It's tempting to focus mainly on the energy issues that have come up in the context of the presidential campaign, such as the Keystone XL pipeline, tax breaks for energy companies, and whether and how to regulate hydraulic fracturing, a.k.a "fracking". Yet whoever is inaugurated next January, and however he resolves these issues, he will also face a much wider array of energy concerns, including some that are outgrowths of current policies or have emerged after a long gestation. Though not intended as an exhaustive list, here are a few such issues that merit close attention from the next president's energy team.
They should begin by taking a fresh and objective look at the overall US energy posture and devising a clear and concise way to describe it to the public. Big changes have taken place, with many of the issues that preoccupied us for the last decade or longer having become less relevant or out of date. Topping that list is the sense of energy scarcity that has burdened us since the oil crises of the 1970s and early 1980s. There's a realistic possibility that the combination of "tight oil" and the gas liquids production from shale gas could push domestic US petroleum/liquids production back above its early '70s peak of around 11 million barrels per day. At the same time, our net oil imports are declining, due in large part to the weak economy. However, as the share of fuel efficient vehicles in our car fleet increases, it's reasonable to think that we've already seen the peak of US demand for petroleum fuels, even after the economy returns to healthy growth. The net result might fall short of energy independence, but it will put us in a much better position than our largest economic rivals in terms of real energy security.
Then there's shale gas. Not only has it reversed a worrisome decline in US natural gas production that prompted numerous projects to import liquefied natural gas (LNG), but it has upended our assumptions about future prices and emissions in the electric power sector, while completing the divorce of oil and electricity that began in the 1980s. Now we're talking seriously about exporting natural gas. When you combine all these changes with biofuels that are contributing roughly a million barrels per day to US supply (in volumetric, though not BTU-equivalent terms) the need to revisit some of our most basic assumptions about energy looks compelling.
Energy scarcity isn't the only paradigm that needs to be rethought. The current administration apparently took office with a view that was prevalent in the environmental community and among some in energy circles, that the solutions to climate change and energy security were effectively synonymous and synergistic. That view predates the shale/tight oil revolution and was founded on the notion that renewable energy and efficiency were the only serious answers to both concerns. That linkage was always oversimplified, because it ignored the trade-offs inherent in the shortcomings of every energy technology available. And now, thanks to unexpected technological developments, we face an explicit choice between energy abundance based on hydrocarbons and a lower-emissions future based on renewables and electric vehicles that won't reach the required scale for decades, despite promising early signs. The transition from the former to the latter appears long and largely unpredictable, nor will it be cheap.
The next administration also faces a set of practical issues, along with the big-picture reframing described above. Two of these issues involve urgent tasks. The first is the growing need for a thorough evaluation of the recent and current approach to incentivizing renewable energy technologies and projects. Since early 2009 we've spent tens of billions of dollars on a constellation of federal grants, tax credits, and loan guarantees to stimulate the growth of a domestic renewable and advanced energy industry and the deployment of its products. There's a lot of new hardware on the ground, but the sustainability of this industry looks uncertain. Although only a fraction of the companies that received federal support have failed, the tally has grown large enough--with the addition of Abound Solar last week--that it's no longer acceptable merely to shrug off these losses as par for the course. We need some hard-nosed, detail-oriented outsiders to conduct a comprehensive post-expenditure review and extract the major lessons learned. That should be an absolute prerequisite before anyone contemplates renewing or expanding any of these programs, including the Pentagon's $210 million "green fleet" program.
Another urgent clean-up task is the reform of the federal Renewable Fuel Standard (RFS). This 2007 mandate was premised on the imminent arrival of cellulosic biofuel technologies that have turned out to be much harder than expected to transfer from demonstration to commercial scale. That has resulted in drastic annual revisions to the cellulosic biofuel targets of the mandate, but even these lower targets have not been achieved. Instead, the EPA imposes penalties on refiners and gasoline blenders for failing to blend non-existent volumes, with consumers ultimately absorbing the higher costs at the pump. The attractive vision of abundant renewable fuels has thus turned into a bureaucratic game. And while corn ethanol supplies 10% of gasoline and consumes nearly 40% of the US corn crop, it cannot more than double to meet the entire 36 billion gallon per year RFS target for 2022, nor should we wish it to. Instead, the RFS must be updated to reflect reality, and the associated biofuel-credit trading system should be restructured to squeeze out the fraud that is infecting it, instead of leaving refiners and blenders--and again ultimately consumers--to pick up a tab estimated at $200 million.
These items don't constitute an entire energy agenda by themselves, but together with a few higher-profile proposals from among those that both campaigns will announce and debate during the next four months, they could fill out a worthy first-hundred-days' energy plan for 2013.
Showing posts with label loan guarantees. Show all posts
Showing posts with label loan guarantees. Show all posts
Wednesday, July 11, 2012
Friday, June 15, 2012
Politics and The Global Cleantech Shakeout
For all the enthusiastic comparisons of the cleantech sector to infotech or microelectronics that we've encountered in the last decade, one rarely employed analogy is turning out to be more apt than the rest: Cleantech seems just as capable as dot-coms and chip makers of undergoing an industry shakeout and consolidation at the same time it experiences growth rates that most other industries would envy. US and European solar firms continue to fall by the wayside, and this week saw the sale by the world's leading wind turbine manufacturer, Vestas, of one of its Danish plants to a China-based competitor. Because the cleantech industry has been driven mainly by policy rather than market forces, and has thus been deeply intertwined with politics, the global shakeout now underway will continue to have political repercussions. Should Europe's monetary problems unleash a new financial crisis, then both the cleantech shakeout and its political fallout could expand.
