Why You Should be Alarmed by Solyndra

NEW YORK ( TheStreet) -- Is the Department of Energy loan guarantee program that oversaw the not-surprising, though still scandalous bankruptcy of U.S. solar company Solyndra right now prepping more cool-looking 21st century green energy plants for eventual failure?

In testimony delivered to the House Energy investigative subcommittee this week, Jonathan Silver, the program's head, explained why the government kept Solyndra alive even after it was clearly in trouble:

" The DOE faced a choice: whether to (1) refuse to allow the Solyndra's restructuring, thereby ensuring that Solyndra would close its doors immediately, and that the U.S. taxpayer would recover only a modest amount of the loan; or (2) allow the company to accept the emergency financing, thereby giving it and its almost 1,000 workers a fighting chance at success, and the government a higher expected recovery on its loan," the testimony reads.

Silver explained that if the Solyndra manufacturing plant's construction wasn't completed, the company wouldn't have a tangible asset to value in the event of a liquidation.

Translation: The Department of Energy was building what it thought was a better bankruptcy, but a bankruptcy all the same. The DOE has said that "no one could have seen" what would happen in the solar market with Chinese manufacturers' flooding the sector with low-cost panels, but judging by Silver's testimony, the DOE saw Solyndra going bankrupt by 2010.

Mind you, this is the same DOE official who told TheStreet on multiple occasions in the past year, and as recently as July, that if the loan guarantee program worked as expected, taxpayers wouldn't lose one penny.

In that context, the testimony presents cause for serious alarm.

Here's why. First, the logic at work here is that once the government puts money to work in a loan guarantee project, it's too late to get out, even if it means putting more and more money at risk with little chance of the company succeeding, and hiding it from the public for as long as is possible.

We can at least take some comfort in the fact that the DOE didn't write a blank check from the federal coffers but the logic it used in allowing more money to be put at risk in the doomed company is, all the same, troubling.

By helping Solyndra refinance its $535 million federal loan, the DOE allowed the government to release another $67 million installment of the existing federal loan to the company. The DOE approved the restructuring despite warnings from Office of Management and Budget staff members that restructuring Solyndra could cost taxpayers $168 million more than liquidation, and the OMB ultimately decided the DOE plan was "reasonable."

Emails newly released by the House Energy committee show that White House staffers were also worried about the company at the time the DOE pushed the restructuring plan through, even worried about an eventual bankruptcy hurting President Obama's re-election chances.

Brett Prior, an analyst at GTM Research, which specializes in solar industry analysis, put it this way, "If it's not working and you know that in 2010, you don't spend additional millions of dollars on facilities no one wants. It's throwing good money after bad."

The DOE's Silver said, "The decision was not an easy one, and it was made only after significant analysis and deliberation, using the same sort of tools and rigor that private sector lenders use in such scenarios."

The fact that the government allowed itself to be subordinated to the equity investors who offered Solyndra its desperation round of funding can be explained this way: The government already knew it and taxpayers were in trouble, and so as long as new money coming in was coming from private investors, why not go ahead and put itself behind those investors in the bankruptcy process, since in all likelihood, none of them would see a penny in payback either way.

Said GTM Research's Prior, "The rational thing isn't always the easiest thing to do."

The solar analyst hints at another alarming issue here, too, when he talks about a facility that no one wants. Solyndra was building customized equipment for a solar manufacturing plant that was already not cost-competitive by 2010.

As solar analyst Aaron Chew of Maxim Group put it, "I actually hadn't really given Solyndra too much mind since they pulled their IPO. From a solar perspective, they had been written off a long time ago. $3 per watt is kind of uncompetitive. It's only a surprise to the public, the writing had been on the wall."

The point is often made that venture capital put more than $1 billion into the deal, and it seems the DOE used the size of the private money in Solyndra as a sign of its worth. This poses another question for the DOE: Did it make the determination that "if the smartest guys in the room are willing to put in more money," that's the seal of approval? Has the government not learned that the so-called smartest guys in the room often make bone-headed investment decisions?

Solyndra and the DOE are sticking to their guns, saying that in the bankruptcy process a buyer might be found, but solar experts remains extremely skeptical.

