Both the Department of Energy and the White House have been broadcasting that DOE has more than $40 billion in loan guarantee capacity available to support clean energy projects.

Given that this capacity has gone largely unused for roughly the last decade, one might reasonably wonder how real is the availability of those resources. It seems to be quite real—and recent program changes should make it more so.

The $40 billion capacity resides in different buckets.

Within the title XVII innovative energy project financing program, $4.5 billion is currently allocated to be made available pursuant to a solicitation the department issued in 2014 for renewable energy and energy efficiency projects. Another $8.5 billion remains under a 2013 solicitation for fossil energy projects. Another $10.9 billion remains under a 2014 solicitation seeking applications for advanced nuclear projects.

Seventeen billion in direct loans remain available under an advanced technology vehicle manufacturing program.

Finally, $2 billion was authorized in 2020 to be deployed as partial (90%) guarantees of commercial loans pursuant to a tribal energy loan guarantee program.

The capacities of these various programs total $42.3 billion.

Renewables are currently the poor cousin in the triad of open solicitations for innovative projects under the title XVII program. Only $4.5 billion of the total $24 billion remaining under those solicitations is available for them. That allocation is not statutory, but rather the outcome of discussions with the relevant Congressional oversight committees. If demand in the project pipeline were to suggest that some reallocation would make better use of the resources supporting these solicitations, then that could be done without legislative action, assuming there is the political will.

Terms on Offer

Under the title XVII program, the government guarantees repayment of 100% of the principal and interest on loans for up to 80% of the costs of constructing energy projects in the United States that embody innovative technologies and reduce greenhouse gas emissions.

Guaranteed loans can have terms up to the shorter of 30 years and the useful life of the financed assets.

Notwithstanding the statutory maximum of 80% leverage, the department must also achieve a "reasonable prospect of repayment." Thus, DOE is unlikely to offer a debt-to-equity ratio higher than what might be expected in commercial project financings. Depending on coverage ratios and the security of projected offtake, leverage in the neighborhood of 65% to 75% is more likely. As to term, again commercial benchmarks, such as a year or so less than the term of an offtake agreement, are likely to guide DOE's offer.

The application process consists of filing a part I application with enough information for DOE to determine whether the project qualifies and is ready to proceed to a part II application. The part II application provides a deeper dive into the technical and financial details of the project. If that passes muster, then DOE will move to full diligence, including hiring external counsel and other consultants to assist in that review. That leads to issuance of a conditional commitment and, if all goes well, definitive documentation and financial close.

The innovative energy projects program has been open for more than a decade. All of its 29 financings to date (except for the Vogtle nuclear power project) were closed from 2009 to 2011. Two important changes have been made since then to make the program a more accessible and reliable financing partner.

Recent Changes

Congress amended the loan guarantee statute last December in the Energy Act of 2020 to make a number of adjustments in how the program works.

Applicants no longer have to pay application fees and reimburse DOE for the fees charged by its external advisors until financial close.

The part I application fee is $50,000. The part II application fee is $100,000 (or $350,000 if a guarantee of more than $150 million is sought). There is a facility fee of 1% of the first $150 million guaranteed plus 0.6% of any additional amount. Successful applicants must also reimburse DOE for the fees of its outside advisors such as legal counsel and independent engineers.

The applicant's risk of being required to pay these fees without seeing the benefits of a closed financing has now shifted from the applicant to DOE. No fees are payable until closing. If there is no financial close, then DOE foregoes the application fees and picks up the advisory fees itself.

More types of projects now qualify.

Projects that "avoid, reduce or sequester air pollutants or anthropomorphic emissions of greenhouse gases" qualified in the past, but now ones that use such pollutants or emissions also qualify. Energy storage projects that use "technologies for residential, industrial, transportation and power generation applications" now qualify. So do carbon capture projects involving "synthetic technologies to remove carbon from the air and oceans" and projects involving "technologies or processes for reducing greenhouse gas emissions from industrial applications, including iron, steel, cement, and ammonia production, hydrogen production, and the generation of high-temperature heat."

Facilities for the "manufacturing of nuclear supply components for advanced nuclear reactors" will now qualify.

Congress loosened the standard for what makes a project "innovative." In the past, a technology was not considered innovative if more than two projects have been using that technology in the United States for at least five years. Going forward, the program is authorized, "if regional variation significantly affects the deployment of a technology," to issue guarantees "for up to 6 projects that employ the same or similar technology as another project, provided no more than 2 projects that use the same or a similar technology are located in the same region of the United States."

The department has had trouble issuing loan guarantees in the past on a reasonable commercial timetable. Applicants can now get a status update within 10 days if an application has been pending for at least 180 days—and every 60 days thereafter—including an estimate of when a final decision will be made.

