USA-Dept Energy Loan Guarantee Debt Program

The DOE Loan Guarantee Program: A Primer

Submitted by Michael Mendelsohn on Wed, 09/01/2010 - 8:31am

The Department of Energy (DOE) Loan Guarantee program offers significant promise to stimulate capitalization of large renewable energy (RE) projects. Through the program, the government guarantees debt associated with energy production or manufacturing facilities relevant to renewable and other energy technologies. Government guarantee on the debt lowers the risk and required yield on the funds raised and makes more capital available to the industry.

The following is a primer on some of the key information relevant to the Loan Guarantee program. For an editorial analysis of one whether the program is working and why, particularly for concentrating solar power (CSP) projects, see Will CSP Ever Fly? In July 2010, the Government Accounting Office (GAO) issued an evaluation of the Loan Guarantee program, focusing on the application review process.

Background

Title XVII of the Energy Policy Act of 2005 (EPAct 2005) created the Loan Guarantee program for innovative energy efficiency, renewable energy, and advanced transmission and distribution projects (referred to as Section 1703 or "innovative" technologies). The Recovery Act amended Title XVII by adding Section 1705, a loan guarantee offer for commercial technologies. Initially under the Recovery Act, Congress appropriated $6 billion to the 1705 program. In August 2009, $2 billion was redirected to the Cash for Clunkers program. In August, 2010, an additional $1.5 billion was removed from the Loan Guarantee allocation to pay for extended unemployment benefits and other initiatives, reducing the total program size to $2.5 billion (Bartlett et. al. 2010).

The loan guarantees are awarded in the form of credit subsidies (Jaffe 2009). A credit subsidy is a similar structure to a loan loss reserve, in which banks set aside money for their loan portfolio. For each loan guarantee award, the federal government sets aside a sum (the credit subsidy) in the project's name, which acts as insurance in the case of project failure (Ibid). Due to the higher risk nature of the projects, most observers expect a loan guarantee program to establish a 6% to 10% credit subsidy ratio for renewable energy projects to be guaranteed. In other words, each dollar of credit subsidy is expected to support $10.00 – $16.67 of debt investment. If so, the remaining $2.5 billion allocated under Section 1705 is expected to support approximately $25.0 - $41.7 billion worth of economic activity.

As of August 2010, the DOE has awarded three loan guarantees and conditionally committed to 6 others related to the manufacture of renewable energy components or the development of renewable energy generating facilities. The nine loan guarantees relevant to renewable energy manufacturing or generation are referenced in Table 1.

Table 1. Renewable Energy Loan Guarantees Awarded/Conditionally Committed

Loan Guarantee Awardee	Award Announce Date	Loan Amount ($millions)	Awarded or Conditional Commitment	Description
Solyndra, Inc.	9/4/09	$535	Awarded	For manufacture of cylindrical solar PV panels
Nordic Windpower, USA	7/02/09	$16	Conditional Commitment	For manufacture of two-bladed wind turbines
BrightSource Energy	2/22/10	$1,370	Conditional Commitment	3 utility-scale solar CSP plants at Ivanpah (400 MW total)
First Wind - Kahuku Wind Power, LLC	3/5/10	$117	Awarded	30 MW wind generation facility and battery storage system
U.S. Geothermal	6/10/10	$102	Conditional Commitment	22 MW geothermal generation facility
Nevada Geothermal Power	6/15/10	$98.5	Awarded	49.5 MW geothermal generation facility at Blue Mountain - first FIPP award
Abengoa Solar	7/3/10	$1,450	Conditional Commitment	250 MW Solana CSP solar facility (+ 6 hours thermal storage)
Abound Solar	7/3/10	$400	Conditional Commitment	For manufacture of CdTe thin-film solar panels in Longmont, CO and Tipton, IN
Caithness	10/10/10	$1,300	Conditional Commitment	For 845 MW Shepherd Flats, OR generation facility
Total	As of 11/04/10	$5,389

Source: DOE (2010).

Two additional guarantees, representing $60 million, have been awarded or conditionally committed to support electric storage facilities in New York and Massachusetts. These projects are expected to provide ancillary and transmission services competitively in their respective wholesale markets, which will enable renewable energy production. One loan guarantee (the most recently announced) was conditionally committed to a transmission facility in Nevada. Other Loan Guarantees have been made by the DOE for development of advanced vehicle manufacturing facilities, nuclear facilities, and other projects. In total, the DOE estimates, the Loan Guarantee program has supported $24.75 billion in project financing. Since the passage of EPAct 2005, eight unique solicitations under the Loan Guarantee program have been issued by the Department of Energy for relevant projects, including:

1) August 6, 2006 Innovative Technologies

• October 4, 2007 – DOE Invites 16 Pre-Applicants to Submit Applications for Federal Support
• Included Solyndra, Tesla, Beacon Power which were recently approved

2 – 4) June 30, 2008 - Three Solicitations

• 2) Innovative Energy Efficiency (EE), Renewable Energy (RE), and Advanced Transmission & Distribution (T&D)
• 3) Nuclear
• 4) "Front-end" nuclear

5) September 22, 2008 – Innovative Clean Coal

6 – 7) July 29, 2009 – Two Solicitations

• 6) Innovative EE, RE, and Advanced T&D
• 7) Transmission
• 8) October 7, 2009 Financial Institution Partnership Program (FIPP)

Source: DOE (2010).

