Take More and Better Financial Risks

Introduction

By 2029, the urgency of climate change, energy affordability, and infrastructure modernization will have sharply intensified. Meeting these challenges will require marshaling investment on a generational scale. Given long-standing frustrations with our balkanized bureaucracy, calls to create entirely new institutions to drive this investment are understandable. Some of these ideas are important and valuable. Building new institutions, however, takes time—it will take months or years for new programs to be stood up and even longer before the proverbial shovels hit the ground. But a progressive administration will enter office intending to deliver quickly. That means the institutions we have now will need to be fully mobilized.

What’s more, addressing these challenges will require a wider aperture—beyond a focus on the pathologies of markets that have led to underinvestment in clean technologies.¹ After years of policy shifts and uncertainty, ensuring greater policy durability will become a central objective to a new administration.

Accordingly, the federal government will need to reimagine its role to one of market-building for the long term. Call it a “whole-of-market” strategy: deploying tools across both the supply and demand sides of the ledger in order to seed and shape markets. The Trump administration recently recognized these dynamics in the defense and minerals sectors to promote its goal of securing domestic supply chains, providing demand certainty through price floors and offtake commitments. The next administration can apply this basic logic to help green markets grow—and better position them to endure beyond political cycles.

While major elements of the Inflation Reduction Act (IRA) and Bipartisan Infrastructure Law (BIL) were reversed before the laws’ impact could be fully realized, the experiences of implementing those laws still offer crucial lessons. This new phase of green finance post-2029 should start with three broad shifts.

Give Greater Demand Certainty So Private-Sector Bets Pay Off

The IRA’s supply-side arsenal was unprecedented in its breadth and depth. However, often the more acute challenge has been not only producing the technologies but securing a reliable market for them. The trade-off of a heavy focus on supply is that firms may build capacity but struggle to attract financing if demand for products is uncertain. Addressing this challenge means embracing the role of the government as a coordinator—supporting demand functions, as well as supply, to help critical new technologies and industries scale. By anchoring early demand, the government can accelerate a technology’s journey to commercial viability, offering a path to policy durability.²

The course of clean hydrogen markets illustrates this dynamic. Despite a raft of federal incentives—a hydrogen production tax credit in the IRA, expanded DOE loan authority, and research and development funding—numerous hydrogen projects stalled as buyers resisted long-term contracts that could lock them into uncompetitive pricing.³ Without executed offtake agreements, developers could not secure the financing needed to bring products to market. An industry benefiting from robust production-side incentives failed to get off the ground due to a lack of customers.

Demand-side or -pull tools are designed to overcome such barriers, addressing the risks that customers will not materialize or that prices will fall below what is needed to justify an investment.⁴ The federal demand-pull tool kit varies across agencies and statutes but generally ranges from direct procurement (the government buying a specified amount of a product) and offtake contracts (a guarantee for the government to purchase a quantity of product at a preset price), to advance market commitments (guaranteeing the purchase of a critical product still being developed) and consumer-side incentives.

We don’t have to look far for precedents—the Trump administration has presented multiple. In the case of rare earth minerals producer MP Materials, investors had been reluctant to commit to projects exposed to China’s dominance of supply chains and export restrictions.⁵ The administration responded with a mix of supply and demand support, providing financing to expand the company’s domestic production coupled with offtake commitments and a price floor. By effectively announcing a market for the company’s output, the government sent a signal that channeled investment toward its goal of domestic production. Operation Warp Speed was perhaps the highest-profile example of the use of demand-side tools: There, the federal government committed billions of dollars to purchase vaccines still under development via advance market commitment–like mechanisms, guaranteeing a market upon the vaccines’ release.⁶ In both examples, public investment didn’t just fund production but built a market.

To its credit, the Biden administration did explore leveraging these tools in the critical minerals and clean hydrogen sectors during the latter half of its tenure, including announcing a cross-sector consortium in January 2024 to design hydrogen demand-side mechanisms.⁷ These efforts were promising but were undercapitalized and established too late, relative to the grant programs and tax credits, to have a meaningful impact.

