DOE Loan Guarantees Return
The US Department of Energy is trying to breathe new life into the loan guarantee program. It is prepared to lend up to another $40 billion at low fixed rates to support innovative renewable energy projects and for other energy-related uses. Will the program be easier to use this time?
Peter Davidson, the outgoing head of the program, talked to Keith Martin of Chadbourne during the Chadbourne global energy & finance conference in early June.
MR. MARTIN: Peter Davidson, you took over as head of the loan guarantee program in 2013. The program had basically been shut down at that point due to brickbats from Congress. You showed a great deal of courage. You put out an open-for-business sign and invited companies to apply to up to another $40 billion in loan guarantees. How much of that is available for renewables and other energy projects?
MR. DAVIDSON: There is $24 billion available for energy projects.
When I took over in May 2013, the loan program office had not made any loans since 2011, and the loans we had made were against the section 1705 economic stimulus program. We had no new solicitations out on the street. Over the last 18 months, we have put out three separate solicitations under which we are actively seeking projects where we can provide senior debt financing.
We have $12 billion for nuclear large-scale nuclear projects, small modular reactors and upgrading of existing nuclear facilities.
We have an active solicitation out for $8 billion in loan guarantees for fossil fuels, oil, gas and coal, and for energy efficiency as it applies to the grid and to improve the efficiency of existing fossil projects.
We have an additional $4 billion to use for loan guarantees in the area renewable energy and energy efficiency in the renewable energy sector.
We have a completely separate program, our advanced technology vehicle manufacturing program, that originally had $25 billion authorized but is now down to $16 billion after about $8 billion loans to Ford and Tesla and various other companies.
That is a total of $40 billion available under all market segments.
MR. MARTIN: So $24 billion of that for energy, and $4 billion of that is for renewable energy. What response have you had to date to the renewable energy solicitation?
MR. DAVIDSON: As you know, Keith, we take very seriously the fact that most companies that apply to us view the fact they have applied for a loan guarantee as confidential. We take confidentiality very, very seriously for our applicants. We do not even like to say how many applications we have. We do not like to say who is in the queue. We put out the renewable energy solicitation last July, so we are nine months in, and we have had a great deal of interest in the renewables area and a great deal of interest in the fossil area.
MR. MARTIN: Is it still possible for other renewables, developers to apply?
MR. DAVIDSON: Absolutely. Even if we have a large funnel of projects, by the time deals emerge from the funnel, there is a smaller number. We encourage people to apply. The advanced vehicle technology manufacturing program has no application deadlines. Companies can apply through the online application portal at any time.
The energy program has rolling deadlines for part I and II applications. They are every other month. The last part II deadline is March 2016. There is no need to worry about that because, if we have any unused authority after that date, we have the right, unilaterally, to extend the deadline. We will extend it if there is any unused authority.
We certainly encourage people to apply sooner rather than later, just because this money was one-time authorization from Congress in the Energy Policy of Act of 2005 and once it is gone, it is gone, unless Congress decides to reallocate new money to this program.
MR. MARTIN: We are talking to Peter Davidson, head of the DOE loan guarantee program. There are $4 billion available for renewable energy developers and $8 billion for fossil fuel. There is still time to apply. In theory, you have to be through phase II of the queue by March 2016, but that deadline can be extended. Peter, the term “loan guarantee” is a misnomer, right? It is really just direct borrowing from the Federal Financing Bank?
MR. DAVIDSON: That is the way it has worked for the majority of our loans. The Department of Energy issues a loan guarantee. The borrower, at the borrower’s option, can take that and give it to a commercial lender or apply it to its bonds in the bond market. Most of our borrowers choose to have us give that loan guarantee to the Federal Financing Bank and then the Federal Financing Bank, which is part of US Treasury, makes a direct loan to the company.
MR. MARTIN: How much of the project costs can the loan guarantee cover?
MR. DAVIDSON: The title 17 legislation authorizing loan guarantees for energy projects says we can lend up to 80% of eligible project costs. As a consequence, every application we receive is for us to fund 80% of the project costs. The amount we actually fund is tied to project economics. What are the cash flows? How long will it be before there is cash flow? What are the debt service coverage ratios?
