Solyndra's Failure Is No Reason To Abandon Federal Energy Innovation Policy
by Jesse Jenkins, Devon Swezey, and Alex Trembath, Forbes, September 2, 2011
Wednesday’s news that the California solar cell manufacturer and DOE loan guarantee recipient Solyndra will be declaring Chapter 11 bankruptcy has government critics grumbling about clean tech boondoggles and failed government programs. But Solyndra’s failure, while unfortunate, is hardly an indictment of federal energy technology policy. Failure is to be expected with emerging, innovative companies, whether they are financed by the government or the private sector. The success of the Department of Energy’s Loan Guarantee Program (LGP) should thus be judged not by any one investment but by the performance of the entire portfolio.
Critics have seized on the news of Solyndra’s bankruptcy to condemn the Department of Energy’s Loan Guarantee Program, which provided a $535 million loan guarantee in 2009. The National Review’s Greg Pollowitz writes that Solyndra’s failure shows “why the government should not play venture capitalist.” Yet the fact is that, when judged by its entire diverse portfolio of investments, the LGP has performed remarkably well. Indeed, with a capitalization of just $4 billion, DOE has committed or closed $37.8 billion in loan guarantees for 36 innovative clean energy projects. The Solyndra case represents less than 2% of total loan commitments made by DOE, and will be easily covered by a capitalization of eight to ten times larger than any ultimate losses expected following the bankruptcy proceedings.
The broad success story of the LGP shows why federal investment in clean energy is necessary to help early-stage clean energy technologies achieve scale and reach commercialization. The inherent uncertainty in investing in novel technologies, coupled with the high capital costs and long time horizons, prohibits most venture capital funds from investing in large-scale clean energy projects. Financing tools and direct investment from the federal government can help bridge this well-known “Commercialization Valley of Death,” and the LGP is an effective way of doing that.
Instead of “picking winners and losers,” as the program’s critics allege, the program actually reduces risk for a suite of innovative clean energy technologies and allows venture capitalists and other private sector investors to invest in the best technology. Rather than picking winners, the LGP enables innovative companies to compete in the marketplace, allowing winners to emerge from competition. And while Solyndra is shutting its doors, companies like SunPower, First Solar, and Brightsource Energy, which also received loan guarantees and other support from the federal government, are industry leading success stories.
With perfect hindsight, it’s all too easy to see why Solyndra proved to be a bad bet: the firm’s central innovation, a thin film technology that avoided the use of silicon, proved to be far less important when refined silicon prices collapsed after Solyndra’s founding; the remaining installation cost advantages provided by the company’s cylindrical solar panels proved too small, and Solyndra was unable to capture the manufacturing cost reductions that have helped other U.S. thin film companies, like First Solar, thrive despite low silicon prices.
Perhaps most importantly, intense pressure from heavily subsidized Chinese manufacturers is driving a surprisingly competitive solar market, forcing Solyndra to get costs down faster than the start-up firm could achieve.
It is possible that these fatal factors could have been avoided by better vetting from DOE, or that removed from the pressures of a fast-paced stimulus environment, DOE may not have made this bad bet. But to assert, as numerous conservative commentators have been quick to do, that Solyndra’s failure is proof positive of the government’s supposed inability to “pick winners” is patently absurd. After all, Solyndra received repeated rounds of investment to the tune of $1.1 billion from some of the private sector’s biggest stars, including Richard Branson, the WalMart family, and leading venture capital firms like U.S. Venture Partners and RockPort Capital. Venture capitalists and the U.S. government both placed a bet, Solyndra’s entrepreneurs took a shot, and unfortunately for all, they missed. Such is to be expected in the high-risk but high-reward world of early-stage technology ventures. In addition, the loan commitment places the government in a senior position in the result of a bankruptcy, ensuring that DOE will get paid out before the VCs and other investors.
Critics who think the government has no place in supporting technology innovation have a tenuous grasp of U.S. economic history. In fact, the government has a long and successful history in helping America’s intrepid entrepreneurs succeed in new high-risk, high-reward technology sectors. As we wrote in “Where Good Technologies Come From,” the government has played a key role, either as an early investor or a demanding customer, in the development of virtually every advanced technology we take for granted today, from aviation to biotechnology, to computers and the Internet, microchips, and now clean energy. Indeed, without a visionary government investing in key strategic industries, world-leading companies like Google, Genentech and Boeing would not exist.
The United States was able to be the world’s technology leader in these fields because of its forward-looking investments, as well as a relative dearth of competition from economic rivals. In today’s clean energy market, however, competition is fierce. U.S. companies compete with low-cost Chinese manufacturers who benefit from generous state subsidies and a robust and comprehensive set of policies to encourage solar manufacturing. Indeed, in 2010 the China Development Bank provided more than $30 billion in loans to Chinese solar manufacturers. China’s large clean energy investments have helped reduce the price of solar cells by 42% in just the last nine months, which was one factor in Solyndra’s inability to compete.
While the United States may not be able to afford the scale of support for clean energy that China can, it can compete by focusing on what it has always done best: innovation. In the solar industry, the long-term goal must be to drive innovation so that solar can be cost-competitive without subsidy. Fortunately, the Department of Energy recognizes this imperative and has embarked on a new effort–the SunShot initiative–geared toward dramatically lowering the cost of solar PV. The SunShot initiative focuses on bringing down costs by pursuing innovations in four particular areas, including solar cell technology, power electronics that optimize the performance of installations, improvements in manufacturing processes, and installation and system design.
The Sunshot initiative and other key technology innovation programs like the Advanced Research Projects Agency for Energy (ARPA-E), embody the kind of smart innovation policy that holds the promise of fundamentally transforming the economy and ushering in a new era of U.S. technology leadership.
In the face of intense competition in the clean energy sector, America faces two choices. We can abandon our entrepreneurs and innovators in this new strategic growth sector, or we can redouble our efforts to invest in energy innovation, support clean energy entrepreneurs and help American firms compete and ultimately prevail in the global clean energy race. If we walk away now, America will lose out on one of the greatest economic opportunities of the 21st century.