Ultimately, the Obama administration would meet every one of its stimulus funding deadlines, athough a few did go down to the wire.
“As the Duke of Wellington said, it was a near-run thing,” DeSeve says. “But we hit every mark.”
Needless to say, the deadlines that weren’t missed got about as much coverage as water mains that don’t break.
Rogers’ Billions
The Recovery Act essentially required the Energy Department to transform itself into a venture capital and project finance operation, which felt like requiring Homer Simpson to transform himself into an Olympic decathlete. The lumbering bureaucracy that had struggled to distribute a few billion dollars in annual clean-energy grants—and had failed to distribute a single clean-energy loan in four years—would now have eighteen months to hand out $37 billion in grants, and even more in loans. This was by far the Recovery Act’s scariest management challenge. For its three decades in existence, the department’s main task had been overseeing nuclear materials. Now it was suddenly the largest clean-tech fund in history.
“We had to change the mentality, or this was going to be a huge bust,” Secretary Chu says.
Chu was Obama’s only political appointee in place at the department, and he was about as apolitical as political appointees get. During the first week of the Recovery Act, he toured an energy-efficiency project with Biden, and made the mistake of contradicting the vice president in public. “He won a Nobel Prize,” Biden snapped. “I got elected seven times.” But while Chu was a newcomer to Washington and the political world, he had spent most of his career around Silicon Valley and the business world. And as the department began to evolve into a government version of Sand Hill Road, Chu’s senior staff took on a Bay Area influence, including assistant secretary Cathy Zoi, a clean-tech businesswoman who had run Al Gore’s climate nonprofit; ARPA-E director Arun Majumdar, Chu’s nanoengineering pal from Berkeley; Sanjay Wagle, a green venture capitalist who had helped run CleanTech for Obama; and Steve Spinner, a Silicon Valley entrepreneur and Obama fund-raiser. The emphasis was private sector expertise: The Chevron executive in charge of biofuels took over the department’s biofuels program, and an executive with almost four decades of experience in the utility industry took over the department’s fossil energy program.
Chu’s most important recruit was his stimulus czar, Matt Rogers, the San Francisco–based founder of McKinsey & Co.’s clean-energy consultancy. Rogers wasn’t wild about the government-as-venture-capitalist analogy—government wouldn’t get to share the profits or meddle with management, and couldn’t accept a 90 percent failure rate—but he’d bring private sector rigor and impatience to the Energy Department as it built an investment portfolio. His wife, a judge, would remain in the Bay Area with their three kids, so Rogers took the job on the condition that he would leave Washington on September 30, 2010, the department’s deadline for committing its stimulus dollars.
To prepare, he read a report chronicling the department’s history of dysfunction, and highlighting specific Recovery Act risks.274
“I don’t think I slept for three days,” Rogers says. “Oh, my God. It was remarkable to see the sheer number of ways things could go badly.”
Rogers now had had to figure out how to set up those 144 programs to produce results. For example, Congress had provided $2 billion for competitive grants to create an advanced battery industry, but hadn’t provided much guidance beyond that. Before the department could solicit bids, it had to decide what to solicit. Should it just finance new battery factories, or should it also promote U.S. manufacturing of anodes, cathodes, separators, and other components? Rogers concluded the new industry wouldn’t be sustainable without a domestic supply chain. What about next-generation technologies? Rogers decided no, only ready-to-build, ready-to-compete factories; to qualify for grants, companies would have to show they had lined up real orders from real customers. The recipients would also have to match their grants with private funds, a test of their competitiveness; the Massachusetts-based battery manufacturer A123 Systems raised its $250 million cost-share through the largest clean-tech IPO of 2009.
This was, after all, a stimulus program, and Rogers wasn’t interested in funding the factories of the future if they didn’t have credible short-term business plans.
“It was risky enough to try to create a domestic industry out of thin air,” Rogers says. “We couldn’t just build on spec.”
