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Friday, September 23, 2011

Putting eggs in the wrong basket

The DOE’s loan guarantee program is coming to a close — going out with a bang and not a whimper. Today particularly it’s proving to be “news that’s fit to print,” as the old Grey Lady motto goes.

The political posturing in Congress over the Solyndra ”scandal” has its latest act today when the Solyndra CEO and CFO are scheduled to take the fifth today rather than tell what honestly happened. Meanwhile, the DOE Loan Programs Office is rushing to process the remaining Section 1705 applications in hopes of giving away $9.4 billion before the program expires a week from today.

The New York Times covered both stories on Friday, with Solyndra on the front page — above the fold — and an update on the LPO buried on page B7. Going with the politics angle, the NYT got its priorities backward — as did the LPO.

The article inside was the real bombshell:
First Solar Says It Won’t Meet U.S. Loan Guarantee Deadline
By Matthew L. Wald

First Solar, a major solar panel manufacturer, said Thursday that it would not be able to accept a partial loan guarantee of $1.93 billion for a giant solar farm in San Luis Obispo County, Calif., because it could not meet the statutory deadline of Sept. 30 to complete the Energy Department’s requirements.
To be fair, the NYT may have buried the story because it was scooped by TheStreet.com.

As the NYT and others reported, First Solar still expects to be funded for two other projects: Desert Sunlight (500MW) and Antelope (350MW). However, the 550 MW Topaz Solar Farm is one of the largest (global) PV installations ever planned, and is also an important project for California (specifically PG&E’s) efforts to meet RPS quotas). It would be located near the existing Diablo Canyon transmission lines, and also would also increase geographic diversity as one of the most westerly solar farms in a state that since the 1980s has sited generating capacity in the southeast (Mojave) desert.

First Solar shares are down 25% in the past week — both because of the specific concern about the loss of the loan guarantee and hit to projected earnings, but also the pall over the entire industry caused by the Solyndra scandal.

Testifying last week before Congress, LPO head Jonathan Silver emphasized that the DOE was emphasizing solar (and other RE) generating facilities over manufacturers (35+ vs. 4 IIRC) because the former have more predictable cashflows and thus are better investments. Particularly with power purchase agreements in place, once completed there is no market risk akin to what took out Solyndra.

Perhaps First Solar wasn’t going to get the loan for other reasons (such as environmental controversies). Still, leaving unfunded major solar farms is a big problem for industry, for society, for taxpayers and for greenhouse gas reduction.

It’s not that the Page One Solyndra story was uninteresting, as it noted all the warning signs available to the administration before the loan guarantee was issued. The online version released a series of documents showing various doubts about Solyndra’s application, impending commoditization, and then concerns by career officials about the process being rushed both in March and September 2009 for political reasons. It also shows the doubts that arose after the loans were granted, as well the successful efforts by Solyndra execs and lobbyists to convince officials to ignores these warning signs.

However, the DOE is rushing out the projects it can most quickly review which are not necessarily not the best projects. The problem of the frantic rush in the final month to commit half the loan balances — after badly investing the first loan guarantee — suggests a problem of prioritization.

A VC, startup or even a multinational knows that it can’t do everything and thus has to prioritize its efforts. Perhaps with the heady funding of stimulus windfall — plus an academic as department secretary — the DOE failed to have the market discipline and realism to focus its attention on the most important priorities. (Or maybe Congress just screwed up, by not allocating it as $6 million/year over three years.)

There’s the old saying: “put all your eggs in one basket — and then watch that basket.” With $18 billion available to invest, the LPO was not limited to a single basket, but there were other, safer investments it could have made that would have supported the cleantech industry.

Saturday, September 17, 2011

Who lost Solyndra?

For the second time this summer, I found myself watching a C-SPAN congressional hearing on a major issue of economic policy. This time, the hearing was about the $535 million Federally guaranteed-loan to the now-bankrupt Solyndra, this time before a subcommittee of the House Energy and Commerce Committee.

The hearing was called by the (obviously hostile) GOP majority to compel testimony by two Obama administration representatives: Jonathan Silver (head of the loan guarantee program for the Department of Energy) and Jeffrey Zients, acting director of the Office of Management and Budget.

Silver, a former McKinsey consultant and private equity manager, didn't want to be bossed around by mere representatives with 1/10th or 1/100th of his net worth, but eventually settled down. Zients — with far narrower legal exposure — was much more cooperative and even a little more sympathetic to fiduciary concerns.

Some aspects of what happened were clear and undisputed:
  • January 2009. The final decision of the DOE (under Bush) is to reject the loan without prejudice
  • February 2009. After the stimulus bill passed, Obama's new DOE secretary wants to push through funding
  • March 2099. The DOE offer a conditional loan commitment to Solyndra
  • September 2009. The DOE approves the loan to Solyndra
  • September 4, 2009 — Vice President Biden announces approval of the $535 million loan guarantee to allow Solyndra to build Fab 2.
  • August 31, 2011: Solyndra declares bankruptcy, laying off 1100 employees
Before the hearing, the Washington Post published leaked e-mails that the approval was rushed so that Biden could make the announcement, although the Democrat majority argued it was quoted out of context. In one memo, a government analysts said the economic models forecast that Solyndra would go broke without additional funding.

The level of questioning by both sides was disappointing. Perhaps it is because both sides are populated lawyers who (mostly) are clueless about economics. Perhaps it’s because I know something about the industry and have been to Fab 2.

The arguments boiled town to a handful of issues, with the two sides were broken records. Republicans were trying to find out who lost taxpayer money and fight against “picking winners and losers.” Democrats (including Silver) tried to argue it was equally Bush's fault (even though Bush never approved the guarantee) and were obsessed with national "competitiveness" of keeping up with Chinese subisides for their solar companies.

