The Effects of Bankruptcies: Fossil Fuel Companies Compared to Renewable Energy Companies

The Effects of Bankruptcies: Fossil Fuel Companies Compared to Renewable Energy Companies

When a coal or oil & gas company files for bankruptcy the investors are the main losers. When a renewable energy company files for bankruptcy both investors and the subsidizers, which are essentially the taxpayers, are the losers. Thus, when a renewable energy company goes under one can say that the poor are disproportionately affected since more of the poor are taxpayers than are investors. The government also loses much more when a renewable energy company goes under. 

Lately, there are coal companies going bankrupt and that will likely continue as coal production and consumption drop during the phase out of coal. In the past year Patriot Coal Corp., Walter Energy Inc., Alpha Natural Resources Inc., and the 2nd largest U.S. coal company Arch Coal Inc. have filed. People are wondering if the biggest U.S. coal producer, Peabody, will be next. If so, coal will be in a world of trouble. U.S. Coal already is said to have a 43% default rate and it is almost certain that the whole industry will contract significantly in the coming years for many reasons: carbon emissions, pollution abatement costs, competition from low-priced natural gas, decreased global demand (particularly from met coal from China), and environmental backlash agaisnt building and financing coal power plants and building coal export terminals.

Oil & Gas companies have also been going bankrupt but this is due to the downturn which is a result of oversupply and to a lesser extent reduced demand growth and is likely to be a temporary condition of the down cycle. However, as of mid-February there have been at least 67 oil and gas company bankruptcies with many more predicted as the downturn lingers. There were rumors about Chesapeake, one of the biggest U.S. gas and oil producers but they have been unsubstantiated.  Some consultants have suggested about a third of shale producers face bankruptcy risks. Bankruptcies, however, are not expected to decrease supply since the hydrocarbons will likely still be produced. Oil & gas bankruptcies have been prolonged as different investors with different goals debate the details of restructuring.

Big bankruptcies in renewables include Solyndra, the well subsidized company that fell victim, among some others, to reduced prices for solar panels and components partially as a result of cheap competition from China. More recently there is the very weak condition of SunEdison (referred to by Huffington Post as the world's largest renewable energy developer) who is also being investigated by the SEC of possibly misstating their accessible cash numbers to keep their stock price afloat, and the bankruptcy of the major EV charging station providers - ECO-Totality and Fisker despite $250 million in subsidies. Back in 2012 the company A123 Systems, Inc., a maker of electric batteries, went bankrupt, taking $500 million in taxpayer funded subsidies with them. One of their subsidiaries also went bankrupt, losing over $100 million in subsidies. According to the article by Robert Bryce (referenced below) SunEdison's total government subsidies amounted to $1.5 billion and now the company's current stiock is valued at a mere $176 million. Two of SunEdison's subsidiaries are also in deep financial trouble. Bryce mentions another solar-heavy company, Spanish energy company Abengoa filed Chapter 15 in the U.S. claiming to be $16.5 billion in debt with subsidies in rants and credits amounting to close to $1 billion and tototla subsidization of nearly $3 billion. The post by Brad Couch referenced below points out this potential for wastage in green industries that are not financially competitive even with big subsidies. He advocates for more incentivization for financially viable technologies like Bio-CNG and Natural Gas Vehicles (NGVs) and infrastructure since this technology is ready to go more mainstream now while EVs and other battery-based technologies are still in R & D stage in terms of competitiveness. 

Yesterday I heard a story on NPR's "The Takeaway" about how much the Oil & Gas bankruptcies could affect investment banking and the answer was that the banking sector restructured after the 2008 economic downturn so that their capital reserves, then at 5% are now closer to 13% and they also made other preparations against sector collapses, such as energy. I wonder how much they factored clean energy defaults into the mix. While I am no finance expert by any means I find it a bit odd that coal, oil & gas, and renewable energy companies are all having financial difficulties while costs for all these sources of energy are at historic lows. Are the low lifting costs of Saudi Arabian oil affecting the whole world energy picture that much? It could be so - if gas and oil were a bit higher there might be a little more demand for coal (though from a carbon perspective that would not be great), there would be more revenue for oil & gas companies, and renewable energy companies would be able to compete more, and perhaps able to raise their prices a bit. I am speculating here but I wonder - is the whole world of energy bowing down to the OPEC faucet-controlled energy price control scheme? Raw materials are distributed geographically. Even solar and wind potential are distributed geographically. Individual countries use their natural resources for economic leverage and sometimes political leverage (think Russia). Geographic distribution of natural resources was a big factor in making the world what it is in terms of human and political successes - see Jared Diamond's Guns, Germs, and Steel. Resource endowments give advantages and disadvantages which all businesses are primed to exploit. I am digressing and getting a bit philosophical here (but hell its my blog so I can do what I want - a nice perk). It would be nice, however, if we could even things out a bit - not be overly-controlled by the "haves" while the "have-nots" must pay the price. While I am a strong component of capitalism perhaps a bit more socialism in the global energy picture would be more apt, especially since some of those who control a big part of the resources (quasi-"means of production") are also states that do not have acceptable human rights, religious rights, due process, government accountability, worker's rights, women's rights, social and environmental records.   
 
Well subsidized companies with loan guarantees are propped up so they won't fail but some are failing, some big ones. Now sure they say SunEdison made some bad financial decisions. Oil & Gas and Coal companies probably also made bad financial decisions like betting on a recovery sooner or getting caught with too much debt in a down market - but these companies aren't propped up by government subsidies derived from taxpayers. Since the renewable companies are funded with more "public" money one might perhaps say they have more of an obligation to avoid mistakes - maybe.

References:


U.S. Oil Bankruptcies Spike 379% - by Matt Egan, in CNN Money, Feb 11, 2016

As U.S. Shale Drillers Suffer, The Bankrupt Keep Pumping Oil - by Reuters, posted in Rig Zone, April 1, 2016

Money Up In Smoke. Another EV Bankruptcy. These Dollars Need Spent Elsewhere - LinkedIn post by Brad Couch, March, 18 2016

Electric Car Charger Company Goes Bankrupt, Stranding 13,000 Docking Stations - in Huffington Post

Electric Car Battery Maker Goes Bankrupt Despite $500M in Subsidies - in CNN Money, Oct., 22, 2012

The Coal Miner 'On Everybody's List' as Next Bankruptcy Victim - by Jodi Xu Klein and Tim Loh, in Bloomberg, Jan 21, 2016

SunEdison's Subsidy-Fueled Collapse - by Robert Bryce, in National Review, April 4, 2016