Demand-pull tools also offer a more practical benefit: They can be implemented more quickly and with less administrative architecture than major supply-side incentives, which may necessitate successive rounds of rulemaking and interpretive guidance.⁸ Still, a demand tool must be tailored to the risk at hand, or it will fail to catalyze the investment it is seeking to induce.⁹

A whole-of-market strategy means coordination across both supply and demand functions, and future administrations should view demand-side support as a key part of their investment arsenal. By deploying these authorities systematically, they can accelerate the creation of green markets that can outlast electoral cycles.¹⁰

Take Risks Like the Private Sector

Financing a clean energy transition will require the government to catalyze hundreds of billions in private investment. Doing so means being willing to make bold bets across multiple industries. However, federal green finance has long been characterized by a low tolerance for risk, with investments gravitating to safer projects rather than the kinds of higher-risk ones that could transform the economy. Changing this dynamic will be as much a cultural challenge as a financial one.

Take the Department of Energy (DOE) Loan Programs Office (LPO), now the Office of Energy Dominance Financing. In 2024 the office emphasized its low loss rate of approximately 3.1 percent of loan value.¹¹ LPO’s lifetime loan loss rate, in fact, sits at around 2 percent, just above that of commercial banks at 1 percent.¹² While a low rate may help avoid the ire of an auditor or congressional committee, it signals underperformance for an agency whose statutory mandate is to catalyze next-generation clean technologies. If a public investment program maintains a loss rate comparable to a bank, it is reinforcing the status quo, not transforming it.

This timidity traces back to recent political history—namely, the fallout during the Obama administration from the highly publicized bankruptcy of Solyndra, the solar company that collapsed in 2011 after receiving a DOE loan guarantee two years earlier.¹³ Ever since, officials have treated “avoiding another Solyndra” as an implicit objective for investment programs. But there is no such thing as a free lunch.¹⁴ Public investments that over-index on avoiding controversy inevitably steer capital toward lower-risk, more mature technologies and away from those with transformative upside.¹⁵ Indeed, as of 2024, around 90 percent of the LPO’s battery-related deployment commitments had gone toward standard lithium-ion batteries, while less than 1 percent went toward next-generation solid-state battery technologies.¹⁶

Venture capital investing offers a useful analogue. There, firms expect most of their investments to underperform or fail and a small number of outsize successes to ultimately drive returns.¹⁷ Or take green banks: While mostly nonprofit or quasi-public, they, too, embrace a more risk-tolerant philosophy. Armed with mandates to create new markets in underserved communities, green banks place calculated bets on technologies where markets have been slow to act, and they do so with a variety of risk-bearing products like subordinated or first-loss positions.¹⁸

There is much the government can learn from markets in this respect. Policymakers should measure success, at a minimum, across a portfolio—not project by project with the benefit of hindsight.

This requires a public sector that is not just better resourced but ambitious enough to embrace a whole-of-market strategy, take on smart financial risks, and deploy the full range of its tools.

Get Agencies to Sharpen All Their Tools

The experience of the IRA and BIL also exposes a fundamental misalignment between the ambition to build new markets and the government’s capacity to do so. Bridging this gap will require restoring and expanding agency resources. More fundamentally, though, it will necessitate confronting the institutional path dependencies and pressures that prevent agencies from leveraging the full weight of their tools.

The DOE, for instance, entered the Biden administration with decades of experience funding and supporting research and development but far less experience coordinating large-scale commercialization. To its credit, DOE quickly moved to recruit hundreds of experts and establish senior managerial positions focused on clean energy deployment, most notably a new undersecretary for infrastructure.¹⁹ Yet the agency’s primary mechanisms for deploying funds—financial assistance grants and cooperative agreements with cost-reimbursement structures—were unsuited for the remarkably complex task of structuring multiparty infrastructure transactions.²⁰

DOE did have more flexible authorities (some of which dated back to the 1970s), which allowed it to partner with nontraditional outside actors, negotiate bespoke commercialization agreements, and support scaled clean energy deployment in ways traditional grant-making could not.²¹ But these authorities were underdeveloped and rarely had been used at scale. Facing pressure to get money out the door quickly, the agency prioritized issuing solicitations and awards. The difficult task of building the internal capacity to use these authorities to structure complex offtake agreements, among other multifaceted transactions, received less up-front attention—leaving these capabilities stuck in infancy. The lesson is that even if the scope of its mission changes through expansive new legislation, agencies will still tend to default to their institutional memory.²²

Going forward, true capacity building means flexing new, or even long-dormant, muscles, especially the kind required to grow green markets at scale.

Conclusion

To deliver more lasting impact, the federal government should embrace the role of a sophisticated market builder. Ultimately, this requires a public sector that is not just better resourced but ambitious enough to embrace a whole-of-market strategy, take on smart financial risks, and deploy the full range of its tools. The real gauge of success will be policy that fosters markets capable of driving clean energy investment long after federal support has receded.