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.

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?

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.

An end to ethanol pandering?

Subsidies for corn-based ethanol have for years been the third rail of politics in Iowa, home of the first presidential caucus. Just like social security in Florida, even suggesting that subsidies be cut has been the kiss of death for would-be presidential hopefuls. The Iowa Corn Promotion Board even has its own pro-Ethanol website.

Thus, it was very encouraging to see this article in Friday’s dead tree edition of the LA Times:

GOP presidential hopefuls take dim view of ethanol subsidies
Most of the candidates want to do away with the government subsidies, which cost $6 billion annually. The once-unimaginable message has support even in Iowa.

By Seema Mehta, Los Angeles Times

For decades, nearly every candidate who hoped to win the presidency has visited this state to pledge their allegiance to King Corn and to the government subsidies that have propped up its price and increased demand for it.

But for the first time, the GOP field is dominated by candidates who want to do away with such kickbacks. One even used his formal campaign kickoff in front of the gold-domed statehouse here to announce his opposition to such subsidies.

The reporter had chapter and verse about how the Republican presidential candidates were opposed to adamantly opposed to ongoing subsidies for corn-based ethanol. The reporter speculated that this might have to do with the importance of fiscal conservatism in the GOP primary this year, or even a decrease in the population of rural voters (who would presumably benefit from the subsidies).

The timing of the report might be a bit embarrassing to the NY Times, which in an unsigned editorial Monday called on Republicans to cut a $100 billion, 10-year ethanol subsidy. The NYT said that ethanol subsidies are being protected by House Republicans, even though (as it noted) the Senate has been unable to institute a reform that supposedly has bipartisan support.

I suspect what is protecting the ethanol subsidy is that the farm states are swing states in 2012 both for the presidency and control of the Senate. I suspect neither side wants to risk losing any votes in these states — since those who lose a subsidy are more likely to get upset than the general voting populace will be happy.

So despite the support of the GOP field and at least one former president, the corn ethanol subsidy is still with us — at least a little longer.

Runaway green jobs inflation

Last month, the Brookings Institute published a report entitled “Sizing the Clean Economy” which promises:

The “green” or “clean” or low-carbon economy—defined as the sector of the economy that produces goods and services with an environmental benefit—remains at once a compelling aspiration and an enigma.

The report claims to offer a definition of green jobs, but that was done several years ago by a San Mateo consulting firm working for a Next10, a California advocacy group.

Of more concern is that Brookings is perpetuating — if not magnifying — the use of “green” as a political statement rather than an economic concept. For as reputable a group as Brookings — the most prestigious economic thinktank on the left — this is troubling.

In previous incarnation as a green jobs project director, I decided that the “green” jobs concept seemed like sausages — you didn’t want to see how they were made (calculated) or it would make you squeamish.

An article from the Mackinac Center for Public Policy (in Michigan) shows how we should ignore the command to “pay no attention to that man behind the curtain” — because (as in the movie) he is no wizard. (Yes, Mackinac is trying to unmask the wizard while Toto is just a naïve little dog, but…)

I was aware of one of the problems in the existing definition. Suppose a building contractor switches from installing inefficient windows to energy saving windows? Voilà! We’ve created a green job!

At least that building contractor (or roofer or electrician) is doing something to make the world a greener place by reducing the need for carbon-based fuels. However, what happens if a janitor switches from traditional chemical cleaning solutions to natural ones? Voilà! Another green job!

Jack Spencer of Macinac interviewed one of the authors, Brookings analyst Jonathon Rothwell, and it gets worse.

First, all mass transit jobs are counted. So if we had bus drivers 20 years ago or Pullman porters 75 years ago, they were working in green jobs and they didn’t even know it.

Then there’s the unappealing matter of garbage. As Spencer puts it:

Regarding the matter of waste industry jobs being included as part of the “clean economy,” did the report include everyone from the designer of a landfill to the person who picks up the trash from the curb?

“Yeah, that's pretty much it,” Rothwell said.

In other words, much of what is counted as “green” jobs are jobs that already exist, have existed for decades, and (unless we have gross labor inefficiencies) are not really growth areas of the economy.

If you add up all the bus drivers and trash truck drivers, it certainly dwarves the number of people working in companies that make renewable energy products. It probably even dwarves the people in the building trades installing solar panels, double-pane windows and CFL light bulbs.

Meanwhile, advocates, politicians, and reporters are republishing these estimates without reservation or qualification. The politicians are intentionally misrepresenting the truth — because they want to claim credit for private sector job “creation”. VCs seeking government subsidies also want to exaggerate the benefits of their tiny little companies. I guess (as in other stories) the reporters are merely economically ignorant naïve.

This is not particular to green jobs, but is a problem anywhere politicians get involved. The arguments for attracting sports teams and their stadia are similarly suspect, both because of the “multiplier” effect but also because money visibly spent at a pro football game is money not spent on a college game, movie, or just a 24-pack of beer. (The problem of unseen substitution is exactly as predicted by Frederic Bastiat 160 years ago).

Again in my efforts to develop renewable energy jobs, we found there weren’t all that many in California, and that the perception this was a growth area exacerbated the mismatch of supply and demand by attracting more job seekers than there were jobs.