The strained comparisons this week between the failures of Solyndra and Konarka, a much smaller solar panel maker, likely won't be the last example of this that we'll see this year. Although I can understand the temptation to link these two situations, the contrast between an award-winning company that took more than eight years to go bankrupt in an economic and competitive environment vastly different than the one in which it was launched, and a business that was already doomed on the day that its half-billion dollar federal loan was inked should have dissuaded anyone from raising this issue. The analogy looks even worse when you realize that Solyndra was only able to undertake the massive expansion that drove it into bankruptcy as a result of serious deficiencies in the DOE's due diligence process, which failed to spot the crashing price of polysilicon, the previous spike in which had underpinned Solyndra's business model.
Past shakeouts have left other industries in excellent shape, despite the pain they entailed. Numerous US automakers went out of business during the Great Depression, which was also a period of great innovation that set up the survivors to become a pillar of the US economy for the next half-century. It's premature to write the epitaph of US cleantech, which could yet emerge much stronger. At the same time, have we ever experienced such a shakeout in an industry so dominated by government subsidies and industrial policy, against the backdrop of globalized competition with similarly supported industries in Europe and Asia? The ultimate outcome looks highly uncertain.
In the long run, the administration's investments in cleantech will either look farsighted and courageous or tragically mistaken, rooted in a "green jobs" fallacy that emerged as an expedient Plan B after successive failures to legislate a price on CO2 and other greenhouse gas emissions. Of course this year's election won't take place with the benefit of history's verdict. Its energy aspects are likely to be dominated by the behavior of oil and gasoline prices and a potential string of further high-profile cleantech bankruptcies, if the economy remains weak. (The list of DOE loan guarantee recipients doesn't lack for candidates.) Is it due to defects in our system or merely human nature that such events seem destined to overshadow the positive energy visions that both sides will present to voters?
The strained comparisons this week between the failures of Solyndra and Konarka, a much smaller solar panel maker, likely won't be the last example of this that we'll see this year. Although I can understand the temptation to link these two situations, the contrast between an award-winning company that took more than eight years to go bankrupt in an economic and competitive environment vastly different than the one in which it was launched, and a business that was already doomed on the day that its half-billion dollar federal loan was inked should have dissuaded anyone from raising this issue. The analogy looks even worse when you realize that Solyndra was only able to undertake the massive expansion that drove it into bankruptcy as a result of serious deficiencies in the DOE's due diligence process, which failed to spot the crashing price of polysilicon, the previous spike in which had underpinned Solyndra's business model.
Past shakeouts have left other industries in excellent shape, despite the pain they entailed. Numerous US automakers went out of business during the Great Depression, which was also a period of great innovation that set up the survivors to become a pillar of the US economy for the next half-century. It's premature to write the epitaph of US cleantech, which could yet emerge much stronger. At the same time, have we ever experienced such a shakeout in an industry so dominated by government subsidies and industrial policy, against the backdrop of globalized competition with similarly supported industries in Europe and Asia? The ultimate outcome looks highly uncertain.
In the long run, the administration's investments in cleantech will either look farsighted and courageous or tragically mistaken, rooted in a "green jobs" fallacy that emerged as an expedient Plan B after successive failures to legislate a price on CO2 and other greenhouse gas emissions. Of course this year's election won't take place with the benefit of history's verdict. Its energy aspects are likely to be dominated by the behavior of oil and gasoline prices and a potential string of further high-profile cleantech bankruptcies, if the economy remains weak. (The list of DOE loan guarantee recipients doesn't lack for candidates.) Is it due to defects in our system or merely human nature that such events seem destined to overshadow the positive energy visions that both sides will present to voters?
Tuesday, November 01, 2011
How Many More Solyndras?
Another firm that received a loan guarantee from the Department of Energy has just filed for bankruptcy. Beacon Power had drawn down $39.1 million of the $43 million authorized by the DOE for the construction of its 20 MW energy storage facility in Stephenstown, NY, but was still operating at a loss and unable to find additional backing. As was the case for Solyndra, the DOE's "loan guarantee" actually took the form of a direct loan from the Federal Financing Bank, an arm of the US Treasury, rather than from a commercial bank or other private-sector lender. If two data points can indicate a pattern, the one here reflects poorly on venture capital decisions made solely by government officials lacking any stake in the eventual outcome of the investment. Real venture capitalists make bad bets, too, but with an entirely different degree of accountability.
The Beacon failure is especially disheartening, because it involves the application of energy storage to grid services, which many believe is crucial for integrating large increments of intermittent renewable energy--mainly wind and solar power--into our electricity supply. In particular, Beacon's use of flywheels, rapidly rotating disks capable of storing and releasing large amounts of energy quickly, looked like a promising alternative to chemical batteries. I've long been intrigued by this technology, which is also being applied to race cars. Beacon's problems appear to be both technical and financial, with two of the company's flywheels having failed catastrophically since startup due to manufacturing defects, and the business model generating insufficient revenue to support the company's obligations.
