Government Is A Lousy Venture Capitalist
Gary Gerard,
dumbhoosier.com
Solar Trust of America filed for
bankruptcy last week.
This is the outfit that won a conditional commitment for a $2.1
billion loan guarantee from the U.S. Department of Energy last
April. You know the drill. Government officials making bold
statements about the "technology of the future."
It's starting to get a little weird, frankly, this whole green
energy strategy. In this case, Solar Trust didn't receive the loan
guarantee, but this incident still begs the question: Why in the
world would the government commit $2.1 billion in loans to a company
that's on the verge of bankruptcy?
Reuters reports that Solar Trust was based in Oakland, Calif., and
held rights for the 1,000-megawatt Blythe Solar Power Project in the
southern California desert. This adds another to the growing list of
bankruptcies of companies in the failed solar industry shakeout.
Most noteworthy was Solyndra, in northern California, which
defaulted on a $535 million federal loan guarantee. Those guys went
broke even after the government ponied up a half billion dollars for
their project.
I am absolutely not against "green" or "clean" energy. I think those
types of energy should be explored and developed. But at the same
time, I think venture capitalists might be better at assessing the
relative feasibility of some of these projects than the government.
Sometimes, it's as if the government throws money out there on a
whim.
I know that's not true. I know they study these projects and do
research before the commit to funding. But it's not their money
they're putting up, it's ours. So there's lots less incentive to be
careful. If you're running a venture capital firm, you're not risk
averse, but you're really thorough. The government? Not so much.
Take the Chevy Volt, please.
General Motors has halted production of the car because it's not
profitable and it just won't sell. Now let's think about this for a
moment. The government subsidizes the company that makes it. The
government subsidizes the car's research and development costs. The
government subsidizes the car's production. Then, the government
subsidizes it's sale by giving tax credits to consumers who buy it.
And this car's production gets halted?
This tells me the market simply isn't ready for the Chevy Volt. Is
it the $40K-plus price tag? The range? I don't know. But even with
all those subsidies, the thing still didn't make it in the market
place. Should the government be lavishing huge amounts of cash on
things like these?
Look at a place like Silicon Valley - the birthplace and current
Mecca of the tech industry. Loaded with companies like Apple, Cisco,
Compaq, Google, Hewlett-Packard, Hitachi, IBM, Intel, Lam Research,
Lucent Technologies, Microsoft, National Semiconductor, Oracle, Sun,
Yahoo! It's the who's who of the world of technology.
These are some of the most successful companies in the history of
mankind – all spawned by venture capital. I don't think you can
force something into the market by throwing money at it. It's either
marketable or it isn't.
I see all these wind farms going up and that's a good thing. That's
some nice, clean energy. But, according to zfacts.com,
here are the subsidies:
First, there's the production tax credit which began at 1.5
cents per kilowatt hour in 1992 and which increases at the rate of
inflation. It is now about 2 cents per kilowatt hour. Almost all
wind generators have qualified for this and will receive it for 10
years. The second subsidy is double declining 5-year depreciation.
This allows investors to take a 40 percent tax deduction the first
year and a 24 percent deduction the second year. At the end of
five years the deduction is complete. Assuming the investor can
use this against a 43 percent combined federal-state tax rate, it
is worth about an additional half a cent per kilowatt hour. The
third subsidy is the most obscure and most unpredictable. About 20
states have adopted renewable portfolio standards. An RPS requires
retail electric providers to purchase a certain percentage of
their power from "renewable" resources, and wind is often the
cheapest alternative. To the extent wind power costs more than is
covered by the first two subsidies, an RPS requirement will force
the retailer to provide the necessary remaining subsidy.
Now, when you figure the up-front costs of building a wind turbine
or a coal-fired power plant, the capacity (usage) factor, fixed
costs and variable costs, coal comes in at about 4.5 cents per
kilowatt hour and wind comes in at 7.5 cents. Of course,
wind-generated electricity is cleaner and better for the
environment. It just costs a lot more to generate.
The only thing that makes wind power feasible is the subsidies.
Those are our tax dollars at work. I don't mind government
subsidizing things that work. But I get a little leery when
government gambles boatloads of tax dollars on iffy projects that
likely won't work.
Certainly, projects funded by venture capitalists go bad from time
to time. But not nearly as often or on as grand a scale as
government-funded debacles. It just seems to me the private sector
is better at this sort of thing.
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