Excerpt from Report of US House Committee on Oversight and Government Reform March 20, 2012 pp 10-15.
II. The DOE Portfolio of Loan Commitments
DOE committed to issuing 27 loans or loan guarantees under the § 1705 program. These loan commitments total in excess of $16 billion. At the outset, the ratings agencies rated 23 of these loans as non-investment grade categories, also known as “Junk,” due to their poor credit quality, while the other four were rated BBB, which is at the lowest end of the “investment” grade of categories. Overall, DOE’s 1705 portfolio’s initial un-weighted average rating was BB-, which is considered “Junk grade.” According to Fitch, a ‘BB’ rating is speculative and indicates an elevated vulnerability to default risk. (Kahuku is rated as junk at BB+)
LINK: Kahuku is 3rd on this list of US DoE loans and loan guarantees.
Within the range of non-investment grade credit risk, six of the Junk loans were rated at the lower tiers of the range. Specifically, these six projects or loans received ratings within either the “B” or “CCC” categories under the Fitch or Standard and Poor’s classifications.
Despite lending to highly speculative and troubled projects, the government only charged those green energy firms its own cost to borrow money. In other words, the government sought no profit or compensation for credit risk. Given the extent of losses already apparent, the failure to seek any compensation for credit risk inevitably means the taxpayer will lose substantial funds. This is distinguishable from normal business practices, where banks or investment firms charge a premium or require more upfront capital as a condition for agreeing to finance riskier projects; thus, if the project were to go completely under, the banks would have some capital to show for the losses.
A. DOE’s High Risk Loan Portfolio
At an October 2011 press conference, after the collapse of Solyndra, President Obama commented on the 1705 loan portfolio saying that “we knew from the start that the loan guarantee program was going to entail some risk, by definition. If it was a risk-free proposition, then we wouldn’t have to worry about it. But the overall portfolio has been successful.” However, the risk conceded by President Obama is larger than he or Secretary Chu have publically acknowledged. Left unsaid is the continuing and mounting risks taxpayers face with each additional disbursement of funds.
As this report reveals, it appears that taxpayer losses associated with Solyndra are just the tip of the iceberg. Clues warning of this risk have been apparent from the inception of the program. This does not bode well for the future of DOE’s loan portfolio. Moreover, most of the energy projects funded under 1705 continue construction or just plan to begin construction. As projects proceed and spend their capital, additional weaknesses will be exposed and more loan recipients will begin to fail.
Secretary Chu has done very little to mitigate these risks. In the first instance, DOE failed to abide by the number one investment rule of thumb – diversify your portfolio. Instead of making investments in a broad range of emerging technologies, DOE sunk 80% of its funds into either solar manufacturing or solar generation projects. This overemphasis on one type of technology leaves taxpayers vulnerable to changes in the market for solar energy. After Solyndra collapsed, Energy Secretary Steven Chu claimed that “this company and several others got caught in a very, very bad tsunami” and then blamed China and the recession in Europe.
Secretary Chu neglected to mention the extraordinarily clear warning by Fitch Ratings (Fitch) prior to DOE’s commitment. Specifically, Fitch stated:
[C]hanges in business or economic conditions center upon the intermediate and longer term pricing of PV solar panels which are now under extreme competitive pressures. Fitch expects PV pricing pressures throughout the term of the DOE loan and this factor will be the largest challenge facing Solyndra and the largest credit risk incurred in repayment of the Fab 2 loan according to its terms.
As the above excerpt reveals, prior to approving Solyndra, Fitch warned DOE that extreme competition within the solar panel market threatened pricing of solar panels in the coming months and years and that this was the greatest risk to Solyndra’s survival. Even knowing this, DOE chose to invest billions of taxpayer dollars despite the clear warning - 16 of the 27 section 1705-backed projects employed solar technology, the very technology that experts were warning about. These loans for solar projects totaled more than $13 billion – more than 80% of the total portfolio. DOE also concentrated its investments in two solar companies in particular, Abengoa and First Solar, to such an extent that financial troubles with either company would affect a significant portion of the loan portfolio. In addition to over investing in solar, the Federal government also permitted “double dipping,” wherein a company received multiple federal grants and loans to cover the cost of a project, thereby reducing the company’s “skin in the game.” DOE also allowed large and financially sound parent entities to undercapitalize their loan guarantee projects, which effectively shifted the risk away from the company to the taxpayer. It appears that for most DOE loan recipients, a low cost loan, in and of itself was insufficient to attract private investors.
In compiling this report, staff considered many troubling issues that deserve attention, yet, because of the magnitude of problems associated with this program, only a share of the concerns could be investigated. Committee staff, therefore, considers this an initial report….
a. Low Natural Gas Prices Reduce Power Purchase Agreement Revenues for Renewable Projects
As natural gas powered generation provides the market clearing price in most regions within the United States, the recent drop in natural gas prices lowered market prices for power. (Note: In Hawaii it is the price of Low Sulfur Fuel Oil which provides the avoided cost basis against which wind and solar electricity is priced. But this explains the panic among green energy scammers when Abercrombie inexplicably included natural gas in his list of alt energy sources in the State of the State address.) These falling power prices reduce the expected value of anticipated Power Purchase Agreements (PPAs), which are agreements that provide power purchasers, such as utilities and suppliers of energy, such as renewable energy generators, with certainty over future prices. The energy industry relies on PPAs to manage risks associated with the purchase and sale of power. The pricing of PPAs largely depends on expectations with regard to future power prices. The recent collapse in natural gas prices reduced the potential revenue for PPAs that have not yet been executed. LINK: Natural Gas Price Chart
Lower natural gas prices increase the risks of renewable energy projects that have not yet entered into long term contracts to sell the power they expect to generate because buyers of their product now have cheaper options. Project Amp and other projects that fail to meet benchmarks necessary to maintain a PPA, suffer the risk that they cannot negotiate agreements sufficient to support the cost of the renewables project, even with the benefit of multiple substantial subsidies.
Accordingly, it is reasonable to expect utilities to seek an exit from expensive PPAs whenever the renewable company fails to meet certain benchmarks, whether those benchmarks relate to commercial operation date, insufficient output, reliability or other variables.
In other words, given the falling price of power in areas where natural gas is the marginal supplier, it is reasonable to expect revenues from risky renewables projects to be at risk to these falling power prices. If a PPA with a solar producer reflects a price based on markets where $4.00 per million British thermal unit (MMBtu) of natural gas was prevalent, the utility paying for that solar power might act on any opportunity to renegotiate or exit the unprofitable PPAs now that natural gas prices are below $3.00. Specifically, as DOE-backed projects come online over the next few years, any failure to meet the production or capacity requirements stated in the PPA may enable the power purchaser to exit or renegotiate the contract, subjecting the renewable project to lower power prices, and thus lower revenues for the company than was predicted at the time DOE negotiated the loan agreement. In other words, given that power prices have fallen since these projects executed PPAs, there is substantial risk that the power purchasers will find a way out from the PPAs they entered into with the renewable projects.
---30---
Related: