How Sun Failed to Shine on Solar Firm’s Dreams : * Energy: The world’s largest builder of solar power plants blames uncertain government policies and a drop in oil and gas prices. Some say it made mistakes too, however.
December was the stressed-out season at Luz.
From executives to laborers, employees put their backs into the work, ignoring the holidays and racking up overtime as Westwood-based Luz International Inc.--developer of plants that generate 90% of the world’s solar power--raced a deadline set by short-term federal tax credits to finish another quarter-million-dollar electricity plant by New Year’s Day.
“It was the fastest-paced, highest-pressure place I’ve ever worked--and also the most rewarding,” says Tandy Manes, chief executive and president of two Luz subsidiaries.
But now the race is over.
Luz and four subsidiaries made bankruptcy court filings late last month, blaming inconsistent state and federal energy policies for their headlong fall after years of high-wire success.
Others familiar with the company say that although government policies--or their absence--did hurt, Luz also made mistakes.
No one disputes that Luz--a big-time builder in the alternative-energy world--slogged through one financial crisis after another to become an internationally respected, even emotional, symbol of the commercial possibilities of solar power.
Indeed, when skeptics ask if sunlight can truly be tamed and fed into major electrical power grids, Luz is the energy industry’s best answer. Despite the court filings, its nine giant plants in the Mojave Desert will continue to generate energy smoglessly for Southern California Edison’s lines--enough to light more than 350,000 households.
Luz was formed in 1979 when Arnold Goldman, a brilliant electrical engineer reared and educated in Southern California, approached Newton D. Becker, a Bel Air investor and founder of the Becker CPA Review course, whose schools are in 100 U.S. cities.
Goldman had pioneered word processing in the United States as founder of Lexitron Corp., a Chatsworth firm he sold to Raytheon Co. in 1977.
The third founder was Patrick Francois, a smart, successful French textile manufacturer whom Goldman had met when both were living in Israel in the late 1970s.
Goldman’s dream was to see cities illuminated by cheap, clean, solar-generated electricity. Francois would handle marketing and finance. Becker, the first big investor, would serve as chairman of the Luz board, made up largely of prominent Los Angeles and Orange County business executives.
At first--in the backwash of the 1970s energy crises, with oil and gas prices high and expected to go higher--government support for alternative, domestic energy sources was impressive. There were federal and state tax credits as high as 50%, exemption from property taxes and special depreciation schedules.
Despite start-up problems, Luz began building plants in 1984. The privately held firm made modest profits on their sale and plowed substantial amounts back into research and development. Luz’s offices soon sprawled over most of two floors of the Security Pacific Bank building in Westwood.
The frantic annual deadlines developed from the first days.
With a new technology, traditional sources of capital were wary. Luz found that it had to sell one plant to raise the money to build the next.
“We had to build a new system every year,” Becker recalled. “Otherwise we had no people, no industry, no company. And we were unique. We couldn’t buy parts off the shelf.”
By the time Luz built its sixth power plant in 1989, the annual ritual was set: Lobby Congress to pass an extension of the federal tax credit; in the first months of each new year, rush to get site approval from the California Energy Commission; frantically raise capital from investors, and, finally, build the plant before year-end, when the tax credit would run out.
A casualty of the federal deficit and tight budgets, renewal of the federal tax credit for solar and geothermal energy projects was uncertain beginning in 1986. Part of a package of orphan laws--known in Congress as “the 12 Extenders"--the credit has lately been renewed only on an annual basis and only after an offsetting cut can be found in the next year’s budget.
Other hurdles included a limit on the size of Luz’s power plants--at first no more than 30 megawatts, later 80 megawatts (enough to light 80,000 homes)--that was imposed as a condition of receiving federal tax credits. Congress had thrown in that number almost out of the blue, as a means of preventing its modest encouragement of solar power from becoming a back-door route to utility deregulation.
Yet this severely limited the early plants’ potential for economies of scale, Luz executives say. They now believe that 200-megawatt plants might be the most efficient.
By most accounts, the company made its share of mistakes, as well--many of which cut into profit when Luz sold its power plants.
For instance, when plant-size limits were raised to 80 megawatts in 1987, Luz promptly decided to expand its next project, No. 8. Yet in the same facility, major technological innovations were already being made.
The upshot was that investors saw even higher risk than usual and demanded even higher returns--shaving Luz’s profit.
