The Department of Energy has been showered with money lately. It’s received about $30 billion in funding (on top of its approximately $24 billion annual budget) from the stimulus bill passed in February. And it’s responsible for issuing $125 billion in loans and loan guarantees. The person in charge of the agency’s finances is chief financial officer Steve Isakowitz. He’s responsible for, among other things, the formulation of the DOE’s budget and the management of the mammoth loan-guarantee programs.
Technology Review interviewed Isakowitz at a recent conference on innovation held at the United Nations (see accompanying video). He discussed the challenge of issuing loan guarantees designed to promote economic recovery while avoiding the mistakes made decades ago when President Jimmy Carter’s administration managed its own loan program. In a follow-up interview, Isakowitz described some specific changes that the DOE is making and also provided an update on the newly established Advanced Research Projects Agency for Energy (ARPA-E), a $400 million agency created to push high-risk, potentially breakthrough energy technology to market.
All told, the DOE has been ordered to allocate $100 billion for commercializing clean-energy technologies, with half of that going to established technology that isn’t being funded because of the recession, and the other half going to commercial-ready technology that hasn’t yet been tested on the market. This program is actually an expansion of a $4 billion loan-guarantee program first established in 2005, but no loans were actually given out until this year. The DOE announced the first award this March: $535 million to the solar company Solyndra. Another $25 billion loan program was funded last year for helping automakers and suppliers produce cars that use less gas. The first awards under that program were announced this week, with $8 billion distributed among three companies: Tesla Motors, Nissan North America, and Ford Motor Company.
Similar loan programs in the late 1970s and early 1980s were a debacle. “The price of oil was skyrocketing, and the conventional wisdom was that it would continue to increase, therefore making things like synthetic fuels look economically attractive,” Isakowitz says. “That was a going-in assumption, and it turned out to be flawed, as the price of oil dramatically dropped. Most of the loans went into default as a result.”
The most famous example, he says, is the Synfuels Corporation, a quasi-public organization created in 1980 to commercialize processes for converting coal and shale oil into synthetic fuel. It was part of an attempt to reduce foreign-oil consumption. At the time, oil cost $40 a barrel (in 1990 dollars) and was expected to reach $80 to $100 a barrel in short order–expensive enough to make synfuels competitive (synfuels cost $80 to $90 a barrel to produce). But oil prices dropped, and the venture failed.
“In some ways,” Isakowitz says, “the challenges are greater today” than they were 30 years ago. For one thing, Congress is working on legislation that would cap carbon emissions and require renewable-energy technologies, both of which are things that could dramatically change the energy market. But the DOE is under pressure to issue the loans quickly, especially since the money is intended to help stimulate the economy. It may need to make decisions about at least some of the loans before it’s known whether that legislation will pass, and if so, what affect it will have, Isakowitz says. “It’s really hard to predict what the market will look like three years from now,” he says. “Your guess is as good as mine about what the price of oil will be going forward.”
To prevent the failures of the 1970s and 1980s from happening again, Isakowitz says that the DOE is bringing in a number of outside experts, in addition to its own experts, to consider a variety of models of what could happen with energy commodity prices. It’s also bringing in experts to help evaluate the potential of new energy technologies, including engineers, and people with experience in finance and marketing.
To speed up the process, the agency is considering working with commercial banks to help sort through loan applications, Isakowitz says. But in light of recent bank failures, he says, the DOE is requiring the banks to have “some of their skin in the game.” Some of the banks’ own money will be on the line, he says, to encourage them to be careful in their loan evaluations. And the DOE won’t rely completely on the bank’s assessments in its decisions about what to fund, he says.
Meanwhile, Isakowitz says that ARPA-E, which operates outside the normal administrative structure of the DOE, is designed to bring “disruptive” technologies to market. He says that ARPA-E should be able to move “much faster” than the rest of the DOE because it doesn’t have to go through the same procurement process and can make its own decisions about hiring people and dealing with various legal issues. Whereas other parts of the DOE might fund research to improve batteries incrementally, by “5, 10, or 20 percent,” Isakowitz says that ARPA-E is designed to support technology that doubles or triples performance. Although the new agency still lacks a director, it’s issued its first request for applications–for $150 million of the agency’s $400 million in funding–and it has received thousands of concept letters describing new technologies. The agency is now sorting through the letters to determine which ideas merit complete applications.