running between $135 and $200 per megawatt-hour, which compares to power from California’s natural gas plants of about $35 a megawatt-hour. 91
  • Shepherds Flat. This wind farm in Oregon is owned by Caithness Energy, with large investments by General Electric, Google, and other major corporations. The project received a $1.3 billion DOE loan guarantee, as well as state subsidies.92 Power from the project is being sold to Southern California Edison, and as with many solar plants, the project takes advantage of California’s mandate for utilities to purchase renewable power. California requires 33 percent of utility power generation to be from renewables by 2020.93
  • Vogtle Nuclear Plant. DOE provided $8.3 billion in loan guarantees to Southern Company and plant co-owners for construction of the Vogtle 3 and 4 nuclear reactors. As Heritage analyst Nick Loris noted, the loan was clearly “blatant corporate welfare” because construction of the plants had already begun years earlier.94 So the loans were an unneeded giveaway to a politically favored company.

At House hearings in May 2012 on the DOE’s green business subsidies, the industry witnesses were generally in favor.95 But James Nelson of Solar3D (now Sunworks) testified on the negative effects of the subsidies:96

  • Firms that receive subsidies become spendthrift. Nelson contrasted his firm’s lean operations with Solyndra’s spendthrift ways. He noted that the “most powerful driver in our industry is the relentless reduction in cost.” But government subsidies tend to inflate costs.
  • Subsidies are not driven by market demands. Nelson noted that U.S. adoption of solar energy at the time lagged behind some other nations. But “this should not bother us if it means that the other countries are investing in technology that is not economically viable.” Put another way, just because other countries may be misallocating resources, does not mean that we should also.
  • Subsidies distort business decisions. Nelson noted that “giving companies money to set up manufacturing in the U.S. may doom them to failure by financing them into a strategically uncompetitive position.” If subsidies induce U.S. firms to set up production in higher-cost places, it will ultimately disadvantage them in the global marketplace.
  • Venture capitalists have already funded the best projects, leaving the dogs for the government. If venture capitalists “reject a project, it is difficult to believe that the government could do a better job of picking a winner,” argued Nelson.

When the government hands out money, businesses with weak ideas get in line because the businesses with good ideas can get private funding and do not want the bureaucratic hassles of government aid. An economist once quipped, “I don’t know whether the government is better at picking winners rather than losers, but I do know that losers are good at picking governments.”

The DOE’s business subsidies should be ended. Wealthy investors and corporations have shown great interest in funding new energy technologies. They would continue to do so without federal subsidies, and they would do so more efficiently without the distortionary effects that federal aid creates.

Time to End Energy Subsidies

U.S. energy markets have changed dramatically over the past decade. Technological advances in the oil and natural gas industries—particularly hydraulic fracturing and horizontal drilling—have led to large increases in domestic production. U.S. imports of oil and gas have plunged, while exports have increased. U.S. businesses and consumers have benefited as gasoline and natural gas prices have fallen in recent years.

This energy revolution was driven by private innovation and competitive markets, and it has created environmental as well as economic benefits. Cleaner natural gas is replacing coal as a fuel source in U.S. electricity production.97 Over the past decade, coal fell from 49 percent of electricity production to 33 percent, while natural gas rose from 20 percent to 33 percent.98

The share of electricity production from renewables, such as solar and wind, has also increased, which is generally thought to have benefited the environment. However, no source of energy holds the environment harmless. The Ivanpah solar project kills thousands of birds each year.99 Wind farms kill hundreds of thousands of birds and bats each year.100 Dams for hydropower create a range of problems, including harm to wetlands and salmon spawning. And subsidized ethanol for vehicle fuel has a dubious environmental record.

This essay has described some of the failures of DOE’s spending over the decades. DOE programs have distorted markets and have suffered from mismanagement, cost overruns, and cronyism. The federal government creates further distortions with an array of special breaks for energy under the income tax.

All of these energy subsidies should be ended. The oil and gas revolution shows that businesses and markets can generate major innovations and progress with their own resources. Furthermore, investors and major corporations have stepped up to the plate and pumped billions of dollars into alternative energy technologies in recent years. The U.S. energy sector is vast, dynamic, and entrepreneurial, and it does not need subsidies to thrive.


