How Institutional Path Dependence Shapes Industrial Policy

The Case of DOE and Hydrogen Hubs

By Narayan Subramanian

A number of retrospectives over the past year have examined how the US Department of Energy (DOE) implemented its historic Bipartisan Infrastructure Law (BIL) and Inflation Reduction Act (IRA) portfolios. Most have focused on speed and the mechanics of government contracting. Less examined is how Congress structured DOE’s discretionary grant programs — distinct from loans and loan guarantees, state formula grants, and Treasury-run tax credits — and how DOE interpreted and exercised the latitude those programs provided. Taking a closer look at this raises larger industrial policy design questions: how does an agency’s institutional history shape its ability to execute new mandates? And what does that reveal about aligning statutory authority with organizational capacity?

In this article, I use the hydrogen hubs program as a case study to examine how DOE’s institutional lineage shaped its approach to BIL and IRA discretionary programs. Drawing on my work as a legal advisor and as advisor to the secretary of energy during implementation, I show how broad statutory discretion interacted with long-standing procedural habits, how those habits constrained DOE’s initial choices, and how later institutional reforms expanded what the department could do.

The hydrogen example illustrates not only the discretion Congress delegated, but also how different institutional choices might have more directly targeted the private capital, offtake, and bankability barriers that determine whether emerging industries can scale — insights that should guide future statutory design and DOE’s use of its authorities. Although the focus here is DOE, the dynamic is broader, as agencies often grapple with new industrial policy mandates when their procedural muscle memory was built for very different missions.

The history of discretionary energy grants

Discretionary grants — “financial assistance” in federal parlance — have been central to federal energy research and development (R&D) for nearly 70 years. The 1954 amendments to the Atomic Energy Act explicitly expanded the Atomic Energy Commission’s remit to include government-funded nuclear R&D for civilian purposes. In parallel, energy R&D programs emerged across the National Science Foundation, the Department of Interior, and the national laboratories founded during World War II. Following the Arab Oil Embargo and the ensuing energy crisis, the Energy Reorganization Act of 1974 consolidated federal energy R&D under the Energy Research and Development Administration, which in turn paved the way for the creation of DOE in 1977.

From the outset, Congress anticipated that DOE would rely heavily on financial assistance to support research, demonstration, and technology development. The Federal Grant and Cooperative Agreement Act of 1977 — passed within months of DOE’s creation — created the modern distinction between procurement contracts, grants, and cooperative agreements, and required agencies to use assistance instruments when the purpose was “support or stimulation” rather than acquisition.

At the same time, Congress gave DOE remarkably broad contracting authority in the 1977 DOE Organization Act, now called Other Transactions Authority (OTA). Congress expected DOE to use this flexibility to accelerate technology development, commercialize new energy technologies, and support national energy security. Statutes passed immediately after DOE’s creation, including the National Energy Act of 1978 and the Energy Security Act of 1980, envisioned a Department that would play an active role in commercializing synthetic fuels, solar, and other nascent energy technologies. In theory, DOE entered the 1980s with both a standardized financial assistance system and a flexible escape valve for innovative, non-standard contracting (via OTA).

In a committee hearing, Representative John Dingell noted: “. . . observe, Mr. Chairman, the great breadth of authority that the Secretary gets. He may enter into and perform contracts, leases, and grants. I am not sure just how much he is going to be granting to whom and what, but there are very few limitations. You have cooperative agreements and other transactions with public agencies and private organizations and persons. He can do literally almost anything he want to in terms of expending money and making agreements.”

Then came the Reagan transition in 1980. An internal transition memo argued DOE was “a large and unmanageable institution” and recommended eliminating it. Congress preserved the Department, but the episode left an imprint. Nothing in statute reduced DOE’s flexibility; instead, the Reagan transition’s push to limit federal involvement in energy policy — and Congress’s resulting compromise to keep DOE focused mainly on R&D — meant the Department simply never used its broader authorities.

Through the 1980s and 1990s, DOE’s procedural habits became deeply rooted in reimbursing R&D costs, not financing large projects or deploying full-scale industrial facilities. When Congress later attempted to reinvigorate DOE’s commercialization mission through the Energy Policy Act of 2005, the Energy Independence and Security Act of 2007, and the American Recovering and Reinvestment Act of 2009, the Department indeed launched major demonstration and commercialization efforts. However, it did so almost entirely through a cooperative agreement model that allowed for more government involvement but foundationally still rested on a cost-reimbursement structure.

In effect, these laws reinvigorated DOE’s statutory mission while simultaneously reinforcing a procedural model built for an era of R&D, not deployment. Over time, the broad contracting authority Congress provided in 1977 faded almost entirely from institutional memory. As that happened, people inside DOE and on the Hill increasingly assumed that the only flexible tool available was the Defense Department-inspired Other Transactions Authority added in the Energy Policy Act of 2005 — a far narrower form of OTA that DOE implemented solely through “Technology Investment Agreements,” which were codified in regulation and designed for R&D and prototyping rather than commercial deployment. The much broader 1977 authority had simply been forgotten.

