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Southern Company, a Georgia utility, is building a new nuclear power plant with the help of a federal loan guarantee. However, the Solyndra experience is making politicians skittish about extending loan guarantees for future nuclear plant startups. Credit: Southern Company

CTT’s Peter Wray has been following the Solyndra calamity since it started to develop last summer. That story continues to unfold and may take years to fully unpack.

Meanwhile, politicians are adopting a “once bitten, twice shy” approach to making federal loan guarantees, and new nuclear startups are likely to feel the bite according to a story by Peter Fairley published online by MIT’s Technology Review.

The story reports that politicians are making apples-to-oranges comparisons between bankrupt Solyndra and its $535 million federal loan guarantee and loan guarantees that DOE offers utilities to build new nuclear power plants. But, the story points out three key differences between these fruit baskets.

First, the only active reactor projects are in southern states, whose utility-friendly laws allow utility companies to recover loan costs from customers in advance. For example, the Georgia utility, Southern Company, is “unlikely to default on its $8 billion loan guarantee because, under Georgia law, it is prebilling its customers for much of the cost.”

Second, utilities that receive nuclear loan guarantees are required to pay a fee “based on the risk the federal government will face.” Solyndra was not bound by a similar risk-based cost.

Finally, the story points out that federal exposure to potential loan default was reduced by the cancellation of several projects that were on the docket in states with unregulated-thus higher risk-power markets. Projects in Texas and Maryland were scrubbed, for example. The cost of electricity from new nuclear power plants is estimated to be two to three times greater than the average price of US power. The price of natural gas is projected to stay low into the 2030s, which will keep economic justification of new plants out of reach for a long time, especially in unregulated markets.

The story concludes, “While the Solyndra case appears unlikely to be replicated with nuclear loan guarantees, political attacks from Congressional Republicans on the wisdom of loan guarantees for energy projects may, ironically, hurt the prospects for further nuclear projects that many support. The Obama administration has just $8 billion left to support new nuclear loans, and has asked Congress for another $36 billion.”

Peter Bradford, an expert cited in the story, notes that some of the political opponents of loan guarantees are painting themselves into a corner. “The Republican rhetoric is every bit as applicable to nuclear loan guarantees as it is to poor old Solyndra,” he says.

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Credit: stearns.house.gov.

Not unexpectedly, the Solyndra investigation threatens to be poisoned by the unfolding political theatrics. Although I am as curious as the next guy to find out what, if anything, happened behind the scenes related to internal analyses of Solyndra’s finances, business model and technical advantages, I never had any illusions that congressional hearings in the midst of investigations by the FBI and inspectors from Treasury and DOE would be productive.

The decision by the CEO and CFO to opt out of a House Energy and Commerce Committee hearing was guaranteed the moment the folks with the no-kidding badges arrived at the company’s front door, so all that is left for Congress to do right now in regard to Solyndra’s management is the theatrics. On with the show!

From Bloomberg:

“Mr. Harrison intends to invoke his Fifth Amendment rights in response to any questions asked by this subcommittee and will not provide testimony,” Walter Brown, a lawyer at Orrick, Herrington & Sutcliffe LLP in San Francisco representing Harrison, wrote today to the investigations panel.

“The company is not aware of any wrongdoing by Solyndra officers, directors or employees” related to the Energy Department loan guarantees or other actions “and the company is cooperating fully” with the U.S. Attorney in San Francisco, Miller said in a statement.

“The record will establish that Solyndra carefully followed the rules of the competitive application process, starting in December 2006 under the Bush administration and continuing under the Obama administration,” he said.

With one exception, I don’t have anything to add to what Eric Wesoff says over at GreenTechSolar:

Optimism and denial by the company? Yes. Poor due diligence by the VCs and the DOE? Absolutely. Criminal activity? Not at this point in the company’s timeline, at least. No smoking gun email with political motives will be found because none likely exists. Save the desire to get a factory built, money deployed, and jobs created. Maybe a few corners cut to get to that objective at the DOE.

The problems start to occur when the IPO is suspended, the reality of cost targets become clear, and a new CEO is put in place.

Brian Harrison, the new CEO, is installed at the helm of this Titanic at a salary of more than $400,000, and not to defend him, but he’s inserted into an untenable position. No management skills or manufacturing process skills could alter the course of this company.

Harrison looked me in the eye at a recent interview and told me to my face that the firm would not need to take any additional funding. He was either in denial or being disingenuous.