 

1 All budget data are outlays from the 2017 federal budget unless otherwise noted. Budget of the U.S. Government, Fiscal Year 2017 (Washington: Government Printing Office, 2016).

2 Matt Yancy, “A $1.7 Billion Hole in the Ground,” Associated Press, October 27, 1983.

3 Congressional Budget Office, “Comparative Analysis of Alternative Financing Plans for the Clinch River Breeder Reactor Project,” September 20, 1983.

4 Government Accountability Office, “U.S. Fast Breeder Reactor Program Needs Direction,” EMD-80-81, September 22, 1980, p. 23. And see Government Accountability Office, “Analysis of the Department of Energy’s Clinch River Breeder Reactor Cost Estimate,” GAO/RCED-83-74, December 10, 1982, p. iv.

5 Henry Sokolski, “The Clinch River Folly,” Heritage Foundation Backgrounder no. 231, December 3, 1982, p. 3.

6 Matt Yancy, “A $1.7 Billion Hole in the Ground,” Associated Press, October 27, 1983.

7 Government Accountability Office, “The Synthetic Fuels Corporation’s Progress in Aiding Synthetic Fuels Development,” GAO/RCED-84-46, July 11, 1984.

8 Robert D. Hershey Jr., “Synthetic Fuels Corp. Is at the Crossroads,” New York Times, November 23, 1983.

9 Milton R. Copulos, “Salvaging the Synthetic Fuels Corporation,” Heritage Foundation Backgrounder no. 423, April 12, 1985.

10 Robert Sangeorge, “Synthetic Fuels Corp. President Resigns,” United Press International, August 18, 1983.

11 Associated Press, “Subcommittee Asks to End Synthetic Fuels Corp,” June 19, 1985.

12The Government Role in Civilian Technology: Building a New Alliance (Washington: National Academy Press, 1992), p. 59, www.nap.edu/read/1998/chapter/1.

13 Robert D. Hershey Jr., “Synthetic Fuels Corp. Is at the Crossroads,” New York Times, November 23, 1983.

14 The Synthetic Fuels Corporation had budget outlays of almost $1 billion in total between 1982 and 1987. In addition, the Great Plains Coal Gasification plant in North Dakota defaulted on its $1.5 billion federal loan in 1986, and taxpayers covered most of that loss.

15 Terrence R. Fehner and Jack M. Hall, “Department of Energy 1977-1991: A Summary History,” U.S. Department of Energy, November 1994, p. 90. See also Government Accountability Office, “Federal Research: Superconducting Super Collider’s Total Estimated Cost Will Exceed $11 Billion,” GAO/T-RCED-93-57, June 30, 1993.

16 Terrence R. Fehner and Jack M. Hall, “Department of Energy 1977-1991: A Summary History,” U.S. Department of Energy, November 1994, p. 46.

17 Terrence R. Fehner and Jack M. Hall, “Department of Energy 1977-1991: A Summary History,” U.S. Department of Energy, November 1994, pp. 73, 90.

18 Government Accountability Office, “Federal Research: Superconducting Super Collider Cost and Schedule,” GAO/T-RCED-93-47, May 26, 1993, p. 7.

19 Congressional Budget Office, “Reducing the Deficit: Spending and Revenue Options,” February 1993, p. 143.

20 Robert Lee Hotz and Lianne Hart, “A Costly Monument to Big Science Difficulties; Research: Physicists and Displaced Families Ponder Legacy of $2-Billion Holes in the Ground Left from Super Collider Project,” Los Angeles Times, October 21, 1993.

21 Government Accountability Office, “Federal Research: Additional Funds for Terminating the Super Collider Are Not Justified,” GAO/RCED-94-153, April 8, 1994.

22 James Rosen, “S.C. Sen. Graham Wants Yucca Mountain Fees Rebated,” McClatchy, March 14, 2012.

23 Hannah Northey, “U.S. Ends Fee Collections with $31B on Hand and No Disposal Option in Sight,” Environment and Energy News, May 16, 2014.

24 Hannah Northey, “U.S. Ends Fee Collections with $31B on Hand and No Disposal Option in Sight,” Environment and Energy News, May 16, 2014. And see Darius Dixon, “The $38 Billion Nuclear Waste Fiasco,” Politico, November 20, 2013.

