No More Solyndras, But Loan Guarantees Remain an Important Tool

Today, the House of Representatives is marking up legislation that would put an end to a number of the loan guarantee programs made famous by the Solyndra collapse.  Clearly, taxpayers did not get much value for their money when it comes to Solyndra, but a better question would be whether loan guarantees themselves are actually good policy for the U.S. government.  I have to say, I think it’s a mixed bag.

I understand all the talking points that say that projects that cannot attract private capital shouldn’t be pursued, but I also can think of a couple issues with that argument that seem to push in a different direction.  One of the upsides of publicly traded companies is that they have to produce value for their shareholders.  Different companies do this in different ways, but overall this kind of arrangement does not lend itself to long-term, upfront capital intensive endeavors.

A good example is the construction of a nuclear plant.  The upfront costs and risks are of such a magnitude that there are very few banks or other entities with the necessary capital to engage in such a project. Additionally, the permitting and potential risks involved may dissuade private financing.  However, the long-term benefits of low-cost power and minimal emissions are very attractive.  Seems that government backed loan guarantees makes sense here.  The technology is not new, but the need for government backing exists.

In terms of solar production facilities, a number of complications exist. The U.S. subsidized the production of solar panels.  China  subsidized more heavily the production of solar panels.  With cheap solar panels now saturating the market, real return on investment has disappeared and resulted in anti-dumping trade remedies being imposed.  The U.S. went through a similar exercise with semiconductors, determined to win control of production.  However, where semiconductors have very few substitutes, there are plenty of alternatives to solar power. Solar power is an incredible resource, but we also have wind, geothermal, tidal, hydro, nuclear, coal, and gas to choose from.  We do have options.

I have read about two very interesting solar projects lately.  One involved a small utility in Florida that set up program to incentivize the use of solar powered hot water heaters.  The program did not require net metering or some of the other provisions allowing individuals to sell back to the grid, but does allow for considerable savings for both the consumers and the utility over time.  For this project, it does not matter where the panels are built, just that they are affordable enough to allow the project to self-sustain.  Another project involves the production of solar energy from a large tower designed to superheat liquid salt.  The closed loop system could be used to store and generate electricity over longer periods of time than standard solar production.

The solar home heating did not involve loan guarantees but did allow the homeowners to take advantage of some state and federal tax incentives.  The large solar facility is utilizing a federal loan guarantee and both state and federal grant funding.

So as the House considers loan guarantees, we should be wary of politicians claiming that all such incentives are flawed.  Just like home loans, a good loan officer makes good decisions on risk in terms of what qualifies and what does not.  When an officer or a bank starts making ad hoc, hurried, or less than careful decisions, mistakes are made.  Perhaps DOE was not the right place for this program and certainly the decision to plow so much tax payer money into a few of these projects was a mistake.

However, the use of loan guarantees remains an important tool, and a relatively inexpensive one, for policy makers.  We just need better loan officers to protect our bank!

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