The Obama Administration’s $60 billion Loan Guarantee Program (LGP) for renewable energy is considered a failure because of Solyndra, Beacon Power, and potential 2012 bankruptcies. What is not well known is that 75 percent of the program’s deployed funds went to relatively low risk power plants that will catapult the U.S. to a leadership role in the utility-scale solar sector. This is hardly the hallmark of a “failed program.” The program is akin to Shakespeare’s King Henry V, who said as a delinquent Prince: “I’ll so offend as to make offense a skill, redeeming time when men think least I will.”
The LGP’s offenses are extensive and justify the current Congressional investigations. Its greatest blunder is failing to stimulate the economy in 2009 by not deploying capital. In the American Recovery and Reinvestment Act, Congress allocated $60 billion of implied lending authority (estimates vary) to section 1705 of the LGP, which could have had a tremendous and critical impact on the energy industry and the broader economy if investments were made in 2009 and 2010. Some had high expectations because the DOE had already been soliciting applications for this program since 2006. Unfortunately, in the first 18 months after the stimulus bill, only 1 percent of the funds were deployed and more than 80 percent of that went to two companies that are now bankrupt.
Congress had good reason to rescind approximately $35 billion from the LGP and launch an investigation. The program’s original concept was timely and brilliant: the government would use $6 billion to derisk approximately $60 billion of loans for innovative energy technologies that were unfinanceable due to the credit crisis of 2009. These figures imply a 10 percent estimated default rate, which takes most venture capital deals off the table. VCs make high-risk investments like Solyndra, but they place multiple bets and hope a single success story can more than offset losses from the failures. For the U.S. government to invest in Solyndra with a low risk tolerance and no other sizable bets was simply irresponsible.
While Wall Street was rejecting the DOE’s gamble on domestic solar manufacturing in 2010, a cluster of power generation applications were emerging as a second act for the LGP. Utility-scale solar has substantially lagged rooftop growth to date due to economic, environmental and financial barriers. The economics of selling solar electricity to utilities at wholesale prices is now making sense though, thanks to a 75 percent drop in panel prices in the last 3 years. On the environmental side, these power plants require large tracts of land with high sunhours that do not exist in traditional European solar markets.
The southwest U.S. is the most logical place on the planet for utility-scale solar. It is a vast public desert in close proximity to a large population that generally wants to increase its use of renewables and is used to paying above-average electricity prices. Unfortunately, securing permits for federal land can require stringent multi-year environmental reviews including an Environmental Impact Study mandated by the National Environmental Policy Act. A handful of developers survived those studies though and in 2011 the only remaining hurdle was financing; it was “redeeming time” for the LGP.
In the last year, the LGP closed on 12 solar generation projects totaling $12 billion, or 75 percent of the program’s deployment since 2009. These systems, which are now under construction, will be game-changing for solar and carry relatively little risk for the taxpayers. They utilize multiple proven technologies and their average size is 283 megawatts, equal to three times the world’s largest solar plant currently in operation. And if something goes wrong and a default occurs, there will be an electricity and cashflow generating power plant to cover losses instead of a customized manufacturing facility that is worth pennies on the dollar.
Two months after the LGP’s lending authority expired, a Berkshire Hathaway subsidiary stepped up and purchased a gargantuan $2 billion solar project in California that has no government loan guarantees attached. Utility-scale solar is cost competitive in the U.S. and private investors are now eager to participate; too bad the DOE won’t get the credit.
Robert Lahey is the Senior Legislative Analyst at Ardour Capital Investments, LLC a boutique investment bank specialized in energy and environmental technologies.
At Solar Power-Gen in Long Beach, California next month, Robert Lahey will be moderating a session entitled “Solar Power on Public Lands: Aligning Conservation and Development Interests.