Wednesday, September 28, 2011

The East Coast Refinery Gap

I see that ConocoPhillips has announced it will idle its 185,000 barrel-per-day Philadelphia area refinery, as a prelude to selling it or closing it permanently. Combined with the recent announcement that Sunoco would exit the refining business and sell or close its two refineries in Philadelphia, this amounts to just under half of the operating refining capacity on the US east coast, and that's counting PBF Energy's Delaware refinery, which is apparently in the process of starting up again after having been sold last year by Valero. If none of these three facilities finds a buyer, the resulting closures would leave a large gap in the east coast petroleum product market that must be filled either by shipping more products via pipeline from the Gulf Coast, to the extent capacity permits, or by means of increased imports from Europe and Canada. East coast gasoline and diesel prices could be higher for years to come.

The story in Reuters gives a good overview of the circumstances leading to Conoco's decision, and you've read about most of these factors in previous postings here. Topping the list is the persistent divergence of crude oil prices between the US mid-continent and the global oil market, due to a bottleneck at Cushing, OK resulting from several factors. Last week the gross margin ("3:2:1 crack") for importing crude priced at the level of UK Brent and turning it into gasoline and diesel or heating oil for the northeast market stood at a breakeven, and it's only a few dollars a barrel in the black today, after yesterday's market recovery. That's not much of an inducement to hang onto massively complex, capital-intensive facilities and to continue investing in them to keep them in compliance with ever more stringent regulations. Sometimes it just makes more sense to take a write-down and sell to someone else, who then starts with a lower capital base and has a better chance of making a return--not unlike the restaurant business. The problem in this environment is that it's not obvious who would step into the shoes of Sunoco and Conoco in Philadelphia. A few years ago buying refineries from integrated companies that wanted to redeploy their capital was a thriving game, with lots of players. Not so much, now.

Conoco's timing on this move is interesting, too. If it were only a question of margins, I'd think they'd wait to see how much profitability improved after Sunoco's plants shut down. Instead, it appears they are focused on a bigger picture. Even if they don't find a buyer, closing a marginal or money-losing facility will improve their overall refinery portfolio as they prepare to spin off the refining and marketing business, while allowing them to use the capital expenditures they won't have to put into the Trainer refinery for more lucrative opportunities like shale gas, which the company has been touting in a series of ads. That probably makes sense for the company's shareholders, though it won't do much for consumers in my neck of the woods, especially if the company's larger New Jersey refinery meets the same fate.

Oil refining has always been a tough business, with its occasional good years normally more than offset by years or decades in the doldrums. But the combination of reduced demand from the recession-weakened economy and the increased supply of biofuel--mainly corn ethanol, so far--has increased the pressure. When I ponder all this it makes me wonder why so many startups are so eager to get into the fuels manufacturing business, even if it will be based on biomass rather than oil, when they will ultimately be exposed to similar market forces.

Monday, September 26, 2011

Drawing Conclusions from Solyndra

When the energy portions of the 2009 stimulus were announced I remarked to a colleague that I wouldn't be surprised if its billions in incentives led to a future scandal or two. In fact, I was thinking more along the lines of fraudulent diversions from the Treasury's renewable energy grant program, which has handed out $8.7 billion since its inception. That program had its own day in the spotlight when it turned out that a significant portion of the initial disbursements were going either to non-US companies or to pay for equipment made outside the US, undermining its green jobs rationale. However, I wouldn't have guessed that the biggest scandal would erupt from the ostensibly lower-risk loan guarantee program of the Department of Energy. The prospect that a tussle over a small cut to that program, for which eligibility is due to end in a few days, nearly set up another government shutdown crisis seems even stranger.

Whatever happens to the loan guarantee program, the decision to lend over $500 million to Solyndra looks bad, and not just in retrospect, with the firm in bankruptcy. The market environment that Solyndra was betting on was already shifting in late 2008--months before its loan was approved. The global bottleneck in the supply of polysilicon, the key raw material for the crystalline silicon photovoltaic modules with which Solyndra's unique CIGS modules competed, was easing as new polysilicon capacity was coming on line, more was under construction, and polysilicon prices were falling. Someone at the DOE should accept responsibility--and the consequences--for ignoring or missing that signal and concluding that it was a good time for Solyndra to double its capacity and fixed costs.

