On August 1st, the US House Energy and Commerce Committee voted to approve the “No More Solyndras Act”. The bill would end the Department of Energy’s loan guarantee program. And it could have been called the “Please Stop Wasting Our Money Act”.
The Energy Policy Act of 2005 gave the Energy Department the go-ahead to guarantee loans for innovative green technologies. To qualify for a guarantee a project had to “avoid, reduce or sequester air pollutants or greenhouse gases” with “new or significantly improved technologies”. And it had to have a “reasonable prospect of repayment”.
Even though the loan guarantee program was authorized in 2005, it didn’t finalize its first guarantee till 2009. And that first commitment was a $535 million loan guarantee to Solyndra, the now failed solar panel manufacturer from California.
Solyndra got its guarantee in September 2009. By September 2011, the company was bankrupt after having spent $528 million of the $535 million that was on the line. And because what it borrowed was guaranteed by the government, taxpayers stand to lose an estimated $500 million (that’s assuming a portion is repaid).
With taxpayers on the hook, it’s troubling that a year before the company collapsed, its CEO referred to the Obama administration as the “Bank of Washington”, according to a recently released email.
Even more troubling is what the House Energy and Commerce Committee found. A day after they voted on the “No More Solyndras Act”, they released a 147-page report that was the result of an 18-month investigation into the Solyndra failure and the Energy Department’s mistakes:
The Department of Energy should have better anticipated the market challenges that contributed to Solyndra’s financial condition.
The Department of Energy ignored critical red flags about Solyndra’s financial condition prior to closing the loan guarantee in September 2009.
DOE failed to consult with the Department of the Treasury…as required by the Energy Policy Act of 2005. Instead, DOE asked Treasury to review the terms only after it has made the decision to issue the conditional commitment…even then, Treasury was only given one day to review the terms.
DOE closed the Solyndra loan guarantee and moved forward with Solyndra’s second loan guarantee application before DOE had the capability to monitor the first loan guarantee.
Solyndra’s financial strategy was dependent on additional government support in the form of sales contracts and a second loan guarantee.
And when the Energy Department restructured Solyndra’s guarantee in early 2011, they prioritized commercial creditors ahead of taxpayers for repayment of the debt (even though the Energy Policy Act says that taxpayers can never be subordinate to other creditors).
After 18 months of digging it was clear that Solyndra was not a story about green innovation but about blind political ambition that was divorced from reality: “administration officials knew Solyndra was a bad bet from the beginning, but the White House was determined to make Solyndra a stimulus success story at any cost. Despite repeated warnings that Solyndra was doomed to fail, the Obama administration went ahead in backing the solar company, cutting corners in the process”.
And Solyndra is not alone. Three of the first five companies that were awarded loan guarantees have filed for bankruptcy (Solyndra, Beacon Power and Abound Solar).
So will the “No More Solyndras Act” do enough? Probably not. It will still let the Energy Department guarantee loan applications that came in before December 31st of last year. That means the bill leaves $34 billion in loan guarantee power on the table. And those $34 billion of potential guarantees were checked out through the same flawed process that vetted Solyndra. The reality is that the loan guarantees are nothing but free money with too few questions asked.
The Energy Department’s portfolio of projects included investments that private capital markets would have shied away from as too risky. The lesson of Solyndra is that the government does not belong in the venture capital business…especially not with taxpayer dollars.