The truth behind Bloom’s sweet deal

The News Journal · October 29, 2016 · Jeff Mordock & Molly Murray

Over the last four years, Delawareans have paid nearly $130 million in energy surcharges – a benefit used to attract fuel cell company Bloom Energy to the state five years ago in exchange for a promise of 900 new jobs.

Counting the surcharge alone, to date, the cost for each one of those pledged 900 jobs for Delmarva Power ratepayers amounts to nearly $145,000 per post.

But in reality, Bloom didn’t create 900 jobs. The real number is 277 positions, meaning each one, to date, has cost ratepayers almost $470,000.

The median annual household income in Delaware, according to the U.S. Census, is $60,235.

And the surcharge continues until 2033.

Defenders of the deal say the surcharge on Delmarva’s Delaware customers was necessary to achieve the state’s goal of having 25 percent of its energy come from renewable sources by 2025. Had this money not gone to Bloom, they said, it would have gone to an out-of-state wind or solar company that would not have created any jobs in Delaware.

“The surcharge is paying for energy created in Delaware as opposed to going elsewhere,” Gov. Jack Markell said.

Dan Simmons, vice president of policy at the Institute for Energy Research, a Washington, D.C., nonprofit that studies government regulation of energy markets, said having ratepayers subsidize a private energy business is unusual.

“Bloom was given a whole bunch of incentives and the surcharge, which is very strange,” he said. “It looks like Delaware was doing everything it could to give Bloom money.”

Simmons questioned the wisdom of such a deal, noting that since so-called Bloom Boxes are similar to a natural gas power plant, it would have been cheaper just to build a plant.

“This is a serious sweetheart deal,” he said. “It didn’t matter if the state took one part of the subsidies away, Bloom would still get money over time. Every business would want that deal.”

The surcharge was guaranteed by state lawmakers for 21 years under legislation approved in 2011 and enacted in the middle of 2012.

And that’s not the only benefit used to get Bloom to locate in Delaware. Other incentives included:

• Twenty-five years of $1 a year rent from the University of Delaware’s 1743 Holding LLC, to attract the company to its STAR Campus as its first tenant.

• $12 million, which could increase to as much as $16.5 million, from the Delaware Strategic Fund in exchange for job creation.

• Expedited permitting.

• The hastily-passed 2011 legislation needed to designate fuel cells, which run on natural gas, as a renewable energy source.

• And, most recently, a pass from state environmental officials on the way the company handled spent fuel canisters at its power generation facility near New Castle. (In the last few days, state environmental officials have concluded the canisters really are hazardous waste and should be handled as such with state inspection, review and accounting by the company. The pollutant of concern is benzene, a known carcinogen.)

There were federal grants, too. Under program 1603 of the Recovery Act, Bloom subsidiary Diamond State Generation Partners LLC received $77 million in 2014 in lieu of a federal tax credit for their Delaware fuel cell facility.

Five years later, the Bloom economic development deal has some Delaware lawmakers scratching their heads, questioning whether it was worth the return. Opponents of the deal argue the number of jobs Bloom created does not justify the benefits handed to them. But supporters, including Markell, argue that Bloom has created hundreds of high-wage, technical positions that Delaware would not have otherwise.

“For the people who have jobs, I’m glad they have jobs,” said Sen. Gregory F. Lavelle, R- Sharpley, the senate minority whip. “But it’s a hell of an expensive lesson picking winners and losers, particularly when we don’t feel we were given the whole story … The Bloom project, as sold, is not what we got. It is more expensive by a factor of four or five. If I’d known that, I never would have voted for it.”

Lavelle said he is especially disheartened by the increasing surcharge that Delmarva Power customers are paying to support the deal and the fact that the 900 promised jobs have not materialized.

Realistic job goals?

Currently, Delmarva customers, on average, are paying an extra $5.55 per month to fund Bloom’s business in Delaware. When the surcharge was initially imposed in July 2012, it only added 65 cents to customers’ bills. The charges, are based on a calculation that includes three separate components. But charges went up as Bloom increased the number of fuel cells.

Lavelle is not the only one who regrets his Bloom vote. Rep. John Kowalko Jr., D-Newark South, represents the district where Bloom’s manufacturing facility is located. Looking back on the deal, Kowalko said he wishes he raised more questions.

“This deal is an economic disaster,” Kowalko said. “It was a failure by the Legislature, including myself, to question the legislation as we should have. It was a rush to have it done in the waning days of the Senate, and that has historically been used as a method where we end up with really bad legislation, including Bloom.”

Democrat Sen. Harris B. McDowell III, D-Wilmington North, did not sign the 2011 legislation. At first glance, Bloom’s fuel cell sales to high-profile businesses like Microsoft and Adobe seemed impressive, he said. But his enthusiasm soon gave way to serious misgivings.