As tempting as it might be to dwell on Solyndra's failure, that should not be our primary concern right now. If laws are found to have been broken or influence improperly used, there will be ample time to address that. Nor should we dwell on the fate of the other projects for which $10 billion in loans or loan guarantees have already been concluded. Many of those projects involve generating renewable power and selling it under long-term agreements that will ensure a profit, with little additional risk. Instead, oversight should focus urgently on those projects that are still under consideration or have received only conditional approvals to date.

One of the applications that apparently got caught in the fallout from Solyndra was a project of Solar City Corp. to install up to 371 MW of rooftop solar panels at military facilities across the US. Solar City was seeking a partial (presumably 80%) guarantee of up to $344 million in loans to carry out these projects. This is precisely the sort of initiative necessary to deliver on the military's goals to increase its use of renewable energy. I heard a lot more about that at an Air Force energy briefing at the Pentagon earlier this month and will write about that session when I receive the responses to the follow-up questions I sent in.

The military faces two major obstacles in achieving its energy objectives, and projects like Solar City's would help overcome both. First, energy generation assets are expensive and would compete with military hardware procurement and other budget priorities. Having someone else make those investments and charge the services for power that they'd otherwise have to buy from a utility is as useful for the military as it is for homeowners who can't afford the up-front costs of rooftop solar. The other aspect with which the project helps is that the economics of rooftop solar still depend on federal and state incentives that the Department of Defense can't access directly. In this case, Solar City would buy and install the hardware and collects the tax credits and other incentives that allow them to charge the military a competitive price for power. With time running out on its application, the company has apparently decided to pursue a scaled-down version of the project with only commercial financing.

As for any remaining applications, if the DOE can't convince itself that they are sound before the clock runs out at the end of the month, then it must either turn them down or ask the Congress for more time. Whatever call the DOE makes it had better be prepared for the scrutiny and second-guessing they are bound to receive. The Solyndra debacle has arguably done as much harm to US renewable energy policy as the Enron scandal did to energy trading. Another Solyndra might just put an end to the whole proposition of financing green energy with public funds in the US.

Note: Posting updated to reflect the current status of Solar City's project.

Thursday, September 22, 2011

Breaking Oil's Monopoly on Transportation

I've been thinking about an op-ed in Tuesday's New York Times written by a former National Security Advisor and a former CIA chief. They propose breaking oil's monopoly on transportation fuels by introducing more fuel competition at the point of use. This isn't a new idea, nor is their preferred tactic of requiring all vehicles sold in the US to be flexible fuel vehicles (FFVs) capable of running on a variety of fuels. I looked at this in April, following another op-ed by Mr. Woolsey, and several times previously in conjunction with the Open Fuel Standards Act, a piece of unpassed--so far as I know--federal legislation designed to put such competition into effect. The idea is as interesting as it has always been, though several trends pose new challenges for its ultimate success.

The op-ed was apparently timed to mark the introduction of a new group called the United States Energy Security Council, the membership of which constitutes a who's who of national security and energy leaders. The Council's issue statement is worth a read and stands apart from some other similarly-well-intended efforts for its clear recognition that our energy security problem with oil has nearly nothing to do with electricity, and thus won't lend itself to leverage from renewable electricity sources until large numbers of electric vehicles are on the road. That could take decades, as I've noted elsewhere. However, I wish the group had spent more time pondering the source of oil's natural monopoly in transportation energy, because I think it might have given them pause concerning methanol, one of the competing fuels they're trying to promote.

The sources of that natural monopoly--the reasons oil continues to dominate the transportation energy market 93 years after the introduction of the Model T Ford--owe little to the market power of OPEC, and much to the energy density and convenience of storage, transportation and distribution of petroleum products. Making fuels like E85 ethanol and methanol as readily available as gasoline, and making cars as compatible with them as they are with unleaded gasoline, won't affect the miles per gallon and range advantage that gasoline enjoys. That advantage is especially evident relative to methanol, which packs just under half the BTUs per gallon in gasoline.

Even though the abundance of shale gas could conceivably alter the economics of fuel methanol enough to put it into serious competition with gasoline, it would face an even more serious marketing challenge than E85, with its smaller but still significant range and mpg penalties, and its miles-per-dollar penalty that could expand significantly when the ethanol blenders credit expires at the end of the year--or sooner. Without substantial engine modifications to take advantage of methanol's other properties--modifications that wouldn't be compatible with fuel flexibility, as I understand it--both mpg and range would reflect a similar ratio as energy content. And unless methanol (with all appropriate federal, state and local motor fuel taxes applied) could be delivered to your corner gas station at less than half the cost of gasoline, then not only would its range be inferior, but also the miles delivered per dollar spent. Consumers tend to notice such things after a while. And that is aside from my long-standing concerns about the mass-market use of methanol.

