DOE Green Investment Portfolio: Is This Government Qua Private Equity Investor Receiving Fair Criticism?


By: Adam Levy

During the first debate, presidential candidate Mitt Romney called Tesla Motors, along with Solyndra, Ener1, and Fisker, “losers.” Governor Romney reiterated his displeasure with the Department of Energy’s (“DOE”) green investment portfolio in the last debate, and the recent bankruptcy filing of A123 has encouraged others to launch similar criticism. Most of these companies received loans or loan guarantees from the DOE intended for the development of innovative green energy technologies. Here is a list of all the DOE green energy loan projects for reference.

Whether this or that energy company is a “loser,” however, misses the point. The DOE’s portfolio and all of its consequences should be judged as a whole. This post will discuss recent developments involving the so-called “loser” companies mentioned above. It will then discuss whether it is fair to characterize the DOE’s support of these and other start-ups as a failure.


Californian solar panel creator Solyndra, now infamous, received $535 million in DOE loan guarantees in 2009 to help it develop its solar energy technology. As widely reported, there were some transparency issues surrounding Solyndra’s financials, causing the FBI to investigate Solyndra for possibly misleading the government when the guarantees were made. In September of 2011, Solyndra filed for Chapter 11 bankruptcy as a result of increasing foreign competition and plummeting costs for materials used in the products of rivals. (Bankr. D. Del.). Solyndra’s plan to exit bankruptcy was recently approved. Although the DOE made Solyndra’s debt to the U.S. senior to the debt of others to ensure a higher bankruptcy payout, the DOE lost top priority status to DIP financiers.


Battery-maker Ener1 has fared better than Solyndra. It received a $118.5 million DOE grant, which was part of a $2.4 billion investment in electric vehicles (“EV’s”) made through the American Recovery and Reinvestment Act of 2009, commonly referred to as “the stimulus.” In February 2012, Ener1 also filed for Chapter 11. (Bankr. S.D.N.Y.). Ener1 only received about half of its DOE grant before entering bankruptcy. The impetus for its filing was defaulting on bond debt after investing heavily in EV maker Think, which also went bankrupt. Ener1 has since restructured its debt and (unlike Solyndra to this date) successfully emerged from bankruptcy. Ener1 recently won a second contract to produce lithium-ion batteries for Volvo’s C30 electric vehicle. A new contract with Volvo suggests that Ener1 might actually have a bright future ahead.


A123 is also an EV battery maker that filed for bankruptcy in 2012. (Bankr. D. Del.). Its troubles stemmed from Asian competition and heavy reliance on Fisker, its customer (discussed below). Before filing for bankruptcy, A123 used only about $132 million of its $249 million grant as well as $6 million provided by the Bush administration in 2007. That money was used to build factories in Michigan, which plan to remain open for now. Attacks on A123 have not risen to the level of those against Solyndra—and rightfully so for the following reason. Johnson Controls, a Wisconsin based EV battery maker, said it would provide $72.5 million for A123’s reorganization in bankruptcy, hoping to acquire its key assets, including: two Michigan plants, its technology, customers and an equity interest in battery facilities in China. Therefore, the progress A123 has made will be absorbed by another innovative U.S. company. Barclays Capital analyst, Brian Johnson, stated that the deal would assist Johnson Controls to become “the U.S.-based player” in the market for lithium-ion batteries.


According to Fisker’s spokesman Roger Ormisher, Fisker is far from a “loser.” They are a small business that sold 1,500 cars, raised over $1.2 billion of private equity, and are now expanding exports to China and GCC countries. Just recently, Fisker received $100 million in new private funding. In terms of public image, celebrities like Leonardo DiCaprio and Justin Bieber have been infatuated with Fisker’s Karma, a sleek and muscular hybrid that can be driven in purely electric mode, 0-60 in 6.3 seconds, while producing low Co2 emissions.

Admittedly, Fisker has experienced a laundry list of not-so-promising events, including cars catching on fire, recalls of hundreds of cars, missing DOE payments resulting in a freeze on its loan, and missing production targets (Fisker missed Karma’s 2009 target release date). It should be noted, though, that it took Fisker both less time and money to produce the Karma than Chevy took to produce the Volt. It is not unreasonable to expect that a new company trying to revolutionize the automotive industry would experience some significant problems at its start. That is, until you consider the success of Tesla Motors.


Tesla Motors (its namesake Nikola Tesla was an inventor that made critical contributions to electricity) is a new automotive company built from scratch that is challenging the way we think about cars. Tesla makes fast, Aston Martin looking EV’s, including their Roadster that can do 0 to 60 in 3.7 seconds and run 245 miles per charge with any conventional 110-volt or 220-volt power outlet. Tesla has placed recharging stations around the country, calling them Tesla Superchargers, for re-energizing during road trips.

Tesla used much of its $465 million DOE Loan on making its newest model, the Model S, which is approaching affordability starting around $50,000 with a federal tax credit. The Model S gets 300 miles per charge compared to Karma’s 51.6 miles per charge in electric-only mode. After seeing the Model S in action here, you can reserve it here and join about 12,000 others in line.

