July 15th, 2012 4 Minute Read Issue Brief by Diana Furchtgott-Roth

Solyndra and the Perils of Green Industrial Policy

The Obama administration has made providing taxpayer dollars for so-called “green jobs” a top policy priority. In his 2011 State of the Union address, the president maintained that government subsidies for “clean energy technology...will strengthen our security, protect our planet, and create countless new jobs for our people.”[1] The financial failure of a number of specific firms which received Department of Energy loan guarantees, however, has raised the question of whether the policy itself is effective or sustainable.

The tangled tale of Solyndra, a startup company that thought it could make solar panels and sell them profitably, ably illustrates the perils of “industrial policy,” a shorthand phrase for government’s attempts to decide which new industries or startups to support with federal money, loan guarantees, or tax benefits. The Fremont, California-based solar company declared bankruptcy in September 2011 after receiving a total of $528 million in federal loans.

It’s not just Solyndra that has gone bankrupt. Abound Solar, a solar panel manufacturer based in Colorado that received funds from the federal government, filed for bankruptcy on July 2, citing aggressive pricing actions from Chinese solar panel companies as the principal cause. Abound received a $400 million loan guarantee, and spent about $70 million before the Department of Energy (DOE) halted its credit. The company plans to suspend operations and dismiss 125 employees.

In August 2010, Beacon Power Corporation received a $43 million loan guarantee from the DOE to build a $69 million, 20-megawatt flywheel energy storage plant in New York. After receiving $39 million of the loan, the company filed for bankruptcy in October 2011 and was subsequently bought by a private equity firm.

Nevada Geothermal, a struggling company heading into financial trouble, received a $98.5 million loan guarantee in September 2010. According to its interim financial statements, Nevada Geothermal has “incurred net losses over the past several years, accumulated a deficit of $98.9 million, has substantial debts and currently does not generate positive cash flow from operations after debt service costs.” With a net loss of $11 million for the nine-month period ending on March 31, 2012, it is likely that the company will be unable to repay its loans. Financial statements issued by the board of directors state, “Consequently, material uncertainties exist which cast significant doubt upon the Company’s ability to continue as a going concern,” raising questions as to why the DOE did not do a more thorough examination of the company’s viability during the loan guarantee investigation process.

Ener1, a manufacturer of rechargeable batteries for the transportation, utility grid, and industrial electronics markets, declared bankruptcy on January 26, 2012. The company filed for Chapter 11 bankruptcy after spending $55 million of a $118.5 million DOE grant. With a 48 percent investment in Think Holdings, AS, a Norwegian electric vehicle manufacturer, Ener1 suffered from decreasing demand for high-priced battery electric vehicles. According to interim chief executive officer Alex Sorokin in the petition, Ener1 also faced fierce competition from battery makers in China and South Korea which have lower costs on manufacturing base, labor, and raw materials.

Range Fuels, a company attempting to convert forest waste into bio-fuels, failed to prove the feasibility of employing the technology in a cost-effective way. It first received a grant of $76 million from the DOE for a plant producing 40 million gallons of wood-based ethanol per year. The company received another $80 million loan guarantee from the Department of Agriculture in January 2009. These grants did not prevent Range Fuels from failure. The plant closed in January 2010, and the company filed for bankruptcy in September 2011.

Both Republican and Democratic administrations have practiced a “green” industrial policy by supporting ventures that promised to pursue renewable, non-carbon-based energy production or energy conservation.

The DOE’s authority to issue loan guarantees for innovative, clean energy technologies, the Energy Policy Act of 2005, was passed by a Republican House and Senate and signed into law by George W. Bush. Under the law, Congress authorized the issuance of $4 billion in loan guarantees in 2007, and $47 billion in 2009 with the objective of encouraging the development of new technologies. [2] [3]

However, no DOE loan guarantees were made during the Bush administration. The DOE wanted to make a loan to Solyndra, but career officials at the Office of Management and Budget (OMB) did not approve it, on the grounds that the project was not financially sound.

The Section 1705 Loan Program was created by the 2009 American Reinvestment and Recovery Act, which amended the Energy Policy Act of 2005.[4] The 2009 stimulus bill gave the DOE an additional $3.95 billion for loan guarantees.[5]

The Obama White House followed up by encouraging the DOE to issue loan guarantees for what the Department and the White House regarded as clean energy projects; however, these projects turned out not to be commercially viable. The loans themselves were made through the Federal Financing Bank (FFB), a bookkeeping arm of the Treasury Department, and so the money was lent at below-market interest rates.

READ FULL REPORT

Donate

Are you interested in supporting the Manhattan Institute’s public-interest research and journalism? As a 501(c)(3) nonprofit, donations in support of MI and its scholars’ work are fully tax-deductible as provided by law (EIN #13-2912529).