The group's focus on alcohol-based fuels also goes against another recent trend in the biofuels industry towards what are called drop-in fuels: fuels that despite their non-petroleum origins are 100% compatible with engines designed to run on petroleum products. Despite all the hype about cellulosic ethanol, it is looking increasingly likely that the main fuels we will get from non-food biomass could closely resemble today's gasoline, diesel and jet fuel. And drop-in fuels don't require vehicles to be modified as FFVs.

When viewed from a technical perspective, I don't find the Council's arguments for mandating FFVs especially persuasive. However, I think there's a more compelling argument to be made, relying on option value. If it costs $100 to modify a car to run on other fuels besides gasoline, then that investment would still have value even if in practice the car's owner never actually bought those fuels, as has been the case with the vast majority of the cars already capable of using E85. The option still has value because it provides an insurance policy against some future circumstance in which the only fuels available (or affordable) are non-petroleum ones, for whatever reason: an oil embargo, peak oil, pipeline failure, or some weather-related catastrophe, take your pick. That kind of competition for oil doesn't even require large sales of non-petroleum fuels before having an impact in the market. The key question is whether it's worth enough to us as a society to require the collective expenditure of roughly $1.2 billion a year (adapting all new cars) or up to $24 billion (retrofitting the entire light-duty vehicle fleet) to force it to happen, as opposed to leaving this as the consumer and manufacturer choice that it is today.

Tuesday, September 20, 2011

Secretary Chu Advised on "Prudent Development" of Oil and Gas

A news item concerning last week's release of the National Petroleum Council's "Prudent Development" report referred to a recommendation supporting a national tax on carbon. That caught my attention. Given the NPC's makeup, a consensus on such a controversial issue would be surprising. The actual text of the report proved somewhat less dramatic on the climate policy front, but no less worthwhile for its comprehensive assessment of the abundance of North American hydrocarbon resources, as well as the development approach "necessary for public trust, protection of health, safety and the environment, and access to resources." The report doesn't just focus on macro concerns about climate change and other environmental issues, but also on timely details such as the methane emissions, water and land-use impacts involved in shale gas production and other resource development.

For those not familiar with the NPC, the organization is charged with advising the Secretary of Energy on matters relating to oil and gas, though in practice it looks at a much broader array of energy issues. In 2007 I helped with the renewable energy analysis in the group's previous study, entitled "Hard Truths." The current study is one of two requested of the NPC by Secretary Chu; the other will look at future transportation fuels and is due out in the first half of next year. What makes these reports unusual is that they incorporate the views of academics, government officials, non-governmental organizations, and the legal and financial sectors, along with those of the energy industry. In the current study, just under half the participants represented oil and gas companies, while the Emissions and Carbon Regulation Subgroup included members from the National Resources Defense Council and US EPA, and the Environment and Regulatory Subgroup was chaired by someone from the Environmental Defense Fund. I think we'd all benefit from more such "strange bedfellows" collaborations.

The report's specific recommendation on carbon pricing as a mechanism for addressing greenhouse gas emissions appears in the Executive Summary and originates in an entire chapter on "Carbon and Other Emissions in the End-Use Sectors." Although it's much more generic than the Fuelfix article indicated, it's still noteworthy. It deals with the need to internalize emissions costs into fuel and technology choices, with a carbon tax mentioned as just one option among a range of measures for establishing an explicit or implicit price on carbon. It states,

"As Congress, the Administration, and relevant agencies consider energy policies, they should recognize that the most effective and efficient method to further reduce GHG emissions would be a mechanism for putting a price on carbon emissions that is national, economy-wide, market-based, visible, predictable, transparent, applicable to all sources of emissions, and part of an effective global framework."

It goes on to address non-market mechanisms such as performance standards and clean energy standards, and how a policy on carbon should be phased in. While individual oil and gas companies have supported cap and trade or a carbon tax either individually or within multi-industry groups, I can't recall such a broad cross-section of this industry going along with the idea of carbon pricing, even in this non-specific manner.

