The SolarCity debacle keeps going from bad to worse and may take down Cuomo with it, demonstrating the futility of politicos picking economic winners.
Andrew Cuomo is a control freak, power-player type politico with a bad case of the fatal conceit; that disease infecting the brains of government officials who think being elected or appointed gives them the clairvoyance to do a better job of picking economic winners and losers than the free market. Indeed, he’s the poster child for the syndrone and it may be about to devour him both politically and legally. Believing his own politically correct schtick, he picked what he thought was an obvious winner – SolarCity – and it’s turning out to be a big loser. Meanwhile, he killed natural gas development, the one thing that might have worked with no help from him but yet deliver something he could have gotten credit.
We’ve followed the SolarCity saga here as the prima facie case for reining in the cronyism that virtually defines New York politics. It demonstrates everything wrong with a system that somehow finds reasons not to produce the natural gas New Yorkers use more of every day, while it subsidizes boondoggle competition for the sake of signaling the superior virtues of New Yorkers. Some readers may be tiring of the story, but things just keep getting worse and the troubles are moving closer to Cuomo with every passing week.
The construction delays, for example, just keep coming. There was this last month:
SolarCity’s Buffalo factory likely won’t hit full production until the summer of 2017 – somewhere between three to six months later than the initial timetable.
SolarCity CEO Lyndon Rive said it will take longer than expected to order and receive some of the sophisticated equipment that will be used to produce solar panels at the South Park Avenue factory…
The $900 million factory, which is being built and equipped through a $750 million state investment, initially was expected to reach full production during the first quarter of next year. Rive said during a stop in Buffalo in December that the timetable had been delayed until the second quarter…
The news of the delay came as SolarCity’s stock plunged by 21 percent to its lowest level since April 2013 after the company fell short of its fourth-quarter growth targets and warned that its first quarter would be weak because of its decision to stop installing rooftop solar systems in Nevada after regulators there slashed incentives.
SolarCity shares fell by $7.31 to $19.04 in mid-day trading Wednesday.
Next came the possible real explanation for the delays:
State officials promised late Friday that tens of millions of dollars will start flowing first thing next week to financially strapped contractors on the SolarCity construction project, saving the jobs of 200 workers laid off earlier in the day because the state had fallen months behind in payments…
Meanwhile, state officials still seemed at a loss to explain how the government had failed in the first place to pay more than $82.5 million in contractor invoices on a Buffalo Billion project. The shortfall since October left the state at least three months behind in its debts, even though a Western New Yorker – developer Howard Zemsky – heads the economic development agency that is responsible for the governor’s initiative.
Cuomo and his staff had remained largely silent and invisible Friday, even as the major billing problem led to plumbers, steamfitters, carpenters and other unionized workers being laid off, at least temporarily. That threatened to embarrass the governor and hurt a major constituency that helped propel him into office and supported his efforts…
Payment delays are not unusual on large construction projects, especially when the government is involved, but SolarCity is much larger and more visible. Friday’s problem demonstrates a potential ongoing hiccup, not only with the Buffalo Billion, but also with the state bureaucracy and the complexity of the RiverBend project…
It’s also not the first such delay associated with Buffalo Billion payments. The second round of payments to the 43North winners were delayed last April, as officials worked to get the $5 million program set up and working smoothly, and at least one contractor said he hasn’t been paid yet for work on the new corporate headquarters of Athenex, on the sixth floor of the Conventus building…
“All of the Buffalo Billion money that was budgeted has been approved for this and authorized by ESD months ago,” he said. “We can potentially authorize more money to them, but only when a source of funds is identified.”
If approved, the $100 million in funding would bring the total authorized for the project up to $350 million. It’s not clear when the state will provide the remaining $400 million of its $750 million commitment.
Then, as the questions got louder, Andrew Cuomo characteristically put someone else out front to take the heat; Lt. Gov. Kathy Hochul:
It doesn’t help that many questions remain unanswered, like how did the state fall so far behind on payments in the first place?
“That’s not something that I have the details on so I’m not going to speculate,” Hochul said.
The state has been relatively silent on the issue. ESD has released three short statements, all after business hours, on Thursday, Friday and Monday.
