Solyndra's Failure No Reason to Abandon Federal Energy Innovation Plicy

This post was originally published at the Breakthrough Institute Blog, and was also picked up by the Forbes online business section.


By Jesse Jenkins, Devon Swezey, and Alex Trembath 

Wednesday's news that the California solar cell manufacturer and DOE loan guarantee recipient Solyndra will be declaring Chapter 11 bankruptcy has government critics grumbling about clean tech boondoggles and failed government programs. But Solyndra's failure, while unfortunate, is hardly an indictment of federal energy technology policy. Failure is to be expected with emerging, innovative companies, whether they are financed by the government or the private sector. The success of the Department of Energy's Loan Guarantee Program (LGP) should thus be judged not by any one investment but by the performance of the entire portfolio.

Critics have seized on the news of Solyndra's bankruptcy to condemn the Department of Energy's Loan Guarantee Program, which provided a $535 million loan guarantee in 2009. The National Review's Greg Pollowitz writes that Solyndra's failure shows "why the government should not play venture capitalist." Yet the fact is that, when judged by its entire diverse portfolio of investments, the LGP has performed remarkably well. Indeed, with a capitalization of just $4 billion, DOE has committed or closed $37.8 billion in loan guarantees for 36 innovative clean energy projects. The Solyndra case represents less than 2% of total loan commitments made by DOE, and will be easily covered by a capitalization of eight to ten times larger than any ultimate losses expected following the bankruptcy proceedings.

The broad success story of the LGP shows why federal investment in clean energy is necessary to help early-stage clean energy technologies achieve scale and reach commercialization. The inherent uncertainty in investing in novel technologies, coupled with the high capital costs and long time horizons, prohibits most venture capital funds from investing in large-scale clean energy projects. Financing tools and direct investment from the federal government can help bridge this well-known "Commercialization Valley of Death," and the LGP is an effective way of doing that.

Instead of "picking winners and losers," as the program's critics allege, the program actually reduces risk for a suite of innovative clean energy technologies and allows venture capitalists and other private sector investors to invest in the best technology. Rather than picking winners, the LGP enables innovative companies to compete in the marketplace, allowing winners to emerge from competition. And while Solyndra is shutting its doors, companies like SunPower, First Solar, and Brightsource Energy, which also received loan guarantees and other support from the federal government, are industry leading success stories.

With perfect hindsight, it's all too easy to see why Solyndra proved to be a bad bet: the firm's central innovation, a thin film technology that avoided the use of silicon, proved to be far less important when refined silicon prices collapsed after Solyndra's founding; the remaining installation cost advantages provided by the company's cylindrical solar panels proved too small, and Solyndra was unable to capture the manufacturing cost reductions that have helped other U.S. thin film companies, like First Solar, thrive despite low silicon prices. Perhaps most importantly, intense pressure from heavily subsidized Chinese manufacturers is driving a surprisingly competitive solar market, forcing Solyndra to get costs down faster than the start-up firm could achieve.

It is possible that these fatal factors could have been avoided by better vetting from DOE, or that removed from the pressures of a fast-paced stimulus environment, DOE may not have made this bad bet. But to assert, as numerous conservative commentators have been quick to do, that Solyndra's failure is proof positive of the government's supposed inability to "pick winners" is patently absurd. After all, Solyndra received repeated rounds of investment to the tune of $1.1 billion from some of the private sector's biggest stars, including Richard Branson, the WalMart family, and leading venture capital firms like U.S. Venture Partners and RockPort Capital. Venture capitalists and the U.S. government both placed a bet, Solyndra's entrepreneurs took a shot, and unfortunately for all, they missed. Such is to be expected in the high-risk but high-reward world of early-stage technology ventures. In addition, the loan commitment places the government in a senior position in the result of a bankruptcy, ensuring that DOE will get paid out before the VCs and other investors.

Critics who think the government has no place in supporting technology innovation have a tenuous grasp of U.S. economic history. In fact, the government has a long and successful history in helping America's intrepid entrepreneurs succeed in new high-risk, high-reward technology sectors. As we wrote in "Where Good Technologies Come From," the government has played a key role, either as an early investor or a demanding customer, in the development of virtually every advanced technology we take for granted today, from aviation to biotechnology, to computers and the Internet, microchips, and now clean energy. Indeed, without a visionary government investing in key strategic industries, world-leading companies like Google, Genentech and Boeing would not exist.

The United States was able to be the world's technology leader in these fields because of its forward-looking investments, as well as a relative dearth of competition from economic rivals. In today's clean energy market, however, competition is fierce. U.S. companies compete with low-cost Chinese manufacturers who benefit from generous state subsidies and a robust and comprehensive set of policies to encourage solar manufacturing. Indeed, in 2010 the China Development Bank provided more than $30 billion in loans to Chinese solar manufacturers. China's large clean energy investments have helped reduce the price of solar cells by 42% in just the last nine months, which was one factor in Solyndra's inability to compete.

