Energy Dept. Makes More Bad Bets with Taxpayer Money

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Chu photoAs the U.S. government Venture Capitalist-in-Chief (and President) Barack Obama and his Department of Energy investment guru (and Energy Secretary) Steven Chu pour other peoples’ money into their favorite “clean” technology schemes, private backers appear to be following them off the cliff, “as publicly traded battery makers watched their stocks tank and their businesses stumble,” according to a Dow Jones report late last month.

According to a Dow Jones-owned industry tracker called VentureSource, private investors put $372.7 million into 14 battery deals over the first three quarters of 2011. Whether they would have transferred so much cash into the otherwise shaky enterprises, without the government leading the way, is doubtful at best. But since the Obama administration wants to create “Green jobs” with a new energy economy, the fools have rushed in, ignoring the fact that government manipulation of industry only creates bubbles that eventually burst.

“Building a whole new industry is challenging,” said David Vieau, CEO of A123 Systems. “But there’s no doubt that the opportunities are immense.”

That’s easy for him to say. As NLPC reported in early December, A123 was given $249.1 million by DOE to help launch two battery-manufacturing plants in Michigan. A123 also received grants and tax credits from the state that could total more than $135 million. In a separate federal grant as a subcontractor for another grantee, A123 received nearly $30 million for a wind energy storage project.

The rewards looked the part of a mutual backscratching relationship between Vieau and the administration. According to records compiled by the Center for Responsive Politics, A123 executives gave nearly $22,000 to Democrat candidates during the 2008, 2010, and 2012 election cycles. And Vieau gave then-Senator Barack Obama $2,300 three weeks before he was elected president in 2008, and has given $5,000 to the Democratic Senatorial Campaign Committee during the last two years. Vieau was also featured in a 30-second spot in late 2009 to promote energy and climate legislation wanted by President Obama and his fellow Democrats.

Eight other advanced battery manufacturers, both established and new, received nearly $1 billion in grants from DOE under the same program. Ten more produced parts and materials for the new batteries, costing taxpayers $235 million via DOE.

The significant public funding, however, has not kept the companies out of financial trouble. Indiana-based EnerDel, a subsidiary of a company called Ener1 Inc. that was created after the purchase of Delphi Corporation’s lithium ion battery business, has fallen on hard times despite the gift of $118.5 million from DOE. According to the Indianapolis Business Journal, Ener1 dumped its executive team in November. Despite plans to have 1,400 employees in Indiana by 2015, the company has downsized in the state from 380 to approximately 250 since March. 

“Ener1’s shares tumbled from more than $4 a share in January,” IBJ reported, “when Vice President Joe Biden visited EnerDel’s Greenfield battery plant, to less than a dollar in a matter of months.” 

Ener1 was booted from the NASDAQ stock exchange in October, when its stock was trading for less than 20 cents. 

At A123, 125 employees were laid off at its two subsidized plants in Michigan. Through the end of September this year, A123 had a net loss of $172.8 million, and is heavily in debt. It's stock now trades at around $2 per share, down from over $10 a share a year ago. The outlook from some Wall Street analysts is discouraging.

“Ford, Nissan, and GM are all getting into electric vehicles, but none has had much success so far,” wrote Travis Hoium of The Motley Fool, a former research and development engineer.  “A123 Systems and other battery makers could benefit if they do, especially after signing a deal to provide batteries to the Chevy Spark, but sales have been so bad I would stay away from battery makers.”

The slow development of the EV market, plus the similar pace in battery utilization to store power from renewable energy for electricity, could not present a clearer illustration of how government in incapable of “building a whole new industry,” as Vieau said.

“The return on equity is poor, incredibly poor,” said Peter Hebert, co-founder and managing director at venture firm Lux Capital, to Dow Jones. “It’s one of those things that could be incredibly valuable. That’s the reason that a lot of venture investors still trump hope over experience.” 

The same is true of nearly the entire clean energy sector – wind, solar, biofuels, advanced batteries, electric vehicles, vehicle chargers. They are mostly not profitable, and without considerable sums of money from government, venture capitalists would not be investing him them nearly as much. It’s not just the little companies; the three major U.S. automakers have received billions in taxpayer funds to support their electric vehicle research and production. And Nissan CEO Carlos Ghosn -- recipient of a $1.4 billion loan guarantee from DOE for the electric Leaf -- has explicitly stated that his company’s development of EVs is dependent on where the subsidies are, not on the value of the car to potential customers in a free market.

“It does not matter if, for example, Portugal stops the incentives, as long as other countries like the United States continue to support,” Ghosn said to Reuters. “If countries like France, Japan and the UK support and then China, that is about to start to support, that's fine.”

And many of the smaller start-ups, like cargo truck manufacturer Smith Electric Vehicles, look to the government to validate them with grants and make them appear economically viable, to help kick-start or enhance their private fundraising efforts. The private venture capital firm Kleiner Perkins, which boasts Al Gore as a partner and has whose executives have donated more than $1 million to federal political causes and campaigns over the last two decades, invests heavily in renewable energy start-ups. Another Kleiner Perkins partner, California billionaire John Doerr, serves on President Obama’s Council on Jobs and Competitiveness. Kleiner Perkins is a major investor in EV company Fisker, which received a DOE-guaranteed $529 million loan, and Dow Jones says it has seven battery company start-ups in its portfolio. But the venture capitalists are willing to gamble, because thanks to taxpayers, there isn’t nearly as much risk.

“It’s the nature of these high-risk, high-reward things that most of them will fail,” said David Wells, another partner at Kleiner Perkins. “But one or two will succeed.”

That’s the Obama clean energy economic policy in a nutshell. Ho-hum, it’s only the taxpayers’ money.

Paul Chesser is an associate fellow for the National Legal and Policy Center.