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InsiderOnline Blog: February 2012

Investment that Has to Be Subsidized Is Not Worth Having

The recent sale a solar ranch provides an example of Milton Friedman’s dictum, “Investment that has to be subsidized is investment that’s not worth having.” First Solar, a maker of photovoltaic solar modules, sold its Antelope Valley Solar Ranch 1 (AVSR1) to Exelon for $75 million, according to a recent SEC filing. The ranch comes with a Department of Energy loan guarantee of $646 million. When you do the math, as David Kreutzer does (“Money Loser + $100 Million Subsidy = Money Maker?” The Foundry, February 13, 2012), the loan guarantee turns out to be more valuable than the company as a whole:

Using a ballpark guess that the loan guarantee would lower the interest rate by two percentage points (say, from 6.5 percent to 4.5 percent), we can calculate the annual savings. For a 20-year loan, that saving is a little under $9 million per year. […] [T]hose savings have a present value of about $100 million—more than the purchase price of the project and the loan guarantee together. […]

To be fair, the $646 million is not likely to be paid all at once on day one. Adjusting for that would lower the value of the guarantee. On the other hand, the interest rate to finance the project without the loan may be higher than 6.5 percent per year, which would raise the value of the guarantee.

In any event, working with round numbers, subtracting the value of the loan guarantee from the purchase price gives a negative number: –$25 million.

It’s as if, says Kreutzer, someone sold a house containing a box with $100,000 in it for less than $100,000. And the taxpayers are the ones who put the box of money in the house.

Posted on 02/13/12 06:13 PM by Alex Adrianson

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