What’s the fallout of the Solyndra scandal? by Tom Ziegler @FortuneMagazine October 4, 2011, 9:57 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons In the wake of President Obama’s solar debacle, the U.S. government needs to rethink its role in backing green energy. By Paul Keegan, contributor The FBI raided Solyndra’s headquarters in Fremont, Calif. FORTUNE — Republicans are hoping it will become President Obama’s “Mission Accomplished” moment: Standing at a podium in a California solar-cell factory in May 2010, surrounded by a cheering crowd and television crews, he declared, “It’s here that companies like Solyndra are leading the way toward a brighter and more prosperous future.” That sunny future never came, of course. Solyndra filed for bankruptcy a few weeks ago, leaving taxpayers on the hook for as much as a half-billion dollars. But the main victim is not only John Q. Citizen, as most breathless news reports have it, but also the fledgling American clean-energy industry, which, facing tight credit and an entrenched fossil-fuel industry, needs capital to expand. It’s hard to fathom how the White House thought it could get away with selling the Department of Energy’s $535 million loan guarantee to Solyndra in March 2009 part of Obama’s stimulus package as a creator of permanent jobs. Almost everybody knew the firm was a high-stakes gamble from day one. When it launched in 2005, its approach was to use cylindrical cells (rather than conventional photovoltaic, or PV, flat solar panels). Management, backed by $1 billion in private equity, said it would beat the competition by not having to use the expensive silicon favored by most PV solar firms. The price of silicon, however, dropped faster than predicted, allowing China to flood the market with cheap PV solar panels. By the time of Obama’s visit, the company had already acknowledged it cost more to produce the cells than it could sell them for. “When Obama visited Solyndra, a lot of people were cringing,” says Kevin Landis, a clean-tech venture capitalist with SiVest Group in San Jose. “The consensus was the economics weren’t going to pan out.” 9 big beneficiaries of Uncle Sam’s green energy largesse The Solyndra story could take on a whole new level of gravity if it turns out that DOE approved Solyndra’s loan application in part to satisfy the White House’s political agenda, or to do a favor for well-heeled Obama donors who had invested in the company, as Republicans charge. The FBI raided Solyndra’s headquarters soon after the company went bankrupt. Its top executives invoked the Fifth Amendment during a congressional hearing in September after assuring members as recently as July that the company was in great shape. Also Solyndra paid high-powered lobbyists allegedly to influence a loan-guarantee process that is supposed to be immune to outside pressure. In the meantime, Republicans in Congress are seizing on this mess as an excuse to gut government support for the clean-energy sector. Rep. Cliff Stearns of Florida, a climate-change skeptic and chairman of one of the committees investigating the Solyndra deal, said in a written statement to Fortune that the appropriate role for the federal government is funding basic R&D efforts: “The government should not be selecting winners and losers.” On the other side of the aisle, Democratic Rep. Ed Markey of Massachusetts argued that Congress was having the wrong debate: “If you want to waste American taxpayers’ dollars, let’s talk about the oil industry, at record high profits, getting $41 billion [in tax subsidies over the next decade] from taxpayers.” It’s fair to ask whether the U.S. government should be performing the role of cowboy venture capitalist by betting on risky companies every VC knows the chance of success of any startup is slim. But overlooked in the furor over Solyndra is the fact that the vast majority of the companies in DOE’s $30 billion-plus loan guarantee portfolio are not high risk. Only $2.3 billion of the total funds falls into the Solyndra category of startups attempting to mass-produce unproven technologies. Of that, about half went to solar manufacturers like Abound Solar and SoloPower and the rest to makers of luxury electric cars Fisker and Tesla TSLA . Though Tesla had a successful public offering last year, neither car company has proved that it can compete against the world’s top automakers. The rest of DOE’s picks are considerably less risky. The two largest loan guarantees went to Georgia Power ($8.33 billion, to build two nuclear reactors) and Ford F ($5.9 billion, to upgrade factories and build electric vehicles). By far the most common projects in the Department of Energy portfolio are solar, wind, and geothermal power projects likely to have a steady revenue stream because they have secured long-term contracts to sell electricity to big utility companies. Caithness Energy is building the world’s largest wind farm in Oregon with a $1.3 billion DOE loan guarantee, and has contracts with Southern California Edison. Only a bit riskier is BrightSource Energy’s giant solar thermal farm being constructed in the Mojave Desert, which has to produce electricity at the rate and scale promised under its utilities contracts. But even if some of these firms fail, they have valuable assets that should limit government losses. “At the end of the day, many of these projects are pretty secure,” says Paul Clegg, a clean-technology analyst at Mizuho Securities USA in New York. “It’s like buying a bond in a utility.” In hindsight, the government should have rejected dicey manufacturing plays like Solyndra and stuck to power plant projects as a relatively safe way to promote the adoption of solar and wind. In the current tight credit environment, the Energy Department’s loan program helps such alternative-power producers attract badly needed private sector capital. Studies estimate the loan-guarantee program could help double the amount of renewable energy on the U.S. grid. What this federal support couldn’t do is help U.S. solar manufacturers like Solyndra compete with China. It’s too late for that. Last year Beijing poured a staggering $30 billion in low-interest-rate loans into its PV solar manufacturing industry. It also gave its PV companies sweetheart deals for land to build factories. China now has seven of the world’s top 10 PV-cell makers, and today its share of the world’s market has risen from 6% in 2005 to 54%, while the market share of American PV makers has plummeted. The good news is that by backing companies like Caithness Energy that build big power-generation projects, the government is helping create American construction and operating jobs, while reducing the nation’s carbon footprint and minimizing the risk to the nation’s hard-strapped taxpayers. This article is from the October 17, 2011 issue of Fortune.