Epic Fail

Over the past 18 months, four solar energy equipment companies have closed their doors. Each one blamed poor market conditions for its economic woes, even though each had fundamental weaknesses that went unaddressed. It now appears that the Department of Energy (DOE) did insufficient due diligence before backstopping one of those four companies, Solyndra, with a $535 million loan guarantee.

Solyndra announced on September 2 that it was entering Chapter 11 bankruptcy and immediately released the company’s more than 1,100 employees, with no notice. The company opened a massive $700 million dollar manufacturing facility in Fremont, Calif., earlier this year using cash from a $535 million dollar DOE loan guarantee and reportedly $1 billion in venture capital funding. The Treasury Department’s internal Federal Financing Bank loaned the money, so a loan guarantee in default is lost cash.

Solyndra joined Hopewell Junction, N.Y.–based Spectrawatt Inc. (an Intel Corp. spinoff) and Evergreen Solar of Marlboro, Mass., both of which filed for Chapter 11 bankruptcy in August. BP Solar closed its Frederick, Md., plant in March of last year.

Great Expectations

You may recall that Solyndra was praised by President Obama as a prime example of how green jobs were being created through government backing of promising renewable energy firms. During a well-publicized plant visit on May 26, 2010, the president said, “It’s here, that companies like Solyndra are leading the way toward a brighter, more prosperous future.” He went on to say that “The true engine of economic growth will always be companies like Solyndra” and that their technology was “game-changing.”

The Solyndra technology was far from innovative, much less game-changing. Its plan was to produce tubes lined with thin-film technology solar cells that are mounted in a flat panel-like rack. Solyndra publicized that this design was better than flat panels because the racks can be inexpensively mounted on a flat surface, like a roof, and because reflected solar energy from a light-colored background improves collection efficiency. However, the well-known flaw with this technology is that it is does not scale well—the production costs don’t drop much per unit when produced in large quantities like conventional flat photovoltaic panels. The DOE fell in love with the technology but failed to quantify the elasticity of production costs in a highly competitive market where solar panels are a commodity.

The cracks in Solyndra’s façade began to appear well before the president’s visit. Solyndra floated the idea of a $300 million initial public offering (IPO) in December 2009, after receipt of the loan guarantee in March of that year. The registration statement prepared by the privately owned company was examined by independent accountant PricewaterhouseCoopers. The accountants’ conclusion was that the company’s huge losses and negative cash flow raised “substantial doubt about its ability to continue as a going concern,” even after a $1.5 billion cash infusion. The IPO was withdrawn in June 2010, a month after the president’s visit, and was followed by the founder and CEO’s departure on August 19.

The selection of Solyndra for a loan guarantee is all the more distasteful when you realize that the DOE must have known the product stood little chance of commercialization in the first place. When Solyndra’s original loan guarantee application was submitted in 2006, the company had a couple of dozen employees and technology that the market had already rejected as uneconomic compared with flat panels. By 2009, the company had a couple of hundred employees but was shipping panels sold at about half the cost of production. During those three years, many companies considered investing in Solyndra, but there were few takers. Then Solyndra caught a break. With the loan guarantee in the bag, venture capitalists jumped in with big money, hoping for a bigger score. They believed that they couldn’t fail, especially by investing in a company that proudly wore the president’s personal seal of approval.

Just as irksome to me was the cavalier attitude of the DOE when it learned of Solyndra’s demise. That same day the DOE released a statement on its web site: “We have always recognized that not every one of the innovative companies supported by our loans and loan guarantees would succeed….” In essence, the DOE dismissed the half-billion-dollar loss as the price of doing business, and without any hint any responsibility. Apparently, failures of this magnitude are an acceptable option at the DOE.

More Failures Will Follow

The Solyndra failure highlights the government’s “push-pull-plus” marketing plan for these technologies. The “push” occurs when the government substitutes its judgment of what constitutes a good product for that of the collective free market and then uses public funds to jam the product into an unreceptive market. The “pull” occurs when the government creates artificial market demand, such as state or proposed national renewable energy portfolio standards. The “plus” is the sweetener added to the deals in the form of incentives and tax credits. A marketing plan predicated on the government injecting cash every step of the transaction is unsustainable today.

Solyndra was the first loan guarantee signed off on by the DOE under the American Recovery and Reinvestment Act, but that didn’t save the company from filing for bankruptcy protection. Given the many other companies with shaky financials that have received loan guarantees, I expect we’ll see more and larger epic fails like Solyndra in the coming years.

Dr. Robert Peltier, PE is POWER’s editor-in-chief.

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