Robert Rapier: Wall Street Journal Energy Panel

Last week I made my debut as a contributor to the Wall Street Journal’s (WSJ) new feature The Experts: Journal Reports. The idea is that the WSJ poses questions to the panel, and each panel member provides a response of 300 words or so. The first 4 questions that were asked — and answered — last week were:

1. Growing oil production has led to predictions that the U.S. could pump more barrels than Saudi Arabia by 2020 and that North American could become a net exporter at a later date. What does this mean for energy markets and geopolitics? (My answer)
2. Should the government be financing new-energy technologies? (My answer)
3. Should there be a price on carbon emissions, and if so, what’s the best way to do it? (My answer)
4. What technological breakthrough is most likely in the next 10 years that could completely change the energy equation as we now see it? (My answer)

Readers can view the answers I provided at the links above, but here is the answer in full that I provided for the second question above:

Robert Rapier: Fund for Products Delivered, Not Promises

Should the government be financing new-energy technologies?

Governments have a poor track record when it comes to pushing new energy technologies because they are generally unqualified to conduct due diligence on companies seeking government funding. A better approach would be for governments to stop trying to pick technology winners, and instead set a consistent framework within which companies could compete. Governments can certainly play a role in incentivizing new technologies that are deemed in the national interest, but this should be done in a way that avoids preferentially funding companies with political connections or those who can convincingly exaggerate the promise of their technology.

A fairly straightforward way to achieve this would be to offer financial incentives for product that is actually delivered, instead of providing grants and loan guarantees to companies that promise to deliver. The government could offer an initially generous, but gradually declining direct per gallon subsidy for qualifying fuels. For example, offer a direct $2/gallon subsidy for the first 250 million gallons of qualifying fuel produced and sold as transportation fuel from a facility, and then $1/gallon for the next 250 million gallons of qualifying fuel produced. Allow any company capable of delivering the fuel to receive the subsidy, but stipulate a phase-out schedule for the subsidy in advance.

Then let the technologies battle it out for supremacy in the marketplace just like other products breaking into new markets. We will have simply tilted the playing field toward a wide range of qualifying energy technologies without putting the government in the position of competently carrying out due diligence on supposedly promising options.

Such a system would have huge advantages over the current system. First, private investors would assume the technology risk, and therefore would be responsible for conducting a high level of due diligence. This takes the technology risk assessment out of the hands of the government so taxpayers won’t end up financing plants that never deliver — which has too often been the case in recent years.

The system I am proposing would be an effective way to filter out those who are essentially just hyping their technologies in order to receive tax dollars from those that have more realistic expectations that can be delivered upon. Producers will be paid for what they deliver instead of receiving taxpayer funds for what they claim they can deliver, and it isn’t taxpayers who are on the hook for their hype should these companies fail.

R-Squared Energy Blog by Robert Rapier