Lessons from Solyndra: We need more, not less clean energy innovation investment
Posted September 8, 2011
The recent headline of the $535 million loan loss to the Dept of Energy in backing Solyndra was indeed an eye opener, but not for the reasons you might think or have recently seen written about it. In particular, New York Times Op-Ed contributor David Brooks, "Where the Jobs Aren't", argues against existing public policy support for clean energy and jobs. While I won’t pick through his arguments here – see Joe Romm of Climate Progress who thoroughly rebuts Brooks in his blog – I do want to highlight two important issues that this story touches. First, Solyndra's failure exposes the overall inadequacy of existing U.S. clean energy policy, especially when viewed through an international lens. In the words of clean energy economy job experts Mark Muro and Jonathan Rothwell of Brookings, we have a U.S. clean energy policy that is “incomplete, fragmented, and uncertain”. Second, the U.S. needs to leverage what it does best – innovation and building new companies. The Solyndra story is a lesson in understanding the risks and rewards that come with pursuing these types of policies.
U.S. Clean Energy Policy: Think Global
Likely resulting from clean energy opponents’ ongoing fear mongering against renewables as too expensive and/or too ‘small scale’ to meet ‘our growing energy needs’, we still have a major perception problem to overcome in the U.S. when it comes to solar and wind industries. Solar and wind are no longer cottage industries offering expensive technologies only catering to a niche set of green-minded businesses and consumers or off-grid minimalists. Instead these are burgeoning global competitive industries on their way to trillion-dollar markets, fueled by skyrocketing demand, declining costs, and increasing public policy support. Solyndra failed because, despite the best of intentions and a promising technology, it simply could not keep pace with innovators in other companies at a time of extraordinary growth in demand for clean energy.
Narrowly focusing on Solyndra also misses the point that the company was only one part of a much larger solar value chain, and in many sections on that value chain, U.S. companies are dominating. This includes companies selling silicon, machining and tooling, developing projects, creating balance of system components such as inverters, or installing systems. The Solar Energy Industries Association (SEIA) recently published a report showing that the U.S. is a net exporter of solar energy products across the entire value chain, adding $1.9 billion in value to the U.S. economy last year. This also includes a trade surplus in China.
U.S. Clean Tech Innovation: Still on the Cutting Edge
The best chance for the U.S. to build world-leading clean energy companies is not to compete on turf that is already well covered by other countries, but rather to leverage what it does best – innovation and building new companies. However, this means backing riskier companies that may not have access to private financing and that may not have an established market now. If private investors were rushing to back riskier next generation technologies, this wouldn’t be a problem. But as has been well-demonstrated, this is not the case. First Solar is a classic example of a next generation solar technology that was launched in the U.S. and is a global leader. So is A123. Solyndra could have been another example, but its technology didn’t develop as hoped for. That doesn’t mean the U.S. should stop doing what it’s doing.
And this does not signal the end of U.S. clean energy investment. Devon Swezey, Jesse Jenkins and Alex Trembath wrote earlier this week in Forbes.com Energy Source blog:
“… when judged by its entire diverse portfolio of investments, the LGP [DOE Loan Guarantee Program] has performed remarkably well. Indeed, with a capitalization of just $4 billion, DOE has committed or closed $37.8 billion in loan guarantees for 36 innovative clean energy projects. The Solyndra case represents less than 2% of total loan commitments made by DOE, and will be easily covered by a capitalization of eight to ten times larger than any ultimate losses expected following the bankruptcy proceedings.”
The U.S. is rightly following a portfolio strategy with its investments. Through funding for the Treasury Cash Grants, ARPA-E, tax credits and loan guarantees, and DOE support innovation research; the U.S. government is helping the private sector clean energy industry pursue a number of different strategies.
We need to understand the government’s role in these companies. Yes, they have had a supporting role in many companies, but Solyndra isn’t a government-owned entity. Among the other private investors were KKR, Argonaut, CMEA, Masdar, Redpoint, RockPort and US Venture Partners, and when added together made for a greater than 2:1 private-public investment ratio behind Solyndra. These are all experienced and well-respected cleantech investors in the field. But we’re not suddenly questioning the motives of those investors, not asking macro-questions about the value of private investment. It’s a complicated point – governments typically aren’t very good at most due diligence activities. But the investors and developers we’ve spoken with described the government due diligence process equally as onerous and difficult as any private financing with extensive diligence requirements. Keep in mind that that nearly 40 loan guarantees have been made across a range of different companies, industries and technologies. Not all will work out. In fact if all of them did it would be a sure sign that the loan guarantees were being targeted to companies that are too mature and not innovative enough. As any venture capitalist will tell you, failure is part of innovation.
The future of clean tech will be won by those who seize the best opportunities to create it. Not all U.S. backed companies will have the right strategy, but those that do have the potential to dominate a multi-trillion dollar a year industry.