Low-Energy Fridays: Loan guarantees for energy innovation is an interesting idea ruined by politicians

In 2009, then-Vice President Joe Biden was stumping for what was known as the stimulus bill. To paint a picture of the administration’s successes, he was championing a half-a-billion-dollar clean energy innovation project supported by the Department of Energy Loan Programs Office (LPO).

That project was called Solyndra, and it promised a novel type of solar power generation. Solyndra failed—bigly—and, as a result, the project (along with the LPO) became the poster child for politicians steering taxpayer dollars to their misguided pet projects.

Fifteen years later, Solyndra may be political trivia, but the LPO is in the news again. The current administration is announcing supported projects at a rapid clip, but it’s worth taking this moment to reexamine the LPO, because while its execution has been poor, its innovation policy intent has some merit.

The LPO was created in 2005 as a mechanism for the government to guarantee loan repayment for risky first-of-a-kind energy projects. It was meant to address the “valley of death” in innovation policy—the period between publicly supported research and development and commercial viability in which new technologies struggle to attract financing.

The rationale behind the LPO is that financiers are naturally risk averse and lack technical expertise to appreciate the potential benefits of an unproven technology. For eligible early-stage technologies, the LPO is supposed to overcome the valley of death by mitigating the risk to financiers and providing sufficient technical chops to prove that funded projects aren’t a pipe dream. But despite the program’s roughly $44 billion portfolio, it has basically no innovation successes to show for it.

The issue lies in the program’s fundamental design. At its inception, Congress didn’t want the LPO to function as a subsidy, so participating projects were required to pay back to the government the value of the subsidy received. In other words, if a high-risk project is likely to fail, the estimated subsidized value of the loan guarantee rises because of default risk, and the amount the project has to pay the LPO also rises. The problem is any project that can attract sufficient financing to cover this “credit subsidy cost” is also less likely to need the LPO’s assistance in securing that same financing, while risky projects that would have benefited from the LPO’s help were unable to cover the credit subsidy cost to participate, making the program something of a damp squib. In 2009, as part of the stimulus bill, Congress funded the LPO to cover the credit subsidy cost—making the program truly subsidize risk. Unsurprisingly, this kicked off a lot more interest among potential applicants, including Solyndra. The 2022 Inflation Reduction Act also funded the LPO to subsidize the credit subsidy cost.

Ironically, though, the problem with the program was not its funding of efforts like Solyndra; in fact, the venture fit exactly what the LPO is supposed to do: Ensure that all energy innovations—even risky ones—get a shot at commercialization. Rather, the problem was that once the Obama administration heralded Solyndra as an example of the success of their vision, its failure became a foil to criticize apparent cronyism in the government. This made the politicians managing the LPO extremely risk averse, fearing more public blowback from a failed project.

Now, the LPO does exactly what is not needed: It subsidizes loans for projects that aren’t at all risky and can attract private financing just fine on their own. Meanwhile, the valley-of-death problem in which potentially-beneficial-but-risky projects have no chance for commercialization remains.

The LPO is garnering attention again, though, having announced a slew of loan guarantees for new projects. However, the recipients are all proven technologies like lithium-ion batteries, photovoltaic solar, and electric transmission—things that are definitively outside the LPO’s intended mission. Clearly, the program is in desperate need of reform to restore it to its original purpose.

Under its current model, the program grants unelected government officials broad power to bless their preferred projects with easier financing. Restoring the program to its pro-innovation mission could be achieved by implementing better project selection criteria, embracing competition, and enhancing oversight to ensure that only suitable projects are eligible. This is unlikely to occur in practice, because politicians aren’t comfortable subsidizing projects that are likely to fail, and one can’t have a government program focused on funding high-risk energy innovations without accepting that same risk.

Ever since Solyndra, the LPO has demonstrated how a good idea can fall victim to politics. But despite its problems, there is some merit to the program’s intent that could make it worthy of reform. Sen. Lisa Murkowski (R-Alaska) said in 2012 that the LPO was in need of reform, but such calls to action have been rare. Now that Republicans have an opportunity next year to unwind subsidies they’ve critiqued—LPO funding included—it may be a good time to return the program to its original innovation mission.