Clearly, creating a new industry constituted “industrial policy,” a toxic phrase in U.S. politics. And a government department selecting companies for grants reeked of “picking winners and losers,” another red flag. But Chu recruited over 4,500 outside experts to peer-review Energy’s grant applications, to make sure decisions were made according to merit. Anyway, as Rogers liked to say, the department wasn’t really picking winners and losers. It was picking the game: clean energy. So it wouldn’t just support one advanced battery maker; it would support thirty promising firms in the battery space, all with unique technological and entrepreneurial approaches. And it wouldn’t assume that advanced batteries and electric vehicles were the only path to green transportation; it would also support a variety of advanced biofuels, and several strategies to promote more fuel-efficient combustion of fossil fuels, like better engines, lightweight materials, and vehicles powered by natural gas. Meanwhile, ARPA-E would finance blue-sky research into cheaper and more powerful batteries, cheaper and more sustainable biofuels, and other paths away from petroleum.
Then the market would sort out the winners and losers.
“We rejected the model where you put all your money on one horse. But we’re also rejecting the model where you give everybody money and let a thousand flowers bloom,” Rogers says. “Those are both I-hope-we-get-lucky models.” Instead, the department focused on technologies that seemed to be on the cusp of a breakthrough, and let the various companies in its portfolio fight amongst themselves.
“This isn’t like Japan, Incorporated, picking Nissan,” Biden says.
As Obama often says, the free market is the most efficient economic engine ever invented, and even his advisers were skeptical about some federal investments in private enterprise. Summers groused that projects that made sense usually didn’t need government help, while projects that needed government help usually didn’t make sense. But the credit crunch had changed some of those calculations, making it virtually impossible to finance green projects. And the sweeping arguments Republicans were making against any government interference in the economy sounded like a combination of libertarian purism and political opportunism. As Bernstein argued, “we’re already so much more than a little bit pregnant.” The U.S. government had provided seed capital for the transcontinental railroad, the Internet, and most of our high-tech industries. It still distorted private economic decisions through a panoply of subsidies and tax breaks for everything from homeownership to cotton farming. One could argue that the best way to promote clean energy would be to tax dirty energy, but Congress wasn’t doing that, and global warming wouldn’t wait for cloture.
It was true that government investments could introduce market inefficiencies, even when experienced capitalists oversaw the process. But the global financial meltdown was a reminder that the private sector wasn’t perfectly efficient, either. And CEOs tend to underinvest in long-term innovation that doesn’t move quarterly numbers.
“We know some of these firms will fail. That’s capitalism,” Bernstein told me. “But we’re saying: Clean energy is important to our environmental and economic future. We’re going to make sure there’s a path for good clean-energy firms to succeed.”
These ideological questions wouldn’t even matter unless Rogers could solve the logistical challenge of getting a dysfunctional department with enough employees to fill the Rose Bowl to move at stimulus speed. Rogers knew that a fivefold increase in its nonnuclear budget would be a challenge, but what really worried him were deadlines that would require spending about four ti
mes faster than usual. So he started “morning tag-ups,” daily meetings where the civil servants overseeing every stimulus program had to explain what they planned to achieve today, what they had achieved yesterday, and if they hadn’t met their goals, what went wrong. Best practices were shared, problems addressed. Everyone’s work was on display; the mantra was Accountability Every Day. “When you shock rats in a maze at random intervals with random intensity, they curl into a ball. It’s called ‘learned helplessness,’ and it’s what happens in a bureaucracy,” says one colleague. “But if you make the shocks predictable, they learn how to deal. Matt empowered the rats, so they could find the cheese.” Of course, bureaucrats are not rodents. Some of them fit the lazy and sullen stereotypes, but many of them were knowledgeable and dedicated public servants who were thrilled to be part of a mission that felt important, and would work extra hours for no extra pay when stimulus deadlines loomed.
Still, when Rogers scoped out his battlefield, he saw land mines everywhere. He had to set up grant competitions for advanced biofuel refineries that only seemed semi-ready to deploy, and clean-coal plants that didn’t seem ready at all. ARPA-E only had three employees when it made its first request for proposals, which attracted such an overwhelming response that it crashed the government’s online application system—3,700 abstracts for just 37 grants.
