The Netherlands Experience

Offshore wind became a reality for the Dutch in 2006 when they built their first offshore wind farm to begin — they believed — reducing their carbon dioxide emissions. Five years later, however, the Dutch government finds that offshore wind at 18 Euro cents ($0.24) per kilowatt hour is just too expensive for continued government hand outs, consisting of about 4.5 billion Euros ($6 billion) last year.  Instead, the government plans to have households and industrial consumers cover the bill starting in January 2013 and to attract funds from the private sector. The change is expected to garner only one-third of the previously funded amount by the government— just 1.5 Euros—and investment dollars are expected to go to less expensive technologies. So, the future outlook for wind in Holland is bleak to say the least.[iv]

Wind currently supplies 4 percent of Holland’s power and was expected to supply 14 percent by 2020. But current speculation is that it will only supply 8 to 12 percent by then due to the changed government policy.

The Dutch are facing issues with wind power because of the high cost and maintenance of offshore wind turbines and because of onshore turbines marring the landscape and views of residents. Offshore wind is about twice as expensive as onshore wind due to the higher cost of materials, more expensive drilling methods, and more complex maintenance. Offshore wind turbines need to be able to withstand strong winds and salt water and they require special equipment and transportation for their maintenance. Because drilling the seabed requires specialized labor and equipment, it is more expensive. And additional transmission lines are needed to connect offshore units to the electricity grid onshore. While offshore wind power generates a higher level of electricity than onshore wind farms, its generation levels are still much less than fossil fuel and nuclear electricity technologies since it is still reliant on the wind blowing.

Wind farms and the British Monarchy

Prince Philip, the Duke of Edinburgh, thinks windmills are useless.  In fact, he has called them a “disgrace”, and will not allow his land to be covered with them despite the leanings of the British government. He criticized the industry’s reliance on subsidies and thinks that advocates are believing in a “fairy tale” since wind power requires back-up power.[v]

Britain has 3,421 turbines, over 85 percent of which are on shore, and another 4,500 are expected to be built.  British electricity consumers pay an average of 90 pounds ($143) a year to subsidize wind farms and other forms of renewable energy in order for the country to meet its carbon-reduction targets. Foreign companies, which own two-thirds of the country’s wind turbines, are estimated to receive 500 million pounds a year in subsidies. While Prince Philip is against wind, the Crown owns almost all of the offshore areas on the country’s 7,700-mile coastline.  Britain currently has 436 offshore turbines. With more offshore sites having been approved, Britain’s offshore turbines could reach 7,000 within 10 years. Growth in offshore wind farms could be worth 250 million pounds a year.

Clean Energy investment

Bloomberg’s New Energy Finance forecast sees clean energy investment rising from $195 billion in 2010 to $395 billion in 2020, and $460 billion in 2035. This investment, they believe, would increase world “clean energy” capacity by just 3 percentage points. They predict that China will take the lead over Europe in 2014 with outlays on clean energy of almost $50 billion annually. Investment growth will be the largest in India, the Middle East, and Africa, ranging from 10 to 18 percent. But the Bloomberg forecasters believe that by 2020, markets outside of the European Union, the United States, Canada and China will account for 50 percent of global annual investment in renewable energy capacity. Of course, that will only be if the world still believes there is a merit in renewable energy and the subsidies it needs to survive.

Despite the Bloomberg forecast, polls in the United States are seeing some disenchantment with renewable energy due to recent events with bankruptcies of renewable energy firms such as Solyndra. The polls show a decrease in support for federal spending on renewable energy of over 10 percentage points and a drop of 6 percentage points in whether government support is necessary to spur new energy technologies. And further, the renewable loan program did not create the jobs President Obama had touted. The Washington Post reported that the $38.6 billion green loan program had created only 3,545 jobs over two years when President Obama had predicted it would “save or create” 65,000.[vi]

History has shown that the government is a poor selector of new technologies. The Washington Post provided a list of failed government energy projects that included the Clinch River Breeder Reactor, the Synthetics Fuel Corporation, the hydrogen car, and “clean coal” to remove carbon dioxide emissions from burning coal and sequestering them. Despite government funding and backing, none of these projects was successful. And not only have solar firms (Evergreen Solar, Solyndra, SeptraWatt) supported by the U.S. Department of Energy filed for bankruptcy this year, but Beacon Power, a firm that the department supported that tried using flywheels for electricity storage, filed for bankruptcy on October 30. Ener1, a maker of lithium-ion batteries, is also a recipient of an Energy Department grant and was delisted on October 28 by Nasdaq because of its low stock price.[vii]

Conclusion

Government investment in failed energy technologies has cost American taxpayers billions of dollars, the latest of which have been in solar manufacturers such as Solyndra and electricity storage technology, Beacon Power.  The government has a history of funding economic ventures in energy technology that have failed as future energy technologies. And yet, Nobel prize winner of physics and Secretary of Energy, Steven Chu, still believes he should spend our hard-earned dollars on more energy experiments. Perhaps that will change as more and more people learn the truth about renewable energy and become disenchanted as we have seen with the Dutch government and the Duke of Edinburgh.

