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The Lesson From DOE’s Latest Loan Default? Invest More.

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News broke last week that the Crescent Dunes solar project, a recipient of $737 million in U.S. government-backed loan guarantees, had filed for bankruptcy. When the project began construction in 2011, it represented a promising pathway to reduce the costs of solar and demonstrate large-scale solar deployment. By the time the plant finished construction a few years later, the rapid drop in solar panel prices had essentially rendered the facility obsolete. Various technological challenges plagued the project, and leaks in critical components forced the plant offline in April 2019, a shutdown that continues to this day.

Critics of the Department of Energy (DOE) loan guarantee program have pointed to the project, and other failures such as Solyndra and Fisker, as evidence that the program is a poor use of taxpayer funds. The Wall Street Journal blared that U.S. taxpayers are “poised to lose up to $225 million”. These arguments quickly fall apart, however, when the loan program portfolio is analyzed as a whole, and disappear entirely when the second-order impact of the DOE loans are considered. Loans made under the DOE program are profitable today, even with these failures, and its efforts have jumpstarted new sectors of the economy, creating many thousands of jobs. The DOE should be making more of these guarantees.

The DOE loan guarantee program (comprising three parts: Section 1703 as created by the Energy Policy Act of 2005, the Advanced Technology Vehicles Manufacturing Direct Loan Program created by the Energy Independence and Security Act of 2007, and Section 1705 as created in the American Recovery and Reinvestment Act of 2009) is broken down by technology sector, including nuclear, fossil, and renewables, and was initially created as a means to enable new projects and technologies to access project financing and reach financial close. Instead of giving federal dollars to projects in the form of grants, the loan programs expect repayment of funds over the life of a loan, with interest. For deals that succeed, the government spends no funds. As of June 30, 2020, the program has issued just over $35.5 billion in loan guarantees, nearly $30 billion in funds have been disbursed, $3 billion in interest has been collected on the loans, and the loans have lost just under $800 million.

Basic accounting shows the loan portfolio to be $2.2 billion in the black as of June 30. The portfolio hasn’t lost any money, even with the failures accounted for. Although many loans are still in repayment, only 1 loan left on the books was issued later than 2011, meaning nearly all are past the point of technological and commercial demonstration and highest risk. Five loans, totaling $3 billion, have already been paid off. The low default rate of DOE loans (losses represent less than 3% of disbursed funds as of June 30) would be market leading for a commercial lender.

And this doesn’t even account for the secondary impacts of the program. Examples abound: Tesla TSLA utilized a loan under the DOE program to purchase and retool its initial factory in Fremont, California to enable production of its first mass-market car: the Model S sedan. Tesla is now a world-leader in electric vehicles, has thousands of employees across multiple manufacturing facilities spanning the U.S. (and the globe), and is worth more than the legacy automakers. Another prime example: Commercial solar in the U.S. had produced zero projects greater than 100 MW prior to the DOE loan program. The program’s support of multiple early projects directly led to a boom in the industry, creating still more thousands of jobs across the U.S. and jumpstarting the utility-scale solar sector.

Failures are to be expected in any lending program, and success must be judged on the performance of the entire portfolio, not any individual transaction. Even with the failure of Crescent Dunes, the time is now to invest more and continue the success of the DOE loan program. Congress doesn’t even need to act: the loan programs still have over $43 billion in authority remaining across its various sectors. All that is needed is for the leadership at the DOE to begin processing and approving loan applications again. The decision should be a no brainer no matter your political leanings: a government program that catalyzes innovation and deployment, generates thousands of good paying American jobs, and actually makes taxpayers money. This program is government at its best.

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