The recent budget proposal from the Obama administration is taking a lot of criticism for its big emphasis on clean energy technology development. While some may critique the method on how this will be funded, others fear the possibility of these clean energy investments failing, the most recent and most widely publicized example being the bankrupt solar company Solyndra.
Yet while we rake the muck of these failed investments, many of us look over the fact that several industries and technologies were made possible from government funding. Clearly, not every investment the government makes will be a great success, but several successful businesses have developed in large part because of government assistance. There are examples across almost every sector of industry, but for now let's focus on developments in energy and see if a failure like Solyndra is an aberration or just part of everyday business for the government.
Backing energy development: It's just what we do
The concept of having the government grant favorable treatment to the energy sector can be traced as far back as before the Civil War. At that time, the U.S. government's largest asset was land, and for many years it sold that land at below market value to encourage settlement and growth, which also gave a deep discount to the largest energy source at the time: timber. According to a research report by DBL Investors, the subsidies that were granted to the timber industry for energy purposes would have equated to about $25 billion per year in 2010 dollars.
Every source of energy has in one way or another benefited from governmental spending, especially in its nascent years.
Even during the Great Depression, the oil and gas sector received more than $1 billion a year (inflation adjusted) in subsidies. These kinds of subsidies have always been used to help these industries to find their feet, and they generally provide a financial incentive to make them competitive against the existing energy options on the market.
Like it or not, the development of energy sources in the U.S. has been closely linked to the government developing a structure for that industry to flourish in some way or another, and in the long run these investments have paid large dividends. Of the $17.1 billion spent on R&D for energy efficiency and fossil fuel development from 1978 to 2000, the Department of Energy estimates that it resulted in a return of $41 billion thanks to the additional revenue from industry growth.
Perhaps this is what makes more recent government spending trends in energy more troubling. According to the Organization for Economic Cooperation and Development, member countries have reduced their spending on energy R&D from 11% in 1981 to 3% in 2010, making it the least funded sector of all government spending. If we expect to make advancements in energy development and energy security, investments will need to be made.
Three steps forward, one step back
When Solyndra went belly-up in 2011, the Obama administration had funded the company with $475 million in government-backed loans. They weren't the only ones: More than a dozen alternative energy companies have filed for bankruptcy protection despite receiving stimulus funding.
Yet for the failures that have occurred along the way, there have been some major successes. Of the 14 major advancements in solar efficiency, 13 of them have been helped by government-backed funding. One of those projects, the advancement of thin-film solar efficiency, began with a public-private partnership in 1991 known as Solar Cells, which many of you know today as First Solar (NASDAQ:FSLR). The U.S. government was also granted several loans to manufacturing giant GE (NYSE:GE) to help it improve efficiency enough that its turbines could compete on the open market.
It may have been a long time coming, but the technology for renewable fuels is very close to the point that they can can compete on the open market against traditional energy sources. First Solar just recently announced a deal with El Paso Electric (NYSE:EE) that it will sell electricity to El Paso from its Macho Springs solar facility for 5.79 cents per kilowatt hour, less than half what El Paso pays for electricity from coal. Also, the Federal Energy Regulation Commission has stated that 83% of all additional energy generation in the U.S. for Q1 2013 came from either wind or solar facilities. Perhaps the route to developing better solutions wasn't the smoothest, but it's hard to deny the overall outcome.
What a Fool believes
Very rarely do breakthroughs in technology happen on the first try, and it can take years to transform an idea into a profitable venture. Just like Thomas Edison's quest to make an effective incandescent light bulb, there will be several failures along the way, but those failures bring us closer to a better solution.
Not every government loan or investment will be right. The overarching goal is for the successes to outnumber the failures. One of America's greatest strengths has always been its ability to foster innovation. After more than 200 years of experimenting, it would be a shame to get gun-shy because of failure now.