In an attempt to build plants cheaper, Luz formed its own construction company, Luz Construction Inc.--an unsuccessful effort, Manes admits. For one thing, the unit didn’t pay its taxes. Although Luz disputes the amount, the State Board of Equalization says the construction company owes the state $18 million.
But Luz’s greater torment came from circumstances that no one had predicted.
To the energy industry’s surprise, prices of oil and natural gas dropped like a stone during the 1980s--in the case of gas, to a fifth its 1981 level. The drops kept the cost of electricity produced by fossil fuels far lower than the projections of hopeful environmentalists and alternative-energy entrepreneurs.
Southern California Edison Co., for instance, says that in 1990, it produced electricity from fossil fuels for roughly 5.5 cents per kilowatt hour. Electricity from the Luz plant built the same year costs 8 cents to produce, according to Luz executives, though they believe that the next generation of Luz technology would have brought that down to 6.5 cents.
In the meantime, while Luz’s contracts with Edison to sell electricity from its earlier plants involved fixed, profitable purchase prices, contracts for the last two plants--Luz’s largest--tied the price that Luz could charge to the changing price of natural gas.
“We were chasing a moving target,” Becker says.
The final disaster began in December, 1989, when the federal energy tax credit was extended again--for only nine months. The shorter credit period left Luz’s deadline tighter than usual; its ninth plant would need to be completed in September, not December.
“That was the beginning of our end,” Becker says. “We had to build a $280-million plant in 7 1/2 months. You can’t build an extension on your home in 7 1/2 months.”
Luz built the plant anyway, incurring heavy cost overruns for overtime and other crash measures that swallowed up fully two-thirds of its remaining capital--$30 million by Becker’s estimate.
The company hoped to make that up in profit on the 10th plant, which would incorporate refinements that could produce electricity even more efficiently at roughly the same price as Luz’s old enemy, natural gas.
Luz already had contracts to sell Edison electricity from plants 10, 11 and 12 and a deal with San Diego Gas & Electric Co. for the power from a 13th facility. All would be big, at least 80 megawatts each.
But renewal of California’s property-tax credit for solar companies had been vetoed by the Deukmejian and Wilson administrations. Only this past May did Gov. Pete Wilson sign a compromise measure to extend the credit.
By then investors were gun-shy of building another plant on the tightest schedule yet.
Several utilities--as well as Asea Brown Boveri Ltd., the giant Swiss industrial concern--considered financing the next round of Luz plants. But all eventually withdrew. Despite a substantial infusion of cash from Becker this spring, the company ran out of money in July.
It subsequently laid off most of its work force--most without vacation pay or even reimbursement for company expenses--and shrank back to skeletal offices. Goldman and Francois--unpaid for six weeks and with no hope of saving their dream--resigned and returned to Israel.
The State Board of Equalization has seized 7,000 acres of Luz’s desert real estate and slapped a lien on the contracts with Edison and San Diego Gas & Electric for future plants, hoping to trade them for Luz Construction’s back sales taxes. And the U.S. Customs Service in Houston is pressing a claim for as much as $20 million in duties and penalties for mirrors and other materials imported from Israel.
Luz filed for bankruptcy late in November. It will liquidate its finance and construction arms but hopes to salvage the units that operate the existing plants for third-party investors.
“This industry is dead before it had a chance to compete,” says Becker.
He criticizes--as do many environmentalists--not only the uncertain nature of government support for alternative energy, but also what he considers the hidden subsidies enjoyed by conventional fossil fuel power producers. Not the least of those are the costs of environmental damage, particularly air pollution.
By his estimate, natural gas, for instance, enjoys the equivalent of a 25% tax credit--a contention that Michael J. Waters, spokesman for the Natural Gas Supply Assn., describes as “absurd.”
In any case, the company has died just as some of the old obstacles to its success are disappearing.
The Solar, Wind, Waste and Geothermal Power Production Incentives Act of 1990--in a clause designed almost exclusively to help Luz--would now allow the firm to build a plant as large as it wanted. Rep. Dan Rostenkowski (D-Ill.) plans to review the 12 Extenders next year, with a mind to either eliminate them or extend them enough to encourage investment.
Some say such changes wouldn’t have helped Luz even if they had come sooner.
“It was fundamentally a business failure,” says Charles R. Imbrecht, chairman of the California Energy Commission, who considered himself a strong supporter of Luz.
Imbrecht criticizes Luz for not retaining an equity interest in the plants it built, as other alternative energy companies have done. Ownership would have built capital and provided tax advantages.
Becker says that was Luz’s continuing wish as well--if only there had been enough cash.