And in Conclusion: The Solyndra Bankruptcy
And in Conclusion: The Solyndra Bankruptcy
George Sterzinger: The Solyndra Bankruptcy
In 2009 a California company, Solyndra, received a loan guarantee of roughly $500 million from the Department of Energy to help finance the construction of a manufacturing facility that promised to produce a new, low-cost way to make electricity from sunlight. Solyndra originally applied under the loan-guarantee program set up in the 2005 energy act and moved to the front of line under the 2008 Stimulus Act, which radically changed the program.
Solyndra?s new technology promised to be significantly cheaper than traditional solar based on the assumption that the price for the traditional modules would not drop. From 2008 to 2010, however, China vigorously developed its solar manufacturing capacity and the price of ?traditional? solar modules dropped about 70 percent, from about $3.75 per watt to under $1.50. In order to make sales at competitive prices, Solyndra is thought to have sold panels at a loss while trying to perfect manufacturing, ramp up production, and lower their module costs. By the summer of 2011, the company ran out of cash and had to declare bankruptcy.
Congressional ?investigations? often begin with conclusions and then hold hearings to fill in the record. True to that form, Republicans in Congress ?investigating? the Solyndra bankruptcy seem to have begun their investigation by concluding that the case of the Solyndra bankruptcy involves crony capitalism, political favoritism, government incompetence, California comeuppance, ?green jobs? hype, and more. What?s really disturbing, however, is their attempt to push past Solyndra to kill the whole loan guarantee program, and to discredit any government role in supporting innovations in critical energy and environmental technologies.
According to the Republican?s conclusions, the DOE made the loan to Solyndra based on ?crony capitalism? rather than the merits of the technology: investors in Solyndra had ties to the Obama campaign operation and used those connections to get the loan guarantee. Various internal White House emails expressed concerns about the Solyndra technology and some argued the basic concept was fatally flawed. But they were brushed aside and the loan guarantee went through.
The Obama administration gets credit for standing by the loan guarantee as a necessary (though inherently risky) support for new, important energy and environmental innovations. But it failed when it allowed the desire for photo-ops to override the wisdom to never celebrate early. Obama should have known better than to visit the factory in May to declare a victory for the green jobs of the future.
Not all is known about how Solyndra used the funds provided by the loan guarantee. Some early reviews of documents provided in the bankruptcy filing showed Solyndra paying executives bonuses in the year leading up to the bankruptcy. We have to wait and see for the results of the investigation. But the important point is not so much the guilt or innocence of Solyndra but whether the bankruptcy proves that government should not be involved in this type of activity at all. The Republicans have concluded that the failure of Solyndra proves that the government shouldn?t ?pick winners? or try to act as a venture capitalist.
The lessons we take from Solyndra are of enormous importance. The United States must find ways to support innovation in energy technologies that carry environmental benefits. The loan guarantee program is one way to do that. It is not the only way, but it is the only way we have at the moment.
Loan guarantees do not act like venture capital, nor are they intended to compete with or displace venture capital. As laid out in the 2005 Energy Policy Act, the loan guarantees were intended to support initial efforts to commercialize important technology innovations. Renewable energy technologies, before they are ready for consumers, must progress from basic science to lab-size proof of concept to prototype operations. (Venture capital can support those early stage developments but in turn demands high rates of return on investments. It can support the start-up, but traditional financing or programs like the loan guarantee are needed for commercial ventures.)
If the initial stages go as planned and the technology looks promising, then the company can attempt to operate on commercial terms and conditions. Initial commercial operations are challenging in two ways. First, costs for first-time projects are higher, and traditional financing is as a rule just not available. Second, these first-time efforts have to compete with available mature technologies in the energy market. Despite sound basic science and robust R&D efforts, important innovations would not make it in the commercial energy market?at least not in the United States.
The loan guarantee in the 2005 legislation was intended to bring energy innovation and commercialization back home. It was essentially the only program we had to drive these innovations into the energy market. In the 2008 Stimulus Act the loan guarantee was expanded to support projects ?shovel ready? to create jobs, requiring the program to be sped up and focus on technologies that were already commercial. Solyndra, which had been working with the DOE for five years, moved to the front of the line for a guarantee.
Looking back, innovation is never ?shovel ready.? Innovation requires patient support. Conflating innovation and ?shovel ready? projects was a mistake. Loan guarantees to support innovations that have not yet been tried are unavoidably risky. It had to be expected that some loans would fail?and some would be successful. A loss on one loan should not be used to dismantle the program.
A counterpoint to the Solyndra bankruptcy is an earlier DOE program that supported several efforts to commercialize thin-film, photovoltaic (PV) solar-cell manufacturing. Many of the firms the DOE supported failed, but First Solar succeeded. It is now a leading PV manufacturer, by virtue of innovative processes that allow it to compete with low-cost Chinese modules.
In some respects, programs like the loan guarantee, which seem initially like public support for private profits, can be a challenge for the Left. There is a long tradition on the left of challenging any and all such government support. But the loan-guarantee program should be seen as public support for a family of technologies that can produce both energy and environmental benefits. Traditional ?public works? were projects like the Interstate Highway system that were purely public (though companies, of course, benefitted from infrastructure development). Now we face the challenge of transforming the energy sector into one that can produce the required amount of energy while also systematically lowering CO2 emissions. The development of these technologies will provide both private and public benefits, but it is against the latter that we should measure the value of loan guarantees.
Support for innovation, and in particular support for moving important innovations into the energy marketplace, is critical. Indeed, the competitive advantage of renewable energy technology lies in a sector?s ability to go through rapid cycles of innovation. This should be the competitive advantage of the U.S. domestic manufacturing industry going forward. Solyndra?s bankruptcy flowed in part from aggressive Chinese support for traditional solar technologies. The lesson here should not be to retreat but to support even more aggressive innovation.
Image: Obama visiting the Solyndra plant in May (Lawrence Jackson, White House, Wikimedia Commons
