Evaluating Federal Solar and other Renewable Energies Policy Following Solyndra

A research paper for ECON 396-001 Domestic Economic Policy. It addresses the history of federal government investment in new energies, the economic rationale for those investments, and the need to continue to invest in solar and other renewable energies despite the publicized bankruptcy of Solyndra. Written 16 November 2011

I. Introduction

The now infamous solar panel manufacturer, Solyndra, filed for Chapter 11 bankruptcy protection, on August 31, 2011. Since that time, the House Energy and Commerce Oversight and Investigations Subcommittee has held several investigatory hearings regarding the government loan guarantee (and subsequent renegotiation of terms) extended to the company. Over the course of the hearings and through significant media coverage, the $535 million loan guarantee has become a politicized issue. Republicans are quick to criticize the program as yet another example of wasteful spending and improper oversight by the Obama Administration, while Democrats are equally reflexive in their defense of renewable energy policy and of government efficacy. Such disagreement should be expected in a hyper-partisan climate, but it often eschews rational economic arguments in favor of emotional talking points. To shed light on those arguments, this analysis will delve into the rationale for federal involvement in energy resource development – including the particular loan guarantee program, while limiting comment on the bankrupt firm.

While that firm received the nontrivial amount of $535 million, that sum represents only one project in a larger Department of Energy loan guarantee portfolio. In turn, that portfolio represents one aspect of a far larger government intervention into domestic energy use and production. That total intervention is the latest iteration of a sustained effort to maximize energy resources to promote American economic growth. This analysis will provide an overview past energy policy, to demonstrate that the federal government has long directed considerable resources to all interventions from tax exemptions, to financing research and development, to subsidies, and to all manner of activities in-between. Recognizing that the provision of resources does not necessarily correspond to economic rationale, this paper will address the arguments opposed to and in favor of government support for renewable energy development. Research is drawn from reports issued by governmental agencies, analysis by venture capital firms, studies by relevant academics, and Congressional hearings. Analysis of that evidence will demonstrate that the scale of the inherently risky loan guarantee program is not unprecedented in American history, can be defended by economic theory, and is still a valuable tool to promote the next major energy developments.

II. A History of Government Support

Researchers differ in their historical categorization of federal government support mechanisms for energy production. For that reason it can be difficult to settle on the overall investment in developing energy technologies, as a policy which aids the oil industry will invariably have various indirect impacts across society. In that same vein, seemingly unrelated government policies can have indirect impacts that benefit energy industries. Still, consensus exists to illustrate the trends and types of energy support. A September 2011 report issued by Double Bottom Line Venture Capital (DBL), a firm which advertises its commitment to companies “enabl[ing] social, environmental and economic improvement in the regions in which they operate,” charted the investment in energy technologies from the Declaration of Independence to the present. Particular attention was paid to the initial levels of investment during the early commercial years of a new, viable energy technology. Authors Nancy Pfund and Ben Healey examined the common assumption that fossil fuel resources have received and still receive sizable federal support in contrast to the basket of renewable energy technologies.

Healey and Pfund analyzed several types of government policies that promote energy growth, including taxes, regulations, research and development investments, direct market provision, use of government services – i.e. seaports; and disbursements such as grants or loans. They argued that “energy transitions fueled” our economic growth from wood powering our frontier days, coal powering our railroads and the Industrial Revolution, and finally with oil reaching the mainstream with the internal combustion engine (Healey & Pfund, 2011). Throughout each transition, they suggest that the federal government has remained an active and interested participant to promote the adoption of new technologies. Early in American history, they cite land grant laws as subsidizing the timber industry, by permitting resources to be “purchased at a discount” (Healey & Pfund, 2011). They calculated a conservative, overall cost of that discount as representing a “25 billion-dollar a year energy subsidy” for that industry (Healey & Pfund, 2011). In addition, they note that tariffs on coal – dating back to 1789; state-sponsored geologic surveys, and assistance for railroads – heavy coal consumers; ensured that an energy which “did not arrive on the scene as a mature, low-cost and competitive fuel source” could develop in the ubiquitous product that fueled the Industrial Revolution (Healey & Pfund, 2011). At least in early American history it would appear that the federal government was an active participant in encouraging energy development.