Currently Open Solicitations

Two solicitations currently open are directly relevant to renewable energy – the July 29th 2009 Innovative Technologies (#6) and the October 7th, 2009 FIPP (#8) solicitations.

The July 29th solicitation is for "innovative" technologies, that either (i) have not been installed in and used in three or more projects in the U.S., or (ii) involve meaningful and important improvements in productivity or value in comparison to commercial technologies (Klepper 2009). Loans are available from the Federal Financing Bank – which can provide very low-cost debt - if applicant seeks a 100% guarantee from DOE (WSGR 2009).

The FIPP program is designed for technologies deemed commercial, i.e., has been installed in and is being used in three or more commercial projects anywhere in the world for two or more years and has been in operation for at least two years (Martin, 2009). The solicitations also differ in that the FIPP program relies on the private market to conduct the bulk of due diligence including the evaluation of project and developer risk, review of contracts, and negotiating loan documentation. Projects must also obtain a near-investment grade credit rating from one of the nationally-recognized rating agencies. Minimal project ratings start at "BB" from either S&P or Fitch, or "Ba2" from Moody's (WSGR 2009). The FIPP program was designed for simple "plain vanilla" project finance structures without complex tax equity arrangements (Klepper 2009).

Under FIPP program, debt cannot exceed 80% of total capital, and DOE will guarantee 80% of loan, up to 64% of total capital (Martin 2009). The July 29th solicitation allows DOE to guarantee 100% of the debt. The loan term can be up to 30 years or 90% of projected useful life. Table 2 breaks down some of the key parameters of the two solicitations.

Table 2. Comparison of 1703 and 1705 Loan Guarantee Solicitations

Solicitation	July 29 Innovative Technologies	October 7 Financial Institution Partnership Program
Technology	Innovative	Commercial
Lender	Federal Financing Bank	Private Commercial Lenders
Applicant	Project developers	Lenders - FIPP
Conducts Due Diligence	DOE	Lender
Pays Credit Support Charge	Applicant	DOE
Refinance Allowed	No	No
Avail. Credit Subsidy	$2.5 billion	$750 million

Sources: Klepper (2009), WSGR (2009), DOE (2010).

The two solicitations are expected to produce very different interest rates for respective borrowers. Because approved applications to the Innovative Technologies program borrow from the Federal Finance Bank, associated interest rates are projected at 25 basis points (b.p.) over treasuries, or approximately 4.65% at current rates for 20 year treasuries currently (prior to consideration of issuance fees) (Martin, 2009). Under the FIPP program, although guaranteed by the DOE, the debt starts with private lenders. Experts predict the debt yields will range from 150 over treasuries (for insurance companies and other buyers of debt that can accept a longer tenor) to approximately 200 b.p. over treasuries (at today's LIBOR-treasury spreads) for banks and other entities seeking a shorter tenor.  

Both solicitations require projects to commence construction by September 30, 2011 meaning the borrower has completed all pre-construction design and testing, received all necessary licenses, and environmental permits, and engaged all required contractors and ordered all equipment. A minimum level of physical construction including site preparation must have begun by that date as well (Klepper 2009).

As the FIPP program requires a private lender and covers a maximum of 80% of the project debt, special rules guide the allocation of risk and reward. Lender-applicants can be domestic or foreign banks, insurance companies, or other companies in the business of lending money. The rights of the lender and DOE must be pari passu and the separate loans paid on a pro rata basis with equal amortization schedules (i.e., on equal terms) (Klepper 2009). Lenders can transfer the economic interest but not the ownership of the loan.

On December 7th, 2009, the DOE issued a rule change to the Loan Guarantee program whereby the DOE will be able to consider financing projects together with other lenders and will be able to provide loan guarantees to projects with multiple participants (who may hold undivided interests in a project). As an example, export credit agencies and other financial institutions will now be able to provide financing to complement Title XVII loans and loan guarantees (DOE 2010). The rule change also eliminates the requirement that the Secretary receive a first priority lien on all project assets as a condition for obtaining the loan guarantee (Stoel Rives 2009).