25 Statement of Dr. Ernest J. Moniz, Secretary of Energy, Before the Subcommittee on Environment and the Economy, Energy and Commerce Committee, U.S. House of Representatives, July 31, 2013.

26 Department of Energy, Office of Civilian Radioactive Waste Management, “Analysis of the Total System Life Cycle Cost of the Civilian Radioactive Waste Management Program, Fiscal Year 2007,” July 2008.

27Wall Street Journal, “Harry Reid and the Horse He Rode In On,” editorial, November 14, 2016.

28Wall Street Journal, “Harry Reid and the Horse He Rode In On,” editorial, November 14, 2016.

29 The DOE was created as a cabinet department in 1977, and it assumed oversight of the facilities discussed here.

30 Terrence R. Fehner and Jack M. Hall, “Department of Energy 1977-1991: A Summary History,” U.S. Department of Energy, November 1994, p. 41.

31 Terrence R. Fehner and Jack M. Hall, “Department of Energy 1977-1991: A Summary History,” U.S. Department of Energy, November 1994, p. 47.

32 Cited in Terrence R. Fehner and Jack M. Hall, “Department of Energy 1977-1991: A Summary History,” U.S. Department of Energy, November 1994, p. 48.

33Budget of the U.S. Government, Fiscal Year 2017 (Washington: Government Printing Office, 2016), Public Budget Database. The $152 billion cost is the sum of the budget functions “Defense Environmental Restoration and Waste Management,” “Defense Environmental Cleanup,” and “Uranium Enrichment Decontamination and Decommissioning Fund.”

34 Quoted in Terrence R. Fehner and Jack M. Hall, “Department of Energy 1977-1991: A Summary History,” U.S. Department of Energy, November 1994, p. 88.

35 Government Accountability Office, “Nuclear Waste: Challenges to Achieving Potential Savings in DOE’’s High-Level Waste Cleanup Program,” GAO-03-593, June 17, 2003.

36 Government Accountability Office, “Nuclear Waste: Action Needed to Improve Accountability and Management of DOE’s Major Cleanup Projects,” GAO-08-1081, September 2008, pp. 5-6.

37 U.S. Department of Energy, Brookhaven National Laboratory, “High-Flux Beam Reactor,” www.bnl.gov/community/cleanup/HFBR.asp.

38 Joby Warrick, “Leaked Report Cites Design Flaws in Plant Built to Treat Nuclear Waste,” Washington Post, August 26, 2015.

39 Lisa Stiffler, “Troubled Hanford Cleanup has State Mulling Lawsuit,” Seattle Post Intelligencer, March 20, 2008.

40 Annette Cary, “$107.7 Billion Needed to Finish Hanford Cleanup,” Tri-City Herald, February 22, 2016.

41 Joby Warrick, “Leaked Report Cites Design Flaws in Plant Built to Treat Nuclear Waste,” Washington Post, August 26, 2015.

42 Luke Ramseth, “High-Tech Price Tag for INL Waste Unit: $800 Million and Rising,” Idaho Statesman, May 9, 2015.

43 T.R. Reid and Bill McAllister, “FBI Accuses Energy Dept. of Lying; Rocky Flats Dangers Allegedly Hidden,” Washington Post, June 10, 1989.

44 T.R. Reid and Bill McAllister, “FBI Accuses Energy Dept. of Lying; Rocky Flats Dangers Allegedly Hidden,” Washington Post, June 10, 1989.

45 Department of Energy, “DOE Certifies Rocky Flats Cleanup Complete,” news release, December 8, 2005.

46 John Aguilar, “$375M Settlement Reached in Homeowner Lawsuit against Rocky Flats,” Denver Post, May 19, 2016.

47 Government Accountability Office, “Nuclear Safety: Concerns about Reactor Restart and Implications for DOE’s Safety Culture,” GAO/RCED-90-104, April 12, 1990.

48 Sammy Fretwell, “MOX Plant at Savannah River Site Will Cost $12 billion More Than Initially Thought,” The State, September 8, 2016.