Unlike Solyndra, the DOE's investment in Beacon Power might not turn out to be a complete loss, though I don't share the confidence of the DOE's spokesman that the "valuable collateral asset" will enable the government to recover the entire sum it lent Beacon. With an operating facility and ongoing revenues, it's possible that the firm's liabilities could be reorganized in such a way than it could emerge from bankruptcy as a viable entity. However, if its reported second-quarter revenue of $525,000 is indicative, it's very hard to see that either the business or the underlying assets could be worth more than a fraction of the $39 million federal loan liability, let alone their $72 million book value. "Haircuts" seem to be in vogue, and I'm guessing that Uncle Sam will take one on Beacon, in order to realize any value at all from the deal.
I'm relieved that the administration has finally ordered an independent review of the entire loan guarantee program, though it's a little late for that to accomplish much more at this stage than bringing additional problems to light. The main 1705 loan guarantee program is out of money and unlikely to receive further appropriations, at least until after the 2012 election. Meanwhile, another energy-related stimulus beneficiary, advanced-battery maker Ener1, was just de-listed from NASDAQ last Friday. The best coda on this whole situation may come from the blog of VC David Gold, who wrote yesterday that the administration's cleantech stimulus is turning out to be "Bad Policy, Bad Politics, and Bad for Cleantech." I'll bet there are many executives at cleantech firms who now wish they had never heard of Treasury grants and DOE loan guarantees.
The Beacon failure is especially disheartening, because it involves the application of energy storage to grid services, which many believe is crucial for integrating large increments of intermittent renewable energy--mainly wind and solar power--into our electricity supply. In particular, Beacon's use of flywheels, rapidly rotating disks capable of storing and releasing large amounts of energy quickly, looked like a promising alternative to chemical batteries. I've long been intrigued by this technology, which is also being applied to race cars. Beacon's problems appear to be both technical and financial, with two of the company's flywheels having failed catastrophically since startup due to manufacturing defects, and the business model generating insufficient revenue to support the company's obligations.
Unlike Solyndra, the DOE's investment in Beacon Power might not turn out to be a complete loss, though I don't share the confidence of the DOE's spokesman that the "valuable collateral asset" will enable the government to recover the entire sum it lent Beacon. With an operating facility and ongoing revenues, it's possible that the firm's liabilities could be reorganized in such a way than it could emerge from bankruptcy as a viable entity. However, if its reported second-quarter revenue of $525,000 is indicative, it's very hard to see that either the business or the underlying assets could be worth more than a fraction of the $39 million federal loan liability, let alone their $72 million book value. "Haircuts" seem to be in vogue, and I'm guessing that Uncle Sam will take one on Beacon, in order to realize any value at all from the deal.
I'm relieved that the administration has finally ordered an independent review of the entire loan guarantee program, though it's a little late for that to accomplish much more at this stage than bringing additional problems to light. The main 1705 loan guarantee program is out of money and unlikely to receive further appropriations, at least until after the 2012 election. Meanwhile, another energy-related stimulus beneficiary, advanced-battery maker Ener1, was just de-listed from NASDAQ last Friday. The best coda on this whole situation may come from the blog of VC David Gold, who wrote yesterday that the administration's cleantech stimulus is turning out to be "Bad Policy, Bad Politics, and Bad for Cleantech." I'll bet there are many executives at cleantech firms who now wish they had never heard of Treasury grants and DOE loan guarantees.
Friday, October 14, 2011
More Lessons from Solyndra
I'll bet that those working and investing in renewable energy are even more tired of the steady stream of headlines from the unraveling Solyndra mess than the rest of us are. Today's crop includes more evidence of the political linkages to the overall process for determining the company's suitability for federal backing and the revelation that an investor in Solyndra was advising the US Navy to sign a contract with them, even as the firm was on the verge of collapse. None of this has done either the industry or the administration any good, and there is much to be learned from this episode. That includes lessons concerning direct government support for the full-scale deployment of renewable energy and other technologies.
Start with the ethics issues. No one should be surprised that investors in Solyndra were lobbying the DOE and White House in support of the company's application for a federal loan guarantee. That was hardly unique to Solyndra or renewable energy. And I'm perfectly willing to accept, unless proven otherwise, that both the DOE advisor whose wife works for a law firm representing Solyndra, and the venture capitalist who apparently advised the Navy to buy Solyndra's technology in his capacity with the Pentagon's Defense Venture Catalyst Initiative, thought they had done everything necessary to resolve any potential conflicts of interest in this matter. Yet in both cases it seems clear that even if nothing improper was done, the appearance of impropriety is very hard to dispel after what seemed like a routine transaction turns into a front-page scandal.
Whenever I see this sort of thing I can't help recalling the early training I received as a petroleum products trader for Texaco, which took anti-trust compliance very seriously. The lawyer who advised our Supply & Distribution department on such matters always reminded us to think about how our dealings with other companies might look if we had to explain them from the witness stand in a court of law. He invariably advised going beyond mere compliance; his mantra was, "Avoid the appearance of evil." That's a lesson that it seems many of the officials involved in the Solyndra debacle either forgot or never received, even if they believed they were in full compliance with existing ethics policies.
When you step back from such details it becomes apparent that these are precisely the sorts of conflicts that result, when the government involves itself so deeply in transactions of a magnitude that would normally be handled in the commercial sector--which even when it makes mistakes does so with shareholder dollars, rather than tax dollars. And make no mistake, if Solyndra had gone broke after receiving $500,000 from Uncle Sam, rather than $535 million, none of these other issues would matter or have seen the light of day.
