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Tesla Repays Its DOE Loan



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Yesterday, we learned that Tesla, an electric-car company, repaid its DOE-guaranteed loan nine years ahead of schedule. Good for Tesla and good for taxpayers. However, this goes to the core of my problem with the DOE loan-guarantee programs. As I have said over and over again, while the demise of Solyndra and Fisker Automotive and the loss of millions of dollar on taxpayers’ money is frustrating, the real problem with these loan programs is that the most of the money goes to companies that could have gotten capital on their own.

Tesla, for instance, managed without the help from the federal government for the first nine years of its existence. And who has any doubt that NRG Energy, the energy giant and the biggest recipient of the DOE’s 1705 loan program, could have gotten capital without the help of the government? I don’t. The same is true for the second-biggest recipient of the 1705 loan, Prologis. Ditto Congentrix, which received a $90 million loan guarantee from DOE even though the company is back by Goldman Sachs. You may also remember that, when SolarCity was approved for a DOE loan but was later denied (I suspect because of closer scrutiny over the political connections of DOE-loan recipients in the aftermath of Solyndra), the company then proceeded to get Bank of America to lend the company the money

What am I upset about, you ask? So the private sector doesn’t need the government to lend money to these companies, but what is the harm? If the loans are repaid or if the loans are low-risk to taxpayers, you’d think the program is a great idea.

First, I believe that the government shouldn’t be in the business of lending money to private companies or encouraging banks to lend money to companies – whether the money will be repaid or not. That’s absolutely not the role of the federal government. Besides, there is something unseemly when so much in government subsidies goes to produce a car that only a few Americans can afford. (So far, Tesla’s main product ranges in price from $62,400 to $87,400 — including a $7,500 federal tax credit, and depending on the states other tax credits can apply).

But more important, the government meddling in the lending business introduce serious distortions and also destroys the level playing field by creating unfair competition for the companies that are not getting a federal guarantee. First, the companies that benefit from the government guarantee get much better terms than they would get without the government’s help. They get lower interest rates than they would on their own and than their competitors will get, and they get to borrow more money than they would on their own and than their competitors can get. Further, the loan guarantee from the federal government opens the door to many other subsidy sources, from state governments and elsewhere. Finally, the government guarantee attracts private-sector capital that those who don’t get the guarantee won’t have access to. These distortions are important and unfair. Here are some examples of how that works:

Eric Lipton of The New York Times reported in November 2011 that green giant NRG Energy obtained a $1.2 billion guarantee to build its California Valley Solar Ranch “at the exceptionally low rate of about 3.5 percent compared with the 7 percent that executives said they would otherwise have had to pay.” The lower rate saves the company $205 million over the life of the loan, Lipton explained. The company has also received two other packages of federally backed loans totaling $2.6 billion. And the deal gets even sweeter: Section 1705 guarantees 80 percent of a project’s total cost, a much higher portion than private banks usually agree to finance. 

State backing confers subtler advantages as well. In 2010 the Government Accountability Office concluded that federal subsidies signal to investors that a company is relatively safe, a perception that helps attract additional private capital. During a July 18 statement before the House Committee on Oversight and Government Reform, Craig Witsoe, former CEO of Abound Solar, one of the Section 1705 companies that recently went under, explained that his company managed to collect an additional $350 million from private investors after it had secured its government guarantee. Much of that funding could be the product of the security that the federal support implied.

Section 1705 loan guarantees are not the only subsidies available to alternative energy firms. NRG received more than three dozen grants under the 2009 stimulus. NRG is also eligible for money from the Treasury Department’s Section 1603 grant program, which provides up to 30 percent of a project’s cost in cash. Eric Lipton calculated that the company would be eligible for a $430 million cash payment on its $1.2 billion Section 1705 project once the construction of the California Valley Solar Ranch is completed. NRG also could receive additional cash under the Section 1603 for its other two 1705 projects. 

These federal goodies are often duplicated at the state and local levels. Lipton noted that “under a state law passed to encourage the construction of more solar projects, NRG will not have to pay property taxes to San Luis Obispo County on its solar panels, saving it an estimated $14 million a year.” California offers depreciation tax breaks for renewable energy plants, reducing NRG’s corporate income taxes by $110 million. 

What is true for the 1705 loan program is true for all other loan-guarantee programs. In other words, getting a loan guarantee by the federal government gives a considerable advantage to the company receiving the loan over its competition. This is why many companies that could get capital on their own are eager to get their hands on government-subsidized loans. In fact Elon Musk said that much about the loan Tesla received from the government:

Elon Musk had something to clarify. He believes government subsidies are usually bad, except when they are good.

Tesla Motors didn’t need the federal government loan to go public or to survive, said Musk, chairman, product architect and chief executive of the electric-car company.

Musk jumped in to comment on government subsidies even before the topic was raised by Alan Murray, who moderated the opening session of The Wall Street Journal’s ECO:nomics conference in Santa Barbara on Wednesday. Musk said that generally he doesn’t believe government subsidies are good, but in some cases they do help.

In the case of Tesla, the $465 million loan that was awarded to the company by the Department of Energy in January 2010 helped the company stage a successful initial public offering the same month that another company backed by a federal loan, Solyndra, pulled its initial public offering. Musk said Tesla’s IPO would have happened anyway, though “it wouldn’t have been as good.”

In the end, we are all better off that Tesla has reimbursed its loan guarantee, and certainly the company should be commended for it. Tesla, I am told, produces fantastic cars and, as long as consumers are willing to pay for them, it should be fine. However, if people aren’t willing to buy the car, there is no reason for taxpayers to keep the company afloat to sell cars that taxpayers don’t want to buy at the price it is sold for. Ideally, the company will renounce the many tax credits and other subsidies it received for its car and fly on its own. I also hope that, in the future, the federal government will get out of the private-sector lending business and stop subsidizing companies of any sort, whether green-energy ones or oil-and-gas firms.

The Wall Street Journal has an interesting piece on Tesla today.



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