This week, the U.S. department of Energy announced that Tesla Motors Inc (NASDAQ:TSLA) had repaid the remaining balance on its $465 million loan. The loan, part of the DOE’s Advanced Vehicle Technology Manufacturing program, was returned to U.S. government coffers — with interest — nine years early. That may sound like big money, but $465 million is pennies in comparison with the $34 billion the DOE has committed in loans for various alternative-energy projects and the development of hybrid and electric vehicle manufacturing.
There are few things that polarize the American public more than having the government provide financial assistance to private industry. The label “crony capitalism” is a popular phrase among critics. Providing federally backed loans to private industry does pose a deep dilemma regarding the interaction of governments and the free market. For a moment, though, let’s set aside the philosophical debate and look at the DOE’s program pragmatically. Certainly, the U.S. doesn’t want to lose money on these investments, but it’s not out there looking to make a huge monetary return, either. Let’s look at two key reasons the Department of Energy might not be committing the free-market heresy that many claim it is.
Prime the pump for private investment
According to the DOE, the stated objective of the Section 1703 Loan Program is:
… to support innovative clean energy technologies that are typically unable to obtain conventional private financing due to high technology risks. …Technologies with more than three implementations that have been active for more than five years are excluded.
By providing federally backed loans to these higher-risk technologies, it is in turn de-risking the investment to a certain degree. As the technology finds commercial application and becomes more attractive to private investors, the government can bow out and let the market take care of the rest.
So far, it appears that the program is doing just that. Goldman Sachs Group, Inc. (NYSE:GS) just recently announced that it will invest $500 million in SolarCity Corp (NASDAQ:SCTY) to reduce upfront costs for SolarCity’s customers (and make a hefty profit on long-term contracts). The investment bank also plans to invest $40 billion over the next decade on alternative-energy projects. Warren Buffett is even getting in on the action. MidAmerican Energy, part of the Berkshire Hathaway Inc. (NYSE:BRK.A) portfolio, has invested $5.4 billion in three major solar projects, two of which got started on DOE loans.
You can argue that private investment could have done it on its own, I can’t refute that. Instead of thinking of these DOE loans as the only reason these projects succeed, think of them as the choke on an engine. Injecting low-interest, federally backed loans to these “cold engine” industries helps them get up to speed and running on all cylinders in the open market faster than they might without them.
Reduce energy and the overall trade deficit
For environmentalists out there, I’m about to break your heart. Despite the claims that these programs will reduce fossil-fuel consumption, it misses out on one small point: These are reductions in U.S. consumption, not global consumption. Even if we don’t use fossil fuels, somebody else will.
Strangely, this is what should make alternative energy so attractive to the United States.
According to the U.S. Energy Information Administration, the U.S. imports about 17% of its total energy needs. Being a net importer of energy profoundly affects the country’s bottom line, as nearly 50% of the U.S. trade deficit comes from energy imports. Some scholars have argued that an increase in the deficit leads to greater U.S. economic growth. Well, if a majority of that deficit is energy shipments to fuel the economic engine, then of course an increase in the deficit will correlate with economic growth. If that massive energy deficit can be replaced by domestic sources, though, then we’re talking about moving toward something the U.S. hasn’t seen in almost 40 years: a trade surplus.
