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No More Solyndras Act: Good Start; Room for Improvement

Posted By Nicolas Loris On September 12, 2012 @ 6:51 pm In Energy | Comments Disabled

This Friday, the House of Representatives will vote on the No More Solyndras Act [1], which would prohibit any new loan guarantees from Title XVII of the Energy Policy Act of 2005. For applications that are already under consideration or have received conditional commitment, the bill would require the Secretary of the Treasury to make a recommendation based on the merits of the program. It would also prohibit restructuring of the loan so investors can’t jump in front of taxpayers to recover money from a failed project.

While the No More Solyndras Act as currently proposed is not a perfect solution, it does move the nation a step closer to ending all energy subsidies by putting a definitive end to the failed loan guarantee program. The bill would be enhanced and further protect taxpayers if it would:

Ensure that recipients pay the full cost of the subsidy as determined by an independent, private financial risk assessor. Currently, loan recipients are responsible for paying the subsidy costs—a determination of the long-term liability to the federal government of the loan guarantee. The problem is that the actual subsidy cost has been politicized. For nuclear, the industry argues that it should cost 1 percent to 2 percent of the project, whereas nuclear critics argue that it should be closer to 50 percent.

Instead of relying on government entities to determine the loan guarantee costs, a condition of future loan guarantees should be that the actual subsidy cost be determined by an outside, private financial risk assessor. This will protect the taxpayer by providing the best, independent information to determine the actual risk of providing the loan guarantee and ensure that the loan guarantee recipient is actually paying the subsidy cost as required by law.

Require recipients to privately refinance within five years of project completion. The most compelling argument for loan guarantees is that political and regulatory unpredictability have made competitive private financing difficult to secure. Since government is a primary source of this unpredictability, it is only fair, one might argue, that government offset the costs associated with high risk.

Completing the project should eliminate that risk. Thus, rather than a long-term financing option, the loan guarantee program should be viewed as a bridge program that helps to protect investors against project failure during the most vulnerable stage: licensing and construction. Upon completion, loan recipients should privatize liability by privately refinancing without the support of additional taxpayer backing. This would provide the best information to determine the actual risk of providing the loan guarantee and ensure that the recipient is actually paying the subsidy cost as required by law.

Venture capitalists are perfectly capable of making these investments and reaping the rewards from risk or suffering the losses from bad investments. We’ve hammered home this key point in papers [2], testimony [3] and blog posts [4]. There are two types of companies that receive loan guarantees: economically uncompetitive companies, such as Solyndra, that could not obtain private financing for a reason; and potentially competitive companies, which use the loan guarantee to offset risk and pad their bottom lines. Neither case can be justified.

While the No More Solyndras Act does not abolish the loan guarantee program, too often Members of Congress ignore the fundamental problem and look for alternatives that improve accountability and transparency and then expand the program with more taxpayer dollars. The No More Solyndras Act improves accountability and transparency and terminates the program. This is a welcome step forward to ending energy subsidies and understanding that these investment decisions are not the role of the federal government.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2012/09/12/no-more-solyndras-act-good-start-room-for-improvement/

URLs in this post:

[1] No More Solyndras Act: http://republicans.energycommerce.house.gov/Media/file/Hearings/Joint/20120712_EP_OI/BILLS-112hr-PIH-nomoresolyndras.pdf

[2] papers: http://www.heritage.org/research/reports/2011/10/the-department-of-energy-should-not-be-the-green-banker

[3] testimony: http://www.heritage.org/research/testimony/2012/07/the-american-energy-initiative-the-cost-of-loan-guarantees

[4] blog posts: http://blog.heritage.org../../../../../2011/09/27/congress-should-scrap-the-energy-loan-and-loan-guarantee-programs/

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