While the United States may not be able to afford the scale of support for clean energy that China can, it can compete by focusing on what it has always done best: innovation. In the solar industry, the long-term goal must be to drive innovation so that solar can be cost-competitive without subsidy. Fortunately, the Department of Energy recognizes this imperative and has embarked on a new effort--the SunShot initiative--geared toward dramatically lowering the cost of solar PV. The SunShot initiative focuses on bringing down costs by pursuing innovations in four particular areas, including solar cell technology, power electronics that optimize the performance of installations, improvements in manufacturing processes, and installation and system design.

The Sunshot initiative and other key technology innovation programs like the Advanced Research Projects Agency for Energy (ARPA-E), embody the kind of smart innovation policy that holds the promise of fundamentally transforming the economy and ushering in a new era of U.S. technology leadership.

In the face of intense competition in the clean energy sector, America faces two choices. We can abandon our entrepreneurs and innovators in this new strategic growth sector, or we can redouble our efforts to invest in energy innovation, support clean energy entrepreneurs and help American firms compete and ultimately prevail in the global clean energy race. If we walk away now, America will lose out on one of the greatest economic opportunities of the 21st century.

Solyndra Round-up

News that California solar company Solyndra will be declaring Chapter 11 bankruptcy has sent waves through the energy blogosphere, not least because the company was an early recipient of a DOE loan guarantee and because President Obama and Energy Secretary Steven Chu both touted Solyndra as a success story in US innovation policy.

• TIME Magazine's Dan Grunwald: Solyndra’s version did have certain advantages, particularly ease of installation. And according to the Energy Department, the company sold more than 1,000 installations in 20 countries, increasing its sales revenue 2,000% in three years. But they couldn’t keep up with the competition on cost.

• Joe Stephens and Carol D. Leonnig at WaPo: GAO auditors fear that similar defaults could happen with other projects, possibly including the other four that it found weren’t properly vetted. The GAO last year uncovered the department’s rush to provide Solyndra its loan — less than 60 days after Chu was sworn in to the fledgling administration — without completing required reviews.

• Arno Harris at the Energy Collective: Bottom line, I'm sad to see Solyndra fail and feel immense sympathy for the 1,100 employees who are now out of work. But in the bigger picture, Solyndra's failure underscores just how successful the PV industry has been at cost reduction--and highlights the risks when governments try to pick winners and losers in highly competitive markets.

• Slate's Andrew Leonard: So what's really happened here is that half-hearted industrial policy lost out to the real deal. Because if Solyndra's failure is taken as proof that the U.S. government can't pick winners, doesn't that mean that China's success proves the exact opposite?

• Mike Traugher at Mercury News: Solyndra also reportedly received more than $1 billion in venture capital over the past five years from firms including Redpoint Ventures and U.S. Venture Partners. Other reported investors included Virgin Group entrepreneur Richard Branson and the Walton family, heirs to the Walmart fortune.

UPDATE (9/6/2011 at 10:05am): 

• Michael Grunwald at TIME: The operation was successful, but the patient died. Politically, it’s probably an impossible case to make. But that doesn’t mean it’s wrong. 

• Bloomberg Analysis: Solyndra said it failed because it couldn’t compete with foreign manufacturers funded by their governments. Those factories produced an oversupply of panels at low prices and offered buyers lengthy payment terms. Demand for Solyndra’s panels also fell as European governments reduced incentives for buying solar energy, said W.G. Stover, chief financial officer, in a filing today. 

Energetics Cliff Notes - Wednesday Edition

All your riveting climate/energy news in one convenient place.

• Greentech Media recaps this weekend's Berkeley-Stanford Cleantech Conference, featuring keynote speaker Steven Chu (see my Twitter timeline for overly detailed liveblogging).
  

• Chu stuck around after the weekend to attend a bill signing by Jerry Brown at a SunPower manufacturing plant in Milpitas. The legislation will require California utilities to get 33% of their power (an increase from 20%) from alternative energy technologies by 2020.

• Bill Weihl, Google's green energy czar and a founder of google.org's fan-favorite Renewable Energy Cheaper Than Coal, on a prototype mirror design that could cut the cost of large solar thermal plants in half.

• Grist's Dave Roberts explains why environmentalists blocking CARB's implementation of AB 32 (featuring California's cap-and-trade program) are a little misguided.

• This (long-ish) post by Barry Brook is one of the best reactions pieces I've seen to the Fukushima nuclear accident.
  

• Big cuts are expected as the latest CR to fund the government unfolds -- high-speed rail is just one of the many unfortunate choices taking hits.
  

Energetics Cliff Notes - Tuesday Edition

• Amid a still-ongoing nuclear accident and buoyant oil prices, The Hill reports that President Obama will "outline a plan for America's energy future" tomorrow (Wednesday). The focus is expected to be on transportation and clean vehicles.

• Gov. Tim Pawlenty thinks his rationalization for flip-flopping on cap-and-trade is better than his rivals' in the race for the 2012 Republican nomination. Sure. Okay.

• An interesting piece at TechCrunch on how high finance is stealing human capital from research, engineering, and entrepreneurialism. "Let’s save the world by keeping our engineers out of finance. We need them to, instead, develop new types of medical devices, renewable energy sources, and ways for sustaining the environment and purifying water, and to start companies that help America keep its innovative edge."