Just how flawed is the green energy loan guarantee program, you ask? According to the memo’s authors, one wind project in particular will receive $1.2 billion in government subsidies for a $1.9 billion project, making it about 65 percent subsidized. And, the authors omit that the project will only create 400 construction jobs and 35 permanent jobs. In other words, each one of these 35 permanent jobs cost over $30 million each.

The memo, written by Larry Summers, Ron Klain, Carol Browner. At the time, Summers was the Chairman of the National Economic Council, Klain was Vice President Biden’s Chief of Staff, and Browner was the White House Energy and Climate Change Advisor. In the memo, these high ranking officials explain three problems with the loan guarantee program. As Tabarrok explains:

The memo says that OMB and Treasury were concerned about three problems, “double dipping” (massive government subsidies from multiple sources), lack of “skin in the game” from private investors and  ”non-incremental investment,” the funding of projects which would occur even without the loan guarantee.

How much double dipping are we talking about? Summers, Klain, and Browner describe the Shepherds Flat wind project and note, according to them, that total government subsidies for the project are over $1.2 billion. This dwarfs the $100 million investment in the project Google was happy to tout. Here’s the Summers, Klain, and Browner explanation of the Shepherds Flat project:

The Shepherds Flat loan guarantee illustrates some of the economic and public policy issues raised by OMB and Treasury. Shepherds Flat is an 845-megawatt wind farm proposed for Oregon. This $1.9 billion project would consist of 338 GE wind turbines manufactured in South Carolina and Florida and, upon completion; it would represent the largest wind farm in the country.

The sponsor’s equity is about 11% of the project costs, and would generate an estimated return on equity of 30%.

Double dipping: The total government subsidies are about $1.2 billion.

Skin in the game: The government would provide a significant subsidy (65+%), while the sponsor would provide little skin in the game (equity about 10%).

Non-incremental investment: This project would likely move without the loan guarantee. The economics are favorable for wind investment given tax credits and state renewable energy standards. GE signaled through Hill staff that it considered going to the private market for financing out of frustration with the review process. The return on equity is high (30%) because of tax credits, grants, and selling power at above-market rates, which suggests that the alternative of private financing would not make the project financially non-viable.

Carbon reduction benefits: If this wind power displaced power generated from sources with the average California carbon intensity, it would result in about 18 million fewer tons of CO2 emissions through 2033. Carbon reductions would have to be valued at nearly $130 per ton CO2 for the climate benefits to equal the subsidies (more than 6 times the primary estimate used by the government in evaluating rules).

This is a serious indictment in and of itself, and reading this, one questions how the administration could in good conscience proceed in approving the project. No matter how you slice it, $1.2 billion in subsidies is a lot. As Tabarrok explains:

In my view, the Summers/Klain/Browner analysis was a damning indictment of the Shepherds Flat project. The taxpayers were expected to fund by far the largest share of the bills and also of the risk and in return they weren’t getting many benefits in terms of reduced pollution. In contrast, Caithness Energy and GE Energy Financial Services, the corporations behind the project, weren’t taking much risk but they stood to profit handsomely. I guess that is why they call it “green” energy.

In short, the Shepherds Flat project was corporate welfare masquerading under an environmental rainbow. [emphasis added]

Despite understanding that a loan guarantee for the Shepherds Flat project was completely unnecessary, the administration provided the loan guarantee anyway. No real surprise since the wind turbines come from GE, one of the administration’s favorite companies.

So what does $1.2 billion in government subsidies provide in terms of job creation? According to CNN Money, 400 construction jobs and 35 permanent jobs. In other words, each one of these full time jobs cost over $30 million each. That is a raw deal for Americans.

Tabarrok rightly concludes, “the real scandal is not what happens when everything goes wrong [such as Solyndra] but how these programs work when everything goes right.”

Read all of Tabarrok’s piece here.

Last week IER Senior Fellow Robert Michaels testified before the Subcommittee on Water and Power of the House Natural Resources Committee and his testimony touched on green jobs. Michaels, an Economics Professor at California State University, Fullerton explains the proper way to think about green jobs policy as it relates to energy:[1]

1.  The proper goal of energy policy is to support the efficient provision of energy.  The lower the cost of energy to the economy, all else equal, the higher will be job creation and economic growth outside of the energy sector.  Raising energy costs by forcing the use of uneconomic technologies that create more job slots will have exactly the opposite effect.  Put simply, more workers in energy reduce the production of non-energy goods and services.

