Ken Silverstein | Mar 28, 2013

In political circles where everything is polarized, it can be difficult to find common ground. But in the real world where there are no clear answers, such diplomacy is a must. And it is especially true when it comes to developing energy policy and when leveraging public and private funds.

That’s the general finding of a paper issued this week by the Milken Institute. The economic and policy think tank tries to determine a balance between government and markets, realizing that innovative energy ideas often take years -- even decades -- to be deployed. To that end, the public sector can serve as a partner, not by replacing private initiative but by aiding those risk takers along the way.

“While it is true that government failures make news, the bigger truth is that public policy, when correctly applied, can lead to breakthroughs with lasting, positive effects,” write Joel Kurtzman and John Bartlett, in the Milken study.

Consider the shale gas phenomenon: Private investors are keen on accessing those unconventional natural gas deposits. As such, they are making capital investments, buying equipment and hiring workers. But what’s less known is that the U.S. government helped to finance and to develop the technologies that serve to ply loose that shale gas from the rocks where they are embedded deep underground.

Devon Energy is quick to give credit. In 1977, its now wholly-owned unit called Mitchell Energy demonstrated the first massive “hydraulic fracturing” drilling project along with the U.S. Department of Energy, which provided technical and financial assistance.

With that, the Milken paper discusses some criteria that similar evaluations should have. Namely, the authors are suggesting that there be a fair allocation of the risks and rewards between the public and private sectors. At the same time, they say that all policies should establish stable incentives and regulations while providing clarity, certainty and a degree of flexibility.

After policies are critically measured, the authors then say that any subsequent decisions should be benchmarked and scored. Government investment in an energy technology is to facilitate the private sector, they say, adding that long-term public support is critical because it takes a while for ideas to commercialize. With each step, though, such assistance should decline.

“Government has to be looking down the road,” says Dan Steward, formerly with Mitchell Energy and a self-described conservative, in an interview with the Breakthrough Institute. “And politicians are often looking for their next election.”

Fair Assessment

The goal, in any case, is to ensure a fair allocation of risks and rewards. Government will want to help develop those technologies that have the potential to make human existence better. But Milken’s authors say that as projects go from basic research to applied research to an actual demonstration that government must relinquish its role.

Doing so would then allow the private sector to assume the risk, which if successful, would also get many of the benefits. A broad range of incentives that include cash grants are awarded, all of which have been leveraged during hard times. But one wind farm in Oregon, called Shepherds Flat, put up just 11 percent of the project’s cost -- electricity that it sold into California at a premium price, says the Milken paper.

Government’s subsidies, taxes and mandates, though, must be certain while the rules that govern the playing conditions must be reliable. If the incentives or regulations are short-lived and wish-washy, financiers won’t commit capital. Here, of course, the institute notes the uncertainty of the production tax credits given to wind and solar developers -- incentives that should remain in place long enough to allow those industries to stand up, but not indefinitely.

Along those same lines, the rules and regulations need to be clear otherwise they will create confusion, scaring off private investors. Legislation that is overly broad or too vague only invites litigation, say the authors, which means that capital is tied up in the court system and not on business development. They point specifically to the New Source Review under the Clean Air Act in which coal and environmental interests battled for years in the courts.

The rudiments of Milken’s analysis is that research and development is a long-term endeavor. Government’s commitment must therefore not waiver. But, nevertheless, such support should gradually decline as projects inch their way to market. With that, success should be measured not on how any one deal fares but on how the overall public-private portfolio performs.

While all are reasonable ideas and approaches, the legislative process is highly politicized and is remiss to credit or award opposing concepts. But if polar opposites could attract, then the nation's energy platform would become more durable.


EnergyBiz Insider has been awarded the Gold for Original Web Commentary presented by the American Society of Business Press Editors. The column is also the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has been honored as one of MIN’s Most Intriguing People in Media.

Twitter: @Ken_Silverstein

energybizinsider@energycentral.com

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