Solar industry vet Marc Cortez questions the ‘success’ narrative surrounding the Department of Energy’s loan guarantee program
If you’re like me, you’ve read many of the recent posts from Jonathan Silver, the former director of the U.S. Department of Energy’s loan program, proclaiming the program’s success. If you can get past the claims where skeptics were simply “proven wrong,” he paints a picture wherein the loan program is performing exactly as plannedand even turning a profit. So what if there are a few Solyndras in the mix? The program is beating Wall Street and most institutional investors and is a resounding success, isn’t it?
Well, not so fast. Like with most things, the devil is in the details.
First, Silver highlights that the loan guarantee program has returns of $30 million on investments of $15 billion after three years of loans, and claims results better than Wall Street and institutional investors. It’s important to remember that the DOE program was a loanprogram, not a venture capital program. Since venture capital firms don’t typically give loans, comparing loan returns to early-stage seed capital returns is not an apples-to-apples comparison; it’s more like apples-to-slingshots. They’re just different beasts. And never mind that it took three years for the program to break even after Solyndra’s failure, when during that same time the S&P 500’s index rose 67%.
So is $30 million return on investments of $15 billion a sign of success?
No, according to Donald Marron, director of economic policy initiatives at the Urban Institute,because the $30 million is “cooked.” According to Marron, the DOE report says that the loans they received from the Treasury did not include the “Treasury’s borrowing costs,” which are undoubtedly substantial. If these normal borrowing costs are included, Marron says, “that puts taxpayer losses in the hundreds of millions of dollars.” That’s hardly the $30 million profit that Silver claims. Even the Obama administration’s own budget report contradicts Silver’s claims, predicting that DOE loans issued between 2009 and 2011 will lose between 13.7% and 98.6%. So where is the profit?
How about using the DOE loans as a successful ramp over the infamous “Valley of Death,” that dread zone where upstart companies need significant capital in order to achieve market scale? Yes, we know the Solyndra story ($535 million), and yes, its demise has been overhyped in the market and the media. But the same process that selected Solyndra also selected Abound Solar, which drew down $70 million of its earmarked $400 million before going bankrupt. This same process also selected Solopower, which sputtered and closed down most of its operations before the DOE “deobligated” the company’s $197 million loan due to noncompliance (which included separate loan payment defaults to the State of Oregon). This process also loaned the Cogentrix Alamosa project $90.6 million, which was constructed with modules from now-bankrupt Amonix.
Overall, the DOE earmarked $1.2 billion of loans to companies trying to commercialize new technologies–7.5% of their entire loan portfolio–and over half of this money was lost on bankrupt companies. True, VCs in this sector have not had much success (Nanosolar alone soaked up $400 million), but $1.2 billion is still $1.2 billion. It’s difficult to support the idea that the DOE loan program was even moderately successful in helping companies cross this manufacturing Valley of Death.
What about DOE loans as a renewable-generating-project financier? This is where the loans can gain some level of traction. Around $13 billion of the loans were used to finance renewable generation. While Silver says these DOE loans “launched utility-scale PV solar,” this neglects the efforts of NextLight, Optisolar, SunPower, First Solar, SunEdison, and other developers that built the foundations of the utility-scale industry we now know.
While these investments were not as speculative as new technology manufacturing, as anyone who has ever developed large-scale projects knows, the anticipated returns are by definition speculative. Financial performance depends on dozens of factors, including proper system sizing, site construction, proper technology selection and local environmental conditions. Some projects may overperform, while others may underperform, and it’s often difficult to understand the factors involved with either.
For example, in October 2014 it was reported that BrightSource’s Ivanpah projects generated only 25% of their anticipated energy production. BrightSource disputed these claims and said that “we are above the cumulative annual guaranteed level,” but also acknowledged that “we don’t control the weather” and that “the amount of sun for 2014 has been about 9% below predicted.” What does this mean for the plant’s ability to generate predictable revenue and therefore pay back its obligations? Only time will tell.
Has the DOE loan program achieved its goals? This of course remains to be seen. The program itself had goals of clean energy innovation, job creation, economic growth and future pollution reduction, so the DOE’s progress towards these goals should also be evaluated. But Silver chose to promote a financial narrative wherein the DOE loan program is profitable, the program’s skeptics were “proven wrong,” and which former Energy Secretary Steven Chu claimed is “more successful than Wall Street.” It’s fair to dig into the financial claims and put them into a broader context.
Given the underlying details of the numbers, it’s hard to support the claim that the DOE loan program is profitable, and even more difficult to support the claim that it’s performed better than existing institutional financial vehicles. The program’s track record in helping manufacturers cross the Valley of Death is also comparable to what cleantech VCs have experienced, and certainly no better. The project portfolio that the loans supported will yield returns comparable to what the other project consortium investors will achieve.
If its financial returns are comparable with what already exists in the market, is the loan program a financial success? And further, if the program’s financial returns are comparable with what’s already available through other means, is it the best use of taxpayer dollars to duplicate this?