Mark Whittington has an idea to solve the methane problem (no, not that methane problem–that one we’ll solve by burning down the rain forests):

If NASA feels that building a methane/LOX engine is too risky for the ESAS, there is a solution. Make such an engine one of the Centennial Challenges. Critics of the Vision for Space Exploration will be less unhappy because that would be another piece of technology developed by non traditional means. NASA will benefit because it gets the engine for the CEV and Mars Lander relatively cheaply.

Well, maybe. The problem is, I guess I don’t see LOX/methane engines as particularly risky, at least no more so than any other generic propulsion development. It’s not a technology risk (in the sense that there may be some unknowns out there that prevent it from being possible) so much as a programmatic risk, in terms of schedule delays or cost overruns. NASA has a lot of experience with these in propulsion programs, so they’re wary of new engine developments (though I suspect that XCOR has broken a lot of the conventional industry cost/schedule estimating models for propulsion system development). Our lack of methane propulsion isn’t because it’s a Hard Problem, but because no one has had sufficient requirement to date to fund it.

If we have unlimited money for prizes, I guess that a prize would be a good way to fund this, but prizes are better employed in those cases for which innovation is required to solve a really difficult problem that many have attempted and no one yet solved, not for a straightforward development program. Rather than offer a prize, I’ll bet that someone like XCOR (or the other companies working on the problem) would be happy to take a fixed-price contract to develop engines to NASA’s specs (they could use the technology contract they have from Marshall to develop a reusable cryo tank as a model), and it would be a lot cheaper than funding a cost-plus contract to Aerojet or Pratt. There are lots of other ways to do innovative procurement than offering prizes.