NCPA - National Center for Policy Analysis

Clean Energy's Accounting Gimmick: "Free" Taxpayer Subsidies

October 24, 2011

Last month, the solar energy company Solyndra went bankrupt and defaulted on a $534 million federally-backed loan.  Many were quick to label it a lesson in the inherent failings of government directed investment.  But critics of the Department of Energy program that backed the loan haven't realized that the program is set to quietly continue to impose billions of dollars of losses on taxpayers, all of which will be hidden from the federal budget thanks to a massive accounting gimmick dubbed "self-pay."  This accounting and financing system inherently places the interests of taxpayers at odds with the interests of companies who are receiving federal funds, says Jason Delisle, director of the Federal Education Budget Project at the New America Foundation.

This system follows some of the standard loan-obtaining procedures.

  • Notably, it requires that those corporations that wish to receive a guaranteed loan pay a fee that will cover the full cost of the loan, as measured by the Office of Management and Budget.
  • However, it is the amount of this fee that remains contentious.
  • The Federal Credit Reform Act of 1990 requires that calculations as to the fair value of this fee ignore market-risk as a factor, thereby choosing to leave out the possibility of a default on the loan.
  • Therefore, this fee is far below market rates (the Congressional Budget Office estimates it to be 8 to 16 percentage points below fair value), and access to these out-of-market loans can be considered a subsidy.

So long as the corporations that receive these loans do not default, the fact that risk was not included in the calculation does not become a problem.  However, in cases such as Solyndra and several other loan recipients that have failed or are struggling to remain solvent, the argument comes to the forefront that they ought not to have qualified for the loans in the first place (or they at least ought to have paid a higher fee in order to obtain them).  This market risk, instead of being internalized within the fee, is being borne by the taxpayers who will pay the price for loan defaults.

Source: Jason Delisle, "Clean Energy's Accounting Gimmick: 'Free' Taxpayer Subsidies," Economic Policies for the 21st Century, October 7, 2011.

For text:


Browse more articles on Tax and Spending Issues