Thursday, October 6, 2011

DOE Loan Guarantees and Potential Consequences

The US Department of Energy (DOE) Renewable Energy Loan Guarantee program ended on Friday, September 30th 2011 with the DOE closing four deals with government loan guarantees totaling around $4.7 billion. This end of program rush was disturbing after learning some details about the programs's first $535 million loan guarantee given to Solyndra, a would be manufacturer of unique solar photo voltaic modules that filed for bankruptcy earlier this month. With recent revelations about the company it appears that loan was ill conceived lacking the primary method of repayment (cash flow) and the secondary method of repayment (sale of the collateral) will not cover the loan. The San Francisco Chronicle described the Solyndra factory. “It wasn't just any factory… it covered 300,000 square feet, the equivalent of five football fields. It had robots that whistled Disney tunes spa-like showers with liquid - crystal displays of the water temperature, and glass-walled conference rooms.” The loan guarantee represents about $1,785 a square foot, though the actual cost of building and equipment was closer to $2,500 a square foot and DOE gave up first position in the loan restricting, so it is very likely that DOE with have to pay on the guarantee and the people of the United States will have a significant loss on this loan guarantee.

This project required venture capital not a government loan guarantee and has raised a myriad of questions about the decision process to award renewable energy loan guarantees. In a widely quoted email sent last year Larry Summers, former economic advisor to the President stated that the U.S. was not well equipped to make venture capital decisions relating to Solyandra. Venture capital investments require oversight and management, not an open checkbook. Citizens Against Government Waste, CAGW, believes the federal government should not operate loan programs. According to the CAGW the government typically funds risky ventures losing significant portions of taxpayer money or funding companies and industries which are mature and profitable and don’t need the money and creating windfall profits for the chosen. The difference between loan guarantee programs and venture capital is apparently not clear to the DOE.

One government loan programs I have had experience with and operates as a loan guarantee program is the SBA Loan programs and though considerably more modest in their goals, had a cumulative combine loss rate of 6.04% in 2008 the last year for which statistics are available. With that kind of loss rate a bank would fail and be shut down by the regulators. Unlike some of the DOE loan guarantees, SBA loans have a 75%-85% guarantee for most of their guarantee programs so that the banks operating the program would also experience a loss on a failed loan. The guarantee loan program has a loss rate of 5.04% still over twice the target small loan loss rate of commercial banks. Surprise, banks do plan to lose money on some loans and price risk groups of loans to cover the anticipated loss. The loans made directly from the SBA have been reduced in recent years because of high loss rates. At this time only micro loans (loans under $35,000) are made directly from the SBA and the cumulative loss rate is 11.12%.

In the final hours of the Energy Department’s loan guarantee program, the agency managed to approve renewable energy loan guarantees for, SunPower, First Solar and Prologis to build solar power projects. These are much less risky than manufacturing plants, as long as the solar modules operate at specified levels, and as long as the sun shines at historical rates, the project will generate electricity, and will have revenues as determined by regulation and state policies. The projects approved on Friday were:

California Valley Solar Ranch Project a $1.237 billion loan guarantee to allow SunPower Corp to borrow the money to build a 250-megawatt photovoltaic electricity generating array in San Luis Obispo County, California using sun tracking technology to increase electricity output. The power will be sold to Pacific Gas and Electric Co. and will generate enough (very expensive electricity to power 64,000 homes and will allow SunPower to increase demand for their panels and maintain or increase production.

Desert Sunlight Solar Farm a $1.46 billion loan guarantee for 80% of a Goldman Sachs Lending Partners and Citigroup loan to First Solar to build one of the world’s largest photovoltaic solar power projects, a 550-megawatt generating project near Desert Center, California. This project will be built by First Solar using their cadmium telluride thin film solar PV modules and sold to NexEra Energy Resources. This combined with the project below will assure sales of 780 megawatts of solar photovoltaic panels for First Solar.

Antelope Valley Solar Ranch a $646 million loan guarantee to the Federal Financing Bank, which is run by the U.S. Treasury. Apparently, they could not find a committed lender and had to get a loan from the federal government. AV Solar Ranch will be a 230-megawatt project in North Los Angeles County, California built and operated by First Solar once more using their cadmium telluride thin film solar PV modules. I guess that the DOE likes these PV modules. The project was recently bought by Exelon Corporation and all the power will be sold to Pacific Gas & Electric Co.

Project Amp a $1.4 billion loan guarantee to Bank of America Merrill Lynch to support Project Amp; the installation of 752 megawatts of photovoltaic solar panels on 750 existing rooftop owned by Prologis. This represents more than 80 percent of the total amount of PV installed in the U.S. last year when the renewable energy solar photovoltaic rebates were widely available. Depending on where these solar photovoltaic panels are installed and whose panels they install they could significantly impact pricing and economics in the solar market and the cost of electricity across the nation.

Solar Renewable Energy Certificates, SRECs, are not real, they are environmental “commodities” created by regulation that was born in New Jersey in 2004-2005 as a way to encourage and support the growth of solar energy within the states that utilize them. SRECs are not physical entities, but merely a credit for having made power. Because SRECs are not physical items their value depends entirely on regulation which can change over time and that is the inherent risk in making financial decisions based on regulations. In order for SRECs to have any value, the states must have a mandated Renewable Portfolio Standard, RPS, the SRECs must be tradable and there must be a punitive financial penalty for not meeting a solar carve out portion of the RPS. A renewable portfolio standard (RPS) is a state legislative requirement for utilities to generate or sell a certain percentage of their electricity from renewable energy sources. The percentage requirements under RPS programs vary widely from state to state. California regulations (if not ammended during the coming years) require that by 2020 utilities get 33% of power from renewable sources.

In some states with solar grant or rebate programs the utility company owns the SRECs so that the homeowner cannot sell them. This has worked in states like California where electricity rates are high and tiered and the solar installation market has become is more competitive and utility payments effectively fund solar rebates. The three California (only) generating projects will in all likelihood ultimately be paid for by California electricity rate payers as an increase in rates under their mandated RPS or by the US taxpayer if the revenue from selling the solar generated electricity does not cover the loan repayment.

As of September 20, 2010, 36 states plus the District of Columbia and Puerto Rico have enacted an RPS or a renewable portfolio goal (RPG). Of these states, only New Jersey, Maryland, Washington DC, Delaware, Ohio, Pennsylvania, and Massachusetts have assigned a multiplier to Solar RECs and created a separate SREC market where the homeowner or facility owner maintains ownership of the SRECs. Prologis operates the world’s largest and most diverse portfolio of industrial distribution facilities with properties in many of these locations as well as others. Depending on the location of the projects and regulations, these DOE guaranteed loans could finance the collapse of SREC value and an increase in electric rates. Though there will be a short term increase in construction jobs, long term employment for these projects will be minuscule. However, these projects will for a short period of time increase the demand for US made solar panels which has fallen in the past six month as worldwide demand falters and serve to protect those manufacturing jobs in the short term. (Chinese solar panel maker Suntech Power, opened a manufacturing plant in Goodyear, Arizona in 2010.)

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