Is This A Good Idea? Should the Government Help Finance Electric Car Makers?

October 12, 2009

A conservative friend of mine on Facebook recently sent me a teasing “debunk this!” message linking to this blog from the American Issues Project. In it, blogger Duane Lester attacks the Obama Administration’s providing financing to nascent electric car manufacturers. In particular, he’s irked by a $529 million loan to Irvine, CA-based Fisker Automotive, to help it bring two electric plug-in hybrid models to market in the next few years.

Recently, the government gave over half a billion dollars to a small California-based car company backed by former vice president Al Gore. The company, Fisker Automotive Inc., received $529 million to build a hybrid sports car in Finland. That's right. The United States government, not content with owning General Motors, is now invested in car production in Finland.

So okay, debunk I shall. Before we proceed, I should correct few details. The Department of Energy gave Fisker a loan, not a gift, as part of its $25 billion initiative to help finance electric car development. They eventually have to pay back the money, plus interest. Gore is one of the thirty-odd partners in Kleiner Perkins Caufield & Byers, a venture capital firm that has invested over $10 million in Fisker, but it actually was another partner, former Oracle COO Ray Lane, who was the mover behind the deal. (As the Wall Street Journal reported in 2008, Gore didn’t play a significant role, though he does want to buy one of Fisker’s cars.) Additionally, only a portion of that money—$169 million—is allocated to producing the Karma, a limited-edition $88,000 high-end “sports sedan” that will be assembled by a Finnish subcontractor, but from mostly U.S. made parts. (The lithium-ion batteries, for example, will be made by EnerDel, an Indiana company that’s traded on Nasdaq.) The bulk of the loan, $360 million, will help develop Fisker’s Project NINA, a less-expensive ($39,500,once federal tax credits are factored in) mass-market vehicle which the company plans to manufacture entirely in the U.S.

Lester’s larger point, though is that electric cars are a wasted government investment, as far as limiting carbon emissions are concerned. He argues that even if at some point in the future, half of cars on U.S. roads were electric or hybrid vehicles:

According to the Government Accounting Office, there isn't enough electricity produced in America to support those numbers. More power plants would have to be built and unless they are all nuclear, more hybrid cars on the road won't change the level of carbon dioxide produced in America.

His source on this is a CNS.com article, but I would encourage you to look at the actual June 2009 Government Accountability Office report upon which it is somewhat loosely based. What GAO concludes that for plug-in vehicles to achieve their “full potential” in reducing emissions, they would need to use electricity from non-carbon generating sources, such as nuclear plants or renewables (solar, wind, etc.). GAO did reference a Duke University study that found that an increase in plug-in hybrids might lead to more coal-fired plants, unless a carbon tax was imposed. But GAO also cited 2006 research by the government’s own Pacific Northwest National Laboratory which came to the opposite conclusion, finding that as long as people charged their plug-ins during off hours, we could replace 84 percent of our cars with plug-ins and not have to build any new plants.

As for Lester’s other argument, that powering cars with electricity from coal-fired plants rather than gasoline doesn’t reduce carbon emissions, government scientists disagree. As a 2007 PNL publication notes that

The extra electricity needed to power PHEVs (plug-in hybrid electric vehicles) would come from coal-fired and natural gas-fired plants. Even though these power plants emit greenhouse gases, overall levels would be reduced because it is more efficient to move a car one mile using electricity than producing gasoline and burning it in the car’s engine.

Instead of federal loans for electric car development, Lester argues that “perhaps we should simply get out of the way of progress,” and advocates the building of more nuclear power plants. Now, as I wrote in this blog a while back, I’m not necessarily against building more nukes, as part of a broad strategy to combat climate change. But if your big issue is government intervention in the marketplace, you couldn’t find a worse cause to champion than nuclear power, which was developed by government scientists and has been heavily subsidized since the get-go. Doug Koplow, a Boston-based energy consultant quoted in this Christian Science Monitor article estimates that between 1947 and 1999, the industry received $178 billion in public subsidies. Sen. Lamar Alexander, R-TN’s proposal to build 100 new nuclear power plants would require the federal government to guarantee Wall Street’s loans to utility companies for “the first dozen or so” reactors. By my back-of-the-envelope calculations, that would make taxpayers liable to pay up to $56 billion if the utilities fall behind on construction and default.

Okay, so here’s my point. In a perfect world, maybe Adam Smith’s Invisible Hand theory would lead to companies acting out of self interest to solve the problem of climate change. But we don’t live in that world. We live in one where the government often has intervened in the marketplace and acted as an impetus to transformational technologies, when private enterprise can’t or won’t. And climate change is too big of a menace to the planet for the government not to step in and do something. Plug-in electric cars would help reduce carbon emissions, and in the process help reduce our expensive and dangerous dependence upon foreign oil. And it makes sense for the government to spread that $25 billion in chips around and put a few on small, agile players such as Fisker, in hopes that they’ll develop innovations that ultimately will benefit everybody.