2.  Any analysis of job creation by green energy must consider the simultaneous effect of job destruction.   Policies that raise the cost of energy to households and businesses must leave them with fewer funds to spend elsewhere.  Such policies include the spending of tax revenues to support green activities instead of other government purchases or returning the funds to taxpayers.  To a first approximation the net effect of such programs on employment will be zero.  This is particularly important here because the new job slots are often visible, while the losses are dispersed among the thousands of goods and services that households and businesses will spend less on.  Jobs that cost more to create will generally have higher costs in terms of lost jobs elsewhere.

3.  Double counting of jobs and unrealistic assumptions about labor markets.

Although they seldom say so explicitly, the models that underlie most studies of green energy and job creation assume that there is a limitless pool of idle laborers with just the right skills to fill the job slots created by the spending.  As always happens in labor markets, many such jobs will in fact be filled by already-employed workers, whether the nation is in prosperity or recession.  Even if green policies moved massive amounts of labor between jobs they would have little impact on the national unemployment rate.

Until the President and others who would try to advance green jobs policy understand these three points, their policy prescriptions will not help advance the economy.

One year ago, President Obama touted Solyndra as a company, “leading the way toward a brighter and more prosperous future.” Now they are bankrupt, squandered over $500 million in taxpayer money, and the FBI raided their headquarters today.  This is not an isolated example, but rather fits the theme of green job creation as we pointed out here, here and here.

Yesterday, Wood Mackenzie Energy Consulting came out with a study that makes the argument that $1.4 million private sector jobs will be created if the federal government allows for more energy exploration and development. This study echoes earlier findings, which you can read here and here.  If Obama were serious about job creation and reducing the federal deficit, he would expedite the development of American natural resources instead of only leasing 2.4 percent of federal lands.

If you’re more of a visual learner, take a look at this chart:

The green jobs expansion the Obama Administration expected was not a bang, but a whimper and sadly, it’s the taxpayers who suffer.

First, the government loaned Solyndra money at a really, really low interest rate—a mere 1.025 percent quarterly. In fact, this was the lowest rate provided for any green energy project.

Second, this low rate was in spite of “red flags” about the risk of investing in Solyndra. One outside rating agency rated Solyndra only a B+ and another rated Solyndra only as “Fair” for credit worthiness.

Third, Obama’s Department of Energy announced the loans before the due diligence was complete and even after auditors raised concerns. But this was not for lack of attention because even the President visited the plant and praised Solyndra as an example of the future of energy.

Fourth, according to ABC News, “Solyndra’s most prolific financial backer is George Kaiser, an Oklahoma oil billionaire who was a bundler of campaign donations for Obama’s 2008 race. Kaiser’s Argonaut Ventures and its affiliates have been the single largest shareholder of Solyndra, according to SEC filings and other records.” This connection alone should have caused pause for the federal government when considering an expedited loan arrangement.

And last, and in my mind, by far the worst, Kaiser and his Argonaut Ventures are first in line to recoup their investment in Solynda in bankruptcy proceedings. As ABC News explains, “Energy officials confirmed this arrangement, saying that private investors including Kaiser would first recoup their $75 million, then the U.S. government would have a chance to recover $150 million of its investment. If any money is left, the private investors and the U.S. government would divvy up the remainder in equal shares.”

In sum, the Obama administration rammed through a half billion loan on very favorable terms to a shaky company, run by a George Kaiser, one of President Obama’s largest fundraisers. If Kaiser and his company made money with Solyndra, they would keep the profits and if Solyndra failed, as in this case, they still get their money back while the taxpayer is left holding the bag.

This is one example of what’s wrong with crony capitalism. With Solyndra, the Obama administration, using taxpayer dollars, insulated the private investors from any risk. For Obama fundraiser George Kaiser, it was a no lose situation. For the American taxpayer, it’s no win.

As this situation with Solyndra shows us, there is no reason the federal government should be in the business of loaning companies money. There were good reasons private firms didn’t loan Solyndra the $500 million—reasons that the Obama administration overlooked because Solyndra was a politically correct business.

The crisis transcends the companies in question. The underlying reality is that solar power is radically uneconomical against conventional electricity generation on the grid. Thus special government favor for short-term profits sets up the industry for longer-term failure when the subsidies dry up—or if other countries bait the same perilous hook and beat us at our own political game.

