President Obama's Energy Plans Have a History of Failure

Alternative energy subsidies make their biggest comeback since Jimmy Carter

“Voters want action on energy,” one congresswoman told The Washington Post. “They don’t really care how much it costs.” A Democratic president was on the verge of signing “the most important energy legislation in a decade,” with tens of billions of dollars dedicated to jump-starting a cleaner alternative to fossil fuels and helping the United States achieve “energy independence.” For too long, most analysts agreed, America had put off the hard choices necessary to prevent the next oil shock and wean the country from petrodictators in the Middle East. Now was the time for bold investment and leadership from Washington.

The year was 1979. At the time I was a low-level regulator in President Jimmy Carter’s Federal Energy Regulatory Commission. It was a boring agency, but I got to work in its most exciting division: the special cases branch dealing with exotic new sources of power. From that perch I witnessed firsthand the sad, expensive, and now-forgotten saga of the Great Plains Coal Gasification Plant in Beulah, North Dakota. Like many projects being discussed in Washington today, Great Plains was hailed as the vanguard of a new domestic alternative to foreign oil.

In 1979, as lines at gas stations snaked for blocks, the House of Representatives, by a vote of 368 to 25, created the U.S. Synthetic Fuels Corporation, an “independent” federal entity charged with creating new fuel sources by spending $20 billion in seed money ($57 billion in 2009 dollars) during its first five years. Originally, the Synfuels Corporation was projected to spend $88 billion ($250 billion in today’s dollars) over 12 years to build the capacity to produce the equivalent of 1.5 million barrels of oil per day from coal.

That was just one element of Carter’s ambitious energy plans. In July 1979 he announced, “I will soon submit legislation to Congress calling for the creation of this nation’s first solar bank, which will help us achieve the crucial goal of 20 percent of our energy coming from solar power by the year 2000.” In 1980 Congress authorized the Department of Energy to spend $1.3 billion on ethanol research and loans to produce fuel for automobiles. In May of that year, Carter declared, “For the first time in our nation’s history, we will have a national energy program to put us on the road to energy security. It’s more ambitious than the space program, the Marshall plan, and the Interstate Highway System combined.”

Sound familiar? During the 2008 presidential campaign, Democratic candidate Barack Obama declared almost daily that developing new energy sources and breaking our addiction to foreign oil would “take nothing less than a complete transformation of our economy.” He explicitly compared his plan to putting a man on the moon and building the Interstate Highway System.

President Obama has not forgotten candidate Obama’s promises. In a February address to a joint session of Congress, the president boasted: “Thanks to our recovery plan, we will double this nation’s supply of renewable energy in the next three years. We have also made the largest investment in basic research funding in American history.” Obama promises to create 5 million new jobs by investing $150 billion in clean energy technologies during the next 10 years. He also aims to put 1 million plug-in hybrid electric vehicles on America’s roads by 2015, promising buyers a $7,500 tax credit. Even more ambitiously, 25 percent of our electricity supposedly will come from renewable sources such as wind, solar, geothermal, and biomass by 2025. To tie a ribbon on the alternative energy package, the president asked Congress to impose a cap-andauction scheme to reduce greenhouse gas emissions 80 percent by 2050.

Will such policies produce the promised results? They didn’t three decades ago.

After Carter’s equally ambitious moves, global oil prices dropped like a rock. The deregulation of natural gas led to vast new fossil fuel supplies, and abundant stocks of cheap coal kept electricity humming down transmission lines. Meanwhile, the federally funded Great Plains Coal Gasification Plant, on which I worked, became the largest construction project in the United States, costing $2.1 billion ($5.3 billion in today’s dollars) to build. The plant was supposed to convert coal into 125 million cubic feet of natural gas per day, an amount equal to about 20,000 barrels of oil. Instead, by 1984, as the price of natural gas continued to fall, Great Plains went into bankruptcy. It was eventually sold in 1988 to a local electric cooperative for $85 million—a little more than 4 cents on the dollar. The $2.1 billion the plant cost to build, if invested in bonds, would have grown to about $8.4 billion by 2009. Instead, Congress disbanded the Synthetic Fuels Corporation in 1986, the money irretrievably lost.

