What Role Should Government Play in Energy Production?

By Amy Harder

How should the Obama administration and Congress promote different sources of energy ranging from renewables to fossil fuels?

The failure of solar manufacturer Solyndra has triggered a debate in Washington over what role the federal government should play in promoting innovative--but risky--renewable energies. The company's downfall has triggered scrutiny of a host of other types of government incentives, including nuclear-power loan guarantees, tax credits to renewable energy companies, and tax breaks to oil firms.

What lessons from Solyndra can Washington policymakers apply to government support for energy production? Should a distinction be made between the types of support the government gives to nascent industries like solar and wind, and more established sectors like oil and nuclear? And how much risk should the government be willing to take with taxpayer dollars?

 

Let Markets Shape Our Energy Future

By William O'Keefe

CEO, George C. Marshall Institute

The role of the government in energy development, and almost all other activities, should be to establish a level playing field and then let the forces of innovation, competition and the market determine the shape of our energy future. Actions that tilt the playing field in favor of politically preferred alternatives don’t work and invariably generate unintended consequences.

The Solyndra problem came about in part because the government decided to back its business model and innovative technology. Solyndra’s business case was flawed, and its technology not ready for commercialization. The lesson of Solyndra is that the government does not have the expertise to pick winners in the race to develop new energy sources and the politically correct alternatives face serious technological obstacles that will not quickly or easily be over come. This lesson has been demonstrated time and time again but the government keeps trying.

Subsidies—whether loan guarantees or direct handouts—take taxpayer dollars and give them to companies that are doing what the government wants instead of what the market wants. The existence of these “incentives” invariably creates a class of businesses that profit from skills in the regulatory and lobbying arenas instead of the market place.

Incentives—to the extent they can be justified on solid economic and national interest grounds—should be available to all companies, not just a chosen few. While President Obama rails against tax breaks for oil companies, the fact is that those tax code provisions do not favor oil companies over other companies. The repetition of that myth does not make it so.

The history of technological breakthroughs is a history dominated by uncertainty, by false starts, missed opportunities, serendipity, and sound decision making. It is beyond the government’s capabilities to promote those qualities. Politics doesn’t tolerate the process of learning by failing.

The government’s role should be limited to promoting competition and support of research that will not be done by the private sector because it can’t gain property rights over the results. That would include high risk, high payoff research. And R&D that could help move promising technologies into the market place, if they can prove to be commercially viable.

Instead of looking at tax credits and loan guarantees to provide incentives for energy development, the government would serve a better role by figuring out why private capital is not being invested and then removing those barriers. Clearly in the nuclear industry, for example, there are actions government can take to make investments less risky and which would lower the cost of capital. These include tort reform, opening Yucca Mountain, streamlining the permitting process, and standardizing designs.

We are an energy rich nation and a nation that leads the world in innovation. Private capital, market forces, our abundance of energy and economic and energy realities can lead to the development of new energy sources in time. Trying to force them into the market won’t work and will produce economic distortions. For the next several decades, fossil energy will be our dominant source of energy. Instead of cursing that blessing, we should embrace it and support the R&D that is needed to advance technology for both using fossil energy more efficiently and developing alternatives.