Department of Energy is overspending and canceling projects in its carbon capture program, GAO says

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For nearly a dozen years, the Energy Department has supported carbon capture demonstration projects in process plants and power plants. But the program was difficult. The DoE canceled some projects before they were built. Others started but were stopped. The Government Accountability Office found that Energy did not do enough to control costs and ended up spending $500 million on projects that were never built. For more details, the Federal Drive with Tom Temin turned to GAO Director of Natural Resources and Environmental Issues, Frank Rusco.

Tom Temin: Frank, good to see you again.

Frank Rusco: Thanks Tom. Glad to be here.

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

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

Tom Temin: Okay, so it’s not just factories that burn coal, then?

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

Tom Temin: I get it. So, in other words, whatever it is, they have fireplaces. And the carbon comes out of those batteries. And the idea is to prevent that carbon from going up into the air.

Frank Rusco: Correct. Yes.

Tom Temin: Well, what happened? So that makes a total of 11 projects over the past 12 years. How many of them are operational? And what is the status of the others?

Frank Rusco: Well, of the initial 11 projects, only two are operational. Another was completed, but it was later closed for economic reasons afterwards. The two that run constantly are industrial processes. And they had an advantage in that they already had pipeline transport systems for carbon. Once they captured and condensed it, they could ship it. And in one case, it goes into a saline formation that actually belonged to the company that captures the carbon. And in the other case, they sell it to an oil production facility, which was nearby, about 30 miles away, and it can be injected into the ground and then further stimulate oil production by creating pressure underground which expels more oil.

Tom Temin: So reading between the lines, the places where it was economical to do that 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 use useful of it once captured.

Frank Rusco: Yes, I think that’s the key. In fact, all about carbon capture is that it’s expensive. There is no way around this. Demonstration projects are designed to inject federal funds into the private sector to encourage the construction of these facilities. And in doing so, usually what happens, you build new facilities, you learn, you can do it cheaper next time. And so the idea is that if the federal government can put money into this, it will reduce the costs in the long run and make these things economical. But there is a fundamental level of economic viability that must be achieved. And in the case of power plants, it just didn’t work. And that was something that the DoE could have anticipated earlier in the process, but they kind of kept funding those things. And in the end, only one was built.

Tom Temin: If they cost a trillion dollars, you can’t pledge it to taxpayers, because it’s regulated. And there’s a limit how far they can go there, so you kind of get held back. We speak with Frank Rusco, Director of National Resources and Environmental Issues at the Government Accountability Office. And how much has the Department of Energy spent so far since 2009?

Frank Rusco: Well, they spent $1.1 billion in total, and almost half of that was spent on projects that weren’t even conceived before they were canceled. And so the other half went a little further — they built one of the power plant facilities and two of the industrial facilities. But about half of that money was really spent before the projects even came out of design, which is unusual. You know, the federal government is generally expected to spend money on design, a certain amount of money on design. The company itself should spend matching funds. And then once they got out of the design, so all the engineering had been done and it looked doable, then the feds would be spending a lot more money. But in this case, they kind of preloaded federal spending. So when the projects didn’t work out, they had already spent about half the money they had on all the projects.

Tom Temin: So you pointed out certain management weaknesses in the operation of this program. What were they and what are your recommendations for energy if they think it’s still a viable thing to do?

Frank Rusco: Law. You know, I’ll start with the “plans to do more”. It is therefore very important that they do it better. So we discovered that there were two main problems. One was a selection process. So when you’re selecting demo projects to fund, you really want to look at a bunch of projects, and you want to look at their design and plans and pick the best ones. It takes a long time, sometimes up to a year or more, to figure out which projects seem the most viable. And in the case of this particular slice of spending, they condense that for the energy projects to about three months, whereas for the industrial projects, they took their time, and they did a little more due diligence, which might explain why they were more successful in this area. So it’s a domain. Just selecting projects is complicated and time consuming, and they need to take that time and do a better job there. The second was when they were administering the projects, really the typical way of doing that is to set milestones. And when the project partner — the private sector company doing it — needs to hit a milestone to secure additional funds. But time and time again, in this particular funding episode, the DoE continued to fund even when milestones were not met. And they also loaded the financing in the early parts of the project. The DoE therefore received, in some cases, 80% or even higher amounts of project funding. In other words, don’t require matching funds in the early stages. And so when you have projects that don’t even come out of conception and you’ve spent all that federal money, the private sector didn’t have much skin in the game, so they can bail out if it doesn’t work , but the federal funds are already spent.

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

Frank Rusco: Absoutely.

Tom Temin: Good. And is the Department of Energy okay with that? And do they plan to take steps to tighten up their planning and then the management of their programming?

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

Tom Temin: And besides, these projects are almost like building a factory next to a factory? It looks like quite large types of facilities to capture and somehow store carbon.

Frank Rusco: Absoutely. That’s a lot of additional capital expenditure for these large processes that take the flue gases and run them through more and more equipment to capture the carbon from the flue gases and then condense it and put it into a form which can be shipped by pipeline. And that’s how. It’s exactly as you said; it is 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 environmental issues at the Government Accountability Office. Thanks very much.

Frank Rusco: My pleasure. Thank you.

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