It's perfectly appropriate--even necessary--for the government to make modest-sized bets on new technology in key areas, particularly when they require greater patience than most corporations are capable of. And it's to be expected that many or even most such bets will turn out to be dead ends, as Solyndra did. The problem is that while a few million dollars will buy a lot of renewable energy R&D, they will buy only a negligible amount of deployment. While the government can afford to make numerous small bets that don't turn out well but advance our knowledge in the process, it can only afford to make a small number of bets on the scale of the Solyndra loan. That ought to be especially true when the deficit and debt loom as large as they do, unless you're a firm believer in the "broken windows" theory of stimulus, or Lord Keynes's suggestion that the government could productively bury bottles of money and let people dig them up.
The easy question is whether the Department of Energy should have backed Solyndra. I have concluded the answer is no, and not just based on after-the-fact information. The much harder question is whether the US government should be in the business of providing this level of support for large-scale manufacturing or deployment, rather than just R&D. And even if it should, can it develop the necessary expertise and processes, not only to make such decisions at least as well as its commercial counterparts would, but also to insulate the decision-makers from the political influence that such high stakes are bound to attract. Answering that depends on a lot more than just one's political or economic philosophy.
Start with the ethics issues. No one should be surprised that investors in Solyndra were lobbying the DOE and White House in support of the company's application for a federal loan guarantee. That was hardly unique to Solyndra or renewable energy. And I'm perfectly willing to accept, unless proven otherwise, that both the DOE advisor whose wife works for a law firm representing Solyndra, and the venture capitalist who apparently advised the Navy to buy Solyndra's technology in his capacity with the Pentagon's Defense Venture Catalyst Initiative, thought they had done everything necessary to resolve any potential conflicts of interest in this matter. Yet in both cases it seems clear that even if nothing improper was done, the appearance of impropriety is very hard to dispel after what seemed like a routine transaction turns into a front-page scandal.
Whenever I see this sort of thing I can't help recalling the early training I received as a petroleum products trader for Texaco, which took anti-trust compliance very seriously. The lawyer who advised our Supply & Distribution department on such matters always reminded us to think about how our dealings with other companies might look if we had to explain them from the witness stand in a court of law. He invariably advised going beyond mere compliance; his mantra was, "Avoid the appearance of evil." That's a lesson that it seems many of the officials involved in the Solyndra debacle either forgot or never received, even if they believed they were in full compliance with existing ethics policies.
When you step back from such details it becomes apparent that these are precisely the sorts of conflicts that result, when the government involves itself so deeply in transactions of a magnitude that would normally be handled in the commercial sector--which even when it makes mistakes does so with shareholder dollars, rather than tax dollars. And make no mistake, if Solyndra had gone broke after receiving $500,000 from Uncle Sam, rather than $535 million, none of these other issues would matter or have seen the light of day.
It's perfectly appropriate--even necessary--for the government to make modest-sized bets on new technology in key areas, particularly when they require greater patience than most corporations are capable of. And it's to be expected that many or even most such bets will turn out to be dead ends, as Solyndra did. The problem is that while a few million dollars will buy a lot of renewable energy R&D, they will buy only a negligible amount of deployment. While the government can afford to make numerous small bets that don't turn out well but advance our knowledge in the process, it can only afford to make a small number of bets on the scale of the Solyndra loan. That ought to be especially true when the deficit and debt loom as large as they do, unless you're a firm believer in the "broken windows" theory of stimulus, or Lord Keynes's suggestion that the government could productively bury bottles of money and let people dig them up.
The easy question is whether the Department of Energy should have backed Solyndra. I have concluded the answer is no, and not just based on after-the-fact information. The much harder question is whether the US government should be in the business of providing this level of support for large-scale manufacturing or deployment, rather than just R&D. And even if it should, can it develop the necessary expertise and processes, not only to make such decisions at least as well as its commercial counterparts would, but also to insulate the decision-makers from the political influence that such high stakes are bound to attract. Answering that depends on a lot more than just one's political or economic philosophy.
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.
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, August 04, 2011
US Renewables Need A Fallback Plan
When I described some of the energy implications of the debt limit crisis last month, the most serious ones were associated with a default by the US government in the event the debt ceiling wasn't extended. That risk has been resolved, for now. But that doesn't mean that everything looks rosy, especially for renewables. Renewable energy technologies and projects are far more dependent on government assistance and policies than conventional energy. The fate of a wide range of federal energy incentives looks highly uncertain, and the impact of that uncertainty is matched by doubts about the health of the US economy and its growth prospects. With the pace of growth already slowing in some renewable energy sectors, any manufacturers or project developers that aren't thinking seriously about how they would manage without federal incentives could be setting themselves up to become roadkill.
Understanding why requires taking a closer look at the debt ceiling bill that Congress passed in the context of the federal budget baseline--never mind that the US Congress has not enacted a budget in more than two years. In April the Congressional Budget Office (CBO) published its assessment of what the economy would look like under the budget submitted by President Obama in February, as well as under the laws already on the books. The latter comprises the "March CBO Baseline" that was mentioned frequently during the debt limit talks and that formed the basis for comparing different proposals. (See Table 1-5 of the CBO report.) Without factoring in this week's debt limit agreement, the CBO projected a cumulative deficit for fiscal years 2012-21 of $6.7 trillion. That figure is important for several reasons.
