StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Learning from Solyndra

26 Sep 2011
Posted by Andrew Samwick

The brewing scandal regarding Solyndra is an opportunity to consider which roles the federal government can and should play in developing alternative energy and which roles it should not.  Take as a starting point the friendly column by Joe Nocera in Friday's New York Times:

But if we could just stop playing gotcha for a second, we might realize that federal loan programs — especially loans for innovative energy technologies — virtually require the government to take risks the private sector won’t take. Indeed, risk-taking is what these programs are all about. Sometimes, the risks pay off. Other times, they don’t. It’s not a taxpayer ripoff if you don’t bat 1.000; on the contrary, a zero failure rate likely means that the program is too risk-averse. Thus, the real question the Solyndra case poses is this: Are the potential successes significant enough to negate the inevitable failures?

If you have a risk that the private sector won't take, it is because the private sector does not see it as a profitable risk to take.  It does not get more profitable if the government takes it.  It only formally shifts the risk of losses to the taxpayers. 

The real question is not whether this program may pick more winners than losers.  The real question is why, if we believe that social policy should be promoting alternative energy, have we not priced energy from fossil fuels at a higher price that reflects the social costs of using them?  With the higher price of fossil fuels,  investments in alternative energy like this one would be more profitable to private sector investors who would reap the gains or bear the losses.  It is better policy to have the government's involvement at the macro level -- setting the price -- rather than at the micro level -- picking the winners.  The Solyndra scandal is a good example of why.

scandals

First off, the Solyndra "scandal" isn't much of a scandal. Here's a comparison of the cost of l'affair Solyndra to others: http://www.mediaite.com/online/some-context-solyndra-investment-versus-m...

Second, it is of course correct to say that "It is better policy to have the government's involvement at the macro level -- setting the price -- rather than at the micro level -- picking the winners."

Unfortunately, however, we're dealing with a Republican Party that rejects market-friendly policies it created and once supported-- such as cap and trade-- as unconstitutional socialism and fascism.

In a world where one of the two major political parties rejects policy as socialism (not an exaggeration; Rick Perry: “Look, when all the answers emanate from Washington D.C., one size fits all, whether it’s education policy or whether it’s healthcare policy, that is, on its face, socialism.”), we get some second- and third-best efforts to address policy concerns.


In theory raising fossil fuel

In theory raising fossil fuel prices through taxation would be the way to go but in the present political environment it does not seem possible. Even if they did manage to implement such a policy, it would have to be believable in the long run for companies to increase investment in alternatives. Perhaps they could make it popular and revenue neutral by providing a lump sum rebate at the end of every year for the amount of the tax.

Increasing investment in basic science seems the most plausible alternative to account for the positive externalities since advancements in science cannot be rolled back. Some type of private investment matching program could also avoid the "picking winners" problem, but that would not have completely prevented the government from investing in Solyndra.


Your question can be answered

Your question can be answered with a single word: oil. Or possibly coal. Regardless, our transportation and energy systems rely heavily on both being cheap. When prices go up people complain. And, people get voted out of office.


Betting on the Dark Horse

Professor Samwick gets it right, I think. It is much easier for government to determine which race should be run that it is for them to pick the winner in that race. The government should run the track---not bet on the horses. Donald Marron of the Urban-Brookings Tax Policy Center recently presented very good testimony to Congress with respect to tax policy and energy which is very relevant to this discussion. His testimony can be found here: http://www.urban.org/uploadedpdf/901452-Energy-Policy-and-Taxes.pdf and I highly recommend it.


It may be easier and wiser

It may be easier and wiser for govt to simply "run the track". But it is far more profitable for them (govt/pols/DC) etc to bet on the horse - and rig the track for that particular horse - and rig the race on the day - and therefore to extract some of the "rent" created. Rent in this case being the campaign contributions, photo opps, lobbyist backscratching, careerist/DC revolving door stuff, perpetual growth of the DC leech at the expense of everyone else in the US, etc - ie political rent is slightly different than economic rent but they can be traded/exchanged.

As long as govt is given the power to "run the track"; they will find ways to turn that job from a mere caretaker/arbitrator/legislator into something far more powerful. Simple self-interest/greed combined with an absence of checks to DC's power.

I have little doubt that the main "lesson" of Solyndra inside the beltway is to do a better job of hiding the corruption so that they don't look as amateur/stupid when it gets exposed. As usual, the far more talented crooks at Goldman have managed to both make money from this Solyndra scam and avoid media scrutiny about their crookedness. So there are still plenty of "green infrastructure public/private partnerships" and other crony opportunities for taxpayers to be scammed by the DC Wall St crowd. And if it doesn't work, then financial crisis 2 will happen and we the taxpayers will get to bail out the welfare billionaires again.


Risk is relative to how much you have...

