Last week, the U.S. Department of Energy released a report on the interim results of its loan guarantee program, the federal government’s huge clean energy investment fund. The results, which show a surplus return and an expectation of $5 billion in profits, should finally silence the program's critics.
These results actually understate the success of the program. The government’s investments also created 55,000 direct jobs and several hundred thousand indirect jobs. They financed enough power to light more than a million homes and to take the equivalent of 4 million to 5 million cars off the road. And loan guarantees to lenders don’t even require the government to put up capital unless there is a problem.
This is good news, both for the U.S. taxpayer and for the clean energy sector. It is also a touch ironic because this is the very same program that was roundly attacked as a failure after an early loss on Solyndra, the solar manufacturer that failed in a very public way in 2011.
That transaction represented less than 1.3 percent of fund capital, but generated thousands of columns and op-eds, hundreds of hours of television coverage and a dozen Congressional hearings. The new report, with far more historical data, has received little coverage. That’s a mistake. The program’s success suggests the government should actually increase its support for clean energy. It’s good for jobs, the economy and the environment. And it’s a money-maker.
How did some members of Congress and the media get it so wrong?
Critics complain that the government is a bad investor, but the track record of the DOE loan program is better than nearly every private sector debt or equity investor in clean energy over the same period. The performance of the Export-Import Bank, the U.S. Department of Agriculture, the Overseas Private Investment Corporation and the many other government agencies that provide loans to U.S. companies is equally good.
This shouldn’t be surprising: investment processes are strict; programs have access to the best public and private sector consultants (the DOE loan program, for example, made regular use of the national labs to vet technology); transactions go through multiple inter-agency reviews; and the professionals who work in the loan programs, most of whom have significant private sector experience, are very capable.
The government is a bad investor when Congress invariably politicizes the process. Transactions get caught in the politics of the moment and are used for their theatrical value, not their real value.
When Congress created the DOE loan program, it set aside $10 billion to cover expected losses. Yet the first time there was a loss -- of less than 5 percent of the loss reserve -- many members were incapable of placing it in context. Investors know that failing transactions come before stronger transactions generate enough profits to offset those losses. In the investment business, this is called the “J curve." In Congress, it’s an opportunity to criticize your political opponent.
Interestingly, making a profit is not even mentioned in the legislation that created the program. The political posturing around the program obscured the fact that the program had multiple objectives like global economic competitiveness, national security, environmental protection and job creation. But meeting those objectives takes time and progress can be hard to see early on.
Critics also misunderstood the real risks in the portfolio. The loan program financed technologies that were being built at commercial scale for the first time. That is inherently risky, but few bothered to learn what had been done to mitigate the risk.
The 50- to 70-page loan program term sheets included extensive risk mitigation efforts. Loans payments were based on robust technical, financial and operational milestones. Detailed credit analysis often required an applicant to reduce the scale of the project or to raise more capital. Indeed, some applicants complained that the government’s diligence and terms were more onerous than those in the private capital markets. Finally, nearly all the loans were actually to power generation projects that had long-term contracts in place to purchase their power, essentially guaranteeing cash flows.
Managed risk worked, and a number of the projects the loan program backed went on to win industry awards for “deal of the year."
Complex financial transactions don’t make for good television. Shouting apparently does. Coverage was generally weak and weighted toward sound bites, even when they were grossly inaccurate. Much of the reporting was done by political journalists, not business journalists. If you’re a hammer, everything looks like a nail. The media needs to do a better job of explaining issues, not simply repeating accusations.
The data is now in. The federal government played an important and successful role in helping scale America’s new clean energy economy. The loan program basically launched utility-scale PV solar, successfully demonstrated next-generation concentrating solar power, and helped revitalize the nuclear industry, commercialize cellulosic biofuels and greatly accelerate the introduction of electric vehicles. And it did all this in three years, at a profit.
The program is a winner. Congress should support the loan program or, even better, create a long-term, self-sustaining, energy infrastructure bank modeled on the very program some once mistakenly attacked.
Jonathan Silver is the former executive director of the loan programs office at the Department of Energy. He led both the federal government’s $50 billion clean energy investment fund and its $20 billion fund focused on electric vehicles during the first Obama administration.
Today, Mr. Silver is an active investor in, and consultant to, clean energy and cleantech companies. He currently serves as a senior advisor on energy investments to The Riverside Company, a multi-billion-dollar investment firm, as well as an advisor to Ernst and Young, Apex Clean Energy and Ethical Electric.