Post IPO, Tesla’s shares started at $17 dollars and have recently been trading around $30, demonstrating the public’s optimism about Tesla’s products and operations. Much of the optimism probably stems from Tesla’s Chairman, Product Architect, and CEO, Elon Musk. A guru pioneer in business, science, and engineering, Musk was also the inspiration for Robert Downey Jr.’s depiction of Tony Stark in the recent Iron Man and Avengers movies. Musk founded PayPay and SpaceX, the first commercial company to recover a spacecraft from Earth’s orbit successfully. Just prior to last week’s presidential debate, Musk outlined some of Tesla’s most recent achievements in a blog post:


  1. Tesla expects to be cash flow positive at the end of November
  2. Production rate in the last week of September was roughly 100 vehicles, four times greater than production in the first week of September
  3. Tesla completed production of 359 vehicles last quarter (delivering over 250 of those to customers) and has already made the 500th vehicle body
  4. Tesla has always made its DOE payments on time and has never asked to delay repayment ever
  5. Tesla initiated an advance payment to prefund the principal payment due March 2013


As Dealbook reports, Tesla is not out of the woods yet. While Tesla would not necessarily be a “loser” if it does not become cash flow positive by the end of November, investors will have some reason for concern. Tesla had only $67 million of cash before receiving the DOE loan and capital raised via its IPO. Tesla consumed $120 million of cash a quarter in 2012 in capital expenditures. But as Tesla sells the Model S, Tesla’s cash position should concurrently improve. The biggest issue will be kinks in the technology or production issues that could decrease confidence, lowering demand and enthusiasm for Tesla’s products. On this front, take comfort that NASA entered into a 1.6 billion contract with Musk’s SpaceX for 12 resupply flights to the International Space Station. This certainly says something about Musk’s handle on technology. The State of California also apparently has confidence in Tesla, recently granting it $10 million to expand its plant to create its SUV/minivan called the Model X. The expansion is estimated to create 500 American manufacturing jobs.

Is it Fair to Characterize the DOE’s Investment in Green Start-Ups as a Failure?

Taken as a whole, the DOE’s support of various innovative start-ups under the Obama administration should be praised. As any private equity fund manager knows, there are winners and losers in every investment portfolio. Although Solyndra may be a loser, other companies have shown promising results that could inspire a wave of innovation to make the changes the future will require. With that said, it is reasonable to ask, should the government be stepping into the shoes of a private equity investor in the first place? Is the government qua private equity, green-energy investor a legitimate use of tax revenue?

There are several good responses. First, the government is not doing anything that strays from American political tradition. The U.S. has a long history of supporting innovation in new high-risk, high-reward technology sectors. Forbes reports that the government has played a key role in the development of virtually every advanced technology we take for granted today in aviation, biotechnology, computers, the internet, and microchips. Indeed, leading companies like Google, Genentech and Boeing would also not exist today without government support. Second, the environment, foreign policy, and the U.S. economy are all on the line. The DOE investment is necessary to combat the serious long-term problem of our dependence on finite energy sources that emit harmful greenhouse gasses. As we all know, reliance on such energy sources also weakens U.S. foreign policy leverage (albeit to a lesser extent at the moment in light of the new U.S. oil and gas boom). The investment has also been an attempt to create sophisticated manufacturing jobs after an economic downturn, and revive manufacturing as a viable American industry.

But why is government financing necessary to cure these problems? The answer lies in the fact that the barriers to entry in the automobile and energy markets are extremely high. The inherent uncertainty in investing in new technologies, high capital costs, and long time horizons prevent venture capitalists from investing in large clean energy projects. For automobiles, there are additional barriers related to brand identity. But with less risk comes more private money to invest in novel, early-stage green technologies. The DOE’s program reduces such risk by providing companies like Tesla an opportunity to develop and compete in an oligopoly currently dominated by a few large name brand companies. Private investors can then invest in the best, already tested start-up technology. Tesla and Fisker are today raising billions in private money from investors like Mercedes and Toyota.

Additionally, the U.S. must also make these investments to remain competitive (or at least on par) internationally, as it faces severe competition from countries like China that are investing heavily in clean energy technology, which has been a key factor in Solyndra and A123’s financial troubles. It is worth noting that Chevrolet still imports battery cells from South Korea for the Volt while the DOE has supported American workers that could produce those batteries here.

Critics are quick to point to the bankruptcies of Solyndra, Ener1, and A123 when attacking the DOE’s green investments generally. It is important to be mindful, however, that the mere filing of a Chapter 11 petition does not automatically make a company a loser. Companies are increasingly using Chapter 11 as a means to restructure when using special tools of the bankruptcy system makes business sense. The automatic stay that kicks in upon the filing of a bankruptcy petition gives a debtor breathing room to negotiate with creditors. Section 346 of the Code provides a means for a debtor to obtain otherwise unavailable credit to keep the lights on. Section 365 allows companies to reject certain unprofitable contracts but keep the profitable ones. All these bankruptcy tools allow companies to continue on as a going concern. In the case of A123, bankruptcy is allowing the preservation of the progress made possible by the DOE investment. “Insolvency” is not even a requirement to a voluntary filing (see 11 U.S.C. § 301).

Additionally, in the case of Solyndra, note that other solar companies that received federal loan guarantees, including SunPower, First Solar, and Brightsource Energy, are achieving remarkable progress.

As a final point, significant intangible benefits are arising from the progress the DOE has made so far. For one, Tesla and Fisker have already debunked the belief that electric cars must be ugly and underperform “normal” cars. Elon Musk calls this “breaking a spell.” Breaking the spell should continue to inspire additional private sector investment and new competition. And hopefully, breaking the spell should also provide inspiration to companies, inventors, and consumers seeking a greener, more efficient way to use energy.


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