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PART V: POTENTIAL PROBLEMS
While the government can help renewable energy firms through purchasing, it can also derail them if several potential pitfalls are not recognized and addressed. The problems all relate to the fact that government purchasing must help renewables succeed in the large private market. Experience shows that the government has not always based its purchasing programs on considerations of private market dynamics.
The government does not necessarily demand the products that will ultimately succeed in the private market. At least two studies of federal government R&D in the wind industry in the 1980s found that the federal government’s choice of large-scale, multi-megawatt turbines and their manufacturers (aerospace firms already ensconced in the government procurement system through defense and space program contracting) went against the tastes of both wind energy suppliers and consumers in the private market.56 In this case, the technology selected by the government was not adopted partially due to high cost and poor performance. Instead, a private market — spurred by multiyear incentives fashioned by federal and state governments — became a stage on which different turbine designs competed for market share, with smaller wind turbines (less than 1 megawatt) predominating on U.S. windfarms and ultimately adopted by the private market.
Part of the explanation of the federal government’s selection of a doomed turbine design lay in the institutional bent of the managing agency, the National Aeronautics and Space Administration, and its subcontractors, who were used to designing costly equipment that would be paid for by a Congress sympathetic to the space program. Government efforts to design commercially successful renewables were partly influenced by non-market considerations unique to the government market — considerations that were based on practices that were insulated from the cost- and quality-conscious private market.
Another problem with direct government involvement in market demand is that it can siphon off contractors’ valuable marketing and production resources. Governments can demand that contractors design their products in accordance with specific government standards. With a tangle of procurement regulations and administrative fiats hanging over their heads, procurement officials can demand extensive paperwork from the contractor to show that the purchase meets a myriad of government cost, quality, and social demands. The result is that contractors spend more time earning a dollar from the government than they would from a private consumer.
At least one major survey of government contractors found that by requiring idiosyncratic marketing, accounting, and administrative efforts from firms, the government has not helped companies hone products and services to the needs of the private market. (See Box 5.)
Thus government procurement may not encourage business practices that are in line with private market requirements, and instead may distract a firm’s resources into an insulated, idiosyncratic purchasing system. This is particularly harmful to the small, underfinanced, and understaffed renewable energy industry. The efforts of the industry will not lead to benefits that can be multiplied through increased sales in the private market, and government procurement will do little to commercialize renewables products.
It is also harmful to future procurement opportunities, for commercialization would help expand and refine renewables’ technical and business infrastructure and would thus make future government purchases relatively easier. In the future, for example, it would be easier for governments to purchase small wind turbines if there were more suppliers and servicers nationwide.
Finally, government procurement can introduce or at least amplify the importance of political risk in the renewables market. Government spending depends largely on annual appropriations determined by legislators with strong political motivations. Procurement decisions from year to year can vary not just because of the price and quality of a product, but also due to political developments. Political volatility is not easily predicted by the industry and its financiers.
The most well known example of government unpredictability hurting renewable energy concerns Luz International. Luz built a central-station solar thermal power plant in California’s Mojave Desert. The plant’s financing relied heavily on Congress extending solar energy tax credits to the end of each calendar year, so that annual plant upgrades lasting until the end of the year could be covered under the exemption. In 1989, however, Congress decided to extend the credit only until September 30. This forced Luz to compress its construction schedule and incur crippling cost overruns. Politically based delays of a state property tax exemption dampened private investment for plant expansion the following year, and Luz went out of business.57
Unpredictability is especially harmful if firms are making significant sunk investments based on future government markets. If government demand evaporates in a given year, it can saddle an industry with unrecoverable investments. This can bring a dependent industry toward bankruptcy, even if it was financially sound before the government became a prime source of demand. As such, government procurement may not encourage more investment in the renewables industry, nor may it result in expanded production of renewables and attendant economies of scale. Thus, unlike a dollar from a private consumer, a dollar from the government may not hold as much value for the continued maturation of the renewables industry.
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