“When I analyzed the marketing of Bloom’s products in California, there was not a cost-benefit calculation that made sense,” McDowell recalled. “Those companies weren’t buying fuel cells on the basis of environmental value; they were buying for the public relations value. The companies wanted to be able to say they were as green as they could get, but they didn’t monitor the energy savings.”

Sen. David Lawson, R- Marydel, and fellow Republican and gubernatorial candidate Colin Bonini, Dover South, were the two senators who voted against the Bloom bill in 2011.

Lawson says he isn’t an “I told you so” kind of guy. But he said recently, “I was very skeptical. I still am. I don’t think they are going to meet the deadline at the end of the month” for promised job creation.

On Friday, Bloom reported to the Delaware Economic Development Office that, as of Sept. 30, it had created 277 jobs in Delaware, earning a total of $45 million. While that represents a 23 percent improvement over the 224 Delaware workers it had last year, it is far below the goal of 900 workers earning a combined $108 million Bloom promised it would bring to Delaware by October 2017.

Lawson said he questioned both the legislation – which he described as more of a contract between the state, Bloom and Delmarva Power, than a law – and Bloom’s ability to deliver on the promised jobs.

During the Senate hearing, he said, “I asked them how many years they had been in business in California.”

He learned that over 11 years there, the company hadn’t created 900 jobs there, he said.

“You’re projecting some phenomenal growth,” he recalled saying at the time. “It turned out my suspicions have been verified. Everything was an emergency. We had to get it done now . . . The ratepayers are stuck with this 21-year plan . . . We’re not getting any benefit from this.”

Sen. Gerald Hocker, R-Ocean View, who, at the time was in the House, called the Bloom bill “a pig in a poke.”

“We did not know what we were getting,” he said. “It cost us jobs. It cost us industry.”

With higher utility costs, it makes the cost of doing business more expensive than in other states, he said.

“I thought this was a terrible deal . . . and the deal goes on.”

Bonini agreed the Legislature wasn’t given the complete story in 2011.

“I believe the governor’s office and the general assembly believed the hype about 900 jobs,” he said. “It was a good story, but it turned out not be a good deal.”

If elected governor, Bonini said he will make renegotiating the Bloom deal one of his top priorities.

“Bloom is one of the reasons our utility costs are out of whack,” he said. “We need to fix that or businesses aren’t going to grow or come here. There is no question businesses don’t look at Delaware because of utility costs.”

His Democratic opponent, U.S. Rep. John Carney, isn’t critical of the deal, suggesting that at the time the state was coming off a serious economic downturn.

“The question is, how committed are you to creating good manufacturing jobs?” he said. “At the time, it looked like a pretty good deal.”

As governor, he said, he would strive for balance between environmental good and job creation.

Some still support the deal.

“I’m still very positive about Bloom,” said Sen. Brian Bushweller, D-Dover/Central Kent. “Basically, I’m happy with the way it’s working out.”

Even McDowell said the final chapter of Bloom’s Delaware story has yet to be written.

“I think school is out on whether or not we did a good thing,” he said.

Markell remains bullish on Bloom’s future. Last week, the company announced a deal with Southern Company, one of the largest utilities in the United States. Under the agreement, Southern Company will buy 50-megawatt fuel cells from Bloom.

“I would love to see Bloom employ more people, but they are bringing hundreds of skilled and good wage jobs to Delaware,” Markell said. “The business continues to grow with a fantastic set of customers. The future looks strong.”

The governor also cautioned against judging the Bloom deal without looking at Delaware’s overall record on job creation, which he says is stronger than other states in the Mid-Atlantic.

“People may focus on one particular thing, but when they look at all the strategic fund companies, those companies have generated more jobs than they had committed to in totality,” he said. “I would urge people to look at all this as a total package.”

The heart of the deal

As Carney suggested, consider the economic climate in 2010 and 2011. The ill-fated Fisker deal to repurpose the old General Motors Boxwood Road plant with a new automaker was falling apart.

In December 2010, the unemployment rate in the state was at 8 percent. Thousands were unemployed or underemployed, and some of the state’s biggest employers were cutting back through buyouts and layoffs.

On the environmental side, the much heralded Bluewater Wind project, a proposal to build a wind farm in the Atlantic Ocean off the Delaware coast, had fallen apart amid financial uncertainties such as the availability of grants and tax credits.

Collin O’Mara, then the state’s DNREC secretary and now CEO of the nonprofit National Wildlife Federation, made a trip to California’s Silicon Valley, where he met with Bloom executives and engineered a pitch for Delaware. O’Mara had been San Jose’s Clean Tech Strategist before coming to Delaware.

In early June 2011, Markell’s office announced the Bloom Energy deal and said the project could create up to 1,500 high-tech jobs between the company and its suppliers at the site of the former Chrysler factory in Newark. They name-dropped some of Bloom’s customers: Google, FedEx, Coca-Cola and WalMart.