Institutional evolution during BIL/IRA implementation: Hydrogen hubs as a case study

These institutional dynamics became especially visible during the rollout of BIL’s earliest large-scale discretionary programs. DOE was directed to establish a program to support the development of at least four regional clean hydrogen hubs to “facilitate a clean hydrogen economy.” The statute then contemplated a suite of activities that the secretary may undertake to carry out the Hubs program, including multiyear grants, contracts, cooperative agreements, and more. In short, Congress did not predetermine the contracting vehicle, it gave DOE broad latitude to choose a structure capable of supporting large, commercially oriented, capital-intensive projects.

DOE, however, in the first Funding Opportunity Announcement (FOA) released for the program in September 2022, opted for the same cost-reimbursement cooperative agreement framework that had shaped its R&D and demonstration portfolio for decades. Rather than anchoring its approach on the bankability of projects in the various hubs, DOE framed the FOA around traditional reimbursable cost categories, cost-share requirements, and DOE-approved budget periods. The FOA required detailed accounting of capital costs and operating expenditures, but it did not require applicants to demonstrate committed project financing, long-term offtake agreements, or other features typically associated with investment-grade infrastructure. To be fair, DOE could not have reasonably required such features given the absence of a functioning clean hydrogen market at the time — nor did its existing institutional framework readily support the kinds of market-shaping interventions that would have been required to seed one.

In parallel, DOE leadership launched an internal effort to reassess the Department’s contracting authorities and determine whether more flexible tools were available. In August 2022, an internal working group which I co-chaired began evaluating how DOE could use its Other Transactions authorities to address commercialization barriers that traditional assistance mechanisms could not. This process prompted the Office of General Counsel to revisit DOE’s statutory authorities and legislative history.

In May 2023, OGC issued a legal memorandum confirming the breadth of DOE’s OT authority clarifying that Congress had long intended DOE to possess the flexibility to craft non-standard, market-facing agreements when needed. Together, these steps laid the foundation for an Other Transactions Guide and the first update to its OTA regulations in nearly 20 years, paving the way for DOE to structure agreements outside the constraints of traditional cost-reimbursement rules.

OCED responded shortly after by operationalizing this new flexibility. In September 2023, the office issued a demand-side support solicitation that explicitly relied on DOE’s broader contracting authorities, stating that the selected entity would negotiate an Other Transaction Agreement. The solicitation framed the program around mechanisms fundamentally different from traditional financial assistance such as revenue backstops, pay-for-difference contracts, and other demand-pull tools designed to de-risk private investment.

Building durable institutional capacity for industrial policy

The hydrogen hubs example is not offered here as a verdict on the ultimate success of DOE’s demand-side support program. Rather, it illustrates how DOE built institutional capabilities (that Congress had originally intended for it to have), and in doing so regained the ability to meet the substantive goals Congress set for it. By rediscovering its Other Transactions Authority, modernizing its financial assistance regulations, and operationalizing flexible, market-facing tools, DOE demonstrated that it could move beyond reimbursing R&D costs toward structuring agreements that address bankability, offtake risk, and market creation.

By rediscovering its Other Transactions Authority, modernizing its financial assistance regulations, and operationalizing flexible, market-facing tools, DOE demonstrated that it could move beyond reimbursing R&D costs toward structuring agreements that address bankability, offtake risk, and market creation.

This institutional shift has implications beyond hydrogen. Several other BIL and IRA programs have faced analogous commercialization barriers particularly where private investment is hampered by demand uncertainty, long qualification cycles, or commodity-price volatility. DOE’s Office of Manufacturing and Energy Supply Chains, for example, began exploring versions of these tools in the critical minerals sector, as reflected in a Request for Information it released in the spring of 2024 seeking comment on potential demand-side instruments to reduce volatility and support project bankability.

We can draw five broad principles from this:

1. Statutory authority is not enough.

Agencies need the institutional memory and procedural capacity to use the flexibilities Congress grants them. Broad phrases like “any other agreements authorized” matter only when agencies know how to operationalize them.

2. Path dependence shapes implementation.

Agencies default to familiar procedures (here, cooperative agreements with a cost-reimbursement structure) even when missions change (e.g., from R&D to demonstration and deployment) unless leadership actively creates space for new approaches.

3. Reviving dormant authorities requires deliberate effort.

DOE’s 1977 contracting authority had faded from memory, and making it usable again required seasoned contracting officers, lawyers, and program managers working alongside newer staff who could identify commercial use cases.

4. Getting technologies deployed takes a different toolkit than funding R&D.

Deployment of early-stage technologies can require offtake guarantees or price stabilization tools that help projects get financed — mechanisms outside the scope of the traditional financial assistance rules agencies have long relied on.

5. Institutional capability develops iteratively.

DOE’s evolution within just one year shows how quickly new approaches can take root once constraints surface but also that meaningful capacity emerges only through repeated application and organizational learning.