We should know that solar is not competitive by a long shot. As DOE secretary Chu told the New York Times last year, solar technology would have to improve five-fold to find its own way in the competitive world.

False Promises

Here are some examples of the false prognostications made by solar advocates:

Environmentalist and erstwhile presidential candidate Barry Commoner (1976):

Mixed solar/conventional installations could become the most economical alternative in most parts of the United States within the next few years.

The head of the Solar Energy Industries Association (1987):

I think frankly, the—the consensus as far as I can see is after the year 2000, somewhere between 10 and 20 percent of our energy could come from solar technologies, quite easily.

Cynthia Shea of the Worldwatch Institute (1988):

In future decades, [photovoltaic technologies] may become standard equipment on new buildings, using the sunlight streaming through windows to generate electricity.

Enron’s Misdirection

Back in 1994, the New York Times excitedly reported that solar’s competitive moment had arrived thanks to Solarex, the second largest U.S. manufacturer of photovoltaic cells, operated and half-owned by Enron.

The feature, complete with a photo of an Enron executive holding a panel up in a sunny sky, concerned a project in the southern Nevada desert that would be the largest in the country, generating enough electricity from sunlight to power the equivalent of a city of 100,000 people. It was expected to begin operating by year-end 1996.

The project came with a bang and ended without a whimper. Here is what I wrote about the “smoke-and-mirrors” project in my book Capitalism at Work (pp. 310–11):

Enron hoodwinked the public back in 1994, claiming that its proposed $150 million project could produce solar power “at rates competitive with those of energy generated from oil, gas and coal.”

A business-section feature in the New York Times, “Solar Power, for Earthly Prices: Enron Plans to Make the Sun Affordable,” reported Enron’s pledge to deliver power for $0.055 per kilowatt hour from a 100 megawatt solar farm in the Nevada desert within two years, comparable to the average cost of delivered electricity across the nation. Enron’s rate was unheard of, exceeding even the most optimistic estimates from environmental pressure groups. But it was highly contrived, depending on a raft of government subsidies, as well as questionable assumptions about financing, technology, and delivery schedules. The rate was also back-loaded, with compounded annual cost escalations for thirty years.

Still, the article described the enticing profit prospects of Enron’s advances. Two officials from the Clinton Administration’s Department of Energy were quoted. “This establishes the benchmark we want and restarts a stalled solar industry,” said the head of DOE’s photovoltaic section. Deputy Secretary William White (aka Bill White, one of Enron’s last defenders [and later Houston's mayor from 2004 through 2009]) stated his intention to try to help make the economics of the project work.

But the smoke-and-mirrors project was too much for the Clinton Administration—and even for Enron, despite a suite of special subsidies. It languished and quietly died. Nevertheless, it was a heady PR moment for a politically correct company and a credulous press that either did not know or did not report the whole story.

Don’t expect false hopes to disappear. The European solar lobby is now predicting that solar will be cost competitive by 2020.

But the failed past of solar informs the present, and Obama’s new push for “green” energy should be judged accordingly. Although stand-alone solar power has a certain free-market niche and does not need government favor, using solar power for grid electricity has been and will be an economic loser for ratepayers and a burden to taxpayers.

Correct as these arguments may be, the defender of the free market is often at a rhetorical disadvantage in such debates. The proponent of some new government intervention appears to “have good intentions,” while the free-market critic comes off as a do-nothing stick-in-the-mud. Worse still, the free-marketeer can appear as the paid shill for corporations that would be harmed by the proposed interventions.

In the present post we’ll try to correct that rhetorical imbalance by focusing on the dark side of government intervention into energy markets. Here too we’ll see that it is corporate interests (often originating outside the United States) that stand to benefit from political favoritism.

The massive regulations, taxes, and subsidies—which we already know make consumers worse off—don’t just fall out of the sky, or from an academic’s blackboard. Often they are designed and lobbied for by corporate special interests. The more one studies the actual processes by which government policies are created, the uglier the whole thing looks.

In today’s post we’ll focus on a Spanish firm, Abengoa, which through its subsidiaries specializes in solar and bioenergy.

Abengoa, S.A.

Abengoa started out in 1941 as an engineering company founded primarily by Javier Benjumea Puigcerver and José Manuel Abaurre Fernández-Pasalagua in Seville, Spain. The company today is a multinational corporation with almost 600 subsidiaries (see page 20 of this report). Two subsidiaries, Abengoa Solar and Abengoa Bioenergy, have benefited from the renewable energy movements in Spain and in the US.

