How Has America Fared As an Investor?

This week, the U.S. department of Energy announced that Tesla Motors (NASDAQ: TSLA  ) had repaid the remaining balance on its $465 million loan. The loan, part of the DOE's Advanced Vehicle Technology Manufacturing program, was returned to U.S. government coffers -- with interest -- nine years early. That may sound like big money, but $465 million is pennies in comparison with the $34 billion the DOE has committed in loans for various alternative-energy projects and the development of hybrid and electric vehicle manufacturing. 

There are few things that polarize the American public more than having the government provide financial assistance to private industry. The label "crony capitalism" is a popular phrase among critics. Providing federally backed loans to private industry does pose a deep dilemma regarding the interaction of governments and the free market. For a moment, though, let's set aside the philosophical debate and look at the DOE's program pragmatically. Certainly, the U.S. doesn't want to lose money on these investments, but it's not out there looking to make a huge monetary return, either. Let's look at two key reasons the Department of Energy might not be committing the free-market heresy that many claim it is.

Prime the pump for private investment
According to the DOE, the stated objective of the Section 1703 Loan Program is:

... to support innovative clean energy technologies that are typically unable to obtain conventional private financing due to high technology risks. ...Technologies with more than three implementations that have been active for more than five years are excluded. 

By providing federally backed loans to these higher-risk technologies, it is in turn de-risking the investment to a certain degree. As the technology finds commercial application and becomes more attractive to private investors, the government can bow out and let the market take care of the rest.

So far, it appears that the program is doing just that. Goldman Sachs  (NYSE: GS  )  just recently announced that it will invest $500 million in SolarCity to reduce upfront costs for SolarCity's customers (and make a hefty profit on long-term contracts). The investment bank also plans to invest $40 billion over the next decade on alternative-energy projects. Warren Buffett is even getting in on the action. MidAmerican Energy, part of the Berkshire Hathaway (NYSE: BRK-B  ) portfolio, has invested $5.4 billion in three major solar projects, two of which got started on DOE loans.

Let's also not forget one of the largest recipients of DOE loans: Ford (NYSE: F  ) . The company received $6 billion to retool several facilities around the U.S. to manufacture electric and hybrid vehicles. Today, these factories churn out one of the fastest-growing segments of Ford's vehicle lineup. The company will surpass last year's total hybrid sales this month, and it expects 2013 hybrid sales to nearly double the previous record in 2010. Unlike Tesla, Ford has yet to repay its DOE loan in full, but with numbers like this, it should be able to do so rather easily.

You can argue that private investment could have done it on its own, I can't refute that. Instead of thinking of these DOE loans as the only reason these projects succeed, think of them as the choke on an engine. Injecting low-interest, federally backed loans to these "cold engine" industries helps them get up to speed and running on all cylinders in the open market faster than they might without them. 

Reduce energy and the overall trade deficit
For environmentalists out there, I'm about to break your heart. Despite the claims that these programs will reduce fossil-fuel consumption, it misses out on one small point: These are reductions in U.S. consumption, not global consumption. Even if we don't use fossil fuels, somebody else will.

Strangely, this is what should make alternative energy so attractive to the United States.

According to the U.S. Energy Information Administration, the U.S. imports about 17% of its total energy needs. Being a net importer of energy profoundly affects the country's bottom line, as nearly 50% of the U.S. trade deficit comes from energy imports. Some scholars have argued that an increase in the deficit leads to greater U.S. economic growth. Well, if a majority of that deficit is energy shipments to fuel the economic engine, then of course an increase in the deficit will correlate with economic growth. If that massive energy deficit can be replaced by domestic sources, though, then we're talking about moving toward something the U.S. hasn't seen in almost 40 years: a trade surplus.

With America in the midst of an oil and gas boom, some projections from the EIA estimate that the U.S. will be a net natural gas exporter by 2020 and a net oil exporter by 2035. By increasing our alternative-energy consumption -- a purely domestic source -- we can more quickly replace our fossil-fuel consumption and export it to premium markets much sooner than projected. Doing so would dramatically shift our energy deficit and take a massive chunk out of the United States' $38 billion trade deficit.

What a Fool believes
Both sides can debate the philosophical aspect of this topic until they're blue in the face. Critics will point out the $535 million that went down the drain with Solyndra. Defenders can now point to the $465 million Tesla paid back to highlight the project's success. Combined, though, these two loans represent only 3% of the entire loan program. Rather than giving a final verdict on the program based on these two companies, we should should see how the entire loan program does at accomplishing the goals I've mentioned. If these programs can deliver a market primer for alternative energy and help us bring down the energy deficit, then it has done its job.

