The Department of Energy Inspector General (IG) has published a final report on the Solyndra debacle. If you will recall, Solyndra was a solar energy company that had a new type of solar cell that they claimed would revolutionize the industry. It was cylindrically shaped and was supposed to gain enough in efficiency to overcome the increased price in materials and manufacturing costs. It was backed by the Department of Energy through their Loan Guarantee Program. Solyndra declared bankruptcy August 31, 2011. The DOE lost $531 million of taxpayer money. The government was supposed to recovery $21 million but never did.
Nearly four years ago I wrote a blog on this whole sordid affair. In a 12/26/2012 blog I said that the probable cause of the mess was insufficient oversight by the Department of Energy. The final report pretty much concluded that – four years later! For the full report see:
http://energy.gov/sites/prod/files/2015/08/f26/11-0078-I.pdf
Some of the more salient features are:
- Solyndra provided DOE statements that were inaccurate, misleading and that Solyndra knew to be false.
- DOE’s due diligence efforts were ineffective specifically:
- DOE relied on investigations by contractors who in turn relied too heavily on statements made by Solyndra and
- DOE failed to react when inaccuracies and inconsistencies came to their attention.
These failures were most damaging to Solyndra’s success in two critical areas:
- The customer value proposition and
- Customer commitment to future sales.
It was always a concern that the efficiency claims made by Solyndra might not offset the increased cost of their solar panels. The Solyndra business model depended on receiving a premium over the going rates for solar panels, and everyone knew that. Evaluation of this model was assigned to the long-term DOE engineering contractor, R. W. Beck (subsequently becoming SAIC and later becoming Leidos). R. W. Beck was to evaluate the efficiency claims and the sales contracts that Solyndra touted. Solyndra claimed to have $1.4 billion in sales under contract. It appears that R. W. Beck depended on claims made to them by Solyndra and did not independently verify the value proposition or the strength of the contracts. By the time R. W. Beck issued its final report in May 2009, all four of Solydra’s customers had been offered price concessions indicating that the value proposition wasn’t there.
Solyndra was required by the DOE to hire an outside firm to prepare a credit assessment. In July, 2009, Solyndra hired Fitch Ratings, Inc. (Fitch). Solyndra provided Fitch with a summary of their customers (up to seven at this point) and contract information. Solyndra denied any contract price concessions and maintained that all customer contracts were sound – even though one customer had already told Solyndra that they would be buying no more panels because their prices were too high. Again, the contractor relied on Solyndra claims without verifying them. Fitch rated Solyndra as BB- (hardly stellar!...see: https://en.wikipedia.org/wiki/Fitch_Ratings and other, linked articles) and concluded:
The Sponsor [Solyndra] has obtained sales contracts with a nominal face value of approximately $2.2 billion, confirming both demand and acceptance of the Solyndra product as well as its pricing model which is at a per watt premium to most other [photovoltaic] products.
The IG report points out additional facts that could have served as warnings to the DOE, but DOE chose to ignore them. The die was already cast and the machinery of government was churning. As it turned out, Solyndra management was lying and neither R. W. Beck, Fitch Ratings nor DOE management insisted on independent verification of crucial technical and business claims. By late 2009, Solyndra was mathematically doomed. Later testimony by Fitch executives indicated that even a 15% reduction in contract prices would certainly mean default on the loans guaranteed by DOE.
The IG blames Solyndra management for much of the debacle. Solyndra lied to DOE and others on many occasions. It is somewhat odd that no legal action has ever been taken against Solyndra management (see the definition of fraud). Why Solyndra and government officials escaped prosecution I’ll leave to the conspiracy theory debaters like “they’re all idiots” Donald Trump and “It was a video” Hillary Clinton. I’m sure they can get plenty of help from rags and wags like the New York Times and Glen Beck. My concern is the actions taken by the government and how they stack up with good government policy.
Clearly there was too much dependence on what Solyndra said. The IG strongly criticized the DOE for their lack of thoroughness and attention to obvious warning signs. It is incredible to me that any person in government would believe anything anyone said – being surrounded as they are on all side by politicians and favor seekers. Did DOE officials really believe that Solyndra management was above the manipulation of the truth so rampant in Washington? I don’t think so. I would be more inclined to believe there was a significant amount of willful neglect. Many of the same players are still in their cozy DOE contractor positions, pissing away more money on other hair-brained schemes.
There’s one other technical issue that should not be overlooked. The DOE has set an Internal Rate of Return (IRR) of 12% as a target for funding projects. That is way too low. General Business Risk commands a 20% or more IRR on almost any independent business proposition. When there is technical risk the appropriate IRR skyrockets. Had DOE insisted on higher IRR, it is much less likely that a 15% drop in prices would have completely wiped out Solyndra. I discuss this in greater detail in my new book, Oil Shale, Treasure Trove or Pandora’s Box. It is available for pre-sale on Amazon Kindle at: http://www.amazon.com/dp/B013PSC0VU .
In dealing with the general policy matters, I have to go back to my 2012 blog. There I pointed out the general weakness of our IG system – especially when trying to evaluate the technical competence of our federal agencies. That we only now, some four years after the presentation of the dead dog, get a report criticizing DOE policy and implementation is a miscarriage of justice. This report should have come out in no more than six months and probably could have been done in half that time. Consistent, quick and vigorous responses by the IG might make an impact on how government actually works. Maybe timely and reliable enforcement actions by the IG would create an atmosphere of accountability. Had that been the case here, we might have seen enough public anger that someone in DOE or in DOE contracting would have been fired. Now this is yesterday’s news and we are of busily bitching about immigration, Planned Parenthood and the specter of nuclear Ayatollahs. The political scum seems to have again outlasted public indignation.
You know, if we had learned something for our $530 million dollars it might have been worth it. Unfortunately I doubt if we have learned anything except that, when it comes to public money there’s practically no accountability. “At this point, what difference does it make?”
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