Where we have ended up historically is an average of 65% to 70% of project cost can be covered by debt.
MR. MARTIN: What debt service coverage ratio do you require? I suppose it varies by project.
MR. DAVIDSON: Hard to say, because everything we do is based on the particulars of a transaction. Deals can be radically different. If someone comes in with a utility-scale solar facility with a 25-year off-take contract with an AA-rated utility, and the project has a fully wrapped EPC contract, the required debt service coverage ratio will be lower than for an advanced technology vehicle manufacturing loan and a new type of energy storage with an untested business model. We would still need to see some type of innovative technology or process for the project to qualify.
MR. MARTIN: I did not hear a range. Is there a range, maybe 1.3x or 1.4x debt service in the typical renewable energy deal?
MR. DAVIDSON: We are different than a traditional commercial lender in that the Department of Energy is willing to take technology risks, both in new technology or technology integration, or in helping to finance the most recent deployment of an existing commercial technology such as a more advanced boiler or a more advanced wind blade. If a project has been deployed overseas, but never in the United States, we will step forward as the first lender if the commercial banks are not willing to participate. The goal of our program is not to take the place of private market lenders. If a developer can raise money from private lenders, our program is not a good fit. Our program is for projects where traditional lenders are unwilling to proceed because of technology risks, implementation risks or process risks.
MR. MARTIN: The technology cannot have been put to more than three commercial applications in the United States, but when you came to visit us a couple weeks ago in Washington, you made an important point. The new part of the project that cannot have been deployed at least three times does not have to be the whole project. How small a piece of it can the new technology be?
MR. DAVIDSON: Excellent point. The legislation says there can have been no more than three commercial deployments within the last five years. Therefore, if there is demand to deploy 20 within the first five years of the first one going commercial, we could theoretically finance all of those. There is a fairly broad definition of what can work. We have 25 engineers on our staff. We have 160 people in the loan program office, making us one of the largest project finance lenders. The engineers help us do the vetting of new technology, new processes and new ways of integrating projects.
MR. MARTIN: Could the new component be, for example, a higher tower for an existing wind turbine?
MR. DAVIDSON: Yes. Examples are higher towers, longer blades. It could be a more efficient boiler in a coal plant. It could be a better way to handle recycled water. By recycling water, you would minimize the truck traffic going back and forth, which would lower the greenhouse gas footprint of a gas plant for fracking. There are many ways it could work. And to your point, eligible project costs are the entire project and not just the new component. The new component could be as little of 5% or 10% of the total project cost, but it must be a crucial part of the project to satisfy the innovation threshold.
MR. MARTIN: Two quick questions: number one, what interest rate can people expect to pay on the guaranteed debt?
MR. DAVIDSON: The interest rate is fixed. Say it is a 20-year loan. We would look at the 20-year Treasury bond, and then we would apply a spread to that of anywhere from 50 to 150 basis points. The spread is based on the underlying credit of the borrower: the more creditworthy the borrower, the lower the spread.
MR. MARTIN: Twenty-year fixed-rate debt at 50 to 150 basis points above Treasuries. That is pretty good.
Last question: a big issue in the past has been how time consuming it is to deal with the government. How long should it take to move a loan guarantee from start to finish?
MR. DAVIDSON: We have made a great deal of effort to make our process more commercial, more transparent and more streamlined. We have done that in a number of ways. We now have a part I application process. We commit to get back to every borrower within 60 days on that. The applicant fills out the part I application on our online portal, which is energy.lpo.gov. We have a great deal of information on that site. There are Power Point slides with guidance for how to fill out the application.
We try very hard to help the applicant to qualify, but if the project is not a fit, we want to tell the applicant that within 60 days.
After that, we are into the same normal due diligence process that any commercial lender would undertake.
We think an application can move from start to finish in as short a period as nine months, between initial application and conditional commitment. If the borrower has all the information ready to go, we can work expeditiously.