In business as in life, some gotta win, some gotta lose.
The federal government recently lost a sizeable bet, one that some critics say should never have been wagered. But it was to the consequence of taxpayers. Not surprising, some are pointing fingers at the Department of Energy for not doing proper due diligence.
The cringeworthy failure is that of Solyndra, a solar-panel manufacturer that received about $527 million in federal loan guarantees. The company, promoted by the Obama administration as a successful example of the use of stimulus money to spur development of a clean-energy industry, shut down on Aug. 31.
And then it filed for bankruptcy protection on Sept. 6. Two days later, the FBI came calling, raiding the company’s Fremont, Calif., headquarters.
A Congressional committee is asking some very pointed questions, as it should. How did this happen? Why did this happen? Who shall we behead?
Both Republicans and Democrats charge that Solyndra essentially misled federal officials about its true financial situation, which I think is probably likely. Rep. Henry Waxman, D-Calif., said executives painted “rosy scenarios” about the company’s finances two months before it shut down in meetings with members of Congress.
But Republican committee members are also contending that White House aides exerted undue pressure on the staff at the Office of Management and Budget to give Solyndra a clean bill of financial health in order to get the loan guarantee.
“Was Solyndra just one bad bet by an administration rushing to claim credit for the first loan guarantee, or is it the tip of the iceberg?” said Committee Chairman Fred Upton, R-Mich.
Dead in the Water
Wherever these charges go, one thing is fairly certain — support for government incentives championed by the Obama administration to build a renewable energy industry in the United States is pretty much dead in the water, at least for now.
“Solyndra has become a bit of a poster child for what can go wrong with government funding for renewable energy,” Stephen Munro, an energy analyst told Bloomberg. He predicted a “hiatus in federal support for clean energy.”
Jonathan Silver, executive director of the Energy Department’s loan office, said that it wasn’t pressure from the White House but rather China that led the department to support clean-energy companies. China provided $30 billion in credit to its largest solar manufacturers last year, about 20 times the U.S. investment, Silver said.
China, it seems, is being hailed the boogeyman yet again, largely because it is the low-cost leader of solar panels.
Evergreen Solar Inc. (ESLR) of Marlboro, Mass., and SpectraWatt Inc. of Hopewell Junction, NY., filed separately for bankruptcy reorganization last month, blaming declining prices and competition from solar-panel makers in China. Neither company received a U.S. loan guarantee.
But the larger point here is that three U.S.-based major solar energy companies have filed for bankruptcy within a month of each other. It comes at a time when solar panel prices are declining and a slowdown in global demand is forcing weaker companies to team with competitors or just go belly up.
Mississippi Gambler
It is in this Darwinian environment that Mississippi this past week has placed its own sizeable bet on the solar industry. The Magnolia State is giving Sunnyvale, Calif.-based Calisolar a $75 million incentive package that includes grants, workplace training and a $59.5 million low-interest loan.
Calisolar has pledged to build a $600 million plant in Lowndes County and produce 16,000 tons of solar-grade silicon a year when fully operational. The company had been construction. So the company turned to Mississippi, a state with a good business climate and hungry economic developers.
Other new green energy manufacturers that have announced new operations in Mississippi include San Jose’s Twin Creeks Technologies (which makes thin wafers for solar cells and received $54 million in state assistance), Kior (a biofuels company that got $75 million) and Soladigm (a developer of energy efficient windows that got $44 million).
In all, Mississippi has committed about $323 million in incentives to green manufacturers, which is some pretty gutsy betting. I only hope that proper due diligence has been performed, because we are likely talking about some emerging technologies that may or may not have been fully proven. My guess is that there are some good bets and bad bets in the mix. Time will tell.
The Bottom Fell Out
A few years ago, prices for the silicon wafers used in most flat solar panels were soaring. Solyndra proposed building a different kind of panel, using cylindrical tubes coated with thin films of copper-indium-gallium-selenide that would pick up light from any direction. The company said its tubes would be far cheaper than the silicon alternative. Wrong.