The more solar modules the company shipped, the more the company lost and the faster the money was running out. The CEO and the CFO had to know this.

Somewhere in a file, wastebasket, or hard disk drive is the evidence that the FBI is seeking - that the officers of the company knew, as their auditors declared a year ago, that they were not a “going concern,” and that the hammer was going to come down hard and soon.

That they failed to notify their investors and the DOE in a honest fashion is the issue here. Is it corporate malfeasance and negligence? Without a doubt. Is it a crime? We’ll soon find out.

Repeating myself, my additional point is that there needs to be a specific explanation of the subsequent renegotiation of Solyndra’s loan guarantee that put a piece of the fed’s money at greater risk than in the original agreement. Much of the “official” reporting has been sloppy on this point (and the general benefits of having a federal loan guarantee program), especially in niche fields where capital markets aren’t very efficient, and the concept of loan guarantees versus loans. The Columbia Journalism Review also has a dim view of the quality of some of the business reporting.

Reader EDW also suggests some valuable perspective on Solyndra versus other situations:

Solyndra investment compared to what the Times calls the Pentagon’s “biggest boondoggles”

Solyndra’s loan guarantee was 3.4% of the DOE solar portfolio

And, in the “do as I say, not as I do” category, Thursday Darrell Issa, chairman of the House Oversight and Government Reform Committee, is holding a hearing that Bloomberg says is titled, ““How Obama’s Green-Energy Agenda is Killing Jobs.” Bloomberg notes that while Issa recent questioned in a C-SPAN interview whether “government can weigh-in with loan guarantees and money and pick specific winners and losers,” he asked for DOE to provide financial assistance to two California companies (Aptera and Quallion)

And, last but not least, Jon Stewart’s riff on Solyndra:

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It still seems like the Solyndra thing is going to stay messy and politicized. From Bloomberg:

Republicans on the House Energy and Commerce Committee released the findings of a seven-month investigation into U.S. support for Fremont, California-based Solyndra today before a hearing where two administration officials faced questions about White House support for the company and its goals for clean energy.

The Department of Energy and the Office of Management and Budget “did not take adequate steps to protect taxpayer dollars,” according to the report.

…

Earlier in the approval process for Solyndra, in an e-mail on March 10, 2009, an official at OMB wrote a colleague, “This deal is NOT ready for prime time.”

And an AP story reports;

“We would prefer to have sufficient time to do our due diligence reviews and have the approval set the date for the announcement rather than the other way around,” said one of the emails from an unnamed OMB aide to the office of Vice President Joe Biden.

Again, I make full disclosure that I could be counted among the cheerleaders for Solyndra.

If I had to make a prediction on where this is heading, it looks to me like the real problem isn’t the initial loan guarantee, but the later renegotiation of the terms that subordinated some of the federal debt. But, hey, obviously, what the heck do I know?

[Update 9/16/11] Several new developments:

• Several news outlets are reporting that the Treasury Department’s inspector general has opened an investigation into the role and actions of the Federal Financing Bank, a government corporation supervised by the Treasury Department.

• A new story out today from the AP adds more about Solyndra, but also hints at red flags around some other loan applications and recipients:

In July 2010, the Government Accountability Office said the Energy Department had bypassed required steps for funding awards to five of 10 applicants that received conditional loan guarantees.

The report did not publicly identify the companies that were not properly vetted, but congressional investigators say one of them was Solyndra.

In March, DOE Inspector General Gregory Friedman again faulted the loan program for poor record keeping, finding that the department kept limited or no electronic data on 15 of 18 loan guarantees examined.

…

A report last year by auditor PricewaterhouseCoopers said Solyndra had suffered recurring losses from operations and negative cash flows, raising “substantial doubt about its ability to continue as a going concern.”

The phrase, “doubt about its ability to continue as a going concern” is a term-of-art used by auditors and MBA-types to formally note that an entity will soon be insolvent unless there is a drastic change.

• Finally, I hadn’t seen this reported earlier, but this is from ABC:

Earlier this month, iWatch News and ABC News disclosed that Solyndra received a rock-bottom interest rate of 1 to 2 percent — lower than those affixed to other Energy Department green energy projects. The low rate was set even as an outside agency, Fitch Rating, scored Solyndra as a B+ — “speculative” — investment. Energy Department officials said the bank set the rate, based on formulas including the payout length, and that Solyndra did not receive special treatment.

