What Does the Solyndra Bankruptcy Really Tell Us?

The announcement this week from solar pv manufacturer, Solyndra, that they will enter bankruptcy has received a great deal of press and consternation from solar advocates throughout the country, including an intense amount of speculation about what went wrong. After learning more about Solyndra’s product and the pv manufacturing market in general, I think a more interesting question is why Solyndra’s demise is so newsworthy at all?

The U.S. solar industry is an incredible dynamic space right now with pv manufacturers facing increased competition from Chinese-based manufacturers who can produce panels at materially lower prices. Adding to the misery is an across the board over-supply issue which is providing even greater pressure on pv manufacturers bottom line by forcing manufacturers to drop their prices in the hopes of landing business.

In Solyndra’s case, not only were they operating in an incredibly competitive environment but their business model was centered around a unique solar product that simply drove their costs too high. Built using customized machinery, Solyndra’s panels were unlike anything in the pv industry as their panels were made of racks of cylindrical tubes as opposed to traditional flat panels.

This was Solyndra’s problem…their manufacturing costs were simply to high for such a unique product to penetrate the market. According to Sam Wilkinson, Senior Research Analyst at IMS Research:

“Despite Solyndra operating its 110MW facility close to full capacity in recent months, we estimate that its manufacturing costs still far exceeded the price at which it had to sell its modules at in order to make an investment case for its customers…

All PV module manufacturing, and CIGS in particular, relies on scale to reach attractive cost levels, and any supplier currently producing in relatively small volumes is at an instant disadvantage compared to the GW-scale manufacturers that are currently dominating the market…”

To conclude, it appears that Solyndra was another manufacturer who had produced a unique and costly product that could not penetrate a market flooded with cheaper and more conventional alternatives. Based on this, I’m not sure why this is a big story at all.

The problem with the Solyndra story is that it has become a political story as the Obama Administration has previously touted Solyndra as a perfect example of the new “green” economy. And most notably, on March 20, 2009, the Department of Energy offered a $535 million loan guarantee to Solyndra which had been fast-tracked by the administration, apparently without proper due diligence. As Warren Meyer from Forbes.com noted:

“It is clear little due diligence was completed before the loan guarantees to Solyndra were rushed out the door in 2009 in time to meet Energy Secretary Steven Chu’s artificial target date for the first loan of Obama’s green jobs program. A good, well-timed sound bite on the evening news was more important that the actual details of the investment.”

So not only does President Obama’s shining example of the green economy go up in flames but does so with over a half a billion dollars in tax payer money. So the real lesson in the Solyndra story is not necessarily that a pv manufacturer went under, it is that perhaps the government is not the best entity to direct the private economy. Why? Again, Warren Meyer sums it up best:

“First, the decisions are being made by, at most, a few hundred government workers. There is no possible way these workers can ever gather the knowledge and information possessed by millions of private actors making similar investment decisions.

Second, and probably more important, government decisions-makers have terrible incentives when making these investments. Seldom, if ever, are government re-allocations of capital made with an expectation of earning a return. In fact, many of these programs promote themselves explicitly as shifting capital to investments no rational private investor would touch. These investments are undertaken because they promote some sexy technology, or create jobs among a favored constituency, or even just because they make for a nice bullet point on a politician’s reelection web site.”

Promoting clean-tech should still remain a critical part of our country’s energy policy whether through tax credits or other market-based measures designed to help increase the competitiveness of U.S. based companies. However, as Solyndra has shown, selective investment in companies by the federal government can cause more harm than good and place unnecessary political pressure on companies who are already battling equally powerful economic forces.