And speaking of the Duke of Wellington, energy efficiency looked like a potential Waterloo; in Obamaworld, the more common description was a three-syllable word starting with “cluster.” The stimulus was plowing a gulp-inducing $11.3 billion into three programs—low-income home weatherization and grants to state and local governments—that had puttered along with a few hundred million per year. You didn’t have to watch Fox News to worry whether hundreds of ragtag ACORN-style community agencies were equipped to handle tenfold weatherization funding increases. Or how tiny state energy offices would handle even larger increases; New Hampshire’s funding spiked from under $300,000 to over $25 million. Most of the 2,300 cities and towns in line for the local grants didn’t even have energy offices. And the red tape surrounding these programs was like something out of an Ionesco play. Routine green-building retrofits would require approvals from historic preservation boards. Eco-friendly co-generation projects to convert waste heat into electricity would require time-consuming environmental impact analyses. And nobody was sure how the Recovery Act’s “Buy American” rules would apply to insulation or programmable thermostats. What if the buttons on the thermostat were made in China?
These programs went way beyond Brewster’s Millions; Rogers’s staff made a portrait of him floating in money captioned: “Rogers’ Billions.” The Department of Energy would have to shovel over $1 billion out the door every week to deliver on its Recovery Act commitments, and the White House was watching. “We will need to demonstrate the ability to deliver large early wins,” Rogers wrote in his action plan.
Chu and Rogers saw three obvious opportunities for early wins that could move money in a hurry: science projects at national labs, nuclear waste cleanups, and those clean-energy loans that the Bush administration had failed to deliver.
Basic science was an easy call—not only because it was Chu’s passion, or because he had run a national lab, but because Energy’s science office already had thick notebooks full of beaker-ready plans for its $1.6 billion in stimulus grants. It was mostly gee-whiz stuff involving “radio frequency niobium cavities” and “femto-second X-rays” that even Rogers found mystifying, but some of the projects had benefits that didn’t require a Ph.D. to comprehend. One $62 million investment is connecting the national labs via the world’s fastest Internet network; its download speed is over ten thousand times faster than an iPhone’s, a godsend for researchers using supercomputers to study climate models and high-energy physics. And just as the World Wide Web began with researchers who wanted to share data, this network should expand beyond nerd-world as well. In 2009, the commercial market for ultra-high-speed equipment did not exist; now the U.S. manufacturers who landed the stimulus work are building similar networks on Wall Street and in South Korea.
“We wanted to make the market,” says Steve Cotter, a national lab official who oversees the network. “This could pioneer the next era of Internet innovation.”
The stimulus also included over $6 billion for cleaning up nuclear waste, the equivalent of two normal years of funding. As the media pointed out at the time, Energy’s cleanup program had a sordid history of delays and overruns. But its contractors were already in place, and Rogers thought better management could produce better results. Ultimately, the Recovery Act work would come in on time and under budget. It would also make an unprecedented dent in the Cold War’s radioactive legacy, shrinking the nation’s contaminated footprint by more than two thirds after years where it barely budged. At the Hanford nuclear reservation in Oregon, workers would demolish seventy-five buildings and reduce the footprint by 385 square miles, slashing surveillance and maintenance costs while minimizing the threat to the Columbia River. The department also completed seven smaller cleanups—as in, all done, the land is clean, no need to come back.
“The program hadn’t finished a cleanup in years,” Rogers says. “Finishing just wasn’t part of its lexicon. We wanted to prove this stuff doesn’t have to last forever.”
The third plank of Energy’s quick-victory strategy was the clean-energy loans that had languished under Bush. The Obama team was eager to send a message that the days of inaction were over. “I asked the loan office: What’s the soonest we could get a loan guarantee out the door?” Chu told me before the program became controversial. “They said: A year, maybe a year and a half. I said no, that won’t work. How about we shoot for a couple weeks?” Of the 143 companies that had sought loan guarantees in the last four years, there was only one whose application was almost ready for prime time. So Chu and Rogers instructed the loan office to focus on Solyndra.
