Solyndra failure strikes again as lawmakers try to cripple loan guarantee programs

By Erin Voegele | July 26, 2012

The House Subcommittee on Energy and Power passed the No More Solyndras Act on July 25. The bill will be addressed by the House Energy and Commerce Committee soon. If the short-sighted legislation becomes law, it would prevent the U.S. DOE from accepting any more loan guarantee applications under the ongoing 1703 and 1705 programs, which were established by the Energy Policy Act of 2005. Essentially, the program would be eliminated.

The DOE would still be allowed to consider 1703 and 1705 applications that were received in 2011. However, the department would be prevented from granting a guarantee until a written recommendation is received from the Secretary of Treasury. The Secretary of Energy would have to take the recommendation into consideration. If a guarantee is made that doesn’t conform to the written recommendation of the Treasury, the Secretary of Energy would be required to supply the House Committee on Energy and Commerce and the Committee on Energy and Natural Resources with a written explanation of why the Treasury’s advice was not followed. A second report would also have to be filed that provides the committees with a review of the decision making process. The DOE would also have to consult with the Treasury regarding any restructure of the terms and conditions of the loan guarantee and would not be allowed to subordinate the interests of the U.S. government to any other financing for the project.

In my opinion, the bill, which was written by Fred Upton, R-Mich., is yet another example of our elected lawmakers destroying programs that they don’t understand. The legislation totally misses the point of the loan guarantee programs.

The DOE is not a bank, and its loan guarantee programs—by definition—are not designed to finance projects that can attract commercial lending. The whole point of the program is to help fund revolutionary, game-changing, first-of-kind, innovative projects. In other words, loan guarantees help attract funding for technologies considered “bad risks” by commercial lenders, primarily because new technologies are considered “risky” by the private sector. That means that the DOE does not—and should not—use the same factors that a bank does to determine eligibility.

Loan guarantees are not designed to finance a standard power plant or petrochemical refinery. They are specifically designed to provide support to new innovations that might change the entire landscape of the U.S. energy industry.

While the push for this bill is obviously the Solyndra loan guarantee failure, these lawmakers are missing a very important point; the 1703 and 1705 programs are designed to absorb some losses. When you are supporting the financing of revolutionary, game-changing, first-of-kind, innovative projects, some projects are going to fail. Period. That’s just how it is. Failure is an integral part of innovation. The important thing, as a society, is to keep trying until we get it right. Diversifying our energy sector is absolutely necessary for the long-term success of our nation. Crippling one of the few programs we have that is designed specifically to support that innovation is shortsighted and just plain wrong.

I think that a report published by Bloomberg Government last spring does a great job of shedding light on the loan guarantee programs, focusing on the 1705 program. The report points out that the DOE was appropriated $2.47 billion in credit subsidy costs to cover project losses. In other words, the department has insurance against losses. Bloomberg determined that the fund could cover the total defaults of eight remaining high-risk projects, in addition to the two that already failed.

The report also debunked the myth that the loan guarantee projects have wasted taxpayer money. According to Bloomberg, loan-guarantees are not included in the federal budget, as they do not represent direct expenditures. Furthermore, the DOE’s program has paid for itself with applicant fees, which would also be used to cover future overhead costs.

It is also important to note that loan guarantees, in various forms, have been used by the federal government for a multitude of purposes throughout our nation’s history. Federally guaranteed loans are not a new idea. The reason we keep enacting new loan guarantee programs is that they work.

Solyndra was not the first loan guarantee project to fail, and hopefully it will not be the last.