The ‘No More Solyndras Act’: Rep. Stearns Wants To Turn a Good Program Into A Bad One

by Richard W. Caperton

Imagine a government program that had produced dozens of success stories, cost less than expected, and helped build an industry of the future. Wouldn’t you want to expand that program?  Yes, you probably would.  Unless, of course, you were Rep. Cliff Stearns (R-FL).

If you were Rep. Cliff Stearns, you would introduce legislation to end the program.  And, if the program somehow did survive, your legislation would make sure that it operated with more bureaucratic red tape and weaker financial standing.

Welcome to the bizarre politics around the Department of Energy Loan Guarantee Program. Tomorrow, two subcommittees of the House Energy and Commerce Committee will consider a piece of legislation written by Stearns called the “No More Solyndras Act.”  Every aspect of this bill is bad. If Congress really wants to improve the loan guarantee program, they should do so by allowing it to fund many more projects with a full portfolio of financial tools. Let’s look at why.

The Loan Guarantee Program has been a success

First, some background. DOE’s loan guarantee program was created in the Energy Policy Act of 2005, and was strengthened in the American Recovery and Reinvestment Act (the stimulus bill). The program is built to provide financing to new clean energy technologies that the private sector is unable to finance.  These companies are trying to cross the “Valley of Death,” where they need many millions — even billions — of dollars to build new projects.  Traditional lenders won’t finance these projects because they’re generally the first-of-a-kind, and venture capitalists who would finance innovative projects simply don’t have enough money to meet these companies’ needs.  So, the government stepped in and guaranteed that they’ll pay back a loan if the company is unable to.  This guarantee unlocks capital.

The program has been an overwhelming success.  The loan guarantee program alone financed 32 projects in more than 20 states, ultimately creating 22,000 jobs directly. Best of all, the government only spent $2.5 billion to mobilize more than $20 billion in private capital.

Even projects without guarantees have benefited from the process. For example, the due diligence process helped bring in a $1 billion investment from Bank of America for the largest residential solar project in U.S. history. The chief executive officer of the solar company deploying the project said that without the due diligence process to attract private lenders, “We would not have been able to make the economics of this project work.”

Enter the “No More Solyndras Act”: A potential disaster

Despite the fact that the Title XVII loan guarantee program has been a success and should be expanded, Rep. Stearns’ legislation would effectively end the program, mandate unnecessary and duplicate consultations, and tie the government’s hands behind when it’s representing taxpayers.

The “No More Solyndras Act” does three main things:

  1. It sets a retrospective deadline by which applications must have been received in order to be considered for loan guarantees. No application that was submitted after December 31, 2011, is eligible for a new guarantee.
  2. It creates a new process for the Secretary of the Treasury to influence the outcome of a decision on a guarantee, and requires the Secretary of Energy to explain why he or she did or did not follow Treasury’s recommendation.
  3. It says that taxpayers must always be the senior debt holder, even after a restructuring of a guarantee for a troubled company.

Each of these is a mistake.

Not only is the deadline arbitrary, it excludes any new technologies from receiving valuable financing assistance in the future.  For example, small modular reactors, or SMRs, are one of the most promising nuclear technologies. Tidal and wave power are other rapidly developing technologies. Yet, when these technologies are ready for commercialization and need to cross the Valley of Death, they will be stranded because they didn’t apply to the loan guarantee program by December 31, 2011.

This makes no sense.

The government should provide equal opportunities to all technologies and companies, not just those that happened to have sent in paperwork by a certain date.

Second, the increased role for the Treasury Department is, at best, an unnecessary solution looking for a problem. The Treasury Department already weighs in on all federal credit programs. Further, this Committee has uncovered no evidence that the DOE has mismanaged this program, so it is not clear how more influence from Treasury would improve management.  It is also important to remember that the Title XVII Loan Guarantee Program is fundamentally about investing in critical low-carbon energy sources.

The goal of this program is to make investments, but Treasury’s ultimate goal is to minimize risk to taxpayers. There is always some tension between making investments and minimizing risk. The rules governing federal credit, as laid out by Congress in the Federal Credit Reform Act of 1990, provide the right balance to this tension.

Changing Treasury’s role in this program would throw off that balance and set a negative precedent.

Third, the restructuring terms mandated by this bill do not provide the best outcome for taxpayers. The goal of a restructuring should be to minimize the amount of money that the government is likely to lose. While in many cases this can be accomplished by making the government the senior lender, this is not always the case. The government needs to be able to operate in sophisticated financial markets and in many cases subordination of federal debt is the only way to bring new investors into a troubled company.

Instead of requiring the government to adhere to certain terms in a restructuring process, Congress would be better off by requiring the government to pursue terms that provide the greatest likelihood that taxpayers won’t lose money.

Improve the program by expanding it

The loan guarantee program is clearly an effective tool at moving the clean energy economy forward. But there are certainly ways to improve the program. Rather than artificially constrain, Congress should recognize that this is a success story and improve the Loan Guarantee Program by allowing it to fund many more projects with a full portfolio of financial tools.

There are three important ways to improve the program:

  • An improved loan guarantee program needs to apply a portfolio approach and have access to a range of financial instruments covering debt, equity, and insurance investments.
  • The improved loan guarantee program’s portfolio of investments should be scored by the Office of Management and Budget on a product basis or using a pre-determined model, rather than deal by deal, thereby ensuring appropriate oversight while streamlining financial management.
  • The improved loan guarantee program should be capitalized over five years on the scale of $10 billion to $20 billion, and the administration should actively work with congressional champions to assure an appropriate way to pay for it.

The Subcommittee on Energy and Power and the Subcommittee on Oversight and Investigations have scheduled a joint hearing on Thursday, July 12, 2012, at 9:15 a.m. For more on this issue, please read Richard W. Caperton’s full testimony on the “No More Solyndras Act”.

Richard W. Caperton is the Director of Clean Energy Investment at the Center for American Progress.

4 Responses to The ‘No More Solyndras Act’: Rep. Stearns Wants To Turn a Good Program Into A Bad One

  1. Paul Klinkman says:

    I’m in Rhode Island, where the previous governor gave a baseball pitcher that he met at a Republican fundraiser $100m to start a video game company. For some odd reason the venture failed big.

    One problem with these loan giveaways is pure size. Pure size breeds corruption.

    Next they’ll be giving the Vogtle nuclear power plant $7 billion in loans. Oh wait, that’s not this particular loan program.

  2. The republicans have joined with the Chinese in waging a war on the US alternative energy industry. The Chinese dump panels on the market and the Republicans do everything they can to undercut the industry legislatively. Has there ever been a period of time when a party in Congress worked with a foreign entity to kill American jobs and destroy an emerging industry that would lead America into a better future? I’m hard pressed to find historical precedence for this.

  3. Tami Kennedy says:

    Let’s see. Add gov. processes (GOP would never do) to manage processes or add additional oversight. Then restrict processing time. There is just something wrong with that logic.

  4. SteveW says:

    I continue to be dismayed at the “business-friendly” GOP’s attitutude toward alternative energy companies. The best world-wide business opportunity to come along in decades, and rather than supporting it, they are doing everything that can to stifle it. Could it be because of all the “contributions” they get from established energy companies?