For renewable energy projects, the federal government has just become the banker of first resort.
The 1985 comedy Brewster’s Millions follows Richard Pryor as he attempts to spend $30 million in 30 days. As it turns out, spending a lot of money fast is not so easy. In the wake of the stimulus legislation, the Department of Energy (DOE) faces a similar challenge: allocating some $60 billion in loan guarantees to projects that advance renewable energy, in a political environment that demands the money get out the door as quickly as possible.
Given the credit-crunched financial markets, the DOE is in effect being asked to serve as banker of first resort for the renewable energy industry. As much potential as this program has for both stimulating the economy and advancing renewable energy, the role of banker is not a customary one for government, and it creates challenges for both the DOE and would-be loan guarantee recipients.
In the Energy Policy Act of 2005, Congress created the Title XVII loan guarantee program for commercial-scale projects using innovative energy technologies that reduce emissions of greenhouse gases or other air pollutants. The logic was that Wall Street financiers have little appetite for first-of-a-kind technology risk and, thus, there was a role for government to bridge the gap with loan guarantees. Congress was clear, however, that the DOE could extend guarantees only to projects that offered “a reasonable prospect of repayment,” a standard that turns out to be quite high.
In 2007 and 2008, Congress provided $42.5 billion in loan guarantee authority. Of that amount, $18.5 billion has been slated for new-design nuclear power plants, $14 billion for advanced renewable energy and energy efficiency projects, and $6 billion for emissions-reducing fossil fuel projects.
The first guarantees have not yet been issued, although DOE Secretary Steven Chu has said some will be out in April. The delays, for which the DOE has been much criticized, had diverse causes beyond the admitted caution of then-Secretary Samuel Bodman. There was a delay of more than a year in funding the program, which impeded the DOE’s efforts to stand up the new organization and write its rules. In addition, a reluctant Office of Management and Budget had to translate its formulas for computing default rates on such things as student loans and federally insured mortgages to complex first-of-a-kind energy projects.
Still another under-appreciated contributor was the lack of readiness of some applicants, sometimes because of unexpected technology or project development issues and sometimes because of failure to provide environmental reports or other information that the DOE needed. The DOE was patient with the early applicants, giving them time to cure deficiencies. The DOE also provided extended application periods, which some applicants still found challenging.
Whatever the growing pains, the program is greatly over-subscribed, receiving applications for hundreds of billions, several multiples of the $40 billion in guarantee authority Congress provided.
Notwithstanding the growing pains, in the American Recovery and Reinvestment Act, known more commonly as the stimulus bill, Congress enacted a temporary expansion of the Title XVII loan guarantee program. This can support $60 billion or more in loan guarantees, depending on how the OMB scores the credit risk of the projects.
The new $60 billion loan guarantee program differs from the existing $40 billion program in three important ways. First, the new program is not limited to innovative, first-of-a-kind technologies. It can apply to renewable energy and transmission projects using technologies already in commercial use. Second, the new program is open only to renewable energy and transmission projects. New nuclear and fossil fuel projects are ineligible. Third, the program is backed by appropriations. The new program does not require large upfront payments by recipients and therefore should be more attractive to project developers.
STREAMLINING THE PROCESS
Secretary Chu has been clear in congressional testimony and other public pronouncements that he understands that the stimulus bill is about creating jobs in the near term, along with renewable energy and new transmission projects that will advance a more sustainable economy for the long term. He has committed to simplify application requirements (especially for smaller projects), conduct a rolling application process, amortize upfront fees over the life of the loan, and, in some cases, rely on due diligence of third-party lenders.
These measures will certainly speed the process, but more can be done. For most loan guarantee applications, the longest lead time item will be environmental review. The DOE must comply with the National Environmental Policy Act and thus must prepare an environmental assessment or an environmental impact statement before stimulus dollars can flow. The DOE could accelerate that process by allowing applicants to submit their environmental reports in advance of their applications. The Federal Energy Regulatory Commission already does this to reduce delay.
The DOE could also create a fast track for truly shovel-ready projects. Those who meet preannounced, objective criteria that make a project shovel-ready could be guaranteed priority review. The effect would be to concentrate staff attention on the projects best able to put people to work immediately. Announcement of fast-track criteria would also communicate to all potential applicants the factors that make it easiest for the DOE to conclude that a project should receive a loan guarantee—criteria that every project need not necessarily satisfy, but that would represent the “gold standard.”
Although different criteria might be appropriate for other kinds of applications, the following criteria for renewable electricity projects might serve as a model:
- Generation equipment ready for delivery. The bulk of the renewable electricity applications will likely be for wind and solar power. Because of manufacturing backlogs, such projects are not truly shovel ready without turbines or solar modules under contract and ready for delivery by the time of financial closing.
- Executed interconnection agreement. Because projects can spend years in the interconnection queues of the regional transmission organizations, an executed interconnection agreement is a clear sign that a project is ready to go.
- Power purchase agreement with a creditworthy buyer. Because it is difficult to estimate project risk without knowing the price the generator will receive for power, executed power purchase agreements or commitments for on-site use will protect taxpayers and speed the evaluation process.
- All necessary land rights and state and local permits. Local opposition adds risk and delay to renewable energy projects, especially wind. Fast track review should be reserved for projects that have or will have by the time of construction all the land rights they will need to build the project, as well as all necessary state and local permits.
The fast track should not be the only track. Some terrific new, low-carbon technologies will reach the market because of the patience the DOE displayed with the early applicants. Every applicant should have a fair opportunity to demonstrate that its project offers the required “reasonable prospect of repayment.”
APPLICANTS, START YOUR ENGINES
The success of the stimulus authority is not only up to DOE. Applicants have to come ready to participate in a government program that can never be as streamlined as borrowing through Lehman Brothers once might have been.
Attention to a few principles will help: Focus on compliance with the program rules. Get ready now. The rules may change some, but the basics of the application are likely to remain. It is certainly not too soon to focus on what will be necessary to enable DOE to meet its environmental review obligations. Do not bring your most complex projects or project structures to DOE. Those may have to wait for rosier economic times.
Ultimately, however, for all the additional burdens of a government program, this program holds great promise for renewable energy developers. Unlike Lehman Brothers, DOE is still open for business, and it’s not even looking for a piece of the profits.