As regards policy of the 20^th century, rigorous quantitative analysis is made possible due to the proliferation of data. Roger Bezdek and Robert Wendling of Management Information Services, a Washington DC-based economic research firm, co-authored a study of federal government energy policy from 1950 to 2003. Unlike Healey and Pfund, Bezdek and Wendling suggest that “energy policy was a low priority for the Federal government” until the 1973 “Arab oil embargo” (Bezdek & Wendling, 2007). As evidence, they note that the current agencies most associated with energy policy were not created until after that crisis, and that the Department of Energy would not be formed from those agencies until 1978. While that may mark the sea change in public attention to the issue – particularly for renewables; Healey and Pfund cite the (still-in-effect) oil and gas subsidies such as the expensing of intangible drilling costs (1916) as evidence of significant federal involvement before the embargo. Those subsidies often translated into “negative marginal effective rates” on investment in oil and gas, such that the investments are “more profitable after taxes… because they help reduce taxes on other income” (Healey & Pfund, 2011).  Its timing of federal interest notwithstanding, Bezdek and Wendling calculated that the federal government spent $644 billion on direct investment in the various energy industries from 1950 to 2003 (Bezdek & Wendling, 2007). That is an impressive sum relative to the $535 million Solyndra loan.

Of particular concern to Healey and Pfund was whether the total government investment was distributed relatively equally across industries during their first fifteen years of development. Their analysis conformed to conventional criticism of energy subsidies, with federal investment in nuclear, oil, gas, and biofuels far outpacing support for renewables such as solar and wind (Figure 1) (Healey & Pfund, 2011). Indeed, oil and gas received an annual average subsidy of $4.86 billion, nuclear $3.50 billion, biofuels $1.08 billion, and all renewable sources a paltry $370 million (Healey & Pfund, 2011). They note that “oil and gas support never falls below a level at least 25 percent higher than renewables” with support “ten times as great” in some years (Healey & Pfund, 2011). Those findings mirror those by Benjamin Sovacool, a professor at the National University of Singapore, who noted that “before the [1973] energy crisis, the federal government awarded 93% of its subsides to fossil energy but only 6% to energy efficiency and renewables” figures which have not changed much as 2004 policy had “fossil energy receiving 86% of government subsidies” with renewable consistent at six percent (Sovacool, 2009). The trend should be clear: fossil fuel energy technologies consistently received and continue receive federal support in excess of the basket of renewable energy technologies – including the derided loans made to solar energy companies such as Solyndra. Accepting the findings from the three cited studies, the impact of such skewed support on energy use must be addressed.

III. Contemporary Energy Use

Frederic Menz, a professor of Economics and Finance at Clarkson University, analyzed the impact of renewable energy policies and the relative adoption of those types of energies. He notes that at one time, conventional wisdom suggested that renewable energy sources would gain primacy due to the “rising costs for fossil fuels, growing concern about environmental issues, and national security concerns with imported oil” (Menz, 2005). However, the reality has been “virtually constant” production of electricity from renewable sources, with “coal and nuclear responsible for about two-thirds of net electricity generation in the United States for the last several decades” (Menz, 2005). As regards adoption of solar photovoltaic technology, some argue that its deployment has been tailored towards “a conglomeration of regional markets and special applications” for which significant production will remain elusive until standardized practices of connecting it to existing grid technology are established (Shum & Watanabe, 2007). The stunted deployment of renewable energy technology and failure to meet expectations for growth to surpass fossil fuels, are argued to be due to conventional fuel subsidies that “actively discourage consumers from seeking cleaner alternatives, encourage the overconsumption of resources… and lead to capacity development and consumer patterns in excess of true needs” (Sovacool, 2009). With significant conventional fuel subsidies intact, the demand for renewable sources will invariably be deflated unless government policy shifts to promote a more level playing field.

