U.S. Loan Guarantee Program: Supporting America’s Fastest Growing Industry

published: 2011-07-08 15:48 | editor: | category: Analysis

June was a busy month for the U.S. Department of Energy (DOE). The DOE awarded over $9 billion in coveted loan guarantees to ten firms. Half of the guarantees announced, $4.5 billion, went to three different thin film photovoltaic generation projects sponsored by thin film leader First Solar (FSLR) of Tempe, Arizona. Due to limited funds, and a looming expiration date of September 30, 2011 for the popular Section 1705 component of the program, many projects will not receive loan guarantees, which could help lower the financing cost of their developments.

Several months ago, several CEOs of solar and renewable energy companies send a strong letter to Congressional leaders urging the extension of the program, but to no avail. The budget battle between the White House and the Republican-controlled Congress makes it highly unlikely that the program gets extended, which must include an appropriation to fund loan guarantees.

The Loan Programs

A division of the DOE, the Loan Programs Office (LPO), administers two components of the program - Section 1703 and Section 1705. Program Office LPO originates, guarantees, and monitors loans to support clean energy projects. American taxpayers guarantee all, or part, of principal and interest payments for the loans up to 80 percent of obligations.

Section 1703 refers to the original loan guarantee program offered by the DOE for firms that have innovative clean energy technologies. However, these companies have a difficult time obtaining conventional financing due to the perceived risk of certain solar projects. Section 1703 mandates the technology must have a positive effect on reducing greenhouse gases.

The United States Congress modified the existing loan program with the intent of “jump starting” the economic after the financial crisis of 2008. The American Recovery and Reinvestment Act of 2009 introduced the “temporary” Section 1705 loan guarantee program. The idea was to stimulate large-scale solar development, which would power job growth, cut the country's dependency on fossil fuel, provide environmental benefits, and make the American solar sector more competitive in the global marketplace. 

Companies respond to “open solicitations” sent out by the DOE, which contain eligibility rules and application closing dates. Proposed projects undergo a similar review process as they would with a lender. The DOE claims it bases the loans guarantee on merit and the returns realized by U.S. taxpayers. Due diligence competed at the outset assures the elimination of as much risk as possible before making the commitment for the loan. The loan guarantee works the same for both programs, with the following exceptions for Section 1703:

a. Developers have to pay the credit subsidy charge up front for projects
b. Developers cannot use any other federal funds in the form of goods or services for the project

The Advanced Technology Vehicles Manufacturing (ATVM) is the third component of the loan guarantee program. It provides direct loans to help promote the development of advanced technology vehicles and associated mechanisms.

Section 1705 Loan Guarantee Allocations

Thus far, the1705 program has provided funding to 37 projects, totaling about $35 billion. The program has created or saved 68,000 jobs in 37 states. Nineteen of the 31 projects closed or receiving conditional commitments consist of solar developers and manufacturers. This group has received loan guarantees exceeding $16 billion.

The 14 solar generation projects receive over 90 percent of the loan guarantees -- $14.5 billion or an average loan guarantee of $1, 036 billion. The $4.5 billion awarded to First Solar represented 30 percent of the total allotted to solar generation. The company three projects will provide 1,400 construction jobs and 43 permanent jobs at three solar energy plants when completed.

Five solar manufacturers obtain a total of $1.55 billion -- an average loan guarantee of $311 million per firm. The first company to receive a commitment under the program, Solyndra received $528 million.

Program Investigations

Sixty percent of the loan guarantees approved for manufacturing, or $535 million, went to the embattled firm Solyndra in March 2009. In May 2010, President Obama visited the company and touted it as an example of a successful company producing solar components and creating American jobs. By November, the company announced it was closing its first factory and the lay-off of dozens of employees.