The timing of this is interesting. It's hard to envision a comprehensive climate bill passing the Congress between now and the November 2012 election, or even being introduced on anything other than a symbolic basis. The pork-laden monstrosity of the Waxman-Markey bill succeeded only in making cap and trade toxic, and I can't imagine a worse environment for introducing any kind of new tax--a price on carbon is clearly a tax--even if the concept behind cap and trade has a solid bipartisan pedigree. Short of the miraculous materialization of a carbon tax as a compromise revenue solution from the deficit-fighting Supercommittee, carbon pricing in the US looks dead until 2013 and possibly well beyond. I'm also starting to see more comments along the lines of this one from the blog of the Information Technology and Innovation Foundation suggesting that policies promoting innovation might be a lot more important in addressing climate change than any level of carbon pricing that could realistically be implemented here.

So whether you regard this recommendation by the NPC as an attempt to restart a stalled debate on carbon pricing, or merely a tardy entry in a formerly crowded field, I think it also signals that the energy industry isn't oblivious to the fact that its emissions--including the lion's share associated with end-user consumption of their products--must eventually be dealt with. Chances are, that will await a return to economic health and stability, when US consumers, voters and taxpayers might be expected to prove more willing to incur the sacrifices this will entail. The report also includes a good perspective on the considerable North American resource upside that could be unleashed with different policies than the ones now in place, and that might just hasten the arrival of more favorable economic conditions for carbon policy.

Thursday, September 15, 2011

Renewable Energy Faces the European Debt Crisis

With all the bad economic news and political turbulence in the US, it's been easy to lose track of the sovereign debt crisis in Europe, which appears to be spreading from smaller, peripheral countries like Greece to affect the banking systems of core European Union members like Italy and France. To read Paul Krugman's column in last Sunday's New York Times, Europe could be on the verge of another financial crisis on the scale of the one triggered by the collapse of Lehman Brothers in 2008. Aside from the global economic consequences of such an event, it would send ripples throughout the energy sector, affecting both conventional and renewable energy markets and participants. While such an outcome is far from certain, it's a worrying scenario to contemplate.

The 2008 financial crisis is a good place to begin looking for the implications of a potential 2011 credit crunch in Europe. Start with oil, which in the fall of 2008 slid from around $100 per barrel to below $40 by mid-December of that year. Of course oil prices had already retreated from a high of $145 that summer, as the weakening US economy and collapsing housing market slowed US demand for oil. Yet it's worth noting that despite their generally more efficient use of energy and higher consumer energy prices, the countries of Europe together import slightly more crude oil and petroleum products than the US does. And as I've noted before, the economies of the EU's Euro area have been partially sheltered from high oil prices by the strength of the Euro relative to the US dollar, in which most oil transactions are settled. Even without a full-blown financial crisis, a sharp drop in the Euro/dollar exchange rate resulting from sovereign debt worries would create a regional energy price spike that could further hamper the EU's growth and reduce its energy demand. OPEC appears to be preparing to trim output for just such an eventuality.

Next consider what happened to renewables, such as wind and solar power. Lending to renewable energy projects in the US dried up in late 2008, as credit became harder to obtain in general, and participants in "tax equity swaps" retreated. Without the generous renewable energy supports in the 2009 stimulus, wind turbine installations might have ground to a halt, and the expansion of solar manufacturing that has recently hit a rocky patch might never have occurred. European projects and suppliers weren't affected to the same degree, thanks to a combination of higher direct subsidies for renewables and robust lending from EU agencies such as the European Bank for Reconstruction and Development.

Those protections look less dependable in a new crisis. European governments have been busily cutting renewable energy subsidies, and growth is already slowing, squeezing local firms like Germany's Q-Cells between a weaker domestic market and low-cost import competition from China and elsewhere. It's anyone's guess whether commercial lending to the renewable energy sector and loans from groups like the EBRD could be sustained in another financial crisis focused on the Eurozone.

A sudden contraction in European funding for renewable energy projects would be felt around the world. Suppliers in the US and Asia have relied on European sales of wind turbines, solar panels and components for much of their planned growth, and the further decline in equipment prices that would follow a big demand drop would leave all but the best-capitalized, lowest-cost competitors scrambling. And even as renewable energy growth has shifted in recent years toward developing countries and away from North America and Europe, Europe has remained the most important market for many of these technologies--particularly for solar PV and offshore wind power--just as Europe has retained the strongest focus globally on reducing the greenhouse gas emissions implicated in climate change. Every aspect of the global energy business has a big stake in the success of Europe's leaders in navigating through the current crisis, but none more than the renewable energy sector.