Likely due to the cushion afforded by conventional fuel subsidies, the outlook for renewable energy production has not been stunning. At the time when Menz was completing his research, the U.S. Department of Energy projected relatively stable shares of energy production (for 20 years) with coal retaining 50 percent, nuclear around 15 percent (down from 20), natural gas contributing 30 percent, and all renewable technologies sharing the remainder (Menz, 2005). Current projections are not as bleak for renewable sources. The 2011 U.S. Energy Information Administration’s annual report notes that renewable sources already contributed 11 percent of total domestic energy use in 2009, and are projected to increase to 14 percent in 2035 (Figure 2) (EIA, April 2011). That increase is still only three percent over nearly 30 years, but is notable for equaling the contribution by the established nuclear industry. Still, that stunted growth may be linked to existing sunset provisions in renewable energy legislation. As an example, the report suggests that when the “federal investment tax credit (ITC) for renewable energy installations” expires in 2016, the “average growth in solar photovoltaic (PV) capacity… slows from 39 percent per year to less than one percent per year” (EIA, April 2011). While it is possible or even likely that the credit is renewed beyond the sunset date, the temporary nature of various renewable energy policies invariably inhibits long-term investment planning by private sector businesses who are able to rely on the permanence of key oil and gas subsidies (Healey & Pfund, 2011).  This analysis now turns to the role government policy can play in encouraging certainty and overcoming the risks associated with solar investment.

IV. The Case for and Against Government Intervention

The economic rationale for government subsidies of private industry is to spur investment in a public good that would not otherwise be produced or would not be produced at the optimal level for society. Specific to the loan guarantee program extended to Solyndra, the provision of public financing is argued to compensate for a dearth of private sector financing for solar energy research and development. By providing a government guarantee, risk adverse private financing may be encouraged to follow suit. However, those conclusions are not without disagreement. It can be argued that public sector investment in research and development can crowd out private sector financing that would otherwise materialize. The direction of funds through a government bureaucracy can be slow, and perhaps leaves venture capital decisions to bureaucrats ill-suited to differentiate between potential winners and losers. Moreover, loan guarantees may not be the most efficient government subsidy for the solar industry. As regards the potential for crowding out, this analysis turns to venture capital investment in renewable energy technology.

Venture capital is traditionally associated with private investment in the development of high risk products in a new, potentially high growth industry. It provides the necessary capital for firms that face cost prohibitive interest rates on equity financing. Venture capital firms diversify their investments across a range of new companies so as to minimize risk if one product fails and to maximize reward through partial ownership in the company if the product succeeds. A 2011 study produced by the Third Way, a self-described moderate public policy think tank, evaluated the current levels of venture capital investment in clean energy technology. The authors note that there was a “rapid rise in venture investment in clean tech” beginning in the fourth quarter of 2007, which corresponded to a reinvigorated government interest in direct renewable energy investment through the creation of the Advanced Research Projects Agency for Energy (ARPA-E) modeled after the successful defense department initiative of a similar name (Freed & Stevens, 2011). It is important to note, that although many conservatives today deride the program that extended a loan to Solyndra, the authors highlight that it was the Bush Administration which first “began implementing loan guarantees for clean tech companies” (Freed & Stevens, 2011). Unfortunately for new renewable energy firms, private “investments in clean tech tumbled 44% from the 2^nd quarter of 2010 to the 2^nd quarter of 2011” with remaining funding “increasingly shifting to late-stage investments” in companies which “have far more options to raise capital and are more likely to survive without an immediate infusion of new funds” (Freed & Stevens, 2011).