History teaches us that the government is not very good at getting the results it intends when it intervenes in complex markets subject to violent price fluctuations. And unfortunately for Obama’s Carteresque agenda, Washington also has a poor track record when it comes to alternative energy research and development.

Whistling Past the R&D Graveyard

Obama has promised to “invest” $150 billion in new energy research and development during the next 10 years. “To truly transform our economy, protect our security, and save our planet from the ravages of climate change,” the new president declared in his February address to Congress, “we need to ultimately make clean, renewable energy the profitable kind of energy.” What he presented as bold new policy has a long and decidedly untransformative track record. The main difference in 2009 is that an unfounded fear of depleting global resources has been replaced with an exaggerated fear of global warming.

Since 1961 the federal government has spent nearly $187 billion (in current dollars) for the development of advanced energy technologies and basic energy science research. About a quarter of the funds were spent during the oil crisis of the 1970s. According to an October 2008 report by the Department of Energy’s Pacific Northwest National Laboratory, $66 billion of that $187 billion has been spent researching nuclear energy, $65 billion on basic energy science, $28 billion on fossil fuel research and development, and $28 billion on renewables and conservation.

A comprehensive September 2008 report by the economic research firm Management Information Services, commissioned by the pro–atomic power Nuclear Energy Institute, slices the government’s energy-spending pie into slightly different portions. In addition to direct research and development spending, the report documents how the feds have used tax incentives, mandates, and regulations to steer energy production since 1950. During those six decades, the paper’s authors found, the oil industry received federal incentives worth $352 billion in current dollars, mostly in the form of tax breaks and regulatory relief (e.g., exemptions from price controls). Natural gas got about $105 billion, coal $99 billion, hydroelectric $84 billion, nuclear $68 billion (minus $15 billion assessed for nuclear waste storage), and renewables $47 billion.

Did all this “investment” in energy pay off? Not according to Robert Fri, a former deputy administrator of both the Environmental Protection Agency and the Energy Research and Development Administration. In the Fall 2006 Issues in Science and Technology, Fri, now a visiting scholar at the D.C.-based think tank Resources for the Future, noted that a “mere 0.1 percent of the expenditure accounted for three-quarters of the benefit.” Three unsexy programs—developing energy-efficient windows, electronic ballasts for fluorescent lighting, and better refrigerators—converted $13 million in spending into $30 billion in benefits, according to a National Research Council study cited by Fri. “Threequarters of the expenditure—a little over $9 billion—produced no quantifiable economic benefit,” he concluded. “Half of this money was applied to synthetic fuel projects that turned out to be at least a couple of decades premature.” As Fri told Chemical & Engineering News last year, “The government is very good at starting energy projects that it believes will solve energy problems, but it is not very good at generating the intended results.”

Yet Washington has gone on an energy project binge. In December 2007, Congress passed and President George W. Bush signed the Energy Independence and Security Act, which raises corporate average fuel economy standards from 27.5 miles per gallon to 35 miles per gallon by 2020, mandates that the U.S. produce 36 billion gallons of conventional and “advanced” biofuels by 2022, bans most incandescent light bulbs by 2014, and establishes the $25 billion Advanced Technology Vehicles Manufacturing Incentive Program to help retool legacy U.S. auto companies to manufacture more-fuel-efficient cars.

In February, Obama upped the ante with his $787 billion American Recovery and Reinvestment Act, which allocated $11 billion to smart grid initiatives (see “Electric Intelligence,” page 26), $2 billion to advanced battery manufacturing grants, $500 million to job training in renewable energy fields, and a plethora of tax benefits to renewable energy producers. In addition, Congress revived FuturGen, a carbon dioxide capture and sequestration project that the Bush administration had canceled when its costs escalated.

Nearly all of the $3.4 billion in stimulus money for fossil fuel research is expected to be spent on carbon capture and sequestration projects, which are intended to demonstrate the feasibility of capturing carbon dioxide produced by power plants and injecting it underground, thus preventing the gas from entering the atmosphere and contributing to global warming.

