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Obama and Solar Energy: Solyndra Bankruptcy is a $527 Million Loss

By Jim Fink on September 1, 2011

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Alternative energy sources such as solar and wind power can’t compete with coal and natural gas on price or practicality.

– Elliott Gue, MLP Profits

I’m still burning mad about Hollywood actress Darryl Hannah’s demand that ordinary Americans foot the bill for “moonshot” programs to forcibly convert the U.S. economy to uneconomic renewable energy sources. Just when I was ready to move on to happier thoughts, I read over the newswires that solar company Solyndra is filing for bankruptcy and laying off all 1,100 of its employees. The company’s press release states:

Solyndra could not achieve full-scale operations rapidly enough to compete in the near term with the resources of larger foreign manufacturers. This competitive challenge was exacerbated by a 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.

In other words, it’s not Solyndra management’s fault. Great. Normally, I couldn’t care less if a company wants to make excuses for its failings, but Solyndra is not just any company. Solyndra is a company that has burned through $527 million of taxpayer money with nothing to show for it.

The U.S. is Becoming a Centrally-Planned Economy

In September 2009, Vice President Joe Biden and Energy Secretary Steven Chu announced that the Obama administration was giving Solyndra a $535 million loan guarantee to build its manufacturing facility. Secretary Chu’s justification for throwing so much taxpayer money at a speculative private company was as follows:

This investment is part of a broad, aggressive effort to spark a new industrial revolution that will put Americans to work, end our dependence on foreign oil and cut carbon pollution.

Is it just me or does this statement sound like something leaders of a centrally-planned command economy like communist China would say rather than representatives of a U.S. president? Why is it the job of government to “spark” a specific solar technology? Isn’t that best left to the private sector, which is accountable to its investors for any losses and doesn’t have the luxury of spending general tax revenue?

If Solyndra’s rooftop solar panels for corporate buildings are so great, why couldn’t the company get sufficient funding from the private sector? Interestingly, Solyndra did receive $950 million in venture capital (VC) funding, making it the second-highest VC funded company in history, and yet that funding still wasn’t enough to get its manufacturing plant built without government assistance.

Political Corruption in Loaning Taxpayer Money to Solyndra?

That raises an interesting question: was Obama’s decision to fund Solyndra – the very first company to receive a loan guarantee from the Department of Energy since the 1980s – based on Obama’s desire to promote solar energy or was it to bail out existing venture capitalists?  As the Center for Public Integrity reported back in May when Solyndra first started having serious financial problems, one of Solyndra’s private investors is Oklahoma oil baron George Kaiser, who was a big political fundraiser for Obama’s 2008 presidential campaign.  It turns out that the Obama administration rushed through the loan guarantee for Solyndra without going through the normal review process. The House Energy and Commerce Committee is investigating the Solyndra loan. Obviously, if the loan turns out to based on political corruption, that would bad and perhaps an impeachable offense.

Solar Panels Were a Terrible Technology to Bet on

But even assuming that politics did not play a role (hah!), the decision to fund such a speculative solar-panel venture is troublesome. As early as 2008 – more than a year before the Solyndra loan guarantee was made – it was commonly understood that a glut of solar panel production was in the works and would severely hurt industry profit margins. Elliott Gue, co-advisor of the market-beating MLP Profits investment service, wrote a detailed article in May 2009 entitled Earth, Wind, and Fire in which he explained the deepening financial crisis for solar energy companies:

The problem is that a significant amount of solar cell manufacturing capacity has been coming online in recent months or will soon come online. Therefore, the industry’s capacity to produce cells is growing rapidly.

Early projections are that cell manufacturing capacity will grow by roughly 80 to 100 percent in 2009. Although it’s too early to know for sure, there’s potential for this cell supply to overwhelm demand near term, even with demand growing at greater than 40 percent annualized.

If that scenario unfolds, the likely response in the industry would be to cut prices in an attempt to compete. That would negatively impact profit margins. For the first time in years, there’s real risk of an important slowdown in solar-related firms toward the end of 2008.   

Anyone who read Mr. Gue’s trenchant analysis would not even consider giving a solar panel company a $535 million loan guarantee just when the industry was slipping into the vise of a slowdown. Yet, Obama did just that. As I wrote in Google and BrightSource Energy, there are two types of solar power: (1) thermal, which uses sunlight to heat water and produce steam for power plant turbines; and (2) photovoltaic (PV) panels which converts sunlight directly into electricity. Google decided to invest in the thermal type of solar power, which is much less susceptible to supply gluts since small PV panels are easier to copy than huge desert-based solar mirror arrays. In contrast, Obama decided to invest in a PV-panel supply glut.

In an article entitled Investing in Nuclear Power Remains a Compelling Choice, I referenced a video interview with Microsoft (Nasdaq: MSFT) founder Bill Gates. In that Gates interview (around the 24-minute mark), Mr. Gates talks about solar and says that the only solar that makes sense from a public policy standpoint are the large solar arrays in the desert. Everything else like solar panels on buildings and homes are just “cute.” Yet, this “cute” solar-panel technology is exactly what Obama threw $535 million of taxpayer dollars at. It’s maddening.

Natural Gas is the Best Type of Clean Energy

Lastly, in past articles here and here I have discussed the energy wisdom of Exelon (NYSE: EXC) CEO John Rowe who, despite being the head of a nuclear power utility, argues convincingly that U.S. energy policy should be based on natural gas. Natural gas is cheap, domestically-sourced, and relatively clean (except for some fracking pollution) and its being fully funded by the private sector without government help because it is an economically-viable source of power. 

Bottom line: both Darryl Hannah and the U.S. government should stop pushing for the production of uneconomic types of power with taxpayer money. It won’t solve our energy problems, whereas natural gas will.

Master Limited Partnerhips are a Conservative Way to Play Natural Gas

One of the best ways to play natural gas is through master limited partnerships (MLPs), which transport the stuff through pipelines. The great thing about pipeline companies is that they get paid based on volume, not energy prices. MLPs have performed spectacularly over the past two years and yet are still not overvalued.

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