In the most quoted statistics of the day, Silver stated that US global market share in PV fell from 40% in 1995 to 6% today (2010) versus 6% for China in 2005 and 54% today.

The two sides argued about whether the government renegotiated the terms of the loan (in violation of Federal law) or allowed Solyndra a workout. (Either way, the government’s interest became subordinated to a new round of private lenders — making it unlikely that the US will see the 20¢/dollar that it would have recieved with a liquidation).

While Solyndra was burning cash at the time of the loan guarantee, Silver (correctly) noted that this was not atypical for a high-growth company. (The point was echoed by far less knowledgeable allies on the committee). But as one of the representatives pointed out, the appropriate risk profile for private equity is different than that for taxpayer dollars.

Both Obama’s friends and foes see this an increasingly embarrassing scandal for the president. Republican moderate (and former CBS news producer) Peggy Noonan wrote
[One thing I’ve admired about Obama] has been a relative absence of deep political scandal. It's been good not to have a Watergate, a Whitewater. But there are signs this week that could change with the Solyndra loan scandal. The White House apparently tried to rush almost half a billion dollars of taxpayer loans to a solar panel manufacturer that later went belly up and took a thousand jobs with it. The reason for the rush: The awarding of the loan would make good PR. This looks bad, and if it's true, heads should quickly roll. It's one thing to be branded as "out of your depth but not corrupt," quite another when it's "out of your depth and corrupt." That is much worse.
Meanwhile, on Thursday night Jon Stewart of Comedy Central told Obama’s enemies “That Custom-Tailored Obama Scandal You Ordered Is Finally Here.”

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As ABC quoted Stewart:
“You know, stories about incompetence in government are only going to get you so far though. For this to truly become weapons-grade political fodder, you’re going to need incompetence with more than just a whiff of sinister cronyism,” Stewart said.
If this week’s hearing is any indication, we are unlikely to have any substantive discussion of the issues raised by the Solyndra default. Unlike Watergate, there was no bipartisan approach akin to “what did he know and when did he know it.”

The debate is a crucial one for the future of the American renewable energy industry. One side asks: can (and should) the government pick winners among American firms? The other asks: can the US industry survive without cheap government financing?

Wednesday, September 14, 2011

Ad hominem attacks over cleantech VC 'disaster'

At a TechCrunch conference in San Francisco, PayPal co-founder Peter Thiel said (according to VentureBeat):
“Cleantech is an increasingly large disaster that people in Silicon Valley aren’t even talking about any more. …The failure in energy and transportation points to a larger failure in clean energy — we aren’t moving any faster, literally, than we were when modern airplanes first came out.”
In response, Greentech Media’s Eric Wesoff wrote:
Peter Thiel Doesn’t Like Cleantech VC, Mankind
Eric Wesoff

Peter Thiel, known as the "Don of the PayPal Mafia," declared clean technology a “disaster” at Venture Beat's TechCrunch Disrupt 2011 conference in San Francisco.

OK, folks, go on home. Stop all this saving-the-world, green-energy stuff. It just isn't working. Thiel has spoken.

Greentech Media is talking about it. And so are plenty of Silicon Valley venture capitalists. And Thiel, evidently, hasn't driven a Tesla.

So, he isn't a fan of cleantech -- or at least the way cleantech investments have progressed.

Judging by these quotes in a Cato Institute essay, other things that Thiel doesn't like include poor people and women.

  • I no longer believe that freedom and democracy are compatible.”
  • “Since 1920, the vast increase in welfare beneficiaries and the extension of the franchise to women [voting-ed.] -- two constituencies that are notoriously tough for libertarians -- have rendered the notion of ‘capitalist democracy’ into an oxymoron.”
Apparently his other disreputable choices (at least for GTM readers) include backing a libertarian for president and a Republican for California governor.

I have met and like Eric Wesoff and respect his knowledge of the industry. However, this sort of ad hominem attack is unseemly and (I would have thought) beneath Wesoff and a reputable organization like GTM. However, the green/cleantech/RE/solar press sometimes seem like they confuse their role as conveyers of accurate information with being cheerleaders for the industry.

There are thrree reasons why the attacks on Thiel are inappropriate (and unnecessary).

First, we all know that rich VCs are opinionated, have big egos and make claims supported by intuition, preferences (or self-interest) rather than facts. For every Peter “emperor has no clothes” Thiel there’s two Vinod "save the planet yesterday" Khoslas. As with any prediction, there’s no way to know which one will be correct— but eventually these investments either will or will not produce the huge returns expected by the VC limited partners.

Second, Thiel is hardly the only one making these criticisms. Respected academics and other analysts are pointing to the scale of investments and risks for cleantech that dwarf software, IT or even biotech investments — and were doing so a year ago. To me, cleantech (at least at the Solyndra level) seems to be a level even beyond Fred Wilson’s bifurcation between software and biotech. (There’s also additional analysis suggesting that VC may no longer be adequate for biotech).

Frankly, the solar industry doesn’t need a lot of new investments to start yet another me-too module company. After excess entry, the brutal price wars and associated shakeout are underway, and VCs have seen such shakeouts before in hard disks, PCs, software, dot-coms and just about anything else funded by the VC herd.

VCs that invested in capital intensive cleantech companies (also including autos and biofuels) will have to decide whether to continue to support their companies (pre-liquidity event) or pull the plug.

It may be that the near-term future for cleantech investing is smaller bets on niche players or companies that can become self-funding soon. Since VC euphoria is cyclical, that would only be a natural correction while investors wait to see how the current wave of investments play out.