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November 4, 2011

Beacon Power: Another DOE Loan Bites the Dust

November 4, 2011
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When Solyndra went belly-up, the proponents of the Department of Energy’s loan guarantee program warned us not to let one rotten apple spoil the whole bunch. With last weekend’s bankruptcy filing of Beacon Power, it looks like there are at least two rotten apples—and counting. After Beacon’s filing, the DOE was quick to reassure taxpayers that their money was safe, but only two days later that turned out to be wrong too. The episode is just another reminder that the federal government has no business playing banker with tax dollars.

Bad News and Good News

The Monday after Beacon Power filed, The Hill carried the story:

A Massachusetts company that received a $43 million Energy Department loan guarantee last year filed for bankruptcy Sunday, a step certain to fuel criticism of federal green energy financing in the wake of the solar company Solyndra’s collapse.

Beacon Power Corp., which develops energy storage systems, filed for bankruptcy protection in the U.S. Bankruptcy Court in Delaware.

Beacon Power had received a federal loan guarantee to help build an energy storage plant in Stephentown, N.Y., that began operating in January. The Treasury Department’s Federal Financing Bank provided the loan.

Critics of the DOE loan program were quick to pounce:

“This latest failure is a sharp reminder that DOE has fallen well short of delivering the stimulus jobs that were promised, and now taxpayers find themselves millions of more dollars in the hole,” said Rep. Cliff Stearns (R-Fla.), the GOP’s point man on the Solyndra investigation and a senior member of the Energy and Commerce Committee, in a statement to The Hill and other outlets.

Naturally, the DOE rushed to do damage control, and reassure taxpayers that the government was looking out for them:

Energy Department spokesman Damien LaVera said there are “many protections for the taxpayer” in the agreement with Beacon Power.

“The Department’s loan guarantee is for the project Stephentown Regulation Services, LLC, not the parent company, and the loan was set up in a way that ensures the Department is not directly exposed to the liabilities of the parent company,” he said in an email Monday.

“It is important to note that this plant itself, which is operational and generating revenue, is a valuable collateral asset. In addition, under the terms of our loan guarantee agreement, Stephentown Regulation Services, LLC currently has cash reserves and proceeds from the plant that it was required to hold as collateral on the loan,” LaVera said. [Bold added.]

LaVera is right, it would be reassuring to taxpayers if the loan to the Stephentown project were completely separate from the bankrupt parent company, and if those cash reserves were still airtight collateral on the loan.

Unfortunately, those taxpayer protections evaporated a mere two days later at the bankruptcy hearing, as the WSJ reports:

A Massachusetts company that received a $39 million loan from the Department of Energy before declaring bankruptcy won interim approval Wednesday from a Delaware judge to use cash collateral for the loan to help pay operating expenses during its reorganization.

Judge Kevin Carey overruled an objection by the DOE in granting permission to Beacon Power Corp. to use some $3 million in cash collateral to keep its business going.

In response to Beacon’s request to use the cash collateral, the DOE asked for a breakdown of expenses related to the Stephentown facility. [Beacon attorney William] Baldiga said providing a breakdown is virtually impossible because the company is highly integrated.

“There are virtually no expenses that are paid at the Stephentown level,” said Baldiga. [Bold added.]

Oops. Taxpayers should at least be glad that their cash collateral was safe and sound for a full 48 hours after the DOE issued its statement.

Why Is Uncle Sam Investing in Flywheels?

Besides the comedy, the episode raises the more fundamental question: Why is the federal government providing loan guarantees to a company working on flywheels, anyway? Beacon’s website gives part of the story:

The world’s first 20 MW flywheel energy storage plant, designed, built and operated by Beacon Power in Stephentown, New York, reached full capacity on June 21, 2011. The plant operates continuously, storing and returning energy to the grid to provide approximately 10% of the state’s overall frequency regulation needs.

The reason the DOE is committed to spurring flywheel development is that solar and wind power are intermittent energy sources. In contrast to more conventional forms (such as fossil fuels, nuclear, and hydropower), solar and wind electrical generation do not provide a steady and reliable source of power. If such technologies are ever to serve more than a niche market, they will need to be supplemented with extensive storage capacity. As a 2008 Sandia National Laboratories report explained:

PV [Photovoltaic] systems are a small part of today’s electricity infrastructure and have little effect on the overall quality or reliability of grid power. Nevertheless, state and federal efforts are currently underway to greatly increase the penetration of PV systems on local and regional utility grids to achieve goals related to emissions reduction, energy independence, and improved infrastructure reliability. However, when PV penetration reaches sufficiently high levels (e.g., 5 to 20% of total generation), the intermittent nature of PV generation can begin to have noticeable, negative effects on the entire grid.

Figure 1 [listed in the report] illustrates the transient nature of PV generation as clouds pass over a typical residential system during the course of a day. Both the magnitude and the rate of the change in output are important: in mere seconds, the PV system can go from full output to zero (essentially), and back again. At high levels of PV penetration, this intermittency can wreak havoc on utility operations and on load-side equipment, due to fluctuations in grid voltage and power factor. Fluctuations at this scale simply cannot be allowed. [Page 10, bold added.]

The use of extensive storage (whether in batteries, flywheels, etc.) is thus necessary if the shares of solar and wind power are to significantly grow in the electrical mix. For this reason, the comparisons of generation costs among different technologies are often misleading, because solar and wind should carry the additional costs of storage technology.

These costs can be quite significant, depending on the storage technology. The Sandia report (page 22) shows that at least for residential and small commercial applications, storage costs (as of the 2008 report) ranged from $150/kWh for lead batteries, to $1,000/kWh for high-speed flywheels, and over $1,300/kWh for lithium ion batteries.

Conclusion

The bankruptcy of the second DOE-backed company in the renewable energy sector is yet another red flag that the government has no business running a bank (or hedge fund) with tax dollars. Government officials shouldn’t be picking specific winners and losers, even if one believes in the threat of climate change. The reason the private sector won’t fund these projects is that they are unprofitable, and that’s exactly why the government shouldn’t be backstopping them either.


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