Abengoa Solar has various projects in Spain and the US. In the past two years they received $2.65 billion dollars in loan guarantees from the DOE. In July 2010 Abengoa Solar received a $1.45 billion guarantee for the Solana project, while in June 2011 it received a conditional commitment of a $1.2 billion guarantee for the Mojave Solar project.

Job-Creation Bang for the Buck?

It is instructive to see just what the federal government hopes to achieve with its generous offer of a taxpayer-backstop to Abengoa Solar’s borrowing spree. President Obama himself, in a July 2010 video address, touted the Solana project (at 2:15 in the video) as part of his “solar recovery.” So how many jobs do these loan guarantees (allegedly) create—using the government’s own figures?

Well, the DOE’s own fact sheet claims that the Solana project has created 1,700 temporary construction jobs, while yielding a permanent 60 jobs “created or saved.” Simple division shows that the $1.45 billion guarantee therefore works out to $824,000 per job (when we include the temporary construction ones), and a whopping $24.2 million per permanent job “created or saved.”

The numbers are similar for the more recent Mojave Solar project. For a guarantee of $1.2 billion, the DOE estimates it will create 830 permanent construction jobs, and will “create or save” 70 permanent jobs. This works out to $1.33 million per job (including permanent ones), and $17.1 million per permanent job.

Now it’s true, a loan guarantee is not the same thing as an explicit subsidy. So long as Abengoa Solar doesn’t default on its loans, the US taxpayer hasn’t kicked in anything. Nonetheless, the whole reason Abengoa Solar had to get the guarantee from the government, is that no private lender thought the risk was worth it. It is not “costless” for the US taxpayer to be on the hook in this fashion. If any reader doubts our claims, we’ve got some personal loans we’d like co-signed.

Tax Credits

Beyond reliance on federal loan guarantees, Abengoa Solar also receives government assistance in the form of investment tax credits (ITC). In 2008 CEO Santiago Seage said that the company would start construction on the Solana solar plant in 2009 if Congress extended the ITC. (Presumably Seage should have also mentioned he would need, in 2010, a $1.45 billion loan guarantee for the Solana project.)

Lobbying Efforts

Say what you will about Seage, he didn’t just rely on the grapevine to get his request up the chain of command. Abengoa hired Cornerstone Government Affairs to lobby Congress on the issue. Later that year Congress extended the ITC.

Abengoa’s most credentialed conduit to policymakers and the scientific community is Dr. Fred Morse, their Senior Advisor on US operations. Morse served in senior-level positions in the DOE under Nixon, Carter, and Reagan working on solar energy. He currently sits on the board of various solar industries groups.

In 2011 CEO Santiago Seage and other leaders of renewables companies sent a letter to Congress asking them to extend DOE loan guarantee funding. Abengoa hired O’Neill, Athy & Casey P.C to lobby the House and Senate on the issue. Senator Dianne Feinstein wrote a letter to the DOE on behalf of Abengoa asking the DOE to speed up the permit process for assessing private land for DOE loan guarantees. (Fred Morse gave $1000 to “Feinstein for Senate” on June 15, 2011, as the reader can ascertain using the search function at the FEC’s website.)

When it comes to dubious lobbying, however, Abengoa Bioenergy is literally award-winning, as this article explains:

BRUSSELS, Dec 10, 2008 (IPS) – An unconventional awards ceremony was held in Brussels Dec. 9. The ‘Worst EU Lobbying Awards’ gave recognition to those corporate interest groups that have resorted to deceptive tactics while seeking to shape legislation in their favour.

Following an online poll which generated over 8,500 votes, the top prize went jointly to three firms that have been striving to convince policy makers that biofuels are ecologically benign.

Abengoa Bioenergy (the U.S. subsidiary of a Spanish firm), the Brazilian sugar industry association Unica and the Malaysian Palm Oil Council (MPOC) were lambasted for the content of their advertisements.

One ad by Abengoa attributed a quote to the European Federation for Transport and Environment (T&E), a green campaign group, which suggested that ethanol made from crops such as sugar was the only solution to addressing society’s “addiction to oil”. Not only did T&E never make that claim, it has been critical of the EU’s efforts to use the increased consumption of biofuels as a pretext for avoiding measures to boost the energy efficiency of cars.

Abengoa Bioenergy hasn’t restricted its lobbying to Europe. Vice President Chris Standlee was head of the Renewable Fuel Association (RFA). The RFA has repeatedly pushed for the VEETC, a tax credit for ethanol blenders. On Abengoa’s website they say that one of the reasons why the reopened their plant in Portales, New Mexico was the favorable legislation and administration conditions. Additionally their CEO said the plant could not have been reopened without the help of the New Mexico Senators who supported the VEETC.