I can't really agree with the column, because risk is relative to what you have. An investment that might be too risky for me would be relatively risk free for Bill Gates or the U.S. government. To clarify with an example, if I have a bet which pays me $101 if I win, but I only have a 1% chance of winning, and I can make this bet 1x/second, it's too risky for me personally, given my bank balance, but if I had $1 million in my bank account, it would just be a money pump - pumping money into my bank account at the rate of $0.01/second all day long, $300 thousand / year or so with essentially no variability over the total of the 30 million bets, and well worth doing.

So for the U.S. government, if it regards Solyndra as one of many investments with significant positive expected returns but high probabilities of 100% losses, it's OK, because in the long run they will see those positive expected returns on average (since the losses won't bankrupt them), but for venture capitalists, it might be that the risk of 5 or 10 consecutive losers of that magnitude is just too great to bear, so they won't make the investment.


==The real question is why,

==The real question is why, if we believe that social policy should be promoting alternative energy, have we not priced energy from fossil fuels at a higher price that reflects the social costs of using them?==

I presume your question above to be a rhetorical one, since there have been good faith efforts to do so - most notably, a cap and trade bill that passed the House but died in the Senate last session.

Secondly, your post suggests that the public and private sectors should evaluate and select projects using the identical risk-based formula. While profitability is and should be a primary concern for private sector investment, why should government adopt the same standards? There are countless public sector investments that are critical, but whose benefits are measured by qualities other than potential profitability.


Bad Bet

This was known by anyone with deep knowledge of the PV industry to be a a gross mistake, given the factors affecting panel pricing over the past several years. Obama needed to create the appearance of action in a dark time in the economy. The only benefit this product had was the lack of uplift in a wind, and other companies have solved this with a fairing that costs a few dollars. There was never any way such a complicated tube structure could be manufactured more cost effectively than a flat rectangular encapsulated structure. And the notion that these could collect sunlight at all times of day never made any sense, since this presumed rooftop area was the limiting factor on solar installation, not the cost of the solar cells. Their product made sense where rooftop area was limited, and Walmart alone has enough rooftop to power a large fraction of the United States.

It was simply a bad idea that temporarily made sense in the face of high prices of a commodity. The high price of the commodity was not driven by insurmountable factors - all the factors driving the price were known to be easy to overcome - which they were. Again, if the high raw material prices were due to a single source controlled by a monopoly, for example, yes, it made sense.

Finally, the VC's that invested in this were dumb. The only way I could be convinced otherwise is if Solyndra faked performance data. Otherwise, the cost structure/cost per watt was known years ago.

Dumb all around. The US, if it expects to participate in the first world industrial economy, needs to be smarter than this.


Private Sector Clarification

The private sector did sink $1B into Solyndra and had already put ~$650+M in at the time of the DOE loan. This is a huge amount of VC money as Solyndra was one of the top VC funded solar firms around.

That being said - spot on on the need to price the externalities of fossil fuels.


solyndra

Solynra was wiped out by the heavily subsidized Chinese PV industry's cutting cell prices by 40%. They also destroyed the silicon cell industry worldwide with that single move. That was no accident. Pretty d*** aggressive trade war if you ask me. Too bad we're gonna just sit back and take it. They make a bold move to take over an industry critical for the world's future and we say OK. Then one party uses it against the other.........brilliant. What does that say about us.

Robespierre2012


You're begging an important question

Why should the government be risking taxpayer money in the first place? Point to me the mandate in the Constitution that it should do anything of the kind.


fools...

Three million to Solyndra on July 15th 2011. A month and a half before the they locked the doors at Solyndra. At what rate was that sum lent? A whopping 0.89%.

The best and the brightest strike again.


You can't run a country by tweaking incentives.

I'm sorry to break this to all the technoliberals out there, but tweaking incentives never works in the long run. The folks at Goldman Sachs are just too damn smart. They will figure out a way to game your incentives whether you build them into the tax structure or set up government VC loans or whatever, and everything just keeps getting more corrupt and cynical and distorted.

If the private sector won't do what needs doing then the damn government should just do it. They'll either succeed or fail, no excuses, and whatever is learned in the process will leak out to the benefit of the private sector, just like Tang.

If the private sector can't figure out how to harness solar power, then start putting in government solar plants. The more bureaucratic it is the more jobs it creates, and the more opportunities for the private sector to prove it can do better.

If people need houses, build the damn houses, don't build a huge, fraudulent, non-transparent mortgage loan system. The subsidy system sort of worked when the bankers were heavily regulated, but once the bankers were turned loose it was a pure Ponzi scheme, with the side effect of producing crappy houses in crappy locations that were no more socially useful than Cabrini-Green.

Same for health care - if the health insurers won't fix the model, we need a true public option, meaning basically Medicare buy-in. If that's no good then let the private sector prove it by coming up with a competitive model. They can't.


is that all there is

I seem to recall that when Obama was elected, many conservatives were off on how it would be a 'corrupt Chicago style administration' and they'd be on the alert for any whiff of scandal. Almost three years in, this is what they've got? Jeebuz.




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