Program Quirks

The Department of Energy revised the implementing regulations for the loan guarantee program in 2016 to address assorted quirks in the original regulations that were adopted in 2007, when the program was disfavored by the administration charged with implementing it.

A quick round of amendments was implemented in 2009 to address the most egregious issues when, in the midst of the financial crisis, the program was provided the opportunity and responsibility to deploy substantial capital in innovative energy infrastructure.

In 2015 and 2016, a quiet project pipeline gave DOE the opportunity to undertake an update to make the regulations more consistent with the needs of the program and commercial norms. Most of the 2016 amendments were of technical details unlikely to interest program participants. A few changes had substantial positive consequences.

The regulations have now been updated again. A key development is the following new provision:

[A] potential Applicant may request a meeting with DOE to discuss its potential Application. At its discretion, DOE may meet with a potential Applicant, either in person or electronically, to discuss its potential Application. DOE may provide a potential Applicant with a preliminary response regarding whether its proposed Application may constitute an Eligible Project.

One might reasonably assume that this would go without saying. Veterans of the project lending programs of other federal agencies like the US International Development Finance Agency (formerly OPIC) or the Export-Import Bank of the United States would probably expect that guidance through the application process would be a core responsibility of the program staff.

However, in the DOE loan guarantee program's first round of projects a decade ago, the loan programs office took a conservative approach to answering questions, anxious to steer clear of any accusation that answering one applicant's question could provide that applicant an unfair competitive advantage over another applicant. A clunky process developed whereby applicants could submit questions and, if the question was deemed worthy, a carefully crafted answer would, after tiers of internal review, be posted publicly some weeks later among "frequently asked questions" on the DOE's website. An advantage of advising multiple clients in the application process was that external counsel could answer many of those questions based on the experience of other clients at later stages of the process. It was a terrific opportunity to add value as counsel, but, for applicants to a new federal financing program, the process was frustrating.

Today, the loan programs office staff is ready and able to answer applicant questions and provide reactions to potential technical, environmental and bankability issues posed by a project as well as to discuss the prospects for ultimate success even before the part I application is filed. There are no promises, of course, and assumptions and representations made in the applications need to be borne out through the diligence process, but the guessing game that characterized the program in the past should largely be avoided.

For those with past experience with the program, it is a new day.

Interest Spread

The all-in interest rate for a DOE-guaranteed loan will range from 0.375% to 2.0% above the interest rate for Treasury securities with a similar average life.

DOE introduced a "credit-based interest spread" in 2016 that is in effect a guarantee fee. It is added to a 37.5 basis-point "liquidity spread" charged by the Federal Financing Bank.

The DOE website says currently that the credit-based interest spread ranges from a maximum of 1.625% for a loan rated B- or below (although a loan with a lower rating is unlikely to pass muster under the program requirement of a "reasonable prospect of repayment") down to 0% for a project rated AA or better.

The credit-based interest spread should not be confused with another potential cost for applicants — the credit subsidy cost — but it will reduce the credit subsidy cost.

Under the Credit Reform Act of 1990, whenever the federal government makes a loan or issues a loan guarantee, it is required to put aside at the Treasury Department a loan loss reserve, inaptly termed the "credit subsidy cost." The amount is the projected loss to the government from having made the loan or guarantee. It reflects the projected net recovery for the government if the borrower defaults. The amount required to be deposited as the credit subsidy cost, which is calculated as a percentage of the loan commitment and is determined by a government model kept confidential, is only determined just prior to financial close. It must be deposited at financial close and cannot be funded with the proceeds of a government-guaranteed loan. If appropriated funds are not available to cover the loan's credit subsidy cost, it becomes a sponsor cost that could materially affect project economics.

This has not been an issue for any DOE-guaranteed loan to date. That is because all but one benefited from an appropriation under the American Recovery Act and Reinvestment Act in 2009 that covered each project's credit subsidy cost. The one exception was the Vogtle nuclear power project in Georgia. While DOE has generally kept credit subsidy cost calculations confidential, it became known that, thanks to high credit quality utility support, the Vogtle guarantee was deemed to qualify for a credit subsidy cost of 0%.

However, although a small amount of credit subsidy appropriation remains available for the title XVII program, future applicants will largely have to pay the credit subsidy cost out of their own pockets.

The credit-based interest spread will reduce the amount of credit subsidy cost applicants have to pay at closing. That's because the calculation takes into account projected future flows to the government, including projected payments of the credit-based interest spread.

When this new fee was conceived, there was some thought that it should substantially supplant the upfront credit subsidy cost payment. There appears to be less confidence of that now.