Abengoa: A Creature of the State

To underscore the reliance of the solar industry on government assistance, an article on the 2010 loan guarantee award to Abengoa began this way:

In 1969, the Nixon White House asked a young assistant professor of engineering at the University of Maryland whether solar energy made sense for America. Absolutely, he replied.

Four decades later, Fred Morse is still trying to persuade the government to put its muscle behind solar. Last week, he scored a big victory.

The same article explains that in addition to the extension of the investment tax credit and the $1.45 billion loan guarantee, Abengoa Solar needed another set of training wheels for its Solana project, namely a government-mandated customer base:

[Arizona Public Service] has agreed to buy $4 billion worth of electricity from the [Solana] plant over the next 30 years, in part because to comply with a state law requiring utilities to generate  at least 15 percent of their electricity from renewable sources.

But don’t take our word for it. Abengoa Solar itself acknowledges its reliance on government assistance:

Despite the prevailing financial uncertainty and the constraints on debt markets, the sector’s development was bolstered by governmental support, including the confirmation in December of the current regulatory framework in Spain, the establishment of the Federal Loan Guarantee (FLG) program in the US, and the publication of stable and attractive regulatory frameworks in new markets.

The website of Abengoa Bioenergy is even more candid about its dependence on government:

At present, Abengoa Bioenergy ranks as one of the leading biofuel producers in Europe, the United States and Brazil…

The Bioenergy business unit is currently reporting excellent levels of business, reflecting its standing as one of the world’s leading bioethanol producers and marketers…

There is now a clear need for a change of practices and policies and various governments have already begun to act accordingly. Business performance depends largely on favorable legislation that facilitates the development of new technologies while enabling biofuel culture to expand and combat the obvious signs of climate change. 2009 turned out to be a very fruitful year in this respect.

Two new legislative acts were enacted on June 25th 2009 in order to consolidate and kick-start the biofuel market over the coming ten-year horizon. European Directive 2008/28/EC on renewable energy sources dictates that at least 10% of transportation fuel within EU member states must be produced from renewable energies by 2020. The amendments made to Directive 2009/30/EC on fuel quality include an additional incentive for using biofuels by ushering in a compulsory reduction in greenhouse gas emissions during gasoline and diesel life cycles between 2011 and 2010.

Working in tandem, these two directives ensure the future of existing biofuel production plants and those currently under construction. At the same time, they provide a platform for long-term growth within the biofuel sector by harnessing current commercial technologies, and also offer special incentives and support for those attempting to develop the next generation of lignocellulosic technologies. All in all, they provide the market platform and the outlook for the coming decade that the sector was hoping for.

The true irony in all this is that, even with all of the government assistance documented above, Abengoa Solar has been losing money: €10.8 million in 2010, €60.2 million in 2009, and €8.7 million in 2008. It’s thus not accurate to say Abengoa Solar is profiting at the expense of taxpayers and consumers—it’s losing at their expense.

Conclusion

There is a charming naïvete among many of the rank-and-file supporters of government “renewables” policies. Even when particular projects experience outrageous cost overruns and fail to deliver their promised benefits, the supporters chalk it up to an honest mistake by people with the right intentions.

Unfortunately, the world is full of business leaders who have no problem turning to the government to ensure them market share at the expense of taxpayers and consumers. We can find such leaders even within the so-called clean-energy industries. Abengoa is one prominent example, but there are others, as we will explain in future posts.

Solyndra, a California based solar panel manufacturer, filed for bankruptcy on August 31, following in the footsteps of Evergreen Solar, based in Massachusetts, and SpectraWatt, based in New York[ii]. According to GTM Research, a renewable energy market analysis firm in Boston, these bankruptcies and the closing of BP Solar’s plant in Frederick, Maryland last year removes about one-fifth of the solar panel manufacturing capacity in the United States.[iii]  Solyndra will be laying off 1,100 workers[iv], the largest to date in a solar firm bankruptcy. Solyndra’s size was aided by loan guarantees from the U.S. Department of Energy totaling $535 million of U.S. taxpayers’ money. The cause of Solyndra’s demise, like that of other solar companies, is due to Chinese solar panels, subsidized by the government, undercutting the global solar market.[v]

China’s Solar Energy Industry

The U.S. Department of Energy indicated that the price of a solar array had declined 42 percent since December 2010.[vi] According to Shayle Kann, a managing director of solar power studies at GTM Research, pricing of solar equipment is determined by the Chinese industry, “and everyone else prices at a premium or discount to them.”

