December 9, 2013

Income Redistribution: A Litany of Section 1705 Failure

Green energy is more about greed than anything.

An obscure portion of Department of Energy loan guarantees in Section 1705 of the overall American Recovery and Reinvestment Act – better known as the “stimulus” – was supposed to jumpstart the renewable energy industry, but the law has proven to be a cesspool of failure and cronyism. A Reason Foundation study released last week details the program’s lack of tangible results with the only successes apparently being those of enriching politically connected investors.

Among the more spectacular and well-documented failures such as Solyndra and Abound Solar, most of the other 24 companies that benefited from Section 1705 loans were already mired in junk-bond status prior to receiving the infusion of taxpayer cash, according to the Reason study. Study authors Victor Nava and Julian Morris also blasted the federal government for a lack of diversity in selecting recipients, noting that 83% of the project funding went to solar projects, with most of the rest supporting wind-based energy.

Rather than investing in new ideas for improving existing technology, such as improvements in electrical transmission infrastructure or in hydropower, which were allowed in the authorizing legislation, those who selected Section 1705 recipients seemed to lean on the all-important criteria of political connection. The study notes that larger loan recipients tended to spend more on lobbying, but those who spent nothing on lobbying had something even more important: a senator to back their project. Maine “Independent” Sen. Angus King founded Independence Wind, a company that received $102 million in loan guarantees for the Record Hill Wind project; meanwhile, all three Nevada-based projects had backers who collectively funneled over $58,000 in campaign cash to Senate Majority Leader Harry Reid.

Instead of a system riddled with questionable investments and cronyism, the authors suggest a different approach: a prize system based on the ongoing X Prize project in which competitors come up with solutions based on a set of specific criteria. One example given in the study is a competition to remove oil from the surface of seawater, with seven of the 10 finalists exceeding the given criteria and the winner besting the existing industry standard fourfold.

The only standard the government seems to exceed under the current system is largess for the well-connected, and that’s not a direction we need to take.

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