U.S. Energy Policy: A National Money Hole?

U.S. policy regarding green energy investment is troubling. As Congress struggles to pass a budget, green energy programs should be the first to go.

A newly-released Reason Foundation report by Victor Nava and Julian Morris, Stimulating Green Electric Dreams, highlights problems with the government’s green “investments.”

The report focuses on the Department of Energy’s $16 billion Section 1705 Loan Guarantee Program— part of the 2009 American Recovery and Reinvestment Act. The loans suffered from rampant cronyism: those with the right political connections and highest lobbying contributions received the most money. Further, the report found taxpayer dollars were essentially thrown away.

A main standard for the program’s loans was “reasonable prospect of repayment by the Borrower.” One would never guess this by looking at the companies that were loaned money, such as Solyndra. As Nava and Morris state, “22 out of the 26 projects were rated as “junk” grade investments or lower, and the other four projects were rated in the “BBB” range, the lowest ‘investment’ grade class.”

As well as the problem of investing in portfolios composed entirely of risky assets, the loans lacked any semblance of energy diversification. Eighty-three percent of funds went to solar companies. Picking risky investments that are all in the same asset class is not a successful investment strategy. If it were, we could all be millionaires. Section 1705 was not an investment in any reasonable sense of the word.

Government, or any select group of individuals, is simply incapable of dictating an industry’s growth, especially one that makes up 8.3 percent of GDP. This is not a slight to the Obama administration or our dysfunctional federal legislature. Rather, it is a basic economic fact of innovation.

Economist Friedrich Hayek, a winner of the Nobel Prize, described a phenomenon known as “spontaneous order.” He explained that innovation requires widely-dispersed knowledge that exists with respect to the unique circumstances, conditions, and preferences of individuals. Such knowledge is only useful if people are free to act upon it.

No energy czar could have foreseen the natural gas boom that has fueled America’s energy renaissance. In the same way, no one person or agency will plot the rise of the next game-changing technology. Belief that someone could do so was termed the “fatal conceit” by Hayek. No matter how much the Department of Energy wishes, they cannot command that solar power becomes a viable or reliable contributor to the national grid.

Current federal energy policy does all it can to stifle innovation. The American energy boom has occurred in spite of, not because of, Washington.

According to a Congressional Research Service report, crude oil and natural gas production has grown significantly in the U.S. over the past three years. This has taken place while production on federal lands has fallen. The report concludes that regulation of federal lands will likely remain more burdensome than regulation of private lands. It also suggests that a more efficient permitting process would help spur investment in federal resources.

The 30 percent increase in domestic oil production since 2008 has occurred overwhelming on private and state lands. The amount of federal lands leased for mineral rights actually decreased 20 percent since 2008. Only 38 million acres of federal land are now leased, whereas 131 million acres were leased in 1984. If more authority were given to states to regulate energy production, the promise of economic growth would lead to more reasonable polices that will likely lower consumer costs.

Receiving federal permits for energy production is difficult. Between fiscal years 2005 to 2012, the number of new permits issued fell over 50 percent, from 3,514 to 1,729. Between 2005 and 2012, the time it took to acquire such a permit rose from 154 days to 228 days. To the contrary, it takes only ten days to secure a state drilling permit in North Dakota.

Policies that make energy production more difficult have regressive effects. According to the Census Bureau’s Consumer Expenditure Survey, those in the lowest earnings quintile spend 11.6 percent of their incomes on electricity and natural gas. This is far more than the U.S. average of 3.6 percent, and the 1.5 percent spent by the top quintile. Increases in energy costs affect the prices of other consumer goods as well.

The government’s failed Section 1705 Loan Guarantee Program is just one example of its perverse energy policies. Lawmakers and bureaucrats should abandon dreams of centrally planning the energy sector. Instead they should give states and private companies more authority to pursue economic growth and provide consumers with affordable energy.

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