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By Robert Rapier on Oct 1, 2013 with 11 responses

Government Mandated Spending: A Lesson in Wasted Tax Dollars

Deja Vu All Over Again

A couple of weeks ago the US Department of Energy’s (DOE’s) Office of Inspector General released an audit report on how well taxpayer money has been utilized in the pursuit of commercializing integrated biorefineries:

Follow-up Audit of the Department of Energy’s Financial Assistance for Integrated Biorefinery Projects

The results are not pretty. In the opening section, the report notes:

“In our prior audit, Financial Assistance for Biomass-to-Ethanol Projects (DOE/IG-0513, July 2001), we reported that the Department had not met its goal to build a full-scale commercial biomass production facility by the year 2000, and provided recommendations for improving Program performance.”

Turns out that a dozen years later, it’s deja vu all over again.

Background

The audit document explains that as a result of The Energy Policy Act of 2005 (EPAct) and the Energy Independence and Security Act of 2007, the DOE was required to carry out a program to demonstrate the commercial viability of integrated biorefineries. I think “demonstrate” is an interesting word choice there. I would have instead used a word like “evaluate.” That could have saved taxpayers a lot of money.

As a result of this mandate, there were three funding opportunity announcements (FOAs) from 2006 to 2009 that resulted in the selection of 29 projects for funding. As of March 2013, the DOE had “obligated over $929 million, including $561 million from the American Recovery and Reinvestment Act of 2009, for the 29 projects, and had expended approximately $603 million (65 percent) of those funds.”

Recipients of the funds were supposed to contribute 50 to 60 percent of the total project cost. The DOE goal was to demonstrate three integrated biorefineries by 2012, with 100 million gallons of advanced biofuel production capacity from 10 demonstration and commercial-scale plants by 2014.

Results

So what do we have to show for over $600 million spent on these projects? Not much.

  • Despite over 7 years of effort and the expenditure of about $603 million, the Department has not achieved its biorefinery development and production goals.
  • The EPAct mandate to demonstrate the commercial application of integrated biorefineries has not been met and the DOE is not on target to meet its biofuels production capacity goal.
  • The Program reported meeting its goal to demonstrate the successful operation of three integrated biorefineries by 2012, but the audit noted that these refineries were “small pilot projects,” and not commercial scale projects.
  • The DOE has not successfully achieved commercial-scale operations even though the FOAs issued in 2006 and 2007 indicated that the proposed projects should be operational at commercial scale within 3 to 4 years.
  • 40 percent of the demonstration-scale and commercial-scale projects selected from the FOAs were mutually terminated by the DOE and the recipients after expending more than $75 million in taxpayer dollars.
  • The DOE is not on target for achieving its 2014 production capacity goal of 100 million gallons of advanced biofuels. More than half of the projects specifically identified to contribute to the goal were terminated.

Contributing Factors

The reason given for these failures is that these projects weren’t at a stage where they were ready for commercial development. They hadn’t had been adequately tested at a small scale. That’s Due Diligence 101, which I explained in: Due Diligence: How to Evaluate a Renewable Energy Technology

If you are going to commercialize a technology, and you want to manage your risks, you prove it at increasingly larger scales and you work out problems at each stage before you scale up again. If you have substantial problems at one scale, you don’t build a larger facility and hope you work them out, because there is a high risk of wasting your money.

So why did they throw money at projects that weren’t ready? Because they had no choice. They were forced to spend the money:

“Program officials acknowledged the projects selected were not fully ready for commercial-scale operations and that the projects were high-risk. However, they indicated that the EPAct required them to move forward with commercial-scale projects…”

The audit highlights the mantra about validation that I have repeated countless times:

“In our opinion, if the Department had validated the technology at the pilot and/or demonstration scales, it would have had greater assurance that the projects were ready to move to commercial scale. This would have strengthened the likelihood for success by reducing project scale-up risks.”

It turns out that the law forced the DOE to spend money on what essentially amounted to the least stupid ideas. In many cases it was fully recognized that there was little chance of success, but the money had to be spent. Imagine that we are talking about curing the common cold. We have $1 billion to spend. Regardless of whether anyone comes up with a single credible idea, the money has to be spent. So instead of throwing money away at a million to one shot, you still throw it away at a thousand to one shot, when what you should have done is say “These are taxpayer dollars, and this doesn’t seem like a wise way to spend $1 billion.”