Silicon prices have plunged nearly 90 percent from their peak in 2008, making conventional panels the better bargains. Solyndra now blames its cost disadvantage on the Chinese government’s willingness to subsidize its own solar panel
industry.
A Role for Government
A day after Solyndra’s failure, the Energy Department awarded a total of $145 million to 69 solar energy projects taking place in universities, government research labs, and major corporations. Many of those grants are for as little as $750,000 apiece.
Steering modest amounts of money to early stage green energy researchers is fine by me. That is government promoting innovation, which I think is essential for the nation’s future viability as a technology leader. When misfires do occur (and they most certainly will), the costs are acceptable, while resulting successes can be very, very big.
But pouring half a billion dollars into a single unproven company? Now that’s just asking for trouble.
The American Energy Innovation Council, comprised of seven business executives including Microsoft CEO Bill Gates, earlier this week released a report urging Congress to continue investing in in energy research and providing loan guarantees for makers of new technologies.
The corporate leaders said we cannot rely solely on the private sector to boost research for new energy sources, because those investments are “lumpy, high- cost and high-risk,” and don’t pay off for decades. The group urged an annual $10 billion increase in funding for new energy.
“You can’t count on the private sector to come in and fill that space,” Gates said at a press briefing.
I can buy that argument. Still, I have to think that making lots of small grants to cutting-edge research labs is the way to go here rather than making huge “all in” bets on companies promising green jobs.
But it would appear that the Energy Department has been playing an “all in” game in some instances. The department has provided about $9.6 billion in loan guarantees to 18 developers and manufacturers since 2009, including $1.2 billion this past week to Abengoa SA (ABG) of Spain, for its Mojave Solar Project, a 250-megawatt facility in San Bernardino County, Calif. An additional 14 projects have received conditional commitments for $9.2 billion in guarantees, according to the Energy Department website.
Saturday Night Live used to have a comic Dana Carvey, who mimicked President George Herbert Walker Bush. The former president, according to the comic’s caricature, was constantly lamenting that pursuing certain courses of action would not be “prudent.”
Again, I have no problem with government investing in research and development initiatives to develop new technologies. But I do wonder how prudent we are being with these huge loan guarantees when betting on certain unproven horses. Of course, there are no guarantees.
Ethan Zindler, head of North American research at Bloomberg New Energy Finance, said the loan-guarantee program has to deal with the conflicting missions of funding innovative and sometimes risky projects while protecting tax dollars.
“Having some of these not work out is inevitable,” Zindler said. “The government is making technology bets and when you make technology bets, sometimes you win and sometimes you lose.”
And Good Time Charlie’s got the blues.
Need a partner in results-oriented site selection? Contact me, Dean Barber, at 972-890-3733 or at barber@barberadvisors.com Barber Business Advisors, LLC is a site selection and economic development consulting firm in Plano, Texas. Please visit our website at www.barberadvisors.com
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Dean, as always very insightful. Coincidentally, I touched on this very issue on my blog (http://tinyurl.com/6h82alr). My take was more of a pie-in-the-sky approach that I readily admit has little chance of seeing the light of day…basically, take the China approach and support worthy companies (thereby hopefully avoiding a repeat of Solyndra) with not only finances but also regulatory/policy decisions. Sadly, the dysfunction present at all levels of our government make that a slim to snowball shot, but it was nice to vent it out. That being said, the micro-investment route you discuss does show some promise. My concern is that it won’t be enough, particularly if we’re competing against the Chinese government. Look at the Japanese auto industry. Lots of regulatory support to get them established and growing market share. Now, they pretty much dominate our auto market. China currently has the hottest auto market in terms of growth, and the US (and European) manufacturers are desperately trying to break into the market there. Unfortunately, the Chinese government has seen fit to dictate that any outside companies wanting to do business must enter into a partnership (and by that I mean give up an ownership interest) with a Chinese firm. Otherwise, no dice. It is hard to stick to the rules when nobody else is. Partner the micro-investments with some regulatory and policy support to help get it established, and we might be able to see the path forward.