If climate change were not a concern, humanity could easily power its economic development using abundant coal and natural gas supplies for decades to come. But in December 2007, at the United Nations climate change conference in Indonesia, the nations of the world, including the U.S., promised to adopt binding greenhouse gas emission limits at another climate change conference at the end of this year. In February, Obama asked Congress to impose a cap on carbon emissions as a way of boosting the production of renewable energy in America. “To support that innovation,” he said, “we will invest $15 billion a year to develop technologies like wind power and solar power, advanced biofuels, clean coal, and more fuel-efficient cars and trucks built right here in America.”

It’s been tried before. Obama apparently believes he’ll be more successful than past politicians in picking the best energy technologies.

How Much for That Kilowatt-Hour?

A kilowatt-hour of electricity is the amount it takes to run 10 light bulbs of 100 watts for one hour. In 2007, according to the Energy Information Administration, monthly residential electricity consumption averaged 936 kilowatt-hours per household. The average price of a kilowatt- hour, adjusted to 2009 dollars, has fluctuated over the years, ranging from about nine cents in the 1970s up to 13 cents in the 1980s; it was 9.6 cents in December 2008, the latest date for which we have data. Prices vary considerably by state, depending on the local regulations and sources of supply. Residents of Connecticut pay nearly 20 cents per kilowatt-hour, for example, while Idahoans pay only 7.5 cents.

On the power generation side, a November 2008 report by the electricity industry’s Electric Power Research Institute provides the best up-to-date comparison of plausible energy technologies. From those numbers and other sources, I have taken a comparative look at the past, present, and future of nine promising energy sources. (See “Energy Futures,” page 29.) Capital costs for each vary considerably; to make a rough comparison, I have standardized capital costs to a 1,000-megawatt nuclear power plant operating 90 percent of the time, which would produce enough electricity for between 700,000 and 800,000 homes.

In addition to those power generation methods, a handful of other once-and-future technologies have come up for discussion. Two in particular deserve extra attention:

The electric car. Who killed the electric car? The batteries did. Back in 1996—when a share of General Motors stock sold for $40, not less than $3—the company introduced its all-electric two-seater EV1 automobile. The EV1’s 1,200-pound battery could power the car for 75 to 100 miles, and fully recharging it took eight hours. G.M. produced only 1,100 cars total and ended the program in 2003, a move that has sparked a cottage industry of conspiracy theories.

A chastened G.M., its CEO defenestrated by President Obama himself, has developed plans to introduce the plug-in hybrid Chevy Volt in 2010. The Volt will be driven by an electric motor powered by a 400-pound lithium-ion battery, supplemented by a range-extending gasoline engine that will produce electricity to keep the battery charged. The Volt will be able to travel in all-electric mode for 40 miles on a single charge.

Obama sees plug-in hybrid electric vehicles (PHEVs) like the Volt as a key step in weaning America off foreign oil. Initially this may sound like a terrific idea. A 2007 study by the Department of Energy’s Pacific Northwest National Laboratory estimated that the country would reduce oil consumption by 6.5 million barrels per day, equivalent to 52 percent of current petroleum imports, if 84 percent of cars, light trucks, and SUVs were PHEVs, traveling an average of 33 miles per day on electric power. Greenhouse gas emissions would be cut by as much as 27 percent.

But the Energy Department study also found that when compared to the 27.5 miles per gallon that internal combustion vehicles get, the breakeven premium for a plug-in hybrid—that is, the extra amount a driver would be willing to pay for the car due to how much he would save in gasoline costs—is $3,500 when gasoline costs $2.50 a gallon and electricity costs $0.12 per kilowatthour. At $3.50 per gallon, the premium rises to more than $6,500. Since batteries are expected to boost the average cost of each vehicle by as much $10,000, gasoline will have to cost more than $5 per gallon before PHEVs make economic sense to most drivers. Of course, federal intervention can help overcome this financial disincentive and the $787 billion stimulus package offers just such an incentive in the form of a $7,500 tax credit. Washington also could double or triple gasoline prices by dramatically raising taxes, though that would be politically unpopular.

President Obama promised to put 1 million PHEVs on America’s roads by 2015. That sounds impressive—until you remember that Americans currently drive 240 million conventional vehicles.

