Energy Dept. overspending and canceling projects in its carbon capture program, GAO says

The Energy Department has been sustaining carbon capture demonstration projects at process and power plants. But the program has been rocky.

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For nearly a dozen years, the Energy Department has been sustaining carbon capture demonstration projects at process and power plants. But the program has been rocky. DoE canceled some projects before they were built. Others started but were shut down. The Government Accountability Office has found that Energy hasn’t done enough to ensure cost controls and ended up spending $500 million on projects that were never built. For details, the Federal Drive with Tom Temin turned to the GAO’s Director of Natural Resources and Environment Issues, Frank Rusco.

Interview transcript:

Tom Temin: Frank, good to have you back.

Frank Rusco: Thanks, Tom. Pleasure to be here.

Tom Temin: This project is kind of a complicated one, and just tell us how it’s supposed to work. What is DoE trying to do here?

Frank Rusco: Yes, DoE is trying to facilitate the development of demonstration projects that’s full-scale, full-size projects, to capture carbon and then sequester it or use it. And they’re trying to do this from power plants and also from industrial processes.

Tom Temin: Alright, so it’s not just plants that burn coal, then?

Frank Rusco: No, they were, in this particular tranche of demonstration projects that they were funding, there were eight coal-powered power plants and three processes that were basically, well, two of them were methanol production processes.

Tom Temin: Got it. So in other words, whatever it is, they have smokestacks. And carbon is coming out of those stacks. And the idea is to keep that carbon from going up into the air.

Frank Rusco: Correct. Yes.

Tom Temin: Well, what happened? So that’s a total of 11 projects over these past 12 years. How many of them are up and running? And what’s the status of the rest of them?

Frank Rusco: Well, so of the 11 initial projects, only two are up and running. One more was completed, but then it was shut down for economic reasons after that. The two that are continually running are the industrial processes. And they had an advantage in the sense that they had already existing pipeline transportation systems for the carbon. Once they had captured it and condensed it, they could ship it. And in one case, it’s going into a saline formation that was actually owned by the company that is capturing the carbon. And in the other case, they’re selling it to an oil production facility, which was nearby, like 30 miles away, and it can be injected into the ground and then stimulate further oil production by creating pressure underground that pushes more oil out.

Tom Temin: So reading between the lines, then, the places where it was economic to do so already had some of the infrastructure in place or, in one case, had the economic incentive, because they had a market for the carbon — a useful use of it once it was captured.

Frank Rusco: Yes, I think that’s key. Really, the whole thing about carbon capture is it’s expensive. There’s no way around it. The demonstration projects are designed to pump federal money into the private sector to encourage the building of these facilities. And in so doing, usually what happens, you build new facilities, you learn, you can do it cheaper the next time. And so the idea is if the federal government can pump money into this, it’ll lower costs in the long run and make these things economic. But there’s a fundamental level of economic viability that has to be reached. And in the case of the power plants, it just didn’t work. And this was something that DoE could have foreseen earlier in the process, but they just kind of kept funding these things. And in the end, only one got built.

Tom Temin: If they cost a trillion dollars, you can’t pawn that off on ratepayers, because that’s regulated. And there’s a limit how far they can go there, so you kind of get hold up. We are speaking with Frank Rusco, director of national resources and environment issues at the Government Accountability Office. Snd how much has the Energy Department spent so far since 2009?

Frank Rusco: Well, they spent $1.1 billion in total, and a good almost half of that was spent on projects that didn’t even get out of design before they were cancelled. And so the other half got a little bit further — it built one of the power plant facilities and two of the industrial facilities. But about half that money really was spent before the projects even got out of design, which is unusual. You know, you would usually expect that the federal government would spend money on design, some amount of money on design. The company themselves would have to spend matching funds. And then once they got out of design, so that all the engineering had been done and it looked feasible, then the federal government would spend much more of the money. But in this case, they kind of front loaded the federal spending. So when the projects didn’t work out, they’d already spent roughly half of the money they had for all the projects.

Tom Temin: So then you have pointed out some managerial weaknesses in the running of this program. What were those and what are your recommendations for energy if they think this is still a viable thing to do?

Frank Rusco: Right. You know, I’ll start with the “are planning to do more of this.” So it is very important that they do it better. So what we found is that there were two main problems. One was a selection process. So when you select demonstration projects to fund, you really want to look at a bunch of projects, and you want to look at their design and their plans and down select to the best ones. That takes a long time, sometimes up to a year or longer to figure out what are the projects that look most viable. And in the case of this particular tranche of spending, they condense that for the power projects into about three months, whereas for the industrial projects, they took their time, and they did a little bit more due diligence, which might explain why they had more success in that area. So that’s one area. Just selecting projects is complicated and takes time, and they need to take that time and do a better job there. The second one was when they were administering the projects, really the typical way to do this is you set milestones. And when the project partner — the private sector company that’s doing this — they have to meet a milestone to get additional amounts of funding. But time and again, in this particular funding episode, DoE we continued funding even when milestones were not met. And they also front loaded the funding into the early parts of the project. So DoE was picking up, in some cases, 80% or even higher amounts of the funding for the project. In other words, not requiring matching funds in the early stages. And so when you have projects that don’t even get out of design and you’ve spent all this federal money, the private sector didn’t have that much skin in the game, so they can bail on it if it’s not going to work, but the federal monies already spent.

Tom Temin: Yeah, that’s kind of a classic risk management mistake, you might say.

Frank Rusco: Absolutely.

Tom Temin: Alright. And does the Energy Department agree with this? And do they plan to take steps to tighten up their planning and then program management of it?

Frank Rusco: Well, I’m sure they have some plans to do that. In response to our report, they did not agree or disagree with our recommendations to improve the management. But what they said is that they’re forming a new office of clean energy, and that will be where they’re going to fund this kind of project going forward. Now that office has been set up, but we haven’t heard back from DoE yet what they plan to do to improve this going forward.

Tom Temin: And by the way, these projects, are they almost like building a factory next to a factory? They sound like pretty expansive types of facilities to capture and somehow keep the carbon.

Frank Rusco: Absolutely. It’s a lot of additional capital expenditure on these large processes that take the flue gas and run them through more and more equipment to capture the carbon out of the flue gas and then condense it and get it into a form that can be shipped by pipeline. And so it is. It’s just like you said; it’s like a plant next to a plant.

Tom Temin: You know, something Rube Goldberg would probably appreciate. Frank Rusco is director of natural resources and environment issues at the Government Accountability Office. Thanks so much.

Frank Rusco: My pleasure. Thank you.

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