I have written several times on this blog about the dangers of subsidies in the energy sector. Indeed, there have been several examples of late which show how government involvement in new technologies is woefully misguided. One such example in the UK comes from Sharp Solar, reported to be scaling back its manufacturing capacity in light of essential subsidy cuts to the industry. Their original business plan relied on generous financial bungs from the government’s initiative to promote “alternative energies”. Now that the support is reduced, Sharp Solar will have to reconsider its business plan.
Everyone knows that the EU & UK’s drive for energy security is burdened by overly ambitious goals set by environmentally obsessed ministers. The natural mechanism of the free market takes a back seat to the unrealistic expectations of Connie Hedegaard (the Commissioner for so-called Climate Action) and our very own Chicken Little, Chris Huhne. The contrast, traditionally, has been the Energy Policy of the United States. The US lets the market decide what form of energy generation and distribution to use. The US government does not, typically, look to offset the free market through profligate subsidies and loan guarantees. At least that was their policy, until Obama came onto the scene.
The story of the failed solar panel manufacturing company Solyndra may be less familiar on this side of the pond. But new details demonstrating just how invested the Obama administration was in promoting a doomed, impractical technology are instructive.
Back in 2005 (yes, during the “W” administration) the US congress passed the Energy Policy Act of 2005. The bill sought to address several energy problems throughout the United States through a variety of means. Perhaps surprisingly, one section of the bill authorized the U.S. Department of Energy to offer loan guarantees to help finance new energy technologies. Inevitably, the Department of Energy was flooded with applications for funding.
One of the companies which applied for underwriting of a $535 Million loan was the California-based solar panel manufacturer, Solyndra. The loan was meant to expand their manufacturing capacity and create 4000 “green jobs”. Now I’ll not get into how “creation of jobs” for the “green economy” is a red herring. Suffice to say, governments are not generally good at creating jobs in the private sector unless at the expense of other industries.
From the outset, Solyndra went hard, pushing for their case, spending nearly $2 million lobbying the White House. Also from the outset the Department of Energy had serious reservations. Solyndra’s business model seemed unsustainable. Their calculations for projected market share were unrealistic and they were manufacturing product for nearly the cost they were selling it. It seemed probable that they would default on their half billion dollar plus loan. In early 2009, during the final days of the Bush White House, the Energy Department’s Credit Committee decided that “the information presented did not thoroughly support a finding that the project is ready to be approved at this time”. By the Obama inauguration later that month however, the project was fast-tracked towards approval by the new government. Barack Obama visited the factory in May of 2010 saying “The future will always be with companies like Solyndra”. Within days of that speech Solyndra quietly cancelled their Initial Public Offering. We now know that the company, and the White House, were worried about their solvency since before Obama’s visit. But nonetheless they chose to promote the ill-fated company as a centrepiece of their Green Energy Policy.
By August of this year Solyndra filed for bankruptcy protection and folded, making 1100 staff redundant.
The lessons of Solyndra are simple. Whether it is the housing market, energy technology or, indeed, higher education, governments have a tendency to ignore what the public wants in place of what it feels the public needs. It offsets the natural balance of the free market by introducing perverse incentives with unintended consequences. When governments tell us they’re picking winners, it’s time to run for the exits.
(This piece with US input from Joseph Bono, my Chief-of-Staff)