The graph below from the U.S. Department of Energy website indicates that the United States must regain the lead in solar manufacturing from the Chinese.  In 1995, the United States had 43 percent of the market but our share has dwindled to 7 percent in 2010–just a pittance compared to that of China and Taiwan. China now has almost three-fifths of the world’s solar production capacity. To compete against China’s low cost labor and beneficial policies is truly difficult and is making U.S. companies file for bankruptcy. Besides inexpensive labor, China provides free or subsidized land from local governments, extensive tax breaks, low-cost loans from state-owned banks, and other state assistance.[vii]

Sources: PV News and Navigating Consulting.

Instead of subsidizing the purchase and use of solar power as the United States and European countries have done, China has focused on building the competitiveness of the country’s solar panel manufacturers, exporting 95 percent of the solar panels it produces.  In the last two weeks, China’s three biggest solar power companies — Suntech Power, Yingli Green Energy and Trina Solar — announced second-quarter sales increases of 33 to 63 percent from a year earlier.

Solyndra’s Story

In Solyndra’s case, it borrowed money directly from the U.S. government through the Federal Financing Bank, part of the Treasury Department, rather than a commercial bank, which is the way the U.S. government typically guarantees loans. To date, Solyndra has received $527 million of the $535 million awarded by the Energy Department, which provided the outlays in multiple stages, contingent on reaching various milestones.[viii]

The Government Accountability Office (GAO) auditors investigating the Department of Energy loan guarantee awards found that the agency had given favorable treatment to some applicants, bypassing required steps for funding awards.  One of those applicants was Solyndra.[ix] Interestingly enough, one of the biggest investors in Solyndra is George Kaiser, a Tulsa billionaire, who was also a key Obama fundraiser.  The chairman of the Energy and Commerce Committee’s subcommittee on oversight and investigations, Representative Cliff Stearns, said he is “concerned that there was a hurry to get this money out of the door and that companies and individuals that supported the president were among the beneficiaries.’’[x]

Conclusion

Solyndra is just another solar firm that failed due to competition from China, who has low cost labor and a policy environment to compete in global markets where they can undercut their competition. China’s entrance into solar panel manufacturing makes total sense. What doesn’t make sense is the allocation of loan guarantees by the U.S. Department of Energy that bypassed steps in the award process and put so much taxpayer’s money at risk. And, it is interesting to note the relationship between Solyndra’s investor, George Kaiser, and the Obama Administration.  This is just more evidence that “trendy, politically directed investments don’t make for efficient allocation of capital.” There is an opportunity cost in that the money provided to Solyndra was not available to be directed where there could be a better chance of success.[xi] Further, even GAO auditors fear that further defaults may occur because not all the loan-guarantee applications were fully vetted.[xii]

Earlier this month, Senator Harry Reid called for the government to focus once again on job creation, specifically in the “clean energy” sector. Yet Green Keynesianism is just as bankrupt as its generic cousin. Ever since his candidacy, Barack Obama has been heralding green jobs as the twin solution to our economic crisis and concerns over climate change. Three years later, we are still waiting for this empty promise.

The Failure of Keynesian Pump Priming

Naturally, today’s Keynesian apologists defend their track record with the familiar excuse: “Our policies averted disaster but weren’t big enough to bring a full recovery. The Tea Party snatched defeat from the jaws of victory.” Etc.

In light of this rhetoric, the following two charts are instructive. The first shows the federal government’s net saving, meaning that deficits show up negative numbers:

Americans may not remember, but it was only a few years ago when a deficit of a few hundred billion sounded outrageous. Yet nowadays, the CBO projects that under realistic assumptions on Congress’ behavior—such as extended the exemption from the “Alternative Minimum Tax” to middle-class families—the government will run perpetual trillion-dollar-plus deficits starting in 2016. (From 2013 – 2015, CBO projects that the deficits won’t be quite that high, but they’ll still be above $900 billion.)

When it comes to monetary intervention, the recent efforts have been truly unprecedented:

Any observer with common sense should realize that our economic problems of the last few years are not due to a lack of Keynesian effort.

Harry Reid Wants to Double Down

Notwithstanding the failure of Washington-based pump-priming thus far, Senator Harry Reid earlier this month called for more:

Clean energy will be part of a broader jobs agenda that Senate Democrats will pursue when lawmakers return from their August recess, Majority Leader Harry Reid (D-Nev.) said Tuesday.

“Clean energy jobs, they are changing the face of this nation. We need to do that,” Reid said Tuesday in a floor speech after the Senate passed the long-sought debt compromise, adding that Congress “must now return to its most important job, creating jobs.”

Top Senate Democrats outlined a broad plan later Tuesday to focus on job creation.

“It’s now time for Congress to get back to our regularly scheduled programming, and that means jobs,” Sen. Charles Schumer (D-N.Y.) told reporters.

