Our Solyndra Epiphany

EIA 2035 Reference Case Fuel Demand for Power GenerationThe piling on by the politicians and media over Solyndra’s bankruptcy after the Obama Administration guaranteed $535 million in loans to the company is as disgusting as the political correctness that got us in this mess.  This is the current day equivalent of the madam professing shock that transactions were being made in the rooms upstairs.

In political terms, Washington is looking for someone to hang for this embarrassment. That Solyndra executives are now taking the 5th to avoid the perp walk before Congress does not mean they are guilty of anything illegal, but rather that they have the good political sense to hire lawyers who know the ways of Washington.

Solyndra failed because its tubular solar product was more costly to produce than alternative flat PV panels made in China.  This is a recurring story around the world as feed-in-tariffs in Europe and US renewable portfolio standards, tax credits and loan guarantees were used by China to grow global market share for its exports of cheaper PV panels.  China played the game, just like Solyndra did.  It used the rules to devise a strategy to gain competitive advantage.

For China the game was simple, low prices, always lower prices to underbid the domestic solar panel producers and take their market share and the tax subsidies that went with each sale.   For Solyndra the game was more challenging, it sought new capital to scale its production of more innovative technology faster to drive down the cost in hopes of competing with China.  That strategy might have worked except by early 2011 the price of polysilicon had dropped from $300/kg to less than $60/kg making China’s PV panels so cheap to make thus flooding the market with excess supply and cratering higher priced producers worldwide.  Falling prices took out not only Solyndra, but Evergreen Solar, SpectraWatt and PV panel producers in Spain, Germany and elsewhere in Europe.

EIA Share of Energy Subsidies by Fuel

Who’s to blame?

  • Governments used tax subsidies, loan guarantees, and mandated purchase rules to promote renewable energy at home.  Instead those policies were used by China to suction up cash from all the subsidies to scale market share for their PV exports.
  • Politicians pandered by using social engineering and burdensome regulations to substitute industrial policies that favor renewable energy and punish fossil fuels for competitive market forces to achieve policy goals to reduce emissions and promote a transition to a clean energy economy.
  • Renewable Energy Companies used tax subsidies to cover the above market cost of renewable energy.  The quest for ever more tax subsidies became their core competency thus taking their eye off technology innovation that was their greatest advantage over commoditized Chinese first generation PV panels.  Falling prices caused by the very tax subsidies they sought swamped them.
  • China is an easy target to blame for this mess because the world tolerates a trading scheme that allows China access to world markets on level playing field competitive terms, but does not demand the same terms for doing business in China.  Why?  Trade with China has become too important in the uncertain, unstable global economy.  The world depends upon China to keep producing cheap goods for export which it is glad to do.  But the true cost of those cheap goods is growing Chinese hegemony in the global economy.

This political theater over Solyndra will play itself out in due course. The question is whether this will be a true turning point for the clean energy business model or for our foolish policy of industrial policy ‘earmarks’.  We want a clean environment.  We want a robust competitive global economy.  But we are learning that there are unintended consequences for social engineering.  Subsidies may be useful to jump start new technologies, but they are not sustainable and neither are the technologies that depend upon them.

There are inconvenient truths in the Solyndra example.

  1. Global market competition is ruthlessly Darwinian in weeding out inefficiency—-celebrate it!
  2. Industrial policy to pick winners and losers rarely succeeds, and is costly and counterproductive because it stifles the very innovation essential to sustainable success—stop doing it!
  3. Don’t blame competitors (China) for taking competitive advantage of your stupidity (Washington) when you fail to fix the strategic problems you face—–grow or die!

That Solyndra was a risky investment was known by the markets and the company itself detailed those risks in painful detail in its public S-1 filing at the S.E.C. in September 2009.  If you are an investor, if one of your companies is going to fail you’d rather they fail fast and cut your losses.  In this case, the political calculus was that despite the probability of Solyndra failure, the good press opportunity was worth the risk—-but, of course, politicians were risking YOUR money not their own.

Than then there is this—–the spectacular growth of unconventional natural gas E&P in the competitive US energy market has done more to undermine coal and reduce emissions, shift the US toward a ‘cleaner’ energy economy, and enhance America’s competitive advantage and energy security than the sum of all renewable energy installed and all energy regulations promulgated in a shorter time period all while driving down natural gas prices.



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