I would have much less issue with a program that required a thorough technical assessment and approval by a panel of independent experts before funding was released. But I do take issue with a program that requires the money to be spent. “No good ideas? OK, just spend it on the least bad ones.”

What’s worse is that the audit highlights that these are lessons that weren’t learned in the past:

“We found that the Department had not fully addressed recommendations to improve operations that had been made by the 2011 integrated biorefinery peer review conducted by a panel of external experts. Specifically, the Program had not formalized lessons learned and best practices from ongoing and terminated projects.”

There was one bit of good news, in that some cost-saving measures had been implemented:

“Program implemented budget phases and released funding to recipients only after specific project milestones and performance metrics had been validated. Additionally, Program officials stated that in some cases, they put projects on hold because recipients failed to meet their cost-share requirements. As a result, the Department had released only 56 percent of the obligated funds for commercial-scale and demonstration-scale projects as of March 2013, an improvement since our 2001 audit revealed that, despite a significant lack of progress, the Department had released all available funding to its financial assistance recipients.”

Conclusions

I think the lesson here is that political wishes continue to trump scientific realities, and taxpayers are left to pay the bills. It’s hard to fault the DOE in this situation, where Congress is forcing them to spend the money whether they can find any worthy projects or not. If only our political leaders understood that you can’t mandate technical breakthroughs, even if you require money to be spent trying to do so. If it worked like that, then every major problem we have could be solved like this. We would have cured cancer, and have thriving colonies on Mars.

But who I am kidding? As I write this the government is in the process of shutting down because apparently it is being run by children. To think that they can competently utilize tax dollars to create an industry that doesn’t exist is probably expecting a bit much. But as a taxpayer, I am compelled to complain when my money is wasted due to incompetence.

Link to Original Article: Government Mandated Spending: A Lesson in Wasted Tax Dollars

By Robert Rapier. You can find me on TwitterLinkedIn, or Facebook.

  1. By Shiggity on October 1, 2013 at 3:04 pm

    Most Americans have given up on the US government to do anything correct. If wealth inequality keeps trending towards the rich, get ready for Revolution.

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  2. By Russ Finley on October 1, 2013 at 9:03 pm

    In general, about half of Americans bother to vote. In general, presidential elections are won or lost by a few percentage points. About 50% of those who bother to vote, always vote for the same party, no matter what, which allows politicians to ignore them. Politicians know all of this. The 48% of the American population who vote, don’t matter to the politicians, and neither do the 50% of Americans who don’t vote. Our politicians are primarily concerned about that 2% who may vote for one party or the other based on some important issue. They are not worried about the other 98% of Americans, which isn’t how it is supposed to work.

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    • By Ed_Reid on October 2, 2013 at 10:50 am

      Perhaps we should be thankful that 50% don’t bother to vote, because that same 50% don’t bother to inform themselves. That is not to suggest that the other 50% are well informed, only relatively more informed.

      Another example of the phenomenon Robert discusses above is the proposed EPA limits on coal plant CO2 emissions. Compliance with these proposed regs would require the application of technology which is “not ready for prime time”. That is even more true of the regs expected next year for existing coal plants.

      Scheduling major breakthroughs is risky business. However, we must remember that “anything is possible, if someone else is responsible for accomplishing it”.

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    • By HopelessAboutChange on October 3, 2013 at 9:30 am

      “Our politicians are primarily concerned about that 2% who may vote for one party or the other based on some important issue.”

      Even worse, those 2% are typically very low information voters who often pick a candidate because they like they way a person looks or because a candidate seems “likable”.

      Our election cycle is far too long. Informed voters typically make up their minds a few weeks into a campaign.

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  3. By anonymous on October 3, 2013 at 11:16 pm

    Mr. Rapier … thank you! Love your site and all your insight on energy issues …

    My opinion is that we need the government to spend! It equals, to the penny, the private sector’s net financial wealth and the difference between imports and exports. Again, to the penny. If the government were to run a surplus the private sector – you and I – would be in debt. We don’t want that. It has happened six times before and has always been followed by a crash. Perhaps you can ‘clear the air’ on economic issues here too!

    There is no ‘crowding out’ here. This is technology that is high risk and that hasn’t been perfected in over a hundred years.

    That government spending is other people’s incomes. That is a good thing, especially now with over 20 million Americans out of work.

    Take an example: the iPhone. Where did all of the technology that goes into the iPhone come from? GPS and the internet … and a host of other technologies that go into iPhones were funded by the Government. Apple just put it together and would never have been able to fund or come up with the essential technologies by themselves [full stop].

    Get to know the sectoral balance approach to economics though … you will not understand economic issues without it and will have a scared Monetarist economist in your head making bad policy choices for you; i.e., we can’t afford things or the government is out of money … that’s garbage. We only have ‘real’ constraints.

    We can afford to invest in our future. We cannot save for the future in money terms; we can only invest in real terms.

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    • By lifematters on October 11, 2013 at 12:59 pm

      The problem with government spending-wasting other people’s money is that they don’t simply print it as they need it (which devalues it), it comes from somewhere – namely, the pockets of small businesses and working families of which I have-am both..

      Nearly half of my earned income for our family of six goes to debt service to the government. This is because government cannot control its spending and taxes in gross disproportion to its need.

      This taking reduces my purchasing and investing power considerably and, taken in the broader sense, slows the economy down – the last 5 years where the US continues to see less than 1 percent economic growth year over year is just one evidence among many.

      The more government takes, taxes, and wastes, the more the economy will continue to suffer, the wealthy will gain (as we are currently witnessing), and the poor and middle class suffer the regressive consequences as we currently see in the record high unemployment and food stamp rates.

      Economic theory notwithstanding, that’s what’s real…

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      • By anonymous on October 23, 2013 at 10:36 pm

        with respect … you are mostly wrong …

        Monetarism has failed … see Milton Friedman’s (the ‘Father’) recantation on June 6th, 2003 … so, the Quantity Theory of Money and inflation/devaluation based on the quantity of dollars in existence is WRONG …

        The Government is the monopoly ISSUER of the US dollar, it does NOT NEED TAXES TO SPEND … it taxes only in order for you to work and to give ‘value’ to the dollar (why else would we care about meaningless pieces of paper? we have to get them in order to pay taxes).

        The Government is just another pocketbook … do cash registers discriminate between ‘private’ sector or ‘public’ sector or ‘foreign’ sector dollars? NO, they do not … when the Government shut down why did spending, GDP, and incomes go down? The Government is just another spender …

        The only constraints on Government spending are REAL … meaning: if the economy was at full employment and capacity utilization any Government spending at that point would result in inflation … we are SO FAR AWAY FROM THAT …

        The ‘private’ sector is not going to get us out of this … they can only borrow so much, as they did from 1971 to 2009 as real wages stagnated … they are USERS of the currency and cannot go into debt indefinitely like Uncle Sam …

        To the penny, the identity: (G – T) + (S – I) + (X – M) = 0

        Government debt is the private sector & foreign sector Net Financial Wealth … Think about the Clinton “Surplus”, the private sector was in debt, an UNSUSTAINABLE position as a USER of the currency … that has happened about 7 times in the history of the US, each with a big crash/correction …

        You are right about taxes being too high. But, the Government does not need the tax revenues as it creates money on keyboards out of thin air (Greenspan & Bernanke are quite clear on this)

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  4. By Forrest on October 8, 2013 at 12:52 pm

    “If only our political leaders understood that you can’t mandate technical breakthroughs, even if you require money to be spent trying to do so.” It’s not only our leaders; sadly most Americans think government spending is wonderful and all powerful. They have
    magic money up on the hill. Money easily spent on projects that have little responsibility
    to perform per ROI. Government spending is horribly inefficient compared to
    private sector spending. Solutions per politics and under politician control,
    again, horrible as compared to private sector. Wasteful spending (government by
    definition) a poor choice to pull economy up upon a speedy recovery.
    Money needs to work extra hard during such times and spent wisely. Political
    leadership should invigorate private sector with lower taxes,
    smarter/better/minimal regulation, and all businesses especially government
    needs to reinvent and evaluate their business plan. Meaning to evaluate cost
    benefit of programs.

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  5. By Christine Lakatos on January 11, 2014 at 3:50 pm
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    • By Robert Rapier on January 11, 2014 at 4:23 pm

      It’s funny, we live in a pretty close-knit community of critics. Your article references Katie Fehrehbacher, who has interviewed me and who links to an article in that article that uses me as a source from an earlier article I wrote about KiOR.

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