“It’s time for jobs to be moved back to the front burner,” he said. “With this debt-reduction package completed, the decks are now cleared for a single-minded focus on jobs in September.”

Reid said staff will work during recess to flesh out the specifics of the jobs package, mentioning energy as one of several issues on Democrats’ agenda.

“So there are many things we can do. And we also, of course, are concerned about the new energy jobs that are out there, and we have a lot of other things that we — we don’t have them finalized yet, but we will,” Reid said.

The implication from the above remarks is that the federal government is capable of creating jobs—such as those in the “clean energy” sector—but gosh they’ve just been so busy lately, they haven’t had time to do so.

This is nonsense. The original Obama stimulus package contained over $80 billion in subsidies for “green” causes, and yet reality turned out (infamously) to be at odds with the projections given by the Obama economic team and Keynesian macro forecasters. Every new round of mandates and deficit spending further shackles the private sector and its ability to provide affordable energy to Americans.

Conclusion

The election of Barack Obama was supposed to be historic for many reasons. One of them was his commitment to “green jobs” and its promise to pull the economy out of its slump. Even though its failure is now three years old and counting, policymakers continue to trot out the same rhetoric.

Rather than picking winners and losers, the federal government need only untie the hands of entrepreneurs to develop domestic energy resources. This would accomplish the goals of higher tax revenue (and thus lower budget deficits), increased output (and thus lower unemployment), and lower energy prices for consumers. Will such common sense be delivered any time soon? We can dream.

Solon North America

Solon North America is a subsidiary of Solon SE of Germany and was founded in 2007. It opened its 105,000 square foot, 60 megawatt capacity, solar panel factory in Tucson, Arizona in 2008. Solon SE recently reported that through the first half of this year, it lost about $90 million. Due to competition from low-cost factories overseas and the market favoring low-cost products rather than better fitted or finished products, Solon North America announced that it will have to close its Tucson manufacturing plant, laying off about 65 workers in October. It will maintain operation of its power plant development business where it is currently building power plants for Arizona Public Service Company, Tucson Electric Power Company and Pacific Gas and Electric Company, all of whom are subject to state renewable energy mandates which force the utilities to purchase electricity from such sources.  It will still employ about 70 workers in the Tucson area.[iv]

Among Solon’s other endeavors are a partnership with the University of Arizona and Tucson Electric Power to study storing energy generated by solar power at a plant built at the University of Arizona’s Science and Technology Park. The company also worked with Arizona Public Service on a 145-acre, 18-megawatt solar plant.[v]

Evergreen Solar

Evergreen Solar started business in 1994 in a 2,500 square foot laboratory in Waltham, Massachusetts with an innovative idea to reduce the cost of photovoltaic solar using a “string ribbon” process for making solar cells.[vi] It started selling solar cells using this technology in 1997 and went public in 2000. However, in the first quarter of this year, Evergreen Solar saw its shipments of solar panels drop 62 percent from the last quarter of 2010. The company said the drop was due to sluggish demand and the lowering of subsidies for solar power in Europe. That forced the company to lay off 800 workers at its Devens, Massachusetts plant.

In the hopes of capitalizing on China’s skilled, low cost labor and Germany’s expanding solar market, in 2005, Evergreen Solar expanded globally to Germany and China in conjunction with companies in those countries. It received a $33 million loan from the Chinese government for its China expansion.[vii] But even this move was not able to keep Evergreen Solar from filing for bankruptcy and laying off an additional 65 workers, mostly at its Midland, Michigan plant.

The state of Massachusetts subsidized the company ’s solar panel manufacturing industry to the tune of $58 million. Now that Evergreen Solar has filed for bankruptcy, the state is trying to recoup about $4 million from the company. In its bankruptcy filing, Evergreen Solar listed a $1.5 million debt to MassDevelopment, the quasi-public state economic development agency.[viii]

Conclusion

Solar panel manufacturing may be profitable for some countries where skilled labor can be found cheaply, especially as long as governments direct consumers to purchase electricity from such sources, regardless of economics. But, in the United States, solar manufacturing plants are closing and the “green jobs” associated with them are evaporating. One may wonder why, but the economics are clear. Without massive subsidies, these industries cannot survive, and without policies that force these products to be purchased, they can’t survive. European countries (e.g. Spain and Germany) are examples where legislative and regulatory policies required solar energy to be purchased at rates far above the going retail rate.[ix] These countries found that they had to slash subsidies because of high rates and little power production due to low capacity factors of solar plants.

With such European experiences, and with companies closing down solar manufacturing plants and laying off workers, why must our government continue to push for these expensive technologies[x] that cannot survive in the market place on their own?