The program requires a credit rating for any project seeking a loan guarantee of more than $25 million. That rating is used to determine the credit-based interest spread. A preliminary rating is required to accompany the part II application and is confirmed (or adjusted) by the rating agency 30 days before financial close.

Stripping

If DOE guarantees 100% of a loan, then the "guarantee" is in effect a loan made by the Treasury Department's Federal Financing Bank.

The DOE loan guarantee program permits, and sometimes encourages or even requires a guarantee of less than 100%. For instance, the current tribal energy loan guarantee program offers guarantees only up to 90% of the guaranteed debt, so each transaction must be funded by a commercial lender that shares the risk of loss. Several of the largest loan guarantees provided after 2009 were pursuant to a financial institutions partnership program (FIPP). FIPP waived the innovation requirement, but limited DOE's guarantee to 80%.

While such risk sharing makes such partial guarantee programs more popular with Congress, they have a built-in inefficiency. There is no natural neighborhood in the capital market for 80%-government-guaranteed debt. A huge market exists for government securities, including fully guaranteed obligations, and lenders exist (albeit fewer) that are comfortable taking project risk. Obligations that are partially guaranteed but carry some project risk are unwelcome in the government obligations market and tend to find their way to lenders otherwise open to taking project risk. They welcome the partial guarantee but tend not to reward it with an interest-rate discount proportionate to the risk reduction.

An efficient solution, achieving the same policy goal, would be to issue fully guaranteed debt on condition that the borrower simultaneously raises a required amount of unguaranteed debt, but that is not what the statute or the regulations contemplate. A good fallback would be to permit the borrower to issue two classes of obligations into the capital market -— one fully guaranteed and one not at all. That bifurcation of the government support is referred to as "stripping." That was determined not to be an option for the partial loan guarantees issued under FIPP.

Several projects structured funding arrangements that both met the DOE restriction but pursued the benefit of placing obligations in their natural markets by stripping indirectly. The "lender" was a trust created to lend to the borrower in exchange for notes that were 80% guaranteed by DOE. The trust funded that loan by issuing two classes of debt, one fully covered by an allocation of DOE guarantee payments, and one eschewing any recourse to such payments. This works, but it generates transaction costs that made it attractive only to the largest transactions.

The revised DOE regulations now meet the market at least half way. Partial guarantees above 90% still cannot be stripped (except, presumably, as before, indirectly). But a guarantee up to 90% can be stripped, permitting the borrower in effect to issue fully guaranteed and fully non-guaranteed obligations, thus obviating the need to establish an intermediary trust.

Other Terms

The DOE regulations have been amended to resolve several pending debates about what terms are permitted.

The regulations now provide that an eligible project:may be located at two or more locations in the United States if the project is comprised of installations or facilities employing a single New or Significantly Improved Technology that is deployed pursuant to an integrated and comprehensive business plan. An Eligible Project in more than one location is a single Eligible Project.

This question was not particularly in doubt since DOE has previously issued guarantees for at least two projects that involved multiple sites. However, the final sentence is important because applicants are tightly restricted as to the number of projects using a single innovative technology for which they can seek DOE financing. The regulations say the following:

An Applicant may submit only one Application for one proposed project using a particular technology. An Applicant may not submit an Application or Applications for multiple Eligible Projects using the same technology.

Thus, it is helpful to be assured that operations in multiple locations do not imply that more than one "project" exists for purposes of DOE financing.

The prior regulations said that the required credit subsidy cost had to be paid by the government or the sponsors, with the possible implication that it had to be paid wholly by one or the other. The regulations now make clear that the credit subsidy costs may also be paid from a combination of sponsor and government resources.

Another new provision clarifies that an eligible innovative technology may include a "defined suite of technologies."

Quirks remain. One is that DOE reserves the right to cancel the financing commitment for any reason and at any time prior to financial close. The principal mitigations of that risk are that DOE has never stood in the way of closing an otherwise approved guarantee and doing so either would be for thoroughly understandable reasons or would severely damage the credibility of the loan guarantee program. That is not a risk that at least this administration would likely take.

Postscript

Topping the good news may be developments in the loan guarantee program leadership and administration support.

The loan guarantee program has had sophisticated managers over the years, but has never before been led by an energy entrepreneur with a background in project development. The appointment of Jigar Shah, of Sun Edison and Generate Capital fame, puts in charge someone who has spent his career in the position of loan guarantee applicants. Shah's ability to look at the program from the applicant's perspective, plus the vocal support of US Energy Secretary Jennifer Granholm and the White House, should go far in energizing a program whose staff, for most of the past decade, could not be sure whether the program and their jobs would survive the next budget cycle. There are now good grounds for believing that the program is back.