Alan Levin ran the Delaware Economic Development Office at the time. He, along with Markell, O’Mara, McDowell and current DEDO director Bernice Whaley toured Bloom headquarters in Sunnyvale, California. He said Bloom was an opportunity to get on the ground floor of a cutting-edge technology.

“Some of the world’s largest companies have chosen Bloom Energy to power their growth, and now Bloom has chosen Delaware as the best site for their expansion,“ Markell said at the time.

Manufacturing jobs were disappearing, and pressure was on to bring jobs to Delaware.

Kowalko said that when he asked O’Mara questions about Bloom, the DNREC secretary responded by asking if the senator really wanted to take a hard stance against the deal after his district lost so many jobs when the Chrysler plant was shuttered.

“We were hemorrhaging jobs at that time,” Kowalko said. “There was an anxiousness and anxiety to bring good news to Delaware. No one wanted to turn their back on 900 jobs.”

Edward C. Ratledge, director of the University of Delaware Center for Applied Demography and Survey Research, said the Great Recession, from 2008 to 2014, hit Delaware hard.

Ratledge and William W. Boyer, Charles Polk Messick Professor Emeritus of Political Science and International Relations at the University of Delaware, looked at the state’s response and recently published a book about it, “Growing Business in Delaware: The Politics of Job Creation in a Small State.”

Ratledge said with all the job losses there was “pressure on the governor to do something.”

The Bloom deal was complicated and it revolved around renewable energy credits.

Before 2011, there were two ways a company like Delmarva Power could satisfy its renewable energy requirements. They could deliver energy produced by an eligible source like wind or solar, or they could buy renewable energy credits. The Delaware Electric Cooperative, for instance, built a large solar plant near Georgetown to grow the company’s renewable portfolio. Delmarva, meanwhile, was buying renewable energy credits from producers outside the state.

The game-changer came in 2011 when the Legislature created a special category classifying a qualified fuel cell – like those Bloom manufactures – as a renewable energy source. The catch was it only applied to fuel cells manufactured in Delaware.

When O’Mara testified at a public hearing before the state Public Service Commission, he said Delaware was not the only state to certify fuel cells as a renewable energy resource. He said eight other states had taken similar steps.

While Bloom Fuel Cells, or Bloom Boxes, can run off renewables such as the methane gas that comes from landfilling trash – in Delaware they are powered by natural gas.

Without the change in the law, Delmarva couldn’t get the renewable energy credits, Ratledge said.

New Castle County activist Victor Singer said he laughed out loud when asked whether the Bloom Boxes used in Delaware were powered with a renewable energy resource.

“I thought it was absurd to begin with,” he said. “The governor’s philosophy appears to be anything that creates a job is worth doing.”

Ratledge called Bloom’s agreement with the state “a sweetheart deal.”

In the jobs report, Bloom CFO Randy Furr blamed the anemic growth on policy uncertainty that is impacting its “ability to plan for further growth.” Furr said at the end of last year, an investment tax credit was extended for solar customers, but that same credit was not extended those who purchased fuel cells.

Furr wrote that if Bloom does not hit its 2017 wage and hiring targets, the company will return some of the strategic grant money.

“Bloom will abide by our agreements and will return the specified grant funds to DEDO to repurpose as the state deems appropriate,” Furr wrote. “We remain singularly focused on sustainability while reiterating our commitment to the State of Delaware.”

It is hard to know how much of the potential $16.5 million the company could receive that could be returned to the state. The clawback provisions are based on the percentage of salary targets Bloom hits. For example, if Bloom reaches two-thirds of the $108 million, it will have to refund a different percentage of the amount than if it only creates jobs amounting to one-third of that amount.

Markell said the state will ensure Bloom returns what is required of them if they fail to meet their goals.

“If they have not met their targets next year, I full expect them to pay what they are supposed to pay,” he said.

Ratledge said the jobs aren’t the only issue.

“They underestimated how much they were going to burn in natural gas,” he said. And “there was no discussion on the spent sulfur capture.”

As for state regulators “they were not as careful as they should have been” during the permitting and review process, he said.

Fast-tracked permits

Bloom applied for a Coastal Zone Permit in November of 2011. The state held a public hearing in March 2012 and the permit was issued the following month.

That sounded pretty speedy to Gerard Esposito, president of Tidewater Utilities based in Dover. Tidewater applied for a Coastal Zone permit for a wastewater treatment facility west of Rehoboth Bay. The review process took so long, he said, the project died before it could get started.

State environmental chief David Small said the Bloom project wasn’t extraordinary. He pointed to four other recent projects that went through the Coastal Zone approval process even faster than Bloom.