Process

Both the Innovative Technologies and FIPP solicitations require a two-part application process. Part I applications to the FIPP are intended to provide DOE "with a summary level description of the project and its creditworthiness, project eligibility, financing strategy, and compliance of the proposed funding plan[...]" (DOE 2010). Under the FIPP program, Part I applications also include information regarding the lender-applicant, including its capability to conduct the primary due diligence and negotiate the terms of the loan. Part I and Part II applications are accepted on a rolling basis although seven application round due dates – starting September 13, 2009 for Part I and November 13 for Part II and continuing approximately every six weeks – allow projects submitted in the same timeframes to be evaluated against other filings. Earlier-round applicants will have priority of review (WSGR 2009)

Under the Innovative Technologies program, DOE scoring will be based on six criteria (weights in parentheses):

• • Creditworthiness (30%)
• • Construction plan (10%)
• • Legal and regulatory risk (10%)
• • Technical merit (15%)
• • Technical approach (20%)
• • Environmental benefits (15%)

DOE scoring of projects will be based on three primary criteria:

• • Programmatic - 35% - project readiness
• • Creditworthiness – 45% - financial strength of project
• • Financing Plan – 20% - Ability of lenders to execute  

The DOE offers potential applicants advice for a swift loan guarantee application process (DOE 2010). Among other things, DOE references specific attributes to facilitate financial evaluation of an application, including:

• • "Strong" engineering, procurement and construction (EPC) contract with a large, established creditworthy counterparty. The EPC contract should specify performance guarantees with liquidated damages for non-compliance
• • Clear rights to the Intellectual Property (IP) necessary to implement the project (especially for innovative projects) and "a willingness to assign those intellectual property rights to the DOE as collateral in the event of a default"
• • Source of equity capital "provided directly by the project sponsor or a combination of the sponsor and committed, creditworthy joint venture partners."

Fees

Applying for and obtaining a Loan Guarantee can be expensive. There are three types of fees payable to DOE which add up to roughly 1% of the loan amount: the application, facility, and maintenance fees. The fees ranges based on the size of the loan. Table 3 compares these fees under each program. The bottom line of the table provides an example of the combined fees in the first year of the loan.

Table 3. Fees by Loan Size under the Loan Guarantee Program

Loan Size	$0 - $150 mm	$151 - $500 mm	$501 + mm
Application Fee	$75,000	$100,000	$125,000
Facility Fee	1% of guar. amount	$375k + 0.75% of guar. amount	$1.625 mm + 0.5% of guar. amount
Maintenance Fee	$50 - $100k	$50 - $100k	$50 - $100k
Year 1 example: Loan Size / Combined Fees	$100 mm / $1.125 million	$300 mm / $2.8 million	$750 mm / $5.6 million

Source: WSGR (2009), NREL (2009).

Importantly, these fees are only the costs payable to DOE. Any project developer will also incur millions of dollars conducting its own due diligence, including the procurement of engineering, legal, geologic and other consultants and advisors.

Conclusion

The loan guarantee program offers substantial promise to capitalize evolving technologies at lower costs and greater project size that the private market is currently capable of. The FIPP program leverages the due diligence capabilities of the private sector to improve the speed and accessibility of the program.

But significant hurdles – including complex environmental regulations, access to available transmission capacity, and cost – remain. Can the DOE and the private sector ramp up the program to provide the massive quantity of capital the renewable energy industry needs to meet the goals of developers, state regulators, and Federal policymakers? Lets just say the jury is still out.

References

Bartlett, J., Goldstein, A. (19 August 2010), Q2 2010 Solar Industry Update, DOE.

Department of Energy Loan Guarantee Program, 2010 http://www.energy.gov/recovery/lgprogram.htm

Jaffe, S. (4 August 2009). "Robbing Renewable Energy to Pay for Clunkers." Greentech Media. http://www.greentechmedia.com/articles/read/robbing-renewable-energy-to-...  Accessed March 17, 2010.

Klepper, 2009, Financing Opportunities Under the Department of Energy's Loan Guarantee Program, Solar Power International Conference, October 27, 2009

Martin, et. al., 2009, Keith Martin (Chadbourne & Parke), Steve Greenwald, Kenneth Hansen, Walter Howes, DOE Loan Guarantee Webinar, March 2009

Stoel Rives, 2009, Show Me the Money: The Law Of The Stimulus Package, 2nd edition, August, 2009.

Wilson, Sonsini, Goodrich & Rosati (WSGR). 2009. FIPP, FIPP, Hooray…? Analysis of and Commentary on DOE's Financial Institutional Partnership Program, http://www.wsgr.com/publications/pdfsearch/wsgralert_fipp.pdf

• All Audiences
• Business
• DOE Loan Guarantee Program
• Loan/debt financing
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