Solyndra bankruptcy was disaster waiting to happen

Solyndra received a big loan even though it couldn't keep up with the falling solar costs, but the loan guarantee program is still vital for scaling up new solar technologies.

President Obama during a visit to Solyndra's Fremont, Calif., plant which was financed partially by the Department of Energy Lawrence Jackson/White House

news analysis Solar manufacturer Solyndra filed for bankruptcy protection today, capping a stunning reversal for the government-backed company in a drama that's raising questions about U.S. industrial policy in green technology.

The Chapter 11 filing follows Solyndra's decision last week to shut down its Fremont, Calif., factory and lay off about 1,100 employees and contractors, saying it could not compete with low-cost manufacturers in other countries.

Solyndra is being held up as a case of the federal government not doing its homework picking companies to back in an effort to create jobs.

But is there some sort of sweeping lesson to be learned from Solyndra? Certainly, the Department of Energy and private investors made a bad and embarrassing financial bet, but analysts warn against drawing broad conclusions from Solyndra's plight. U.S. solar technologies still have the potential to compete on the world stage with the aid of supportive government policies, even if domestic manufacturing isn't the centerpiece of the industry.

That's not to say there aren't major challenges. Led by Asian manufacturers, solar panel prices have fallen about 50 percent since 2010, creating a brutal environment for what is a commodity product. Solyndra is the third U.S.-based solar manufacturer to file for bankruptcy this summer, following Evergreen Solar and Intel-backed Spectrawatt . Germany-based SolarWorld and Solon plan to shutter U.S. plants and QCells and Renewable Energy Corp. said they will cut production in Europe.

Solyndra is like other solar companies in that it could not keep pace with falling prices, despite having innovative technology. What sets it apart is that Solyndra secured a large $535 million loan guarantee from the Department of Energy to build a plant even though many industry analysts said that it faced an uphill battle competing on price. Overall, it raised about $1 billion from private and public sources.

"In this case, questions have to be asked. The consensus view inside the solar industry is that Solyndra was not going to make it," said Shyam Mehta, a senior analyst at GTM Research. "The general idea of policy is fundamentally sound. What we have to do in the U.S. is make bets on innovative technologies that have the promise to lower costs."

Solyndra's product design, while clever, was conceived at a time when the prices for solar-grade silicon were relatively high. Instead of polycrystalline silicon solar cells, Solyndra used thin-film materials coated onto glass tubes. These glass tubes were placed onto a collector and installed by placing them on flat commercial rooftops.

The problem for Solyndra--and others--was that prices for solar-grade silicon plummeted as capacity increased and Chinese manufacturers ramped up solar panel volume, causing a crash in prices in late 2008 and 2009. Solyndra also had a manufacturing process which required specialized equipment, contributing to a technology with higher production costs, explained Mehta. As a result, Solyndra was delivering products to customers but not able to make a profit.

Solar prices per watt are expected to continue falling this year and experts expect the industry to continue to consolidate as companies struggle to survive. Those price drops benefit consumers who want to buy or lease solar panels, but create a volatile business environment.

"What we are seeing in solar happens in every industry that is maturing and growing more competitive. You're going to see winners emerge who find innovative ways to offer consumers the most competitively priced products," Rhone Resch, the president of the Solar Energy Industry Association, said in a statement.

Industrial policy
In addition to questions around the wisdom of providing a huge loan guarantee to Solyndra, the situation shines a spotlight on how effective U.S. policy is on solar and in green technologies. Obama administration officials have touted clean-energy technologies as a way to perk up the U.S. economy--President Obama himself visited Solyndra's California plant.

But politicians should temper their expectations on how much solar manufacturing can add in terms of jobs. Many U.S. companies are seeking a technology advantage by using thin-film solar cells, but typically these thin-film processes are highly automated, which means they create fewer manufacturing jobs relative to traditional panels. It's also worth noting that about half of the money spent on solar is in the installation , not production of the actual hardware.

Even if the U.S. isn't ideal for solar manufacturing, it doesn't mean that providing loans to solar companies is a lost cause. Loan guarantees are designed to give new solar technologies, which are too risky for banks, a commercial foothold. Once they demonstrate they can compete on costs globally, in theory those companies will expand. A good model is First Solar which made its first thin-film solar plants in the U.S. and Germany near its research and development centers, said Mehta. Drawn by ample government incentives, it then replicated those plants with a new one in Malaysia.

There are other U.S. companies trying to crack into the global solar market with the aid of loan guarantees. The Department of Energy has given out three other loan guarantees for solar manufacturing, including $400 million for thin-film manufacturer Abound Solar, $150 million for 1366 Technologies , and $197 million for SoloPower .

It remains to be seen how effective loan guarantees are compared to industrial policies in China and other countries when it comes to scaling up U.S. solar technologies. But young solar upstarts need financing to build a demonstration factory to show whether they can compete internationally. An alternative to loan guarantees in the U.S. is partnering with a large industrial company and investor, as solar start-up PrimeStar is doing with General Electric.

"There is huge profit potential but no one is stepping in to fill the void that venture capitalists have left . These companies need sugar daddies that can finance their scale up," said Mehta. "If you're trying to compete with the Chinese, it's all about going big or going home and going big means scaling up."

 

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