The contracting of private sector investment in renewable energy is not likely due to any inherent infeasibility of the technologies. Indeed, Menz notes that the “costs of generating electricity from renewable resources have declined consistently for the last three decades” – a finding supported by Healey and Pfund in solar industry (Figure 3); which suggests that other factors such as the current economic stagnation and tightening of credit and capital is to blame (Menz, 2005). There is certainly still room for growth, with the basket of renewable energy technologies only accounting for 11 percent of domestic energy use, and the nonpartisan Union of Concerned Scientists in 2005 estimating that the “major renewable resources excluding hydropower… could potentially provide 5.6 times the total amount of electricity used in the country in 2001” (Menz, 2005). Moreover, a 2001 study indicated the effectiveness of government “renewable energy technology initiatives,” as they were estimated to have saved $30 billion in “avoided energy costs” from an initial government investment of only $712 million over the previous decade (Herzog, Lipman, Edwards, & Kammen, December 2001).  Accordingly criticisms of renewable energy subsidies neglect the longstanding government involvement in the sector to spur development of energy resources to fuel economic expansion, and ignore the vast untapped potential of fully implementing those resources.

If government support is accepted as a necessary feature of energy resource development, then criticism could be leveled at the loan guarantee program in particular. As part of his research, Sovacool conducted an extensive in-depth survey with stakeholders across the energy industry including representatives from utilities, regulatory agencies, energy systems manufacturers, interest groups, research institutes, and consumer advocacy organizations. In the study, he asked each to describe the best public policies that could be used to spur renewable energy adoption. Increased funding for research and development and expanding low-interest loans or government financing recorded at 8^th (19%) and 9^th (18%) respectively (Sovacool, 2009). The four most cited policy mechanisms were “eliminating subsidies [for conventional fuels], altering electricity prices [increasing prices with increasing use], forcing utilities to adopt renewables, and increasing funding for renewable power through a national systems benefit charge [a small user fee for weatherization and education programs]” (Sovacool, 2009). Together, those policies may counteract the “technological institutional complex” favoring oil, coal, and natural gas which inhibit the “market ready” solar technology from faster adoption (Shum & Watanabe, 2007). However, favoring those techniques does not exclude continued investment in loan guarantee and research programs. The money saved from ending conventional fuel subsidies could in part be used to fund the loan guarantee program which compensates for inadequate private sector provision for an industry free of the externalities associated with fossil fuel production. This analysis now turns to the details of the loan program and Solyndra.

V. Loan Guarantee and the Politics of Solyndra

The nonpartisan Congressional Research Service conducted a review of the Department of Energy’s loan guarantee program to inform the ongoing House Energy and Commerce Oversight and Investigations Subcommittee’s review of the Solyndra case. The Department of Energy Loan Programs Office administers three loan programs, with Section 1705 designed “for certain renewable energy systems… that may have varying degrees (high or low) of technology risk” (CRS, 2011). It was a temporary program created by the American Recovery and Reinvestment Act and expired in September 2011. It amended the Energy Policy Act of 2005, a bill that first authorized DOE loan guarantees. Of the $16.5 billion in Section 1705 loan guarantees, approximately 82% were directed to solar projects (CRS, 2011). Those projects were defined as either solar manufacturing – like Solyndra; or solar generation.

The report notes that manufacturing projects are considered high risk since they “have to manage several market risks in order to succeed” involving production scale, competition with existing, proven technologies; and operating in a “dynamic marketplace that has experienced dramatic cost reductions and new market entrants” (CRS, 2011). In contrast, generation projects are viewed as having the lower “manage operation and execution risks” associated with effectively overseeing an established firm with an established technology that would then, using the capital from the loan, be enlarged to a competitive scale (CRS, 2011). Figures four and five list the 16 projects that were awarded loans, which include four for manufacturing, and their related cost. It is important to note, that while Solyndra – at $535 million, is the largest manufacturing loan, it would be the third smallest in generation – which average just under $1 billion apiece. Of that mix of 16 loans, one failed in September 2011 when Solyndra filed for bankruptcy. Unfortunately for the program, which as of yet has 15 successful loan recipients, the negative attention with the Solyndra failure came at time of increasing fiscal austerity.

