07/23/2013 10:17 am ET Updated Sep 22, 2013

A Better Way for Clean Energy Investment

The Obama administration's multi-billion dollar stimulus experiment in clean energy left taxpayers holding the bag in the notorious Solyndra bankruptcy, but could nonetheless provide a "teachable moment" in how government might better handle similar investments in the future.

A new paper released by the Conservation Leadership Council concludes that tomorrow's government investments in clean energy will be more effective by better incorporating the dynamic of the competitive marketplace.

Solyndra -- along with the newly Chinese-owned A123 Systems -- are emblematic of what happens when government's investment decisions are driven by cronyism enveloped in a massive funding effort to stimulate the economy. Instead, says Dr. Derek Stimel, government's future ventures into green energy should be guided by the competitive profit motive.

Consider the extent of Washington's energy investments in the wake of the Great Recession of 2008. Stimel says subsidies for energy more than doubled, from $17.9 billion in fiscal year 2007 to $37.2 billion in fiscal year 2010, much of it directed toward clean energy. Solyndra received $535 million and A123 spent $132 million of the $249 million in federal grants it was offered before declaring bankruptcy. By comparison, the total cumulative investment during the same period by venture capital across all industry types was roughly $105 billion.

As Stimel notes, one danger posed by the sheer extent of government's investment was the "crowding out" of private dollars; that is, Washington effectively prevented private industry from making its own investments in clean energy technology by limiting opportunities for private ventures.

The Obama administration was correct, Stimel says, in seeking the opinions of venture capital experts to help evaluate funding opportunities under the program. Their involvement sought to tap their extensive experience in investing in new and emerging technologies.

Nevertheless, Stimel cites evidence that stimulus funds were funneled by these venture capitalists into companies to which they already had ties, resulting in the same crony tendencies that often accompany large-scale government spending.

The culprit, Stimel argues, is not criminal activity on the part of the participants themselves, but rather a poorly designed public policy. The problem, he asserts, is that these venture capitalists pursued their own objectives, which did not align with those of the administration or the public as a whole.

Stimel advances two alternative approaches that would reduce cronyism and mimic the competitive dynamic of the free market.

The first is a system of block grants to the states, which would at least compartmentalize the potential for cronyism, reducing the risk of infecting the entire funding process and limiting the prospect of large-scale debacles on the scale of Solyndra.

The block grants would foster a greater variety of innovative approaches to green energy technology, Stimel argues, and the states already have significant experience in funding clean energy projects.

From 1998 to 2009, the states funded more than 74,000 separate clean energy projects ranging from wind to geothermal to landfill gas projects -- 19,000 such projects in 2009 alone, according to Stimel's research.

Yet because there is little reason to expect that the states will be any better able to evaluate green energy projects than the federal government, Stimel's preferred alternative is the creation of an auction of federal funds modeled after the Term Auction Facility of the Federal Reserve.

With the auction process, the federal government would be one step removed from responsibility for evaluating individual projects, eliminating the prospect of conflict of interest or cronyism. The competitive dynamic of the marketplace would be effectively re-created, but Washington could be assured that the funds are, indeed, used for clean energy purposes.

While many Americans would like to see us move toward "green energy" as a means to reduce our dependency on foreign oil and fossil fuels in general, such a move should be driven by market forces, not the strong arm of government and crony capitalism. What Stimel presents are realistic solutions to accomplish these goals.

Investments in green energy technologies will inevitably result in failures, and even those investments that are successful cannot be expected to pay off for a long time. Yet with any public investment the size and scope of the stimulus, failures caused by incompetence and cronyism are simply not tolerable.

By articulating two new alternative approaches to inject market-based competition into the process, the Conservation Leadership Council has advanced a long-overdue discussion of how America can at least salvage a valuable lesson from the Solyndra fiasco.