Warren Buffett knows a thing or two about investing. So when Berkshire Hathaway invests big money into alternative energy, investors should pay attention. One of the biggest winners from the Berkshire solar buy is First Solar. As the United States' largest solar company, it could do well with Wall Street dumping money into the solar industry. If you're looking for continuing updates and guidance on the company whenever news breaks, The Motley Fool has created a brand-new report that details every must know side of this stock. To get started, simply click here now.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2013, at 1:29 PM, mdk0611 wrote:

    How much of the $465 million Tesla paid back was accumulated through government tax credits for alternative energy?

  • Report this Comment On May 31, 2013, at 2:15 PM, BMFPitt wrote:

    The headline had nothing to do with the article.

  • Report this Comment On May 31, 2013, at 3:17 PM, remmdawg wrote:

    I agree with BMFPitt. The headline is incongruent with the content of the article. First of all, "America" is a general term which could refer to individual American investors as well as the government. The article specifically discusses United States government "investments." But it doesn't provide any real overall data on the performance of the United States government "investments." Perhaps because it would be extremely difficult to accurately estimate returns on government "investments." You would have to tally up all the bailouts as well as all the crony capitalist handouts and tax breaks. You would also have to factor in the cost of borrowing all those trillions for "investment." Then you would have to try and figure out if the government actually made more money than it handed out. I would make an educated guess that it doesn't. Why? Because it's spending other people's money. There's no incentive for making a decent return on investment or doing due diligence on the risk/reward of any "investment." The entire concept of government "investing" in private companies in a myriad of ways defies common sense and economic principles. It's a setup for corruption and waste that dwarfs Madoff's crimes.

  • Report this Comment On May 31, 2013, at 3:19 PM, damilkman wrote:

    I can only speak for myself. I have no issues with the government making loans to a single entity or class of people providing it does not do the following. It is done based on value and not connections and crony capitalism. This is the big issue with Solyndra. The other item is it must not distort the market. A case where I believe the market is being distorted is the student loan program. Higher education continues to increase faster then inflation because there is someone willing to pay the bill.

    What I do not like about this article is we cannot really say how DOE is doing on return. We have examples of success and failure. However, we have no clue on the bottom line. Is the DOE breaking even on their loans or not? As BMFPitt pointed out the answer to the question has not been made.

  • Report this Comment On May 31, 2013, at 4:29 PM, SkepikI wrote:

    Tyler: I had high hopes for this article and read the whole thing, only to be disappointed with the vague analysis, sparse examples and to be blunt complete lack of logic driven conclusions. I was expecting to see maybe a graph of DOE "investments" ( I use the term loosely) over time, maybe a decade or so, and the repayment rate, default rate, and perhaps a summary of 'lost' loans no longer recoverable. Alas, I see nothing of the sort. The list of busted companies is long and successes like Tesla (still to be fully analyzed in my book) is short. Still, I don't know how it all stacks up in detail. Apparently, neither do you, which should tell you something.

    To go along with Fords technology loans that we stand some sort of chance to recover, now that Ford is actually making money, there is the same sorts of loans to GM and Chrysler, which I understand were FORGIVEN? Written off?? Forgotten? as part of the bail outs. Then there is the Wind Production Tax Credits, loans to Wind manufacturers (no idea on status of those) plus a few other "minor" actors whose loans/grants are now irrecoverable like Solopower, A123, Revolt, etc etc. I really was looking forward a well researched, somewhat detailed article that summarized "what we know so far" instead of the one or two off examples so common.... silly me.

  • Report this Comment On May 31, 2013, at 5:47 PM, TMFDirtyBird wrote:

    @Skepikl

    In terms of evaluating the current iteration of the DOE loan program. The program was authorized by Congress in the Energy Independence and Security Act of 2007 and the first loans were issued in 2010.

    Of those loans, Tesla ($465 m) has repaid, Solyndra ($535 m), Solopower ($197 m), Abound Solar ($400m), and Beacon Power ($43m) are bankrupt and considered lost loans. The remaining $32 billion in loans are still considered unresolved or outstanding.

    When allocating funds for this project, Congress estimated approx. $6.8 billion as a loan loss reserve.

    Ford and Chrysler both received funding through the economic stimulus plan and not the DOE loan program. A123 and ReVolt received grant money rather than loans, both of which were not part of the DOE program, either.

    If you would like to track all of the DOE loans, you can do so here:

    https://lpo.energy.gov/our-projects/

    I will admit that I am not up to date of the details of the money that was distributed as part of the economic stimulus plan. If there was any confusion separating those two programs in this article, I apologize. Perhaps something that will be re-visited later on.

    Hope this helps.

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