RENEWABLE ENERGY:

One market report could hold clues to Solyndra's demise

In the early hours of Jan. 12, 2009, a livid Chris Gronet, the founder and then chief executive of the solar company Solyndra Inc., fired off an email to Steve Isakowitz, general counsel of the Department of Energy.

"I was appalled to learn on Friday that our application is being delayed yet again," he said, referring to Solyndra's hopes for a $535 million federal loan guarantee enabling the company to build a second manufacturing plant for its unconventional tubular solar units. Heavily in debt from startup expenses, the California firm had to have federal backing to expand its production, a key to lowering its costs and achieving profitability.

The next day, DOE's Loan Guarantee Credit Committee reached a unanimous decision "not to engage in further discussions with Solyndra at this time," according to another of the emails released by the Republican leadership of the House Energy and Commerce Committee in its ongoing investigation of Solyndra's fall into bankruptcy this month.

Emails and internal memos reveal that a key concern for the DOE staff was the marketing challenge that confronted Solyndra from the start: Could its innovative but unproven "thin film" technology hold its own in a fiercely competitive global solar arena and make the company a going concern? The DOE Credit Committee of career department officials cautioned in January 2009 that while the "project appears to have merit," an independent marketing assessment was required.

DOE did request and obtain an outside marketing analysis of Solyndra's prospects by the Seattle-based R.W. Beck consulting firm. Its contents are not public. It could support DOE's insistence that it adequately assessed Solyndra's prospects before granting the conditional loan guarantee on March 20, 2009, and the final approval that September. Conversely, it could give more fuel to House Republican claims that the application was rushed forward by DOE without proper oversight to highlight the Obama administration's clean energy initiatives.

The Solyndra application had moved forward under the George W. Bush administration's Energy Department. But it took on greater importance with the change of administration, according to emails released by the House committee's Republicans. One such memo, in February 2009, records a DOE adviser calling Solyndra the "litmus test for the loan guarantee program's ability to fund good projects quickly."

The Beck report is not among the documents and emails released so far by Republican leadership of the House Energy and Commerce Committee in its showcase investigation of Solyndra. Energy Department spokesman Damien LaVera says DOE is legally barred from releasing it. SAIC, the government contractor that owns the Beck firm, won't make it available, either.

An unreleased piece of the puzzle

DOE commissioned the Beck marketing report in late January. The first draft was delivered March 7, according to a DOE chronology. The DOE staff's Credit Committee recommended conditional approval five days later, and the administration affirmed that approval on March 20.

Jonathan Silver, a venture capitalist hired to head DOE's Loan Guarantee Office, testified at a House Energy committee hearing this month that DOE continued to review the Solyndra project until the final approval Sept. 3, 2009. He said he believed the final Beck report was delivered April 27.

Throughout 2009 and continuing through this year, however, the marketing challenges only worsened for Solyndra. Its technology was up against the most popular solar technology, based on polycrystalline silicon modules. The prices of this competing technology began to retreat from inflated peaks reached in 2008, undercutting Solyndra's sales and profit margins.

Also, European governments scaled back generous price support for solar power units, shrinking sales throughout the industry. China's production of subsidized silicon modules soared. And the brutal recession that struck in 2008 dried up credit that many businesses needed to buy industrial solar units like Solyndra's.

Silver testified that the pace of these market changes surprised DOE and industry experts:

"First, the price of polysilicon actually came down more dramatically than expected, as plants came on quickly to ramp up production. China began flooding the world market with increasingly inexpensive conventional solar panels because, as we've discussed earlier, the Chinese government, through both the China Development Bank and other smaller banks, has provided multiple tens of billions of dollars of credit and credit subsidies, plus other forms of support, to their solar manufacturing industry."

Rep. Diana DeGette (D-Colo.) asked, "And here's my question. Why didn't DOE predict those events?"

"I think we did understand that there were challenges in the marketplace," Silver said. "The fundamental responsibility and objective of this program is to identify innovative technologies that can be built out at scale and therefore leapfrog the traditional price curves that these technologies are on. But if the -- if the slope of the curve is more dramatic than anticipated, you will -- you will have this kind of event," he said, referring to the circumstances that brought Solyndra down.

Earlier signs of trouble

Warnings of this storm appeared well before the Solyndra loan guarantee was finally approved.

A 2005 law passed by the National People's Congress, China's top legislature, set a goal to increase the share of renewable energy resources to 10 percent of China's total energy consumption by 2020. A report by Dewey & LeBoeuf in March 2010 cited a 2008 study by the nonprofit Climate Group concluding that China was emerging as the world's leading renewable energy producer.

The law firm's report quoted a 2008 statement in Renmin Ribao, a newspaper published by the Chinese Communist Party's Central Committee, that "it is manifest to all that supportive government policies investing billions of dollars in energy efficiency and renewables are driving huge levels of innovation in China."

China's Ministry of Finance, Ministry of Science and Technology and National Energy Administration announced the "Golden Sun Demonstration Program" in July 2009. It called for at least 600 megawatts of solar power manufacturing capacity to be installed throughout China.

By the first half of 2009, some 50 Chinese companies were planning or constructing polycrystalline silicon production lines with an investment of more than $14 billion, according to a research report published in China. It predicted China's total production capability would eventually exceed two times annual demand in the world.

The surge of China's solar manufacturing helped to create a growing oversupply, which dramatically deflated the price of silicon-based solar modules beginning in 2008, industry market studies show.

Prices of the purified polycrystalline silicon had climbed steadily beginning in the mid-2000s, responding to demand from European countries pursuing their carbon-reduction strategies. But in 2008, Spain began to pull back on its costly solar subsidies. Germany significantly reduced its feed-in subsidy support for renewable energy through a change in legislation on Jan. 1, 2009. France and Italy also scaled back their support.

Market troubles in China and Europe

Solyndra's strongest sales had come from Europe. As that market weakened and Chinese production kept climbing, silicon prices plunged further, undermining Solyndra's competitiveness. The price of polysilicon fell from $475 per kilogram in February 2008 to $73 per kilogram in May 2009, according to Bloomberg New Energy Finance.

Solyndra's average sales price was $3.24 per watt in the fourth quarter of 2009, approximately 66 percent higher than the $1.95 average sales price of leading crystalline silicon photovoltaic manufacturers, the company noted in a Securities and Exchange Commission filing for a proposed stock offering it withdrew in July 2010. "If such downward pricing pressures continue, our competitors could decide to reduce the sales price of their photovoltaic systems, even below their manufacturing cost, to generate sales," Solyndra stated. It might not achieve profitability.

The company's sales jumped from $6 million in 2008 to $100 million in 2009, but production costs also mounted, from $40 million to $162 million. Solyndra was losing money on every unit sold.

Creating a competitive U.S. solar power industry is a signature goal of President Obama and Energy Secretary Steven Chu. If technology advances can cut the cost of solar units in half, solar power could compete with coal-fired generation without the need for government subsidies, DOE says. Chu says that milestone could be reached by the end of the decade, putting the United States on a path toward generating 80 percent of its electricity from clean energy sources by 2035, a top Obama climate priority.

Affordable, low-carbon power, coupled with a marked shift toward plug-in vehicles, would cut into U.S. dependence on foreign oil, yet another key objective. The loan to Solyndra was meant to help keep a U.S. solar manufacturer going until solar power took off on its own. But at this point, the Solyndra bankruptcy is Exhibit A in the Republican campaign against administration clean energy strategies.