First, it serves as a reminder that even after the $917 billion of cuts agreed up front and the $1.2-1.5 trillion of future cuts to be determined later this year, the US debt would still grow by more than $4 trillion over the next decade, mainly through increases in mandatory, or non-discretionary spending--entitlements and other untouchables. That won't change even under the deal done by the Senate and House this week; all of its pre-programmed cuts are to discretionary spending, the category into which most federal spending on renewable energy would fall.
But even that $4 trillion figure looks optimistic. As I understand it the CBO baseline assumes that next January 1 all of the Bush-era tax cuts will expire on schedule, resulting in substantial increases in taxes on both ordinary income and dividend income. And that's not just for those earning more than $200,000 per year, or whatever the threshold of "wealthy" is determined to be; it's for everyone. Nor would the Alternative Minimum Tax, which has been biting a growing number of middle class families every year, be indexed as proposed. It also assumes that the Social Security payroll tax will revert to its normal level of 6.2%, up from this year's 4.2%. Barring a dramatic improvement in the economy between now and the end of the year, it seems unlikely that all of those tax increases will be allowed to take effect. That means that the government's revenue through 2021 is likely to be significantly lower than the CBO forecast, because both growth and tax rates are likely to be lower. That translates into bigger deficits and more pressure for deficit reduction.
So the environment for continued support for renewables will be one in which the government's projected deficits continue as far as the eye can see, even after painful cuts, while its ability to continue borrowing on that scale looks suspect. With the main focus of budget cuts falling on the category that includes cash support for renewables, how likely is it that the Congress would extend the Treasury renewable energy cash grant program when it expires on December 31, 2011, or add new appropriations for the Department of Energy's Loan Guarantee Program? And if the Congressional super-committee's proposals include tax reform that would eliminate many "tax expenditures"--tax credits and deductions--then a host of programs such as the solar investment tax credit, the wind, biomass and geothermal energy production tax credit, various biofuel tax credits, and the electric vehicle purchase tax credit, could end up on the cutting block. In the coming scramble to avoid the budget knife, renewables will be competing with better-established programs with broader and more influential constituencies.
It has always been a risky proposition to build companies and industries, the economics of which depended on substantial government subsidies. Some folks could be on the verge of finding out just how risky. If we go down that path, it will probably also result in awkward questions being asked about some of the decisions made by the stewards of these government programs. They should be; I've never understood what kind of due diligence could have resulted in hundreds of millions of dollars in grants or "loans" going to to clean energy and automotive startups with minimal track records, when private investors weren't willing to bet on those risks at that scale. From a national energy policy and strategy perspective, our focus should not be on saving individual companies--no TARP for renewables, I suspect--but on preserving key capabilities essential to ensuring a long-term competitive US position in the global clean energy market.
What would that entail? First, as government funding for renewables becomes constrained it should be focused on R&D at the expense of deployment. Not only would the available money go much farther, but it would also create more options for the future. The next step should be to ensure that whatever the government does spend on deployment should go to projects that are close to being viable without help, or in the case of the military that enhance combat capabilities. That means, for example, focusing solar development assistance on sunny places like the southwest--preferably in proximity to existing transmission infrastructure--and putting an end to paying people to install utility and rooftop solar in places that receive less than about 5 "peak sun hours" (kWh/m2) per day, on average. Again, the money would go farther, and we'd be shoring up nearly viable operations, instead of trying to command the tide not to overwhelm the marginal ones. And finally, as I suggested last week, a greater emphasis on exports to developing country markets, where energy demand is growing at impressive rates and where renewables are becoming increasingly popular, would increase export earnings and employment while participating in volume-related unit cost reductions. And looking beyond renewable energy, the US government has a bird's nest on the ground in the form of the potential lease bid and royalty income from the substantial oil and gas resources that have been placed off limits for various reasons. Tapping those looks like a much smarter source of revenue--not to mention job creation--than selling off the Strategic Petroleum Reserve bit by bit.
If that sounds like a recipe for putting the US cleantech industry on life support after years of robust government-supported growth, then that's consistent with the severity of the fallback plan that could become necessary. The need for this would depend on the priorities set by the special Congressional deficit reduction committee established by the debt ceiling bill, and by the Congress as a whole, along with the subsequent efforts that will be necessary to prevent our long-term debt from growing beyond our ability to service it. Nor would it be quite the starvation diet it might appear, as long as states kept their renewable portfolio standards in place. This isn't a scenario the cleantech industry would willingly choose, but it's one that it can't ignore.
Understanding why requires taking a closer look at the debt ceiling bill that Congress passed in the context of the federal budget baseline--never mind that the US Congress has not enacted a budget in more than two years. In April the Congressional Budget Office (CBO) published its assessment of what the economy would look like under the budget submitted by President Obama in February, as well as under the laws already on the books. The latter comprises the "March CBO Baseline" that was mentioned frequently during the debt limit talks and that formed the basis for comparing different proposals. (See Table 1-5 of the CBO report.) Without factoring in this week's debt limit agreement, the CBO projected a cumulative deficit for fiscal years 2012-21 of $6.7 trillion. That figure is important for several reasons.
