Solyndra and the Perils of Industrial Policy
There is no better proof of the risks of "green" industrial policy, or the misuse of "stimulus" funds, than the case of Solyndra, the California solar company. It declared bankruptcy this month after receiving a total of $535 million in federal loans.
The tangled tale of Solyndra, a California company that thought it could make solar panels that turn sunshine into electricity and sell them profitably, ably illustrates the perils of "industrial policy," a shorthand phrase for the government's deciding which new industries or start-up companies to support with federal money or loan guarantees.
Republican and Democratic administrations have endorsed so-called "green" energy ventures/enterprises that promised to pursue renewable, noncarbon-based energy production or energy conservation. (By now, even the most casual observer has noticed that companies are eager to call themselves "green.")
President Obama, seeking to burnish his Administration's image as pro-environment, has made numerous visits to companies that tout themselves as "green."
Solyndra received a $535 million loan from the Federal Financing Bank, guaranteed by the Energy Department under its loan guarantee program for innovative clean energy technologies.
The company, founded in 2005 and based in Fremont, California, had used $460 million of these loans by February 2011 to build a second factory, even though it still had excess capacity at its first plant. With Solyndra's bankruptcy, the bulk of these funds are lost to taxpayers.
By January 2011, it was clear that the company was going to fail. Still, the Energy Department helped shore up Solyndra by allowing it to draw on another $68 million in government loans. In addition, according to Bloomberg, based on government reports, the administration allowed $385 million in government loans to take a back seat to $75 million in new investors' funds.
This was done because the Energy Department thought that the January deal represented the highest net benefit for the taxpayer, according to government reports. The $75 million from investors became senior to all government debt except $143 million.
The remaining $385 million in government loans, first issued in 2009, have equal status to $175 million in original investor funds, and can only be recuperated after the investors get back their $75 million and the government gets back its $143 million. This reduced the value of the $385 million by about a third, because the government would not get back all its money.
Confidential emails published by the House Energy and Commerce Committee depict White House and Energy Department officials rushing to sign off on the project in 2009 so that Vice President Biden could appear at the Fremont plant in September 2009 to trumpet the administration's support for green jobs. President Obama visited Solyndra in May, 2010.
Solyndra's bankruptcy has been attributed to factors beyond its control, such as falling prices for polysilicon products, such as solar panels, and lower costs and pricing in China. But documents filed with the Securities and Exchange Commission in September 2009, ahead of an initial public offering that was withdrawn in June 2010, show that the company was fully aware of all the risks.
Presumably the Energy Department was aware, also. This is the essence of industrial policy: the government takes on risk because it wants to encourage indigenous production of a new product.
Here is some of the back story: Solyndra was founded in May 2005 to produce a less expensive alternative to solar panels. It manufactured panels consisting of forty cylinders coated with solar cells.
A competing technology consisted of flat solar panels, made of polysilicon. Polysilicon was expensive, and, according to Solyndra, the panels were more costly to attach to the roof.
By November 2008, Solyndra had raised $450 million from investors, and was applying for a loan guarantee from the Energy Department under the Energy Policy Act of 2005.
But the loan was turned down in January 2009, while the Bush administration still held office, on the grounds that "there is presently not an independent market study addressing long term prospects for this company" and "there is concern regarding the scale-up of production assumed in the plan for Fab 2," the second factory.
Lachlan Seward, director of the loan program at the Energy Department, wrote on January 13, 2009 that "after canvassing with the committee it was a unanimous decision not to engage with further discussions with Solyndra at this time."
After President Obama took office days later, the tone changed. In a confidential email dated March 10, 2009 released by the Energy and Commerce Committee, a senior adviser to the Energy Secretary wrote, "The solar co board approved the terms of the loan guarantee last night, setting us up for the first loan guarantee conditional commitment for the president's visit to California on the 19th."
As it turned out, Mr. Obama only came in 2010, and Vice President Biden came in 2009.
Another official, presumably from the Office of Management and Budget, replied, "DOE is trying to deliver the first loan guarantee within 60 days from inauguration (the prior administration could not get it done in four years). This deal is NOT [sic] ready for prime time."
Concerns were still apparent later that summer, on August 19, 2009. An official, name blacked out, wrote presciently, "While debt coverage is robust under stress conditions, the project cash balance goes to $62,000 in September 2011. Under the assumption that a small amount of cash is tied up in working capital, the project will face a funding shortfall. Even one day of [missed] A/R results in a negative cash balance, for example."
Yet, the administration pushed ahead, planning for a presidential or vice presidential visit.
As of August 27, the loan was not approved. An Energy Department official wrote, "Can you confirm whether there are any issues regarding a closing on Sept. 3 for a Sept. 4 VP event on Solyndra?"
On August 31, 2009 an unidentified OMB official wrote to Terrell McSweeny, domestic policy adviser to Mr. Biden, saying "We have ended up in the situation of having to do rushed approvals on a couple of occasions (and we are worried about Solyndra at the end of this week.) We would prefer to have sufficient time to do our due diligence reviews and have the approval set the date for the announcement rather than the other way around."
The loan was approved on September 3 and Mr. Biden announced it via satellite at Solyndra's plant on September 4.
Fast forward to January 2011, when Solyndra's cylindrical panels were not competitive. The price of the polysilicon used by its rivals on their flat panels, the product competing with Solyndra, had fallen from about $375 a kilogram in 2009 to around $60, making flat panels far more attractive. First Solar, a U.S. maker of flat panels, could generate solar power for 75 cents a watt, compared to $4 for Solyndra.
Still, when Solyndra came calling, the Energy Department insisted on throwing good money after bad, to the frustration of an unnamed OMB official. He wrote, on January 31, 2011, "If Solyndra defaults down the road, the optics will be arguably worse later than they would be today." [sic] He added that the public might understand one mistake, due to the complexity of dealing with innovative companies, but not two mistakes.
Despite the government's rescue effort in February, 2011, Solyndra filed for bankruptcy in September 2011.
It was not as though Solyndra's problems were a secret. On May 27, 2010, in trade journal GigaOM, reporter Katie Fehrenbacher suggested that the Energy Department guarantee for Solyndra was a mistake. She wrote that Solyndra's manufacturing and capital costs far exceed those of its rivals, and that its technology was uncompetitive.
PricewaterhouseCoopers, Solyndra's auditors, also expressed public concern about the company. The combination of its deficit, operating losses, and negative cash flow raised doubts as to its viability.
And Solyndra itself, in a public S-1 filing at the S.E.C. in September 2009, dutifully offered 22 pages of reasons why it might fail. In case anyone missed the point, the report included a table of historical financial and operating data from 2006 to 2009, showing six different measures of gross and net losses. Not one positive number.
Why did the government pour more funds into Solyndra, and accept a subordinate status on the loan? Could it be because one of President Obama's campaign contributors, George Kaiser, was a major investor in Solyndra through Argonaut Private Equity? Mr. Kaiser raised between $50,000 and $100,000 in donations for the president, and donated over $50,000, split between the Democratic Senatorial Campaign Committee and Obama for America, according to campaign records.
Solyndra shows that the government should not try to pick industrial winners. The temptation for politics to trump sound judgment and waste millions in taxpayer money is always there.