The Department of Energy's financial handouts were supposed to help American companies gain a foothold in emerging industries and fuel manufacturing job growth. Solar power and battery technologies were the poster children and were expected to lead the way. President Obama visited plants and touted new jobs, and stocks hit the market with a great deal of enthusiasm.
The idea was great. Manufacturing companies can have a hard time getting the funding they need to expand, and if we don't push them along here, China will take over eventually. The problem is that some of the most highly touted government-backed companies have been failures. Bankruptcies, like Solyndra's, have given the DOE a black eye, and with electric vehicles selling more slowly than expected and solar prices falling, there's likely to be more bad news in the future.
Problem No. 1: Stimulus doesn't help adoption rates
A fundamental flaw in the DOE's plan was projections of how fast we would adopt new technologies and how fast the corresponding costs would fall. Invariably these two factors are linked, so when one fails, so does the other.
The battery market has been a prime example. Both Ener1 and A123 Systems (Nasdaq: AONE ) received DOE grants to build out capacity in the U.S., and both have failed to live up to their potential. Ener1 has already filed bankruptcy, although its DOE-backed subsidiary EnerDel was left intact, and A123 Systems is in a world of hurt. How did we get here?
A123's problem has been underutilization of the immense amount of capacity the government helped the company build. Before the DOE grant took hold at the end of 2009, the company had 169.3 MW of capacity available, which was built up to 645.8 MW to end 2011. In the fourth quarter of 2011 the company shipped only 21.7 MW of batteries, which would have been 51% of the company's quarterly capacity in 2009. For the full year the company shipped 146.4 MW of batteries, still less than the 2009 capacity.
When you build out capacity too fast, plants, production lines, and workers sit underutilized, costing you money. This underutilization is why the company's losses have been growing despite increased revenue, while the stock is plunging to dangerously low levels.
All has not been lost, however. In the same round of funding that gave A123 Systems $249.1 million and EnerDel $118.5 million, the DOE also gave battery-related grants to General Motors (NYSE: GM ) , Ford (NYSE: F ) , and Polypore (NYSE: PPO ) . These companies are profitable and are more likely to grow closer to the potential the DOE had in mind when grants were announced, even if the timeframe was longer than originally planned.
Problem No. 2: Betting on technology
When the DOE picked companies for its grants and loan guarantees, it was essentially making bets on each company's technology. That has been a public failure on the government's part, partly because it's extremely difficult to do. Even if you're an experienced venture capital firm you fail on most technology bets.
Solyndra's technology was cool, but it never competed with the falling cost of silicon-based solar modules from Asia. A123 and Ener1 still have strong technology, but adoption rates and costs couldn't keep up with the market. Where these companies failed, others will succeed.
Bets on technology may be the DOE's biggest mistake. The private markets are for high-risk projects, not government funding -- a lesson learned the hard way.
Wait, there are success stories?
DOE loans haven't been a complete failure. By all indications, Tesla Motors (Nasdaq: TSLA ) is looking like a winner in the electric-vehicle market. Ford and Nissan have gotten federal loans to expand U.S. capacity for more fuel-efficient vehicles as well, which is driving sales. There may be failures in electric vehicles, but there will be successes, too.
Loan guarantees for electric power plants have also been successful. Plants built by First Solar and SunPower have been some of the largest recipients for these guarantees, and they help bring down funding costs for owners at little to no expense to taxpayers. Solyndra, Evergreen Solar, Energy Conversion Devices, Q-Cells, and others may get the headlines, but the solar market will live on with some of the companies assisted by the DOE.
The problem is, most of the money went to things like efficiency, carbon capture, solid waste recovery, etc. These aren't sexy, they don't create headlines, and they are unlikely to create the media buzz a bankruptcy might, even if they're successful.
Has the DOE's stimulus been a complete failure?
The one thing I've learned about renewable energy in the last few years is that without a financially sound base, there's little hope for a company. If solar products don't provide an attractive return for investors and electric-powered vehicles don't save enough fuel for consumers, they're simply not going to sell. And the goal is to end these subsidies eventually, so eventually a sustainable business must emerge.
The DOE gave grants and loan guarantees before the industry sorted out what technologies and what companies would be the winners and losers. Therefore there will be some black eyes on the program before all is said and done. Does that make it a failure? No, but it does make the investment questionable.
What we may take away from this, more than anything, is that the government can incentivize behavior it wants to encourage, but investing in companies is a bad way to do that. Grants for cash-generating utility projects, tax incentives for investment, and investments in efficiency have paid off in many ways. But a few dings, no matter how small, on $34.5 billion in total awards can make a program look like a colossal failure, even if it has done some good in the energy industry.
The energy industry can be an intimidating place for some investors. But we've uncovered one winner that continues to benefit from rising oil prices. To get instant access to this report, "The Only Energy Stock You'll Ever Need," simply click here -- it's free.