Solyndra-gate

Posted by Dan Karney on Sep 18, 2011

Filed Under (Environmental Policy)

All good political scandals require the suffix “gate” and Solyndra-gate is no exception.  In this particular scandal, the Obama Administration provided a $535 million loan guarantee to Solyndra, a California-based company developing advanced solar-panel technology.  The loan went bad as Solyndra filed for Chapter 11 bankruptcy earlier this month.  Loans go bad all time, but in this case some allege that the Administration knew that Solyndra had a faulty business plan, but provided the loan guarantee anyway to benefit a prominent campaign donor that had heavily invested in Solyndra.  Compounding these allegations, the Administration repeatedly pointed to Solyndra as an example of job creation by green businesses, making the optics of the situation awkward.

Ignoring the potential improprieties of the situation, ideological opponents of the Obama Administration pounced on Solyndra-gate as another example of big government meddling in the private sector.  However, data suggests that loan guarantees for green energy, and wider energy sector in general, might in fact be good government policy.  To illustrate these ideas, I am borrowing two points from a blog posting titled “Five myths about the Solyndra collapse” and posted on Ezra Klein’s Washington Post site Wonkblog.

  • First, “Solyndra proves that energy-loan guarantees are a flop. Not exactly. The Energy Department’s loan-guarantee program, enacted in 2005 with bipartisan support, has backed nearly $38 billion in loans for 40 projects around the country. Solyndra represents just 1.3 percent of that portfolio — and, as yet, it’s the only loan that has soured. Other solar beneficiaries, such as SunPower and First Solar, are still going strong.”
  • Second, “The government should leave energy R&D to the private sector. Actually, there’s reason to think the private market is drastically under-investing in new energy technology. As a new report from the American Energy Innovation Council lays out, the utility sector spends just 0.1 percent of its revenues on R&D — the average for U.S. industries is 3.5 percent.”

Both points have merit: government loan guarantees do necessarily doom a company, and basic research in public goods is underprovided by the private sector.  However, a Wall Street Journal article suggests that the loan guarantee was in fact Solyndra’s undoing due to saddling the company with high fixed costs (link).  Furthermore, loan guarantee programs have a cost to the Treasury, and it is not clear that such programs return the highest benefit for their cost either in terms of job growth or long-run tax revenue compared to other ways of stimulating energy R&D.