49 Government Accountability Office, “National Ignition Facility: Management and Oversight Failures Caused Major Cost Overruns and Schedule Delays,” GAO/RCED-00-141, August 2000, p. 4.

50 Government Accountability Office, “National Ignition Facility: Management and Oversight Failures Caused Major Cost Overruns and Schedule Delays,” GAO/RCED-00-141, August 2000, p. 5.

51 Bill Sweet, “National Ignition Facility: Mother of All Boondoggles?” IEEE Spectrum, October 5, 2012.

52 Bill Sweet, “National Ignition Facility: Mother of All Boondoggles?” IEEE Spectrum, October 5, 2012.

53 Bill Sweet, “National Ignition Facility: Mother of All Boondoggles?” IEEE Spectrum, October 5, 2012.

54 National Nuclear Security Administration, “2015 Review of the Inertial Confinement Fusion and High Energy Density Science Portfolio: Volume I,” May 2016, p. ii.

55 David Kramer, “NIF May Never Ignite, DOE Admits,” Physics Today, June 17, 2016.

56 Government Accountability Office, “Fossil Fuel R&D: Lessons Learned in the Clean Coal Technology Program,” GAO-01-854T, June 12, 2001.

57 Government Accountability Office, “Fossil Fuel R&D: Lessons Learned in the Clean Coal Technology Program,” GAO-01-854T, June 12, 2001.

58 Justin Blum, “U.S. Loan Proposed to Rescue Alaska Power Plant,” Washington Post, April 24, 2005.

59 Steven Mufson, “Plan for Carbon Storage Dropped,” Washington Post, January 1, 2008.

60 Jim Suhr, “Durbin, Bond as Energy Department to Spare FutureGen,” Associated Press, May 19, 2008.

61 The second version of the project consumed about $200 million. Ari Natter, “DOE Suspends $1 Billion in FutureGen Funds, Killing Carbon Capture Demonstration Project,” Bloomberg BNA, February 5, 2015. And see Nicole Kaeding, “Admitting FutureGen’s Failure,” DownsizingGovernment.org, Cato Institute, February 10, 2015.

62 Rebecca Smith and Cameron McWhirter, “Mississippi Plant Shows the Cost of Clean Coal,” Wall Street Journal, October 13, 2013.

63 Steven Mufson, “Intended Showcase of Clean-Coal Future Hits Snags,” Washington Post, May 14, 2014.

64 Ian Urbina, “Piles of Dirty Secrets Behind a Model Clean Coal Project,” New York Times, July 5, 2016.

65 Rebecca Smith and Cameron McWhirter, “Mississippi Plant Shows the Cost of Clean Coal,” Wall Street Journal, October 13, 2013.

66 Matthew L. Wald, “Hoping Not to Repeat the Mistakes of the Past,” New York Times, November 22, 2008.

67 Matthew L. Wald, “Hoping Not to Repeat the Mistakes of the Past,” New York Times, November 22, 2008.

68Budget of the U.S. Government, Fiscal Year 2003 (Washington: Government Printing Office, February 2002), p. 132.

69 Brent D. Yacobucci, “Alternative Fuels and Advanced Technology Vehicles: Issues in Congress,” Congressional Research Service, April 4, 2013, p. 15.

70 Matthew L. Wald, “U.S. Drops Research Into Fuel Cells for Cars,” New York Times, May 7, 2009.

71 Matthew L. Wald, “Hoping Not to Repeat the Mistakes of the Past,” New York Times, November 22, 2008.

72 Harry Stoffer, “Hydrogen Slips as Green Auto Solution,” Automotive News, March 17, 2008.

73 Brent D. Yacobucci, “Alternative Fuels and Advanced Technology Vehicles: Issues in Congress,” Congressional Research Service, April 4, 2013, p. 16. And see Congressional Budget Office, “Federal Support for the Development, Production, and Use of Fuels and Energy Technologies,” November 2015, p. 31

74 Bill Canis and Brent D. Yacobucci, “The Advanced Technology Vehicles Manufacturing (ATVM) Loan Program: Status and Issues,” Congressional Research Service, January 15, 2015, p. 13.

75 Bill Canis and Brent D. Yacobucci, “The Advanced Technology Vehicles Manufacturing (ATVM) Loan Program: Status and Issues,” Congressional Research Service, January 15, 2015, p. 13.

