MakovskyTuesday, December 2, 2014
“It’s a portfolio that JPMorgan and others would be glad to hold.” That’s a quote from John MacWilliams, a senior advisor to the Department of Energy’s Secretary referring to the DOE’s Loan Program Office (LPO) that once provided millions of dollars to a failed company you’ve probably heard of. Solyndra—the California solar module maker that received an infamous $535 million loan guarantee from that program and proceeded to go bankrupt a mere two years later. But recent reports from the DOE are painting a far prettier picture for the program a lot of people in DC love to hate.
According to recent news reports, “Interest payments to the government from projects funded by the LPO were $810 million as of September 2014 – higher than the $780 million in losses from loans it sustained from startups including Fisker Automotive, Abound Solar and Solyndra, which all went bankrupt after receiving large government loans intended to help them bring their advanced green technologies to market.”
Agreed, that is great news. But likening the portfolio to Wall Street? For comparison’s sake, the three years it took the program to break even, S&P’s 500 index increased by 67 percent. So not incredibly similar—but good news nonetheless.
Originally created under the Bush Administration in 2005, the DOE’s LPO was formed by Congress to develop “secure, affordable and reliable energy.” That said its focus on renewable energy didn’t take off until President Obama’s 2009 economic stimulus, the American Recovery and Reinvestment Act.
For young companies to enter the energy industry, they face huge financial obstacles. To develop large-scale projects, energy entrepreneurs need enormous bank loans, but most banks won’t invest until the new technology is proven. Quite the chicken or the egg story.
The LPO’s goal was to close this commercialization bridge of death by backing those young companies’ debt. If the company goes belly-up after receiving its loan from either the U.S. Treasury or a private bank, the federal government covers the losses on that loan. If the company succeeds in commercializing its technologies, they pay the LPO back over time with interest.
One success story of the program is another company you’ve probably heard of, Tesla, who last May became the first company to pay back its entire loan in full to a tune of $465 million. The current portfolio under the LPO includes almost 30 companies, totals $32.4 billion in loans and accounts for 55,000 jobs nationally. The technologies span from solar, biofuel and nuclear, to wind, automotive and geothermal, and the companies have names like 1366 Technologies, Inc, Kahuku Wind Power, NextEra Energy Resources, NRG Energy, and Abengoa.
Peter Davidson, the program’s director explained the three criteria companies must meet to be considered eligible under the program. “First, technologies must be innovative, meaning that they aren’t already deployed on a large scale in the US. Second, projects must lead to a significant reduction in greenhouse gas emissions. And third, developers must have a reasonable prospect of paying back their loans.”
But before you go filling out applications for your massive loan guarantee, you should know that prospective companies pay hefty fees throughout the process, totaling close to $200,000. Just from those fees, the DOE expects to collect close to $50 million in the next fiscal year. The most recent loan guarantee solicitation went out in July and the first part 1 submission due date was last month.
When all loans are paid back, the government says it could ultimately net up to $6 billion for taxpayers. Even with those predictions, not everyone is all-in on the program. Congresswoman Marsha Blackburn (R-TN-7) said that while the goals of the program may be well intended, “what we have seen is incredible mismanagement, and it’s become the poster child for crony capitalism.”
For me, the question comes down to: “Should the government be in the business of propelling companies forward with loan guarantees?” If that question referred to all industries, I’d say no it’s not. But as indicative by the recent UN climate summit and the emissions reduction announcement with China, the need to finance these technologies is real. And as mentioned before, the barrier to entry in the energy industry is humungous. We’re not talking about a Silicon Valley entrepreneur who develops an app and has a billion dollar market cap 12 months later. Will there be failures in the program? Of course. But just ask any venture capitalist if their track record is 100% on point. As long as the Tesla’s significantly outnumber the Solyndra’s, the program provides a much-needed service to the energy sector, and in turn, the American people.