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Feds Pay $10 Million for $50 Light Bulb

Photo courtesy of Reason.com

BY KATHERINE MANGU-WARD - In 2007, when Congress passed legislation that would gradually ban old school incandescent light bulbs, they added a carrot to the pile of sticks: A $10 million dollar prize to encourage the development of a cheap, green, domestic light bulb to replace the dearly departed Edison model.

Five years later, that bulb is coming to a hardware store near you. It will cost you 50 bucks. It also fails to meet many of the original prize specifications. The winner, Dutch electronics company Philips, was the one and only entrant, suggesting that the prize failed to stimulate widespread additional private spending on R&D. The portion of the LED bulb made in America is less than initially envisioned. And the guidelines for pricing were utterly ignored: The goal was $22 price tag in the first year, falling rapidly to $8 by year three.

Meanwhile, a lot has happened in those five years. Americans are (perhaps grudgingly) adopting new light bulb technologies; experimenting with CFLs, halogens, and LEDs. The florescence of options was partially due to the fact that the relevant technologies reached a natural tipping point, partially due to the increasing cost of energy, and partially a response to the impending ban. (The end of the 100-watt incandescent was targeted for this year, with lesser wattages slated to fall victim on subsequent New Year’s Days.) In other words, in the time that elapsed between conception and delivery the prize has become perfectly irrelevant.

The “L Prize” fiasco is a reminder that while prizes can be a wildly successful way to stimulate interest and investment in a particular problem—think of the X Prize—the way they are structured matters. A lot.

In this case, the prize was a first-past-the-post arrangement. So electronics giant Philips, which also makes a Chinese-manufactured version of the same product for half the cost, quickly fiddled with the specs and figured out a way to make some of the chips in San Jose—all jobs that will go to American citizens, no doubt—and do the assembly in Wisconsin. Two other companies had announced their intention to join the fray, General Electric and Lighting Science Group, when the Department of Energy abruptly declared a winner.

"We are pleased to be the only one who has submitted anything," chief executive of Philips Lighting North America Zia Eftekhar told National Geographic. "Even though I'm unbelievably happy we won, it's still good to challenge the entire industry to move the technology forward."

One part of that statement is undoubtedly true—Philips was likely quite satisfied to be the only company in the running—but the idea that the prize has moved or will move the industry forward is silly. Instead of spending the time and energy on genuine innovation, Philips diverted resources from developing the bulbs they were planning to build overseas and sell in the United States to tweak their product to conform (not even all that well) to semi-arbitrary guidelines written by a bunch of bureaucrats with the goal of dispensing some guilt cash that was tacked onto a bill that made a product preferred by virtually everyone in the country at the time illegal.

The goal for this prize shouldn't have been fastest, it should have been best. By the time the rules of the competition were announced, it was already apparent that the nation's basic light bulb needs were not going to go unmet. But rather than aim high, the Department of Energy set its sights squarely on a successful press conference at which the backs of congressmen, department officials, and energy execs could be patted and/or scratched. Mission accomplished.

The trade publication Energy Efficiency & Technology notes that the bulbs that are coming to market are actually a little different than the model that won the competition: “The commercial lamp has three rather than four optical segments and uses fewer LEDs. The reason, says Philips, is that LED technology has progressed a bit even since the end of the contest.” In other words, the carrot is worse than irrelevant. Philips dropped whatever they had into the feds’ laps in order to grab the prize and will continue to improve the bulb, running as fast as they can ahead of the stick. (Frankly, it’s a little surprising the sticky gears of the energy bureaucracy didn’t require the company to stick with the federally tested and approved model in order to maintain its favored status. Thanks goodness for small favors.)

While a $10 million check to sell a slight variation on a product you were developing anyway seems like a pretty sweet deal, it’s actually chump change compared to the real prize: preferential treatment by federal buyers and others major players who are beholden to the feds, such as the many utility companies offering subsidies to customers who purchase the bulbs. The knowledge of this pot of gold at the end of the rainbow further reduced Philips' incentive to keep prices low.

But wait: Why would a company that sells power want to subsidize products that help people consume less of what they’re selling? Ordinary economics no longer applies once you go through the looking glass into much of the heavily regulated utility sector. In California, for example, profits and consumption have been “decoupled”: Prices are based solely on what the state deems to be a fair rate of return. Which means that more demand for energy—accompanied by the possibility that new power plants must be built—is just an expensive pain in someone’s butt, not an opportunity to make more money.

Add in a nudge from your industry’s primary federal regulator, and voila!: Power companies are dropping boatloads of Hamiltons on their customers. In fact, that $10 figure is likely to increase as the Department of Energy pressures utilities to take a bigger bite out of the $50 monster they helped create.

The race to create better, greener light bulbs was underway before the 2007 legislation. The ban intensified the pace. The badly designed, poorly executed L Prize did little more than introduce an overpriced lame duck light bulb into the mix.

Katherine Mangu-Ward is managing editor of Reason magazine.

Short URL: http://www.hawaiireporter.com/?p=46912

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