Where does this leave taxpayers? There's little chance of seeing recovery of the $528 million lent to Solyndra, and what's really cause for concern are the other high-risk manufacturing projects to which the DOE is loaning money. Are they building other better bankruptcies, putting hundreds of millions more in taxpayer dollars at risk?

There are three additional projects in the DOE program that focus on the high risk area of solar manufacturing, and the mistakes made with Solyndra could be repeated if someone isn't watching over the DOE or it doesn't refine its monitoring and evaluation process.

The three projects are:

Abound Solar is a thin film solar manufacturer that received a $400 million loan guarantee from the DOE.

Another thin film manufacturer SoloPower that received a $197 million loan guarantee.

And just last week, the DOE closed a $150 million loan commitment to 1366 Technologies.

Add it up and you've got $750 million lent out to solar manufacturing operations with unproven technologies that could take years to be commercially viable, if that ever even happens. The good news it that these companies aren't anywhere near the manufacturing build-out of Solyndra, not yet.

Abound produced 80 megawatts of solar panels in 2011 and isn't scheduled for a major manufacturing ramp until next year. 1366 Technologies is first setting up a demonstration stage plant of 20 megawatts in Massachusetts, and loan money for a further manufacturing build-out of 1 gigawatt will be based on its success.

Let's sound one final alarm bell here. In defending the DOE program, Silver has made the point that only 4 of the more than 42 projects are related to solar manufacturing. This statistic is supposed to reassure taxpayers that much of the loan portfolio is in less risky ventures, and that's true, though the argument can be made that the DOE isn't the best risk evaluator, and this reassurance from the DOE also just put a "bankruptcy watch" label on each one of these projects.

In the words of cleantech venture capitalist Neal Dikeman of Jane Capital Partners, an admitted harsh critic of the DOE loan guarantee program, these loans shouldn't be called loans at all but grants because the risk of default is so high. "You're building a manufacturing plant where the product is unproven and depending on a current forecast of pricing, and all the while companies are hemorrhaging cash," he said.

Craig Lund, the head of business development at 1366 Technologies, doesn't try to mask the high-risk nature of his company's business and the threat from China.

"There are no certainties in life, there's always risk and what I can say is in the last two years we have been able to dramatically improve the general speed and quality and process of wafers we are generating, but the big proof point will come on the first commercial line," he told TheStreet.

That first commercial line might be a big success, cutting standard solar wafer manufacturing costs by 50%, or it might not. There's also the chance that cutting 50% off the conventional manufacturing cost today may not be winning the race tomorrow, given the speed at which the solar industry is evolving.

1366 Technologies' Lund said the company expects the current trend of the leading wafer manufacturers reducing costs by 6% to 7% a year will stay in place, adding: "If it takes us ten years to commercialize, we are in trouble."

Even those skeptical of Solyndra, like Maxim's Chew, are giving 1366 the benefit of the doubt, saying when he first became aware of the concept, he said "Wow, if it works..."

Yet none of this hope -- which Solyndra had plenty of, too -- means that the DOE should proceed from the idea that once it's put in some money, the analysis of how to spend every dollar after that should factor in the money already spent.

The DOE can say that its cost/benefit analysis procedures are rigorous, but its handling of Solyndra's bankruptcy belies that contention, and it should have employed some common sense well before the situation reached such a fateful point.

The ultimate irony is obvious: In attempting to manufacture a better bankruptcy, the Solyndra decision makers created the worst possible of all bankruptcies. It's become a political nightmare for the Obama administration at a time not just of re-election but of a new jobs plan supposed to help an economy upon which reelection is dependent recover.

In the long road view, the failure to deal with Solyndra's failure more quickly and transparently has done considerable harm to the concept of green energy funding by the federal government. Most major countries, and major developing countries, have some federal policy on renewable energy that is comprehensive or working towards that goal by experiment. We have none. And we do need one, whether or not it involves the federal government playing such a large role in the formation of capital. The Department of Energy Loan Guarantee program has been a real attempt, and we haven't come up with anything better yet, but in this instance, it has done itself no favors, only leaving us with questions about its viability and vulnerable to constant attack from critics and political powers aligned against it.

These far-reaching consequences were likely not factored into the "significant analysis and deliberation" carried out by the DOE and OMB about Solyndra, using all of the available "tools and rigor," as they tried to decide how to admit the solar company was doomed.

-- Written by Eric Rosenbaum from New York


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