Tuesday, September 13, 2011

The American Jobs Act's Poison Pill(s)

I had a completely different topic in mind for today's posting, but I'll have to come back to the energy implications of a potential European financial crisis later. Since President Obama's jobs speech to Congress last week I have been awaiting the text of the actual proposed bill, rather than the summaries I'd been seeing. It finally came out at the end of the day yesterday. I feel obliged to point out a few provisions that haven't been widely advertised, either in the original speech or on the fact sheet that the White House published. These include several measures related to alternative energy, such as the inclusion of some project categories within the purview of the proposed National Infrastructure Bank, or the funding for putting solar panels on abandoned and foreclosed buildings as part of their rehabilitation. However, I'm not sure how much any of this matters, because the bill sent to the Congress also includes a slate of provisions that were certain to be regarded as a "poison pill"--sections that would preclude passing it on the all-or-nothing basis that the President seemed to be pushing for last Thursday. Energy features prominently in these poison pill measures.

I can't do justice to a 155-page legislative draft in the few hours I've had to review it. I'll restrict my comments today to the "offset" provisions that escaped being mentioned in the administration's fact sheet and reserve comment on the other aspects of the bill for a later date, if necessary. It seems clear from reading Sections 431-442 that the architects of this bill view the US domestic oil and gas industry as a declining cash cow, rather than as the source of new jobs and growth that I described in last Thursday's posting. Those sections set out to repeal every single oil and gas industry tax benefit of which I was aware, and a couple I hadn't even heard of. Included are the Section 199 manufacturing tax credit enjoyed by every other manufacturing company in America, along with portions of the tax code designed to prevent US companies from being subject to double taxation on their global income, protections that I believe their non-US competitors enjoy automatically under the territorial tax systems in use in most developed countries. In a different context I wouldn't have found any of this surprising, but rather a measure of consistency, since the administration has pursued the termination of these benefits in every budget proposal since 2009 and in a number of bills introduced by its allies in Congress.

The surprise comes from their inclusion in a bill intended to provide immediate relief for the large number of Americans still out of work, and possibly to avert a double-dip recession--a bill described as consisting mainly of provisions that have been backed by both parties at various times. However, the legislative history and likely fate of the poison pill provisions is abundantly clear: they have failed every time they were proposed, including in the previous Congress in which the President's party held overwhelming majorities in both houses. Along with the other "offset" provisions, such as those limiting itemized deductions for taxpayers making more than $200-250,000 per year, or going after the tax treatment of hedge fund income and corporate jets, it's hard to see their inclusion in the American Jobs Act as anything other than politically motivated. This morning's headlines reflect the entirely predictable reaction to them.

It's not that these measures aren't a legitimate subject for debate and action. However, that debate is part and parcel of the growing bipartisan consensus on the need for comprehensive reform of our convoluted tax code, in which the majority of current deductions and exemptions, including those for energy, would be sacrificed in exchange for the lower tax rates necessary to make all US businesses--not just a chosen few--more globally competitive. Squandering that opportunity to pay for a short-term boost to the economy would, among other outcomes, leave the US energy sector less competitive and the nation worse off in the long run. Meanwhile, when the Congress rejects these poison pills and proceeds to cherry-pick among the bill's headline measures, it might also adopt the American Jobs Act's final provision, which dumps the problem of paying for it in the laps of the Supercommittee appointed to find the remainder of the deficit reductions agreed in the Budget Control Act of 2011--already a pretty tall order.

If there was ever a chance for a "clean" jobs bill to pass intact, the pursuit in this venue of the administration's long-standing agendas with the oil and gas industry, hedge fund managers, and corporate jet owners erases it. Whatever the outcome of the negotiations with and within the Congress over this bill, you can count on hearing a lot more about these issues between now and next November.

Thursday, September 08, 2011

Turning to Energy for Jobs

Yesterday's Energy Jobs Summit at the US Capitol, hosted by The Hill and API, focused on the potential of the energy sector to add large numbers of new jobs to help alleviate the national jobs crisis that President Obama will discuss in tonight's speech. The figures presented by API and others were impressive, with the oil and gas sector alone capable of creating over a million jobs if provided increased access to US resources. Panelists also discussed "green jobs", including those from energy efficiency projects. Yet I was struck by the inherent tension between today's job-creation imperative and our long-term need for an energy sector that is as productive and cost-effective as possible, in order to support economic growth and reemployment in the roughly 92% of the economy beyond energy. That makes highly productive private-sector energy jobs requiring little or no public investment especially valuable.