Solyndra has become Republican shorthand for ineptitude, cronyism, and the failure of green industrial policy. But in early 2009, it was the toast of Silicon Valley, a hot start-up with a potentially game-changing product it was already starting to sell. It had raised $1 billion from elite investors like the Walton family of Walmart fame, Oklahoma oil magnate George Kaiser, and British mogul Richard Branson, whose Virgin Green Fund selected Solyndra from a pool of 117 solar firms.275 It was not some hackish Democratic operation. Kaiser was an Obama fund-raiser, but the Waltons were Republican donors. The Bush administration had embraced Solyndra, and had tried to speed up its $585 million loan application for a state-of-the-art solar panel manufacturing facility in Fremont, California.276 The civil servants on the department’s credit committee objected to the rush job, and refused to approve the loan before Bush left office, but suggested they would sign off once a few concerns were addressed. “The project appears to have merit,” they wrote. Bush’s political appointees had been so encouraging to Solyndra founder and CEO Chris Gronet that they apologized when the loan was delayed.
“I find the response completely unacceptable,” Gronet emailed a department official in January. “An apology is not enough.”
Solyndra’s slogan, “The New Shape of Solar,” was more than marketing hyperbole; its technology was truly revolutionary. Most solar panels look like tinted windows. Solyndra’s looked like horizontal ladders for lizards. Most panels harvest sunlight with silicon wafers. Solyndra’s relied on a metal mixture called CIGS etched onto elongated glass cylinders. Solyndra’s panels were more expensive than traditional panels, but they were easy to install, which drove down their overall cost; they clicked together like Legos, so they didn’t require elaborate mounting devices, or even tools. The company was burning through cash, and its financials evoked the old joke about losing money on every sale but making it up in volume. But its executives believed a more efficient factory and new economies of scale would slice their production costs, at a time when sky-high silicon prices were brutalizing their competitors.
The Obama team knew solar manufacturing was a risky business, but the point of the loan program was to help firms like Solyndra cross the so-called Valley of Death for innovative technologies with major start-up and scale-up costs. Some loans would go bust, but Congress had reserved enough money to cover plenty of Solyndra-sized failures. And Solyndra felt like a classic American story of innovation, founded by a Silicon Valley scientist from the semiconductor industry, improving technology originally developed by a national lab, aiming to reinvigorate a U.S.-born manufacturing industry that had fled overseas. Its loan would create 6,000 construction jobs, more than the Hoover Dam, and 1,800 permanent jobs. It would rally an additional $200 million in private capital off the sidelines, and finance a high-tech factory that could produce enough solar panels to replace a medium-sized coal plant every year.
The Recovery Act made the loan program less onerous; if you think of the loans as mortgages, it paid for the mortgage insurance. But the Obama administration made the terms of the Solyndra loan more onerous, requiring the company to raise more capital—in the mortgage analogy, a larger down payment. OMB, traditionally skeptical of government loans, raised some concern about the state of the solar market, but Rogers figured the extra capital requirements would be a good test for Solyndra. It would have to persuade private investors that the new factory made sense before it could get the government loan. In March, the credit committee decided its concerns had been addressed, and approved a conditional loan commitment. It felt like an early win.
Republicans later subpoenaed nearly 200,000 pages of administration documents about Solyndra, and they did reveal some internal debate over the loan. An Energy Department loan officer was irritated when Chu prematurely told reporters the deal was almost done: “This nonsense has got to stop.” During a technical dispute over cash flow models, an OMB analyst presciently suggested that Solyndra could run out of money in 2011. And just a week before Biden was scheduled to announce the final loan, an OMB official requested more time to analyze whether a recent slump in silicon prices could affect Solyndra’s market position. In retrospect, that would have been a good idea.
The New New Deal Page 29