The House Subcommittee leading the charge on Solyndra has conducted three hearings to date since September 2011. The author viewed and reported on these hearings as part of his employment responsibilities at ML Strategies, a government relations consulting group with offices in Washington, DC. At each hearing there was an evident partisan divide with talking points trumping reasonable economic policy differences. Excluding a September hearing which hosted the chief executives of Solyndra (who used the Fifth Amendment), panelists have been forthcoming with their knowledge of the process and related agency involvement. Testimony has been given by the Deputy Director of the Office of Management and Budget, the now former Executive Director of the Department of Energy Loans Programs Office, the Deputy Assistant Secretary for Fiscal Operations and Policy at the Department of the Treasury, and the Chief Financial Officer at the Department of the Treasury’s Federal Financing Bank.

Throughout the hearings, the partisan divide can be expressed as Republicans opposed to the program in principle as the government is seen as inappropriately acting as venture capitalist, and Democrats describing the failure of the loan as embodying the inherent risk in such investments but not invalidating the process as a whole. While the Subcommittee continues the investigation, it would be inappropriate to conclude whether there was any malfeasance on the part of Solyndra or the government in this loan process. Still, some interesting points are present as a result of the hearings. A letter authored by the Ranking Member leadership to the Chairmen of the Committee and Subcommittee highlighted the inconsistency of treatment for the Section 1705 loan as opposed to other disbursements. In contrast to conservative disapproval for government picking winners and losers, they note that the Subcommittee has not investigated the bankruptcy of Open Range, which received $267 million, the “largest federal broadband loan in history,” nor the Department of Energy conditional commitment of “more than $10 billion to just two nuclear projects” – indeed advocating for the nuclear loans (Waxman, DeGette, & Markey, 2011). While it is difficult to draw conclusions about Solyndra, the advocacy and neglect of those two other loans suggests that the investigation guided more by political motives than by any economic policy disagreement – especially as regards $10 billion for the struggling nuclear industry that the EIA report anticipates will shrink relative to the growing renewables sector.

VI. Moving Forward, Loan Subsidies after Solyndra

This analysis has attempted to show that government intervention in energy industries is a longstanding aspect of American policymaking. Reasonable individuals will always disagree about particular form of that intervention, and the current atmosphere of austerity can only inflame those partisan divisions. With externalities associated with both climate change and fuel sourced from unstable or unfriendly regions of the world, there is clear need for continued renewable energy development. It was the 1973 oil embargo crisis that brought federal energy policy to widespread public attention, but since then, the government has not committed a comparable financial effort to renewable energy as was found in past energy transitions. More important that initial funding, Oil, coal, and natural gas are established industries that no longer require the significant (often permanent) federal subsidies to sustain demand for their products.

Instead of focusing on the one failure of Solyndra, focus should be directed towards the fifteen successes of the loan guarantee program. Still, even the attention on Solyndra should not neglect the dramatic fall in the price of solar technology by 42 percent over the course of the loan (ML Strategies, September 14, 2011). Continued investment in such increasingly price competitive technologies will ensure that the United States can lead the idea economy that economist Paul Romer found is critical for continued economic growth so as to again surpass Department of Energy estimates of renewable energy use. Abandoning loan guarantees will stymie that innovation as risk adverse private sector firms have been shown to refrain from investing in the rapidly changing industry without government interest. Transitioning from entrenched (and hugely profitable) conventional fuel interests will require significant political courage, but without that action the United States risks falling behind other countries which are committed to securing the next stage in energy development.

VII. Appendix

Figure 1 – “Comparison of Early Federal Subsidies to Energy Sectors” (Healey & Pfund, 2011)

Figure 2 – “U.S. Nonhydropower Renewable Electricity Generation” (EIA, April 2011)

Figure 3 – “Solar Average Installed Cost per Watt” (Healey & Pfund, 2011)

Figure 4 – “Solar Manufacturing Projects” (CRS, 2011)

Figure 5 – “Solar Generation Projects” (CRS, 2011)

Works Cited

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