Solyndra manufactures a unique solar module; cylindrical panels overlaid with copper indium gallium diselenide (CIGS) thin-film technology. The accounting firm Price Waterhouse Cooper conducted an audit of the firm and uncovered miscalculations in its capital requirements. It also claims the firm had unwarranted expectations of its ability to deliver. Solyndra, which scrapped plans for an IPO, suffered heavy loses, and cash flow in the red. Although it raised $970 million in funding over five years, the company carried a large amount of debt.

Republicans have called for an investigation of the circumstances surrounding the awarding of the loan guarantee citing favoritism from the Obama Administration. Congress request personnel from the White House Office of Management and Budget to appear before the body to give testimony, but individuals summoned failed to appear.

Besides the Solyndra investigation, an Inspector General (IG) office audit revealed the Loan Program Office did not keep detailed records of the loan guarantee program as required. The IG found the DOE electronic record keeping system very erratic. Of the 18 projects evaluated by the IG, three did not contain any information for projects and 12 had missing data. The three remaining developments showed some effort to record the necessary data in the proper manner.

The key problem discovered by the IG involved the lack of data to determine the credit worthiness of projects. The IG stated in the report that the DOE did not realize it had an obligation to maintain records concerning due diligence or consultants and project advisors. In addition, the DOE operated under pressure to work at a rapid pace to evaluate proposals.

The U.S. Solar Industry after Section 1705 Expiration

The guarantee loan program, along with tax credit, renewable energy credits and other enticements have played a major role in helping to bring about the maturation of the overall domestic solar market  within the past few years. In 2010, the industry double installed capacity of 878 MW over the previous period. According to the Solar Energies Industries Association (SEIA), in the first quarter of 2011 a recent of installed capacity shows a 66 percent growth. SEIA also reports 116 percent growth “non-residential” installations.

Utility scale installations have a small showing in first quarter numbers, but SEIA expects the figure to grow significantly by the end of 2011. Solar generation projects supported by the Section 1705 guarantee loan program will start coming online in late 2011 and over the next couple of years. The SEIA expects a record-setting year for utility developments, with 886 MW of new capacity.

The issues uncovered regarding Solyndra and the DOE's faulty record keeping add fuel to critics argument that the government should not continue  supporting the solar industry. They insist it'ss time for the industry to stand on its own and compete in the free market without help from struggling American taxpayers. This argument against government support of solar weakens when one takes into account the government's support of the oil, coal, nuclear and other energy-related industries. Uncle Sam has a history of providing tax incentives for drilling for oil, research grants for clean-coal advances and nuclear power or building dams for electricity production.

A paper by Environmental Law Institute, “Estimating U.S. Government Subsidies to Energy Sources: 2002-2008”, revealed the U.S. government spent $72 billion in direct subsidies to various fossil fuel industries from 2002 to 2008. During the same period, the total subsidy for clean air fuels was $29 billion. In addition, the report says the largest subsidies for fossil fuel have a permanent place in the U.S. Tax Code.

Heritage Foundation analyst Nicolas Loris advocates the government ridding itself of all energy subsidies altogether, given the state of the economy.

The loan guarantee program needs an overhaul to ensure only companies that meet the criteria get the guarantees, which provides protection for taxpayers. Maybe the Congress should revisit the issue and gather the hard data necessary to determine if loan guarantees benefit the solar industry and the country. For an economy that is desperate to create jobs, solar and other clean energy technologies can play a vital role in leading the country out of its recession.

SEIA president Rhone Resch said the solar industry is America's fastest growing sector and currently employs about 100,000 workers. He believes the work force could double over the next 24 months, and catapult the U.S. to the largest global market.

Roger Efird, managing director of SunTech America, a subsidiary of SunTech Power - the world leading solar module producer, stated: "Is the solar industry going to die if we lose these programs? No, but we're going to stall" He went on to say, "We'll certainly lose a lot of jobs. There's no doubt about that."

Numerous projects will not receive Section 1705 loan guarantees; however, some of these developers may secure Section 1703 loan guarantees or other financing, but will pay more for financing and earn a lower return on investment.

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