First, it serves as a reminder that even after the $917 billion of cuts agreed up front and the $1.2-1.5 trillion of future cuts to be determined later this year, the US debt would still grow by more than $4 trillion over the next decade, mainly through increases in mandatory, or non-discretionary spending--entitlements and other untouchables. That won't change even under the deal done by the Senate and House this week; all of its pre-programmed cuts are to discretionary spending, the category into which most federal spending on renewable energy would fall.
But even that $4 trillion figure looks optimistic. As I understand it the CBO baseline assumes that next January 1 all of the Bush-era tax cuts will expire on schedule, resulting in substantial increases in taxes on both ordinary income and dividend income. And that's not just for those earning more than $200,000 per year, or whatever the threshold of "wealthy" is determined to be; it's for everyone. Nor would the Alternative Minimum Tax, which has been biting a growing number of middle class families every year, be indexed as proposed. It also assumes that the Social Security payroll tax will revert to its normal level of 6.2%, up from this year's 4.2%. Barring a dramatic improvement in the economy between now and the end of the year, it seems unlikely that all of those tax increases will be allowed to take effect. That means that the government's revenue through 2021 is likely to be significantly lower than the CBO forecast, because both growth and tax rates are likely to be lower. That translates into bigger deficits and more pressure for deficit reduction.
So the environment for continued support for renewables will be one in which the government's projected deficits continue as far as the eye can see, even after painful cuts, while its ability to continue borrowing on that scale looks suspect. With the main focus of budget cuts falling on the category that includes cash support for renewables, how likely is it that the Congress would extend the Treasury renewable energy cash grant program when it expires on December 31, 2011, or add new appropriations for the Department of Energy's Loan Guarantee Program? And if the Congressional super-committee's proposals include tax reform that would eliminate many "tax expenditures"--tax credits and deductions--then a host of programs such as the solar investment tax credit, the wind, biomass and geothermal energy production tax credit, various biofuel tax credits, and the electric vehicle purchase tax credit, could end up on the cutting block. In the coming scramble to avoid the budget knife, renewables will be competing with better-established programs with broader and more influential constituencies.
It has always been a risky proposition to build companies and industries, the economics of which depended on substantial government subsidies. Some folks could be on the verge of finding out just how risky. If we go down that path, it will probably also result in awkward questions being asked about some of the decisions made by the stewards of these government programs. They should be; I've never understood what kind of due diligence could have resulted in hundreds of millions of dollars in grants or "loans" going to to clean energy and automotive startups with minimal track records, when private investors weren't willing to bet on those risks at that scale. From a national energy policy and strategy perspective, our focus should not be on saving individual companies--no TARP for renewables, I suspect--but on preserving key capabilities essential to ensuring a long-term competitive US position in the global clean energy market.
What would that entail? First, as government funding for renewables becomes constrained it should be focused on R&D at the expense of deployment. Not only would the available money go much farther, but it would also create more options for the future. The next step should be to ensure that whatever the government does spend on deployment should go to projects that are close to being viable without help, or in the case of the military that enhance combat capabilities. That means, for example, focusing solar development assistance on sunny places like the southwest--preferably in proximity to existing transmission infrastructure--and putting an end to paying people to install utility and rooftop solar in places that receive less than about 5 "peak sun hours" (kWh/m2) per day, on average. Again, the money would go farther, and we'd be shoring up nearly viable operations, instead of trying to command the tide not to overwhelm the marginal ones. And finally, as I suggested last week, a greater emphasis on exports to developing country markets, where energy demand is growing at impressive rates and where renewables are becoming increasingly popular, would increase export earnings and employment while participating in volume-related unit cost reductions. And looking beyond renewable energy, the US government has a bird's nest on the ground in the form of the potential lease bid and royalty income from the substantial oil and gas resources that have been placed off limits for various reasons. Tapping those looks like a much smarter source of revenue--not to mention job creation--than selling off the Strategic Petroleum Reserve bit by bit.
If that sounds like a recipe for putting the US cleantech industry on life support after years of robust government-supported growth, then that's consistent with the severity of the fallback plan that could become necessary. The need for this would depend on the priorities set by the special Congressional deficit reduction committee established by the debt ceiling bill, and by the Congress as a whole, along with the subsequent efforts that will be necessary to prevent our long-term debt from growing beyond our ability to service it. Nor would it be quite the starvation diet it might appear, as long as states kept their renewable portfolio standards in place. This isn't a scenario the cleantech industry would willingly choose, but it's one that it can't ignore.
Friday, July 29, 2011
The Market for US Cleantech Is Out There
One of many press releases I received this week highlighted the new Clean Energy Export Principles developed by a "multi-industry coalition, which was coordinated by the National Foreign Trade Council, and U.S. government representatives." They recommend a significantly expanded and technology-neutral effort by the US government to promote exports of clean energy gear, including equipment for the smart grid, energy efficiency and energy storage. They also suggest the need to reduce trade barriers affecting such exports globally, not just to help US industry but to increase the effectiveness of efforts to mitigate climate change. I can only hope that the administration embraces these recommendations as enthusiastically as it has other aspects of its green agenda, because these principles are aimed squarely at the biggest opportunities for clean energy technology and emissions reduction, outside our borders.
It doesn't really matter whether these principles reflect the sensible recognition of trends in the global energy marketplace, or merely make a virtue of necessity at a time when government support for domestic clean energy deployment is approaching its statutory and practical limits. However the current debt ceiling crisis is resolved, the capacity for the federal government to continue providing generous incentives for cleantech deployment, either through the Treasury renewable energy cash grants that have totaled nearly $8 billion to date, or the Department of Energy Loan Guarantee program that has backed or directly funded more than $40 billion in loans for clean energy projects is likely to be far more constrained in the future.