• Andrew Revkin laments the hyperbole and fear-mongering that go hand-in-hand with the media's reporting on Fukushima.

• Florida's rejection of $1.2 billion in high-speed rail funds may be good news for the Merced leg of California's planned HSR route (via California High Speed Rail Blog -- follow it!).

• The German Green Party is taking over the state of Baden-Württemberg, ending a 58-year control by the Christian Democratic Union party. Roger Pielke Jr. wonders what will replace nuclear power in the state, which currently supplies "about half of its electricity" and which the Greens are expected to get rid of. (Answer? Coal. Woohoo.)

• Americans for Energy Leadership provides an update on the state of the US solar industry. "Though the data can be analyzed and interpreted from numerous angles, overall the industry appeared to grow and expand substantially in 2009."

• Jesse Jenkins of the Breakthrough Institute was on NPR's Weekend Edition on Sunday, explaining that the incident at Fukushima will not likely alter the future for nukes in the US. Basically, we weren't exactly planning on building a lot of new reactors before, and the events in Japan aren't going to change that one way or the other.

• Christine Hertzog on the asymmetric information problem between utilities and consumers RE smart meters. "People need to know the true financial and economic costs of power outages, and how different Smart Grid technologies reduce overall outage time and increase reliability metrics. In other words, what are the risks of not implementing these solutions."

Energetics Cliff Notes - Tuesday Edition

A note to my readers: some of you may have noticed my recent contributions to WattHead - Energy News and Commentary and the Americans for Energy Leadership Blog. For those interested, be sure to follow my future posts on these excellent new sites, and check out what other authors have to say. Now on to the news...

• Elizabeth McGowan thinks that GOP victories in November could actually benefit climate/energy policy, if a newly balanced Washington power structure moves past cap-and-trade.
• Despite global temperatures and increasing extreme weather, 2010 is a banner year for climate skepticism.
• The Solar on the White House campaign was officially defeated this week, with Secret Service concerns about rooftop installations trumping climate symbolism.
• PG&E's market capitalization fell by $1.2 billion following the San Bruno natural gas explosion.
• A new study by the National Renewable Energy Laboratory (NREL) says offshore wind resources have the potential to quadruple US energy needs.
• Dan Froomkin presents a case of industry capture of federal inspectors by the oil industry.
• Dan Kammen, director of the Renewable and Appropriate Energy Laboratory at UC Berkeley, is joining the World Bank as its Chief Technical Specialist for Renewable Energy and Energy Efficiency.
• The AGs from Nebraska, Alabama, Texas and North Dakota are preparing lawsuits challenging California's AB 32 on the premise that it violates the Interstate Commerce stipulations of the U.S. Constitution.
• Today is the 40th anniversary of the Clean Air Act and the 50th anniversary of OPEC.
• This is one of the more ridiculous things I've seen lately.

Energetics Cliff Notes - Tuesday Edition

• The New Republic reports on a new study showing that solar energy has become cheaper than nuclear - will the market it take it from here?
• Governor Brad Henry of Oklahoma has signed into law the Energy Security Act, an RES of 15% by 2015.
• Tera-Gen Power just received $1.2 billion in financing to expand their Kern County wind farm to 3000MW, making it the biggest wind farm in the country.
• Here we go again - another oil leak is spewing oil 20 feet into the air in the Gulf.
• Chevy announced the pricing plans for its anticipated Volt: $41,000 before tax breaks, or $350/month lease.
• Daily Kos points out that BP hasn't put any of its $20 billion in Gulf reparations in escrow yet.
• Paul Krugman weighs in on the death of the climate bill, lending his considerable column to the blame game.
• Remember how bringing a comprehensive climate/energy bill to Copenhagen was supposed to show the world how serious the US is about fighting climate change? Well, after missing that deadline, Michael Levi at CFR discusses how the latest failure will affect US climate diplomacy.
• Here are some key recommendations from the report Powering America's Economy: Energy Innovation at the Crossroads of National Security Challenges.

Intersolar

Tomorrow, I'll be attending Intersolar in downtown San Francisco. I'm actually very excited about the convention and I'm sure my friend and I will have an enjoyable and informative day there. From their website:

Intersolar North America, taking place from July 13-15 in San Francisco's Moscone Center West Hall, promotes the development of business opportunities throughout the U.S. solar industry. More than 580 U.S.-based and internation exhibitors and 20,000 trade visitors are expected across the more than 130,000 square feet of floor space. The conference, again taking place at the InterContinental Hotel, features over 30 tracks and 250+ speakers for the 1,600 expected attendees.

Since its establishment in 2008, the exhibition and conference have developed into the premier platform for the solar industry in North America. Intersolar North America, co-located with SEMICON West, focuses on photovoltaics and solar thermal technology and has quickly established itself among manufacturers, suppliers, distributers and service providers as a vital international industry meeting point.

I'll be live-tweeting my experiences all day tomorrow, and reflecting on it here afterwards. See you on the Interwebs...