Until recently one of the poster children for cleantech, Solyndra’s apparent demise was all the more notable due to its blue chip investor roster and its prominent selection by the Department of Energy in March 2009 for a $535 million loan guarantee. Indeed, President Obama visited Solyndra’s facilities only 16 months ago touting the company as a shining example of cleantech innovation, job-creation, and wealth-creation.
Solyndra follows closely in the footsteps of fellow solar module manufacturer Evergreen (NASDAQ: ESLR) to receive substantial government financial support…and fail not long thereafter.
So many commentators have written about Solyndra in the last few days that I’m tempted to look at another topic for this week’s posting, but I feel compelled somehow to chip in my $0.02.
The first penny: what is going on in the solar business that’s causing companies like these to crash and burn? Isn’t the solar business booming?
Yes, the solar business continues to grow rapidly. One of the reasons that the industry is growing is that the price of solar energy is falling, becoming more economically attractive for more potential customers. This is a good thing. However, it does put pressure on the companies that make products for the solar marketplace. Simply put, like most forms of energy, solar energy is generally a commodity, where lower-cost producers win and high-cost producers either have to improve or die.
By its own account, Solyndra was not the lowest-cost producer: its product was inherently more expensive, but promised other advantages that would reduce costs elsewhere in the total installed solar energy system. It’s quite possible that these theoretical advantages never really materialized, as most implementers of solar projects – while still with plenty of room for innovation – have begun to standardize their business practices (e.g., sales, marketing, procurement, installation) relative to conventional PV modules, most of which are available from other suppliers at a lower cost. In other words, Solyndra’s proposed solution did not neatly “fit” the marketplace in which it was competing.
While it is indeed good news that the price of solar modules has been falling, it’s nevertheless inescapable to point out that this trend is driven heavily by increasing penetration of supply from Chinese PV module manufacturers, capitalizing on their low cost structures and immense financial/policy support from the central government – neither of which are readily available to U.S. PV module innovators. In other words, for newbies in the PV industry like Solyndra to succeed, they are going to have to produce a module at a cost comparable to those sourced from China – yet with higher wages and taxes, more stringent rules for doing business (e.g., environmental regulations), and less government support.
If you say it can’t be done, you’d be wrong: U.S. based First Solar (NASDAQ: FSLR) is widely-recognized as the leader in today’s global PV market, with a very low cost structure due to several proprietary inventions. The Chinese and new entrants from the U.S. alike will have to aim at First Solar as its target. At the same time, First Solar will have to hustle to maintain its competitive edge in the dog-eat-dog solar business.
My second cent: the hue-and-cry from many pundits that Solyndra’s collapse is evidence of faulty energy policy from the government – not just the loan guarantee program and Solyndra’s selection, but all of the efforts to promote clean energy technologies like solar energy.
There’s no question that the government is not great at picking winners. In my view, it’s far more effective for the government to put in place market-based mechanisms with overarching goals, and then let the private sector players compete fairly.
The problem is, when it comes to the energy markets, those who oppose subsidies for renewable energy like the loan guarantee program are almost unanimously also opposed to any market-based mechanism that aims to internalize the cost of emissions associated with fossil fuel energy so as to make the playing field for clean energy closer to fair.
(As an aside, these same opponents also tend to oppose the removal of subsidies for fossil fuel energy. And, these same opponents also tend to deny that anthropogenic climate change is likely to be happening. And, these same opponents also tend to oppose a variety of environmental regulations. And, these same opponents are often led by sources of information that derive financial gain from fossil fuel interests. A lot of generalizations in the above passage, and while generalizations are often dangerous and there are undoubtedly some exceptions, I feel comfortable in making these statements on the whole.)
Lacking any political will to try and structure the energy marketplace in the most logical manner to drive towards clean energy solutions, the government thus resorts to incremental, tactical, second-best (actually, probably closer to nth-best) policy mechanisms like the loan guarantee program.
As a venture capitalist, the loan guarantee program does very little to spawn technology innovation and support start-ups of interest to me. Rather, the program is aimed to provide some security to lenders to offer debt for scaling up companies whose technologies are essentially proven. The loan guarantee program mitigates execution risk in the growth or expansion stage, or in early project deployment. Typically, the assets against which the loans are made (e.g., manufacturing equipment) have substantial residual value.
Thus, as Solyndra goes through the liquidation process, the private sector lenders behind the company are likely to get some of their money back – and the hit to the taxpayer will probably end up being less than the face value of $535 million, although my fellow CleanTech Blog colleague Neal Dikeman is not too optimistic. Time will tell.
As for concerns that Solyndra was improperly or inappropriately selected by the Obama Administration to receive the loan guarantee in the first place, this is an issue worth further investigation. Improprieties wouldn’t surprise me, as I’ve sensed improprieties of similar flavors in various governmental operations and civic affairs over the past few years. In my opinion, the U.S. has become a country in which government – federal, state and local – has become increasingly “pay-to-play”.
If Solyndra turns out to be yet another example, it would bother me…but I would also add two further comments:
1) I would be willing to bet a considerable sum that the list of companies in conventional energy that have recently received public sector finance benefits unfairly or unethically is very long (as “big energy” has lots of money and they throw it around very liberally in the lobbying arena), and
2) Let’s implement market-based mechanisms in the energy sector to discourage emissions, so that we can get rid of targeted subsidy programs where undue influence in government selection can occur.