That begs the question, when DOE says “the bank set the rate,” is that a reference to Treasury’s Federal Financing Bank?

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This was the bad news (at least for investors) from Fremont, Calif., last week:

Solyndra LLC, the American manufacturer of innovative cylindrical solar systems for commercial rooftops today announced that global economic and solar industry market conditions have forced the Company to suspend its manufacturing operations. Solyndra intends to file a petition for relief under Chapter 11 of the U.S. Bankruptcy Code while it evaluates options, including a sale of the business and licensing of its advanced CIGS technology and manufacturing expertise. As a result of the suspension of operations, approximately 1,100 full-time and temporary employees are being laid off effective immediately.

I first wrote about Solyndra nearly three years ago, and I was impressed with its wedding of CIGS (copper indium gallium diselenide) technology with tubular 360° design to easy flat-panel installation. Each unit was lightweight and said to be more tolerant of environmental conditions, such as wind. These aspects coupled with Solyndra’s high-automation assembly line (which, admittedly, carried a hefty capex risk) seemed like it would make it at least a contender, if not a leader in the commercial PV markets.

I was not alone in being impressed with the company. A number of venture capital groups (e.g., Rockport Capital Partners and Madrone Capital Partners) and, apparently, even a nonprofit (George Kaiser Family Foundation) invested in Solyndra, and about several hundreds of millions was raised from private sources. The most high profile bettor on the company, however, was the DOE, which offered in mid-2009 a $535 million loan guarantee to assist the company build a larger and even more automated fabrication facility. Planning for the offer began under the Bush administration

The new facility was opened a year ago and eventually employed 1,000+. Revenues in 2009 were $100 million and climbed to $140 million in 2010. But by November 2010, some cutbacks and layoffs were announced.

What happened next is a little sketchy, but it seems that the DOE, now under the Obama administration decided to renew its bet early in 2011. According to reporting by William McQuillen at Bloomberg, additional private money could be available to Solyndra, but only if this private debt was made more senior (i.e., gets repaid ahead of) a chunk of the DOE monies.

McQuillen writes, “[DOE] decided the January refinancing represented the “highest probable net benefit” for the government, according to a government document obtained by Bloomberg News. Investors provided the company $75 million that became senior debt, ahead of all but $150 million of the federal government’s stake.”

In other words, the $385 million of the loan guarantee would be subordinate if the company failed. And, well … that is what happened. To be sure, some of that might be recouped if bankruptcy negotiations fail and the only outcome is liquidating the company’s assets.

The liquidation value must have been part of how the DOE came up with the $385 figure, but not entirely. Interestingly, the Bloomberg story also reports that Solyndra also gave the DOE intellectual property rights as part of its collateral.

Besides potential governmental losses, a slew of Solyndra’s workers were suddenly laid off, and the swiftness of these layoffs suggests either some mismanagement or, quite possibly, that there was some hope for a white knight rescue right up until Aug. 31.

This summer was brutal for US photovoltaic companies. Solyndra joined Evergreen Solar and SpectraWatt in filing bankruptcy.

Solyndra blames its problems on “global oversupply of solar panels and a severe compression of prices that in part resulted from uncertainty in governmental incentive programs in Europe and the decline in credit markets that finance solar systems.”

One of Solyndra’s competitors in the PV market takes exception with that. Barry Cinnamon, Westinghouse’s CEO, notes that some of the competitive advantages Solyndra was banking on didn’t pan out. One, for example is that Solyndra believed that silicon would remain expensive and its CIGS-based technology would provide a cost advantage. Says Cinnamon, “Unfortunately for Solyndra, and fortunately for all the silicon solar panel manufacturers and customers, silicon has gotten very cheap over the past few years. So, the problem that Solyndra solved—expensive silicon—disappeared.”

Cinnamon also argues that the rest of the PV companies have been able to match Solyndra’s low-cost installation systems. To Cinnamon’s list, I would add that others have been able to match the company’s fabrication automation levels. But, it maybe is still too early to comprehend everything that went wrong or was neglected.

As to the current state of affairs, I leave the last words to Cinnamon:

“It’s a mistake to blame Solyndra’s problems on our lack of manufacturing commitment or relatively higher labor costs compared to China. Solar panels are commodities being sold on the worldwide market on a dollars-per-watt basis much as aluminum is sold on a dollars-per-kilogram basis. It is crystal clear that cheap and easy-to-install solar panels are exactly what the U.S. needs to reduce our energy costs and create installation jobs.”

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