Nobody from the state agency or SUNY has appeared on camera or directly answered questions from reporters. There’s been no statement from Governor Cuomo either, since the story broke.
And, there was this explanation, too, which including the typical political spin about not believing what one sees with one’s own eyes:
Hochul insisted Tuesday that there is no problem with the SolarCity project beyond what Cuomo administration officials have said will be a one-time mistake. “In the short term, it’s being resolved,” she said, adding that the overall project has “never been delayed, and it’s actually on schedule.”
Later in the day, state officials, speaking on condition of anonymity, said the funding problem developed because of a change in construction plans. The state set aside $350 million for construction of the factory, with an additional $400 million to pay for the various equipment that SolarCity is set to use in its manufacturing process. That $400 million for costs of equipment – called “tools” in these projects – was going to come through an array of state agencies, including the Dormitory Authority and the New York Power Authority.
However, while the building is under construction, it turns out that between $60 million and $80 million had to be spent from the construction pot of funds on various equipment that the Cuomo administration thought was not needed until down the road, according to the officials.
“That created the hole we have today,” one of the officials said.
Really, or is the fundamental problem of the risk and poor economics associated with so many renewables; economics that only work with massive subsidies from political patsies hoping to enrich themselves with a ton of graft courtesy of gullible New Yorkers seeking to soothe their politically correct consciences? Well, consider this from MIT Technology Review (emphasis added):
But the real risk lies in the rapid advance of solar technology: a record-setting panel today might look relatively inefficient three or five years down the road. Soon after SolarCity showed off its high-efficiency panels last October, Panasonic topped its rival by claiming that its new panels would reach efficiencies of 22.5 percent. Meanwhile, efficiencies in the lab are even higher: researchers have made exotic solar-cell materials with efficiencies of up to 40 percent. “I think that within 10 years, most manufacturers will be producing panels over 20 percent efficiency, with the best commercial panels reaching over 23 percent,” Green says.
O’Sullivan adds: “For now, SolarCity is moving the boat out as far as it can with, generically speaking, contemporary technology. But we’re beginning to approach a choke point for the economics of any silicon-based technology”—including the new cells SolarCity is bringing online. Future advances, he says, will entail much lighter, flexible panels that offer much higher efficiencies and are even cheaper to install—and thus produce electricity at a much lower cost.
This is the danger for large boondoggle projects, of course, as compared to smaller, more adaptable endeavors that don’t involve massive infusions of public money. Small to mid-sized gas companies such as Cabot Oil and Gas, Chief Oil and Gas or Range Resources have demonstrated the capacity to innovate and adapt to changing markets, plus they do it with their own money, not that of the taxpayers.
SolarCity is locking itself into a particular technology at a large scale using someone else’s money and the risk, therefore, is magnified several times over, which brings us this from InvestorGuide.com (which also says SolarCity insiders “have been dumping stocks left, right, and center”):
When SolarCity installs solar panels, it makes a long-term agreement with the clients for about 20 years where the clients pay them periodically. While this tactic has led to strong revenue growth, it is not sustainable in the long-run as SolarCity’s debt keeps on increasing.
SolarCity is a highly leveraged company and its interest expenses is almost equal to its cash flow, which is why it is impossible for the company to turn profitable in the long-run. Hence, I think investors should continue shorting SolarCity despite its 60%+ fall.
Clearly, SolarCity’s business model is not built to last for the long-term. Given the increasing debt and interest expenses, SolarCity will soon run into trouble. Although the stock is down over 60%+ year to date, I think investors can still consider shorting it as SolarCity’s business model is unsustainable. I think the SolarCity’s shares will be worth about $5 by the first quarter of 2017, which is why I think investors can still short the stock.
Is this analyst correct? If so, it suggests the Cuomo payment delays are all about managing the slow collapse of this white elephant enterprise and watching out over his shoulder for Preet Bharara, who’s reportedly been eyeing up this strange deal for some time. Delay and indecision are classic Cuomo maneuvers, and shoving an underling out front who has been deeply involved in the deal herself is more typical of this guy. If I were Kathy Hochul, I’d be very worried I might be the sacrificial lamb offered up by Cuomo for Bharara’s enjoyment this upcoming holiday season.