House vote could begin to dismantle loan guarantee program
The U.S. House of Representatives is set to vote on loan guarantee legislation on Friday. The No More Solyndras Act would essentially discontinue the U.S. DOE’s loan guarantee program, preventing the department from approving any applications received after the end of 2011. While the bill only addresses the DOE program, I would guess the USDA’s program would be next in line for the bill’s supporters.
Unsurprisingly, “conservative” organizations that primarily support the fossil fuel industry have been some of the bills strongest supporters. For example, earlier this year American Commitment send a letter to members of the House in support of the act, saying that the DOE’s loan guarantee program “has produced little if any value for the American people, but has resulted in a parade of scandalous waste of taxpayer dollars, most spectacularly in the case of Solyndra. Federal bureaucrats simply do a poor job of picking promising energy technologies, which should be unsurprisingly because they lack the dispersed knowledge that only the marketplace can efficiently use to allocate resources.”
These types of comments lead me to believe that the American public—and leaders of these types of organizations—have little to no understanding of what a loan guarantee actually is.
First, loan guarantees—by definition—do not require the same fiscal standards as bank loans do. This is by design. New, innovative, potentially game-changing technologies are not something that traditional lenders consider, because they haven’t been proven on a commercial scale. In other words, they are risky. However, if these “risky” technologies are successful, many have the potential to completely change the landscape of our energy future. It is the role of these loan guarantee programs to step in and make sure that worthwhile, technologically sound, well-researched technologies like this see the light of day and are enabled to move beyond pilot- and demonstration-scales, to commercial production.
Second, if I own Company XYZ, and I am granted a loan guarantee for $500 million, the DOE (or USDA) is not on the hook to pay out that amount if I fail. Rather, loan guarantees support institutional investment. In other words, if my project fails, the loan guarantee simply is in place to hedge the risk my local bank took on my company. A portion of the money they provided me is guaranteed, at a particular rate. The DOE doesn’t hand them a check for $500 million. I grew up in a town where a failed loan guarantee project employed hundreds of local citizens, which in a town of only 3,000 or so is a big deal. When the original project owners failed roughly two decades ago, due to financial reasons, the DOE actually stepped in and took custody of the plant. It worked out a deal with an adjacent power plant, which took ownership of the facility. That “failed” project is still operating today. The DOE might have lost a little money on the deal, but it certainly didn’t lose everything. In addition, that plant is still operating, providing employment to hundreds of area citizens and pumping money into rural economies. Essentially, just because a project failed, doesn’t mean all value is lost. Chances are a failed project will still hold value in terms of equipment, intellectual property, etc. This value doesn’t disappear when a project fails, and can be used to recoup costs.
Finally, loan guarantee programs budget a failure rate into their programs. Some projects are expected to fail. If they didn’t the DOE wouldn’t be taking on the type of risk the program is designed to support. Indications are that programs fees have traditionally funded the programs, the failed project expenses, and then some. The DOE is not raiding taxpayer dollars to pay for Solyndra’s failure, as some would have us believe.