Nor is this simply a question of money. The whole notion that we are in some kind of renewable energy deployment race with China or any other country ignores the big differences in our respective levels of economic development. If there were such a race we would be bound to lose, and not because we don't have the right policies or strict enough regulations, but because US electricity demand is growing slowly and is backed by both ample generating capacity and ample supplies of relatively cheap and low-emitting fuel. Meanwhile both electricity demand and capacity in the developing world are growing rapidly, and the indigenous generation fuel in good supply is mainly coal. That, together with the disparities in economic growth coming out of the global recession, is the underlying reason why investment in renewable energy in the developing world apparently surged past that in the developed world last year.
With cleantech supply chains already substantially globalized, the leaders in this industry must be global in scope and focus. US manufacturers of cleantech equipment shouldn't ignore the US market, but they must be realistic about it. Even with growing opportunities in the smart grid and solar power, the US will account for only a small fraction of the global market for such goods and services, as growth shifts away from the mature markets of Europe and North America. The market share that counts, for competitive strength and economies of scale, is global market share. And global sales will provide the volumes needed to drive down costs for both exports and domestic installations. There's a huge, growing market for cleantech, and it is mainly out there.
It doesn't really matter whether these principles reflect the sensible recognition of trends in the global energy marketplace, or merely make a virtue of necessity at a time when government support for domestic clean energy deployment is approaching its statutory and practical limits. However the current debt ceiling crisis is resolved, the capacity for the federal government to continue providing generous incentives for cleantech deployment, either through the Treasury renewable energy cash grants that have totaled nearly $8 billion to date, or the Department of Energy Loan Guarantee program that has backed or directly funded more than $40 billion in loans for clean energy projects is likely to be far more constrained in the future.
Nor is this simply a question of money. The whole notion that we are in some kind of renewable energy deployment race with China or any other country ignores the big differences in our respective levels of economic development. If there were such a race we would be bound to lose, and not because we don't have the right policies or strict enough regulations, but because US electricity demand is growing slowly and is backed by both ample generating capacity and ample supplies of relatively cheap and low-emitting fuel. Meanwhile both electricity demand and capacity in the developing world are growing rapidly, and the indigenous generation fuel in good supply is mainly coal. That, together with the disparities in economic growth coming out of the global recession, is the underlying reason why investment in renewable energy in the developing world apparently surged past that in the developed world last year.
With cleantech supply chains already substantially globalized, the leaders in this industry must be global in scope and focus. US manufacturers of cleantech equipment shouldn't ignore the US market, but they must be realistic about it. Even with growing opportunities in the smart grid and solar power, the US will account for only a small fraction of the global market for such goods and services, as growth shifts away from the mature markets of Europe and North America. The market share that counts, for competitive strength and economies of scale, is global market share. And global sales will provide the volumes needed to drive down costs for both exports and domestic installations. There's a huge, growing market for cleantech, and it is mainly out there.
Monday, July 18, 2011
Energy Implications of a Federal Default
Much of the attention concerning a possible failure to increase the US debt ceiling by month-end has focused on the government's ability to borrow, and on how individuals might be affected, whether as recipients of social security, pay or pensions from various branches of the federal government, or as consumers seeking car loans or mortgages. I haven't seen a lot of discussion about the potential impact on energy, other than some speculation about higher oil prices. As I started to consider how different categories of energy might be affected, it occurred to me that a list, or a set of lists was the best way to tackle this. It's not intended to be comprehensive, and I would welcome your input on what I've overlooked.
The first category of energy impacts concerns companies or individuals who are awaiting a check or wire transfer from the government, for which funds might not be available in the absence of a prompt deal to extend the debt ceiling. These include:
The first category of energy impacts concerns companies or individuals who are awaiting a check or wire transfer from the government, for which funds might not be available in the absence of a prompt deal to extend the debt ceiling. These include:
- Projects that have qualified for Treasury renewable energy cash grants, but have not yet received the funds, or that hope to qualify shortly. Since this program started in 2009, the Treasury has disbursed $7.8 billion to project owners and developers.
- Companies that sell energy to the federal government and its various branches. This includes start-ups selling renewable aviation and diesel fuels to the Department of Defense, as well as firms selling the government the large quantities of electricity and conventional fuels it uses. (I will be attending a joint Army/Air Force energy forum tomorrow.
- Companies with contracts related to various energy efficiency programs initiated under the stimulus or previous legislation, including weatherization.
- Individuals who receive federal energy assistance.
- Beneficiaries of the Department of Energy's loan guarantee program that have not yet secured loans are a good example of this category. Note than many of the projects listed on the Loan Program Office's site have only obtained conditional approvals, indicating that their financing has not yet closed. They would be vulnerable either to a protracted default or one that undermined confidence in the government's "full faith and credit" to such an extent that a federal loan guarantee wouldn't aid in lining up lenders.
- Refiners and others blending ethanol into gasoline and collecting the Volumetric Ethanol Excise Tax Credit.
- Producers of biodiesel and cellulosic biofuels and small ethanol producers, all of which receive tax credits for producing renewable fuels.
- Oil and gas companies benefiting from the various tax credits and deductions that have been in the administration's cross-hairs since it took office.