One of these days people will realize how much fewer jobs have actually been created (as opposed to shifted) by green technologies. I look forward to the day when we measure such jobs the same way we measure IT jobs or aviation jobs — in specific (identified) companies and industries. Certainly that’s the only measure that matters to entrepreneurs, employees, investors and others that have real skin in the game.

Livin' On A Prayer

While I was out of town at a conference, one of the big RE stories in California was the 2010 year end report of the California Solar Initiative. California added 194 MW of solar generating capacity in 2010 (vs. 132 MW the previous year).

As Dana Hull of the Merc explained it (with my commentary inserted inline)

In January 2007, California launched an unprecedented $3.3 billion effort to install 3,000 megawatts of new solar over the next decade and transform the market for solar energy by reducing the cost of solar-generating equipment.
…
The California Solar Initiative's road map calls for 1,750 new megawatts of solar power to be installed on residential and commercial roofs in the state by 2016. [Presumably the other 1.25 GW is utility scale. But does state really require that they be on rooftops rather than (say) a carport in a high school parking lot?]

Through the end of the first quarter of 2011, California had an estimated 924 megawatts of rooftop solar installed at nearly 95,000 sites -- putting it more than halfway toward meeting the solar initiative's goal.

Overall, the report left me puzzled as to the efficacy (or expected outcomes) of the CSI program. If in 4.25 years we’re about halfway to the residential/commercial goals — but incentives are almost entirely depleted — where will the remaining adoption come from?

This called to mind the refrain of the Bon Jovi hit that should be familiar to anyone who’s been to a teen dance in the past 25 years:

Whoa, we’re halfway there
Whoa-oh, livin’ on a prayer
Take my hand, we’ll make it I swear
Whoa-oh, livin’ on a prayer

I don’t be able to predict the future, but I can see two possible scenarios for how the remaining 5+ years of CSI will play out.

One is that the price of the equipment is close enough to grid parity that the additional 800 MW will be installed over the remaining years without resort to subsidies (despite calls for California to institute a feed-in-tariff).

The other possibility is that with subsidies gone, adoption will plummet. In that case, the people hoping for success without money behind it inhaled a few times too many when attending rock concerts.

Commodity competition: good for buyers, bad for sellers

Except for those favoring symbolic consumption, electricity is by definition a commodity. For most intents and purposes, the sale of equipment that produces electricity is also commoditized.

Through technology improvements, manufacturing improvements, scale economies and good old fashion competition, prices are getting lower — bad for sellers, good for buyers.

One data point on wind comes from a GE executive, speaking Tuesday at the Renewable Energy Finance Forum-Wall Street. The quote comes from Kevin Walsh, who the GE website says is “Managing Director and Leader of Power and Renewable Energy at GE Energy Financial Services” — in reality the GE spokesman for its RE businesses, part of the $18b/year “Ecomagination” line of products and services.

The quote was in a Renewable Energy World Twitter tweet:

@REWorld: "Cost of wind down 40% in the past 3 years. Call it grid parity -- it's happening folks and that's exciting. " Kevin Walsh of GE #reffws

I looked for RE World to post a real story but so far it hasn’t happened. Still, 40% in 3 years is pretty impressive: not quite Moore’s law (50% in 2 years), but (at 80% every decade) well ahead of the historic PV trend of 50% a decade.

Still, on an annualized basis, PV can top that — both for the past month and the past three years. Prices plunged recently for the upstream supply of crystalline silicon, at least according to Bloomberg New Energy Finance:

The June issue of the Bloomberg New Energy Finance Solar Value Chain Index shows that the spot price of solar grade silicon fell by 28% month-on-month to $53.4/kg, relieving some pressure on downstream manufacturers of wafers and solar cells.

The price of 6" multicrystalline silicon wafers dropped by 23% in June to a record low of $2.39/piece. At the next point in the production chain, multicrystalline silicon cell prices were down 15% in June to $0.92 per Watt.

Module prices are also falling, though at a slower rate, with a 6.5% decline in June bringing crystalline silicon modules to $1.68/W. Chinese manufacturers are offering modules at significant discounts, with prices at $1.49/W, while modules manufactured outside of China are still priced higher, at $1.79/W. Prices for solar modules are now 58% lower than in the third quarter of 2008.

The “June” results are based on a survey conducted between June 2-8; “The Solar Value Chain Index started in May 2009 and the Module Price Index was launched in November 2010.”

Why the precipitous fall?

Martin Simonek, solar analyst at Bloomberg New Energy Finance, said: “Currently the markets are oversupplied with modules, as manufacturers seek to reduce their inventories in markets that are demanding cheap modules because of reductions in subsidies. Producers are preparing for a painful consolidation that could see several players exit the solar industry.”

Naturally, price cuts are a double-edged sword for the industry: lower prices spur adoption and total industry volume, but hurt (or kill) profits.

Or as another speaker at the REFF Wall Street conference remarked this morning:

@REWorld: Solar system costs cut by 1/3, now they don't like the stocks. People still aren't happy but we'll get there. -- Amy Smith #reffws

Note: I interviewed Simonek today for additional clarification. More in my next post.