So what do you think? Express your opinion below.

Comments

[Astroboy]

FIRST! HAHAA

[John]

I'm still trying to figure something out--let's say gobs of people buy electric cars and then plug them in to recharge them during "off hours." At what point does the demand then reach a point when "off hours" doesnt apply anymore?

[John]

Oops--never mind--should have read closer. 84 % is pretty good, actually. Now if we could get a more efficient grid...

[Patrick J. Kiger]

Hey John, that's actually a really good question. I seem to remember that back in the 1990s, phone companies suddenly saw their off-hours nighttime usage increasing, because people were starting to use dial-up internet connections.

You're also right on with your comment about our needing a more efficient power grid. It would also help to be able to plug in more small, decentralized and dedicated power plants that were closer to the consumers, rather than putting all the power into a gigantic pool and sending it long distances. We lose something like 8 percent of the electricity generated in the US during transmission. Saving a portion of that would power a whole lot of electric cars.

The US wastes enough electricity through leakage in the transmission system to power vast numbers of electric cars.

[Bob (via PJK)]

Note from PJK: I'm re-posting this comment that my friend Bob, who's a business journalist, posted on my Facebook page..

"The $500 million to Fisker is only a loan if Fisker survives to pay it back. I'd argue in this case it's not a loan, it's very risky bet. Meanwhile, Chinese electric car company BYD is coming to the US next year with a $20,00 electric car while Fisker is making very expensive electric toys. We're betting on some pretty weird horses in this race."

[Patrick J. Kiger]

Note from PJK: Here's the response I posted on Facebook...

A bit of perspective here--the same DOE program loaned $6 billion to Ford and $1.5 billion to Nissan (which has an electric car battery plant in TN), so the $500 million to Fisker in some ways actually is a hedge. Also, it's a conditional loan. Fisker has to meet incremental design and production benchmarks set by the government, or they won't get ... Read Moreall the money. And even if they ultimately don't make it in the marketplace, whatever innovations they develop will end up in Ford or GM electric vehicles.

As for BYD, they originally announced that they'd be marketing a $20,000 mass-market car in the US, but now that they're getting closer to the target date, it's turning into a $40,000-plus car, and they'll only be sending over a few hundred. That's assuming they even have an actual production car they can bring to market. They haven't released a plug-in for the Chinese consumer market yet, and there's some speculation by analysts that they're having technical problems.
(http://online.wsj.com/article/SB125085247014949083.html)

[Thumper]

Electric cars are works of the devil. If God had wanted us to plug in our cars every night, he would have given us 220v outlets in our garages!

[Patriot]

Electric cars are a joke. Look how big of a carbon footprint Al Gore has. It's like a third-world country.

[Sonny R. Brase]

WHAT? WHY?!!!. 1995 GM mskes EV-1 leases car to several people in CA. and AZ. Then around 2003 with-out warning or the offer to sell to customers, took them back and destoyed them all. That is to say (CRUSHED)! a working viable alternative to fossil fuel. Try asking MR.Bush, CA. Repesentatives, U.S.Senators, Congress, and above all GM auto makers. Bailouts and loans! Again WHAT? WHY?! They had it right and dropped the ball. For the people does not mean anything any more.

[Caffeine Driven Stress Magnet]

I agree. GM made a huge mistake shutting down the EV-1 program, rather than expanding it. The EV-1 did have some flaws, but the EVs available today are way better.

[Natural Man]

We don't need no electric cars. Just walk!

[Ray]

If it weren't for government funding, we wouldn't have the Internet, or teflon frying pans. I think it's a great idea for the government to back the development of electric cars.

[Rev. David Bozek]

There is another company in Silicon Vaalley -- APTERA -- that is taking deposits on all-electrics, as well as plug-in hybrids. Price is $27,000, with the first production run starting next summer.
Go to : www.APTERA.com. It's a weird-looking car, but would you trade weird for 300 mpg in the hybrid??

[Patrick J. Kiger]

Here's a HowStuffWorks article on APTERA, too.
http://auto.howstuffworks.com/aptera-hybrid.htm

[kiroshimasylvia]

I appreciate the concern which is been rose. The things need to be sorted out because it is about the individual but it can be with everyone. I like this particular article It gives me an additional input on the information around the world Thanks a lot and keep going with posting such information.
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[Car Finance]

Its give me many type service.And jobs.

[Car Finance]

It,s give many type service and jobs.

[Car Finance]

The car service is proide different type service and job.

[Car Finance]

car finence is good it's provide many skills.And it is popular.

[captive insurance companies]

Well electric cars are the future, are they not? Can't wait to do away with gasoline! So...shoot, why not finance the manufacturers...better than financing them to continue making gasoline powered cars, no?

[Mandar]

Science cannot be rushed by pumping money , can it ? After all Rome wasn't built in a day.

[Used cars for sale]

I think this is backup for companies those who are looking to invest in more fuel efficient technologies, but electric cars are still not popular in market so obviously there is risk in regards to investment