Solyndra Bankruptcy Raises Questions About Federal Loan Guarantees

The government knew backing Solyndra was a gamble, but what was the risk?

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High risk was essentially the nature of the ill-fated Solyndra investment from its conception, but it's really only now—after what could potentially amount to a scandal for either the bankrupt solar company, the Obama administration, or both—that the risks taken by the Department of Energy's Loan Guarantee Program are coming to the forefront.

Solyndra, a solar manufacturing company based in Fremont, Calif. that specializes in producing a new type of cylindrical solar photovoltaic panels, was the Obama administration's clean-energy poster child back in September 2009 when it finalized a loan guarantee deal with the Energy Department. Early this month, however, after receiving $527 million in federal funds over two years, the company filed for bankruptcy.

[Read about how Obama abandoned clean energy in his recent jobs speech.]

With the half billion in taxpayer dollars loaned to Solyndra mostly likely lost for good, Americans now have to ask themselves whether the loan guarantee program is worth the gamble, and whether they should trust the administration with managing the risks involved.

Democrats have been quick to point out that it was the Republican Bush administration that set the loan guarantee program in motion and first began to process Solyndra's application; it was the Obama administration, however, that ultimately moved forward on Solyndra's loan guarantee with money set aside by the American Recovery and Reinvestment Act, better known as the 2009 stimulus. According to the Energy Department, more than two years of due diligence were completed before the loan guarantees were first offered conditionally in March 2009, and then finally closed later that year. At the time, Solyndra's new rolled-tube technology seemed like it had potential. Though it was more expensive to deploy than other more traditional solar panels already in the market, it didn't have to account for the price of polysilicon—which was fairly high at the time—and it was also much cheaper and easier for consumers to install.

However, after the deal was signed, the global solar market changed unexpectedly, significantly changing Solyndra's business prospects. A large influx of Chinese state loans to domestic silicon producers and a decline in demand in the European market drove down the price of polysilicon and it continues to fall—as much as 42 percent just since the beginning of 2011, according to the DOE. Though this benefited consumers, Solyndra lost its competitive advantage with other solar manufacturers around the world, something that even a new facility built with the money backed by the loan guarantees couldn't overcome.

According to the head of the Department of Energy's Loan Programs Office, Jonathan Silver, who testified before members of Congress Wednesday, these changes came as a surprise. After all, the department wasn't the only one to bet on Solyndra. Private investors also dumped hundreds of millions of dollars into Solyndra's new manufacturing facility, and the company had been hyped by other credible sources, like the Massachusetts Institute of Technology's Technology Review and the Wall Street Journal. "Silicon just went way, way down and it became less of a compelling technology because of the price of silicon just changing completely," said Kate Gordon, vice president for energy policy at the Democratic-leaning Center for American Progress. "That's the piece that nobody could have really predicted, neither the DOE or all the private investors who put their money in this project."

Also, compared with other DOE loan guarantee projects, the very nature of Solyndra's project might have made it a greater risk for taxpayers. Unlike the majority of the solar projects in the department's portfolio, which are built for solar power generation, Solyndra was building a facility to manufacture solar panels, a commodity susceptible to global competition and market swings. According to Damien LaVera, spokesman for the Energy Department, the solar generation projects are "good for the taxpayer because they tend to carry less risk" than the manufacturing projects, due to power purchasing agreements that generally guarantee revenue after a project is completed. And indeed, such solar projects are thriving due to the cheaper price of photovoltaics worldwide. In contrast to the bust of Solyndra, the U.S. solar industry as a whole is on track to double its solar capacity in 2011 from 2010 to almost 2,000 megawatts, according to the Solar Energy Industries Association.