- US manufacturers, including oil and gas companies, power generators, ethanol producers, and a wide array of non-energy recipients of the Sec. 199 deduction for manufacturing their products in the US.
- Purchasers of electric vehicles eligible for the tax credit of up to $7,500 per car for EVs and qualifying plug-in hybrids, or up to $4,000 for natural gas vehicles and other alternative fuels.
- Car manufacturers and dealers depending on these tax credits to help sell their vehicles.
Friday, March 12, 2010
Putting a Price on Risk
I spent most of the day in Richmond yesterday attending the first Summit on Virginia's Energy Future. I'll write more about the main topic of that session next week, but a statistic from one of the panelists stuck in my mind for the entire drive home. In describing the risks that utilities take on when investing in new power plants, the President and Chief Nuclear Officer of Dominion Virginia Power, David Heacock, explained that over the sixty year life of such a facility, the cumulative difference between their high and low long-term natural gas price forecasts amounted to $7 billion, equivalent to the entire up-front cost of a nuclear power plant. He also suggested that the value of the difference between their high and low forecasts for the price likely to be imposed on CO2 emissions was in the same ballpark. Despite the recent financial crisis and accompanying loss of confidence in sophisticated risk-monetizing mechanisms that failed so spectacularly to account for low-probability events, some businesses have no choice but to assess risk in terms of its dollar impact. And as government fills in for a number of hopefully-temporary gaps in various markets, it must also grapple with risk in this way.
The President's proposal to quadruple the total loan guarantees available for new nuclear power plants has raised some concerns about the cost of backing loans to an industry that has suffered spectacular defaults in the past. Doubtless many of my readers are too young to remember the WPPSS (or "Whoops") default in the early 1980s. The amount in question, $2.25 billion, would seem more like a rounding error in today's inflated terms, but that was a lot of money at the time, and it caused quite a stir. I don't believe the Whoops precedent is relevant to today's emerging nuclear renaissance, other than as a reminder--as if we needed one after the last couple of years--that the risk of default is never zero, and a loan guarantee always costs something.
I also find it interesting that worries about the cost of such guarantees have come up mainly in the context of nuclear power, while loan guarantees, loans and outright grants to a variety of "green" projects and firms have attracted little comment along these lines. A case in point is the widely-celebrated $529 million federal loan--that's loan, not loan guarantee--to Fisker Automotive. As with today's nukes vs. Whoops, there may be no direct analogies to the DeLorean experience or various other sorry episodes in the history of the car business, other than to remind us that the risk of default on that loan is also not zero.
As another speaker at yesterday's session pointed out, we are in an extraordinary time, in the aftermath of a financial crisis and with credit for many firms still frozen. At such times, the government may have to step into roles that are otherwise better left to the private sector, such as financing auto start-ups and backstopping loans to power plants. When that happens, our proper attitude towards the risk that we are taking on collectively is neither to sweep it under the carpet, as has largely been done with various green loans and loan guarantees, nor to assume it approaches 100%, as some seem to be doing in the case of nuclear power. The magnitude of these risks can be quantified and weighed against the cost of doing nothing. It can also potentially be reduced through judicious diversification--recognizing that the government itself controls some of the key risks of default through another of its powers, to regulate. With great power comes great responsibility, and those wielding it today should consider that carefully, as they would be called to account later should some recipient of one of these loans or loan guarantees ever default. Now, that's a 100% certainty.
The President's proposal to quadruple the total loan guarantees available for new nuclear power plants has raised some concerns about the cost of backing loans to an industry that has suffered spectacular defaults in the past. Doubtless many of my readers are too young to remember the WPPSS (or "Whoops") default in the early 1980s. The amount in question, $2.25 billion, would seem more like a rounding error in today's inflated terms, but that was a lot of money at the time, and it caused quite a stir. I don't believe the Whoops precedent is relevant to today's emerging nuclear renaissance, other than as a reminder--as if we needed one after the last couple of years--that the risk of default is never zero, and a loan guarantee always costs something.
I also find it interesting that worries about the cost of such guarantees have come up mainly in the context of nuclear power, while loan guarantees, loans and outright grants to a variety of "green" projects and firms have attracted little comment along these lines. A case in point is the widely-celebrated $529 million federal loan--that's loan, not loan guarantee--to Fisker Automotive. As with today's nukes vs. Whoops, there may be no direct analogies to the DeLorean experience or various other sorry episodes in the history of the car business, other than to remind us that the risk of default on that loan is also not zero.
As another speaker at yesterday's session pointed out, we are in an extraordinary time, in the aftermath of a financial crisis and with credit for many firms still frozen. At such times, the government may have to step into roles that are otherwise better left to the private sector, such as financing auto start-ups and backstopping loans to power plants. When that happens, our proper attitude towards the risk that we are taking on collectively is neither to sweep it under the carpet, as has largely been done with various green loans and loan guarantees, nor to assume it approaches 100%, as some seem to be doing in the case of nuclear power. The magnitude of these risks can be quantified and weighed against the cost of doing nothing. It can also potentially be reduced through judicious diversification--recognizing that the government itself controls some of the key risks of default through another of its powers, to regulate. With great power comes great responsibility, and those wielding it today should consider that carefully, as they would be called to account later should some recipient of one of these loans or loan guarantees ever default. Now, that's a 100% certainty.
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