Three people raised questions at Bloom’s Coastal Zone hearing. Among them was Middletown resident John Nichols. Since that hearing, Nichols has gone to court to challenge the Bloom project both for the environmental permit process and the decision by the state public service commission to approve the rate surcharge. His cases have been dismissed for lack of standing.

Nichols said he continues to question the Bloom deal.

“Bloom is expensive, and it’s dirty,” he said.

Earlier this month, Bloom confidentially filed documents with the Securities and Exchange Commission for an initial public offering, according to media reports.

Matt Ross, a spokesman for Bloom, declined to comment on whether the filing is for an IPO.

“Our focus continues to be on what is important, which is creating a strong company focused on sustainable and long-term growth,” he said.

The filing is confidential because of a 2012 law permitting companies with under $1 billion in revenue to quietly file proposed IPO documents with the SEC. Companies typically use the rule to gauge investor interest before going public.

Rumors that Bloom would go public have circulated for years, but the company never pulled the trigger. The confidential filing has some wondering why the company might be making a play for investor cash at this time.

Kathleen Smith, principal at Renaissance Capital, a Greenwich, Connecticut-based manager of IPO-focused Exchange Traded Funds, said the company’s private backers have held their investment much longer than usual. Typically, a private investor cashes out after a few years, but some of Bloom’s investors have maintained their investment for the company’s entire 15-year lifespan.

That combined with what Smith described as a weak market for energy IPOs could lead to a situation where the public values the market below what the private investors paid for their share of Bloom.

“The longer these private investors hold these shares, there is going to be a lower rate of return on them if you look at the time value of money,” Smith said.

David Stevenson, director of the Cesar Rodney Institute’s Center for Energy Competitiveness and a longtime Bloom critic, offers a different possibility for why the company could go public at this time. He says Bloom’s government subsidies are drying up and they need to meet their debt obligations.

In late 2014, Bloom raised about $130 million in the form of convertible debt notes, according to an email to clients from Spruce Investment Advisors, a manager of funds that hold Bloom shares. The notes, which are essentially loans provided to investors, carry a term of three years. That means the loans would need to be repaid by December 2017.

The Spruce email says the notes would convert to preferred stock in the event of an IPO, “assuming an initial offering price of at least $25.76 per share.”

“Their backs are against the wall, and they are throwing a Hail Mary so they can stay viable,” he said.

Some of the subsidies outside of Delaware are starting to dry up. After winning nearly 75 percent of the available Connecticut contracts in 2013, no additional contracts have been announced. Ross said Bloom has continued to win contracts and deploy fuel cells in the state, but not all contracts have been publicly announced.

“We believe it is our customers’ right to choose when and how they announce their projects,” he said.

In June, California modified its $1.4 billion Self-Generation Incentive Program, which had doled out more than $400 million to Bloom. The company was said to be the single largest recipient of funds from the program.

The Golden State’s legislature has begun tinkering with the program to possibly phase out the use of fuel cells and invest more in energy storage. It is also considering changing how the money gets disbursed.

“Without those California subsidies, Bloom doesn’t have a business,” Stevenson said.

Will they stay?

As Bloom struggles to find footing in Delaware and animosity from Delmarva ratepayers grows, some wonder what will keep Bloom here after the surcharge expires.

Ross said the company has no plans to vacate the state.

“The advanced fuel cell systems manufactured by Bloom Energy in Delaware are exported across the U.S. and to markets around the world, thanks to our highly-skilled team in Newark,” he said. “We have, to date, invested over $50 million in our Newark facility and are fully committed to continuing to build this new industry in Delaware, and to having the state and the entire region benefit from this growth.”

Markell agreed with Ross. The governor said Bloom would not abandon the hundreds of manufacturing jobs it created and the state. He added that the company has become involved in community groups, including one of Markell’s favorite programs, Pathways to Prosperity. The program prepares high school students with in-demand jobs skills by having them work at local companies, including Bloom.

Stevenson remains skeptical. Under Bloom’s agreement with the state, they would have to refund Delmarva customers if they leave. The amount decreases every year Bloom remains. That clause was added to the Bloom contract by the Public Service Commission to better protect ratepayers. If Bloom left after a year, they would be required to pay $20 million. This year that number has dropped to $7.5 million, and it will fall to $3.5 million by 2021.

“I think the $7.5 million is enough to keep them here,” Stevenson said. “But after that, if another state offered them a deal there is no incentive to stay here.”

For now, Delaware residents are eagerly awaiting next year’s jobs report to learn whether Bloom met its hiring and wage targets or if taxpayers will get back at least some of their money. But that may be of little consolation to the Delmarva ratepayers seeing ever-increasing utility bills.

“Even if we repeal the fuel cell designation and clawback the money DEDO put out, that won’t be a drop in the bucket compared to what the ratepayers have put out,” Kowalko said.

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