In recent years, several solar companies have filed for bankruptcy after receiving hundred of millions of dollars in loans and subsidies from the government.
As the battle between Arizona electric utilities and the solar industry continues to play out, Veronique de Rugy, an economist and senior research fellow at the Mercatus Center at George Mason University, told Arizona Business that the way the solar industry is currently operating makes it very likely that “we are going to be waiting for a long time for solar to actually be profitable.”
Earlier this year, a Spanish solar company declared bankruptcy in Delaware after receiving $191 million in financing from the Export-Import Bank of the United States (EXIM), prompting many to question whether the company will ever repay its taxpayer-funded loans.
Abengoa, a global corporation that specializes in sustainable technology, filed for Chapter 15 bankruptcy in U.S. Bankruptcy Court in Wilmington, Delaware, and must restructure its $16.4 billion debt by the end of October. Between 2007 and 2015, EXIM authorized over $300 million in loans to Abengoa and its subsidiaries and disbursed $191 million to the company.
“It is driven by politics and not sound business; that is how the government operates,” de Rugy said. “When you look where the loans are going, the vast majority of loans are going to well-established companies that could have actually had access to capital.”
A lot of money also goes to companies like Solyndra, Abound Solar and others who don’t have “sound business ideas,” de Rugy said.
“So you have those two things going on, and of course, people are always more outraged by the Solyndra type or the Abengoa type or Abound Solar, but the truth of the matter is that it is also outrageous all the other companies that are getting money that will likely never default and shouldn’t have gotten money in the first place because there is no need for it," de Rugy said.
Solyndra, which was a manufacturer of thin film solar cells based in Fremont, California, received a $535-million U.S. Energy Department loan guarantee and a $25.1-million tax break from California's Alternative Energy and Advanced Transportation Financing Authority in 2009. But plummeting silicon prices made it difficult for the company to compete with conventional solar panels, forcing Solyndra to file for bankruptcy in 2011.
Abound Solar was also a manufacturer in the solar industry and received a loan guarantee of $400 million from the U.S. government in 2010 for the next decade. Two years later, the company laid off almost half its employees, suspended operations and filed for bankruptcy.
Certain projects based in the U.S. that involve renewable energy systems, electric power transmission systems and leading edge biofuels qualify for the Energy Department Section 1705 Loan Program, which authorizes loan guarantees from the government.
“It was total double dipping,” de Rugy said. “If you got the 1705 loan then you would get a large amount of cash from Treasury, at least for a while, and then there are all of the subsidies at the state level which (are) quite significant. And when you really look at who are getting these, you see a political connection, you definitely see a lack of valid justification for giving money to these companies.”
When government intervenes in the market, it tends to distort the market signal and shift resources toward projects that are subsidized, de Rugy said, which creates malinvestments.
“The fact that you have a large amount of investments doesn’t actually tell you very much about the potential profitability of that project." de Rugy said. "And the more states double down with consumer credits and other sorts of benefits to artificially boost the demand and supply for a given industry, the more likely are you to have malinvestments.”
The solar industry can be profitable, de Rugy believes, but all of the incentives and artificial signals create a big problem. And it is very detrimental to have companies that are over investing beyond what would be reasonable and then going under because they can’t approach a plan in the long term.
“But the part of the story that should not be forgotten is a lot of the winners at the federal level are all beneficiaries of these billions in loans that are guaranteed and things like this and are companies that have no problems accessing capital in the first place and are already in the business,” de Rugy said.
Instead, resources should be given to companies in a particular industry that “needs to be propped up because otherwise no one would do it.”
“We have people talk about how solar is this new thing," de Rugy said. "No! It has been going on for a long time. It is like nuclear. I have no problem with either of these energies and I don’t have a problem with green energies. I just think that it is very likely that we are going to be waiting for a long time for solar to actually be profitable,” she said.
The decision to make resources available for certain companies needs to be thought out thoroughly because it could spell disaster for some companies, de Rugy said.
“When a governor picks solar or wind or whatever as the favored green energy it means resources are diverted to these two or three particular projects, and all of the others that actually have potential, it will be even harder for them to see the light of day,” de Rugy said.
Much of the problem lies in subsidies themselves, de Rugy said. An industry is not going to be profitable if it keeps receiving subsidies. The question then becomes: does the government plan on handing out subsidies forever?
“You see it in agro subsidies where farmers will plant a particular crop because, and only because, there is a subsidy for this one and not for the other one,” de Rugy said.
But there is more that takes place behind the scenes when it comes to subsidies and loans, de Rugy said.
“My biggest concern is that it is really unfair," de Rugy said. "Again, it is just a few companies that are actually getting these preferential loans in particular and it is not really all of them. It is about the government picking winners and losers and the winners are often their friends."
"For what it’s worth I am against all sorts of subsidies for the oil industry or tax credits or any of that stuff,” de Rugy said.