In a new study released at the summit, Wood Mackenzie estimates that the US oil and gas industry could increase its employment by 1.4 million by 2030, with a million of those jobs attainable by 2018--more than half in the next two years--under new policies that would lift the current bans on offshore drilling outside the established areas of the Gulf of Mexico and on shale drilling in New York, speed up permit issuance in the Gulf, open up new onshore acreage for leasing, and approve the Keystone XL pipeline. In the process, domestic production of oil and gas liquids could eventually nearly double, while natural gas output would grow by over 60%. Even better, from a deficit-and-debt reduction perspective, this effort would require no new government expenditures and stands to contribute a cumulative $800 billion in additional federal and state royalties and tax receipts.

The potential jobs impact is extraordinary, when you think about it. Oil and gas is an incredibly capital-intensive industry with very high worker productivity--one reason that salaries in the industry tend to be much higher than average. An industry like that is hardly the first place one might think to look when seeking massive job growth. The fact that such growth is even possible is both a validation of the tremendous untapped resource potential we still possess, and an indictment of decades of bipartisan energy policy mismanagement that has preferentially outsourced US energy production, rather than exploiting our own resources.

What about the contribution of "green jobs"? The growth of cleantech--renewable energy and energy efficiency--can certainly contribute to US job growth, yet we should understand clearly that such jobs won't spring forth spontaneously from the private sector without substantial continued government incentives and subsidies. Nor are those a guarantee of success. The US wind industry installed just 2,151 MW of new capacity in the first half of 2011. While that was considerably better than last year's pace of 1,250 MW, it's still 47% below installations in the first half of 2009, despite last December's against-the-odds extension of the Treasury renewable energy grants, which paid out $2.2 billion to wind projects this year. And the recent solar bankruptcies and the aggressive offshoring by solar manufacturers fighting to stay competitive with Asian suppliers also demonstrate that green jobs, other than those in installation and construction, are just as vulnerable to global competition as in any other US manufacturing industry.

Conventional energy jobs aren't immune from competition, either. I was startled to read yesterday that regional refiner Sunoco plans to exit the refining business after more than 100 years. Its two Philadelphia-area refineries will either be sold or shut down by mid-2012, with 1,500 jobs at stake. Prospects for a quick sale of these facilities look poor, because these plants are among the most exposed to global oil prices that have been running more than $20 per barrel higher than for crudes produced in Canada and the US mid-continent. Idling these plants would take a big bite out of east coast gasoline supplies and inevitably lead to both higher product imports and higher gasoline prices in the northeast and mid-Atlantic regions. As someone pointed out at yesterday's session, it's a sad commentary that Sunoco can make more money selling sodas and snacks at its retail facilities than it can refining crude oil.

That dynamic makes the production-related jobs in the Wood Mac study even more attractive: Despite being tied to a depleting resource, US oil & gas exploration and production enjoys a greater sustainable competitive advantage in the global marketplace than either refining or cleantech manufacturing, at least when it has sufficient access to domestic resources.

However, these opportunities also pose a test of our seriousness on the jobs issue. Opening up the Virginia and California coastlines, for starters, along with the coastal plain of the Arctic National Wildlife Refuge to exploration raises a host of NIMBY and environmental concerns. I don't want to trivialize them, but I would suggest that the time when we could afford such sensibilities may have passed, heralded by our continued descent in the rankings of national global competitiveness and the rapid growth of our indebtedness. Creating a number of "green jobs" comparable to Wood Mac's estimate of 1.4 million from oil and gas would require the expenditure of tens to hundreds of billions of dollars the federal government doesn't have, and that the current Congress seems unlikely to be willing to appropriate. It would also risk embedding expensive energy at the core of the US economy, hobbling our non-energy economy, where most Americans are employed.

Yesterday's energy jobs summit was held in the new Capitol Visitor Center, which I hadn't seen before. It's a gorgeous facility and a suitable addition to the paramount edifice of our democracy. However, I was also struck by the contrast it provided with the meeting's subject matter. Recall that the Visitor's Center ended up costing over $600 million, well over twice its original plan. I hope that when the President presents his jobs program tonight, it will be grounded in the crucial distinction between that kind of government-funded, "shovel-ready" project that might put some of our fellow citizens back to work for a few years and an energy-and-jobs resurgence funded entirely by companies and their investors.

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.