76 Congressional Budget Office, “Federal Financial Support for the Development and Production of Fuels and Energy Technologies,” March 2012, p. 6. This is the amount of budget authority.

77 Department of the Treasury, “Overview and Status Update of the Section 1603 Program,” July 31, 2016.

78 Joe Stephens and Carol D. Leonnig, “Solyndra: Politics Infused Obama Energy Programs,” Washington Post, December 25, 2011. And see www.washingtonpost.com/politics/specialreports/solyndra-scandal.

79 Carol D. Leonnig and Joe Stephens, “Federal Funds Flow to Clean-Energy Firms with Obama Administration Ties,” Washington Post, February 14, 2012.

80 Congressional Budget Office, “Federal Support for the Development, Production, and Use of Fuels and Energy Technologies,” November 2015, Table 3. In addition to the items in the CBO table, the Vogtle project received another $1.8 billion loan guarantee in 2015.

81 Carol D. Leonnig and Joe Stephens, “Obama Was Advised against Visiting Solyndra after Financial Warnings,” Washington Post, October 3, 2011.

82 Eric Lipton and John M. Broder, “In Rush to Assist a Solar Company, U.S. Missed Signs,” New York Times, September 22, 2011.

83Washington Post, “Greenlighting Solyndra,” December 22, 2011, www.washingtonpost.com/wp-srv/special/politics/solyndra-key-players.

84 Joe Stephens and Carol D. Leonnig, “Solyndra Loan: White House Pressed on Review of Solar Company Now Under Investigation,” Washington Post, September 13, 2011.

85 Stephen Dinan, “Obama Clean Energy Loans Leave Taxpayers in $2.2. Billion Hole,” Washington Times, April 27, 2015.

86 For discussion about distortions from energy subsidies, see Veronique de Rugy, “Assessing the Department of Energy Loan Guarantee Program,” Mercatus Center, June 19, 2012.

87 Eric Lipton and Clifford Krauss, “A Gold Rush of Subsidies in Clean Energy Search,” New York Times, November 11, 2011.

88 Eric Lipton and Clifford Krauss, “A Gold Rush of Subsidies in Clean Energy Search,” New York Times, November 11, 2011.

89 Most of the details for these projects are from Nick Loris, “Examining the Department of Energy’s Loan Portfolio,” Heritage Foundation, March 3, 2016.

90 Cassandra Sweet, “High-Tech Solar Projects Fail to Deliver,” Wall Street Journal, June 12, 2015.

91 Cassandra Sweet, “Ivanpah Solar Plant May Be Forced to Shut Down,” Wall Street Journal, March 16, 2016.

92 Controversy surrounds the multiple subsidies the project received from the state government. See Ted Sickinger, “Shepherd’s Flat Wind Farm’s $30 Million in Tax Credits Will be Reviewed by Oregon Energy Department,” The Oregonian, February 23, 2013.

93 Patrick McGreevy, “Gov. Brown Signs Law Requiring 33% of Energy be Renewable by 2020,” Los Angeles Times, April 13, 2011.

94 Nick Loris, “Examining the Department of Energy’s Loan Portfolio,” Heritage Foundation, March 3, 2016

95 House Committee on Oversight and Government Reform, Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending, hearing on “The Obama Administration’s Green Energy Gamble,” May 16, 2012.

96 James Nelson, Solar3D, testimony to the House Committee on Oversight and Government Reform, Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending, May 16, 2012. Nelson was not against federal funding of basic energy research, but rather against subsidies to businesses for commercialization.

97 Natural gas emits about half the CO2 that coal does in electricity production. Wall Street Journal, “Energy: Squaring Off,” November 14, 2016, p. R1.

98Wall Street Journal, “Energy: Squaring Off,” November 14, 2016, p. R1.

99 Cassandra Sweet, “High-Tech Solar Projects Fail to Deliver,” Wall Street Journal, June 12, 2015.

100 Cassandra Sweet, “Ivanpah Solar Plant May Be Forced to Shut Down,” Wall Street Journal, March 16, 2016. And see Brady Dennis, “Study: Wind Turbines Kill More Bats than Estimated,” Washington Post, November 8, 2016.

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