Corn ethanol. The Energy Independence and Security Act of 2007 established a misbegotten national renewable fuels standard requiring transport fuel refiners to use at least 36 billion gallons of biofuels by 2022. That’s equal to about 27 percent of the gasoline Americans use each year. The idea is that biofuels are a way to recycle carbon dioxide without adding any more to the atmosphere. Ethanol is also supposed to further the fanciful goal of “energy independence,” since the raw materials are produced on America’s farms.

Worldwide in 2007, 100 million tons of grain were turned into biofuels. That’s enough grain to feed 450 million people for a year. In January 2005, the American landscape was dotted with 81 ethanol plants with a combined capacity to produce 3.6 billion gallons a year; by January 2009, the number of ethanol distilleries had grown to 172 with a total capacity of 10.5 billion gallons. According to the Global Subsidies Initiative, a Geneva-based nonprofit that spotlights transfers of public money to private interests, this boom was fueled by $7 billion in federal and state subsidies in 2008. Converting low-priced food into higher-priced fuel was a key factor in the sharp increase in global food prices during the last couple of years. As for the alleged climate change benefits, some researchers argue that the pressure to produce ethanol causes farmers in developing countries to chop down forests. A study in the January 2008 Science calculated that such deforestation releases more carbon dioxide into the atmosphere than growing biofuel crops on the land can replace in 86 years.

Congress engineered a similar ethanol boom in the 1970s and early ’80s by reducing the federal excise tax on ethanol by 40 cents per gallon. The result was a 10-fold increase in the number of ethanol plants, which reached 163 in 1984. Then the price of oil collapsed, and with it fell the artificially stimulated ethanol industry. This pattern is now repeating. As the price of oil has fallen since July 2008, so too has the price of gasoline. Without subsidies, ethanol cannot compete with gasoline unless oil prices are over $80 per barrel. Consequently, the boom has gone bust. In October the country’s second largest ethanol producer, the South Dakota–based VeraSun, filed for Chapter 11 bankruptcy. By some estimates as many as 40 ethanol plants could follow this year.

Naturally, an industry that was conjured into existence by Congress has come calling to the Capitol begging for yet more help. Specifically, ethanol producers now want Congress to mandate that fuel refiners increase their ethanol content from 10 percent to 15 percent. (According to a 2008 report by researchers at Iowa State University, more than 70 percent of U.S. gasoline contains ethanol.) Bob Dinneen, president of the Renewable Fuels Association, a trade group, says “approving the use of ethanol blends up to 15 percent is a necessary and positive step to ensure the full potential of a robust domestic ethanol industry.” And not incidentally, to save his members from bankruptcy.

Wild Cards

Amid these erratic shifts in federal policy, American researchers and innovators are in hot pursuit of the next energy technology. Despite the ongoing economic turbulence, global venture investing in clean technologies was $8.4 billion in 2008, up from $6 billion in 2007 and $4.5 billion in 2006, according to the Cleantech Group consulting partnership. Solar power start-ups garnered the lion’s share of venture capital at $3.3 billion, followed by biofuels at $1 billion and companies focused on alternative transportation (batteries and fuel cells) at $800 million.

Given human creativity and the lure of fabulous profits, it is entirely possible that some nanotechnologist might find a dramatic new battery chemistry or a way to paint solar cells onto the sides of houses to produce electricity. Disruptive technologies are disruptive in large part because nobody can see them coming or foresee their ultimate economic elaboration. When the laser debuted in 1960, it was called “an invention looking for a job.” Since then, it has been applied to everything from compact discs to eye surgery. So what future breakthroughs in energy might occur?

Biocrude. In addition to the problems I’ve mentioned, ethanol has a major drawback: It corrodes pipes and picks up water, so it cannot be transported through pipelines. Wouldn’t it be better if biofuels were more like gasoline and diesel? Then there would be no need to transform our vehicles or our fuel distribution systems.

Based on this insight, several start-ups are trying to engineer microbes to make such fuels. LS9, a privately held San Francisco start-up that calls itself the “renewable petroleum company,” has modified bacterial metabolic pathways so that E. coli can eat cellulose and excrete hydrocarbons almost indistinguishable from diesel. In October the company hired a veteran oilman as CEO, and it is now seeking $100 million to build a pilot plant. The facility aims to produce 2.5 million barrels per year by the end of 2010. Its break-even oil price is $50 a barrel.

