Friday, September 02, 2011

Will Solar Bankruptcies Be Different From Ethanol's?

The solar equipment business appears to be undergoing a shakeout, as three US solar firms have declared bankruptcy in the last few weeks. The most prominent of these was Solyndra, which was notable for its receipt of a $535 million federal loan guarantee. Joining Solyndra in bankruptcy filings were Massachusetts-based Evergreen Solar, which had been ailing for more than a year, and former Intel spin-off SpectraWatt. These failures raise many questions, but one that I haven't seen discussed much is whether these companies' assets will merely be absorbed into other, more successful solar firms, or effectively sold for scrap. I suspect the outcome will be quite different from that of the ethanol bankruptcies that followed the financial crisis.

Observers of these firms might be tempted to look to the ethanol industry for a model of how their bankruptcies could turn out. After all, ethanol represents another green industry--or at least one with green aspirations--the growth of which has also been entirely predicated on government subsidies and mandates. And in a pattern similar to the current situation in the global solar industry, US ethanol producers had invested aggressively in capacity expansion ahead of actual demand and were faced with high costs that couldn't be recovered in the marketplace, particularly when growth slowed and the price of their product fell during the aftermath of the financial crisis. The shakeout that ensued saw a number of ethanol producers, including one the largest, VeraSun, enter bankruptcy with the intention of reorganizing, though most ended up in liquidation. With the exception of a few small facilities, the vast majority of the ethanol plants that were idled by these business failures were acquired and restarted by larger, better-capitalized entities such as refiner Valero. The buyers paid $0.30-.50 on the dollar for the assets, and most now have profitable ethanol businesses, after the legacy cost overhang was removed.

Unlike ethanol, however, the output of solar manufacturing is anything but a commodity. Solar cells, modules and panels are differentiated products and still quite costly, compared to conventional energy sources. Solyndra's cylindrical modules were very different from FirstSolar's thin film modules and SunPower's crystalline silicon modules. It's much harder to envision the assets of Solyndra, Evergreen and other failing solar manufacturers being snapped up by more successful competitors, for several reasons. First, technology differences likely make the idled facilities of little use in the manufacturing processes of the survivors. The location of the capacity is also an issue, because the winning solar suppliers have mainly adopted a strategy of shifting manufacturing to Asia, where costs are lower and supply chains possibly better integrated. So I doubt there's a Valero waiting to put these plants and their employees back to work quickly, nor do current economic conditions give much hope of these facilities being quickly repurposed for some other product. I would like to be proved wrong about that.

Because of the low likelihood of recovering more than a tiny fraction of its investment in these companies, it's crucial that the Department of Energy and its Congressional overseers immediately assess the lessons from Solyndra and ensure that the DOE's Loan Program Office doesn't sow the seeds of further expensive failures in its rush to issue additional loan guarantees before the appropriations for them expire at the end of the month. And just to clear up some confusion in the terminology, although the government's role in Solyndra is usually described as a loan guarantee, suggesting some future, contingent loss if Solyndra doesn't make good on its debts, the actual lender in this case was the US Treasury's Federal Financing Bank. There is nothing contingent about the losses that taxpayers face in this bankruptcy. Those losses will be even harder to stomach if the firm's nearly new factory and production lines aren't put to some good use.

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