Several other companies are pursuing a similar strategy of tweaking microbes to make oil. Amyris, based in Emeryville, California, has engineered yeast that can eat hydrocarbons and secrete diesel. The company opened a pilot plant last fall and claims it will produce 200 million gallons of diesel a year by 2011. Of course, these strategies mean growing feedstock such as sugar cane, which means more land competition between food and fuel.

Ultracapacitors. Like batteries, ultracapacitors are energy storage devices, but they store electrical charges instead of batteries’ chemical charges. The secretive company EEStor, headquartered in Cedar Park, Texas, claims its ultracapacitor weighs just under 300 pounds, charges in minutes, and can propel an automobile 250 miles. If true, this would be a revolutionary technological breakthrough. Such ultracapacitors could power cars and store energy produced by renewable sources such as wind and solar power. The company has contracts with the small Canadian electric car company Zenn Motors and the huge American defense contractor Lockheed Martin. Considerable skepticism is warranted, since nobody outside of the company has seen a working version of the device.

New approaches to nuclear power. In March, Obama shut down work on the Yucca Mountain nuclear waste facility in Nevada. That left the country without a national storage option for the copious amounts of highly radioactive and long-lived waste produced by light-water nuclear reactors, the only kind of fission plants currently functioning in America. Aside from the waste issue, light-water reactors produce plutonium, which can be used to make nuclear bombs. Shutting Yucca Mountain may provide the impetus for building new types of nuclear reactors that can burn up radioactive waste to produce still more electricity.

For instance, the Argonne National Laboratory has developed a technology it calls the integrated fast reactor (IFR). The IFR, which is cooled by liquid sodium rather than water, is called a “fast” reactor because it uses fast neutrons instead of slow ones in its nuclear chain reaction. In addition to consuming nuclear waste and plutonium from nuclear stockpiles to produce electricity, the IFR uses uranium with 100 to 300 times the efficiency of light-water reactors.

Backers of the technology argue that fast reactors could provide all the electricity the country needs for centuries, using only uranium that has already been mined. So far no such plants have been proposed for construction in the U.S.

Another alternative is the thorium reactor. Thorium, a slightly radioactive metal, is three times more abundant than uranium. It cannot sustain a nuclear chain reaction by itself but can function with neutrons provided by outside sources, such as fissile isotopes of uranium. Thorium reactors also burn waste and plutonium, although less efficiently than IFRs. The McLean, Virginia–based Thorium Power is working with the Indian and Russian governments to build commercial thorium reactors. In December 2008, three Scandinavian companies submitted a proposal to build a 1,500-megawatt thorium reactor in Finland. The estimated cost is $2.3 billion, and it would take five to eight years to build.

Innovators, Not Planners

Such leapfrog jumps in technology, including processes undreamt-of today, are surely where our energy solutions will come from. Instead of creating artificial alternative energy markets that depend on government support and the high price of oil, policy makers should be focusing on removing barriers to the creation of revolutionary new technologies. In their 2008 book Earth: The Sequel, the environmentalists Miriam Horn and Fred Krupp write: “Mandates presume that the government already knows the best way to proceed on energy. But the government doesn’t know any better than anyone else. The best thing to do is to level the playing field…and then let the market sort things out.”

While Horn and Krupp were specifically addressing the problem of climate change, the point applies to all sorts of energy innovation. During the last half-century, both federal and state governments have intervened repeatedly in energy markets and tried many times to steer the evolution of technologies via research and development subsidies. Far more often than not, this activity has turned out to be a colossal waste of taxpayer dollars, resulting in expensive failures like the Great Plains Coal Gasification Plant. Thirty years ago, as a young energy regulator, I had a front-row seat as another president’s ambitious plans to transform America’s energy economy crashed and burned. I suspect that today’s eager young bureaucrats will witness a similar debacle.

Ronald Bailey Reason magazine's science correspondent.This article first appeared in the June 2009 issue of Reason magazine.

Ronald Bailey is Science Correspondent