In one of the first moves to implement the American Recovery and Reinvestment Act of 2009 (ARRA), Department of Energy (DOE) Secretary Steven Chu has announced substantial restructuring to come at DOE in order to expedite the “Rapid Deployment” of ARRA funds, including $6 billion in loan guarantees for renewable energy, transmission and biofuel projects within the United States. Section 406 of the ARRA creates the Rapid Deployment Loan Guarantee Program through newly enacted Section 1705, which expands the Innovative Technology Loan Guarantee Program established by Title XVII of the Energy Policy Act of 2005 (EPACT 2005 Loan Guarantee Program). Under the newly created Rapid Deployment Loan Guarantee Program, DOE will provide loan guarantees for Section 1705-eligible projects if the project commences construction on or before September 30, 2011. Section 1705-eligible projects include wind, solar, geothermal and other types of renewable energy projects that generate electricity or thermal energy as well as renewable energy component manufacturing facilities.

The $6 billion approved in the ARRA for the Rapid Deployment Loan Guarantee Program is in addition to an aggregate $42.5 billion that has been authorized under the EPACT 2005 Loan Guarantee Program through three loan guarantee solicitations since 2006. The DOE has indicated its intent to expedite closing of loan guarantees under the EPACT 2005 Loan Guarantee Program as well.

DOE Actions to Expedite Future Funding Disbursement

Secretary Chu announced on February 19, 2009, only two days after the ARRA was signed into law, that the agency will take immediate action to streamline the disbursement process, beginning with simplifying loan application forms and other paperwork. DOE expects to begin offering loan guarantees under the current EPACT 2005 Loan Guarantee Program by late April or early May and then to begin offering loan guarantees under the new ARRA Rapid Deployment Loan Guarantee Program by early this summer.

Other key reforms being proposed to more effectively and expediently disburse funding while retaining project accountability include:

  • Review projects applications on a rolling basis;
  • Achieve accelerated loan underwriting by contracting with outside partners;
  • Allow fairly substantial application fees to be paid as part of the loan at closing as opposed to up front;
  • Reduce upfront costs by restructuring credit subsidies so they are paid over the life of the loan;
  • Establish a website intended to provide transparency in both projects and results as well as assist applicants navigate the process;

Focusing in on the ARRA’s Rapid Deployment Loan Guarantee Program Opportunity

The ARRA of 2009 amends Title XVII of the Energy Policy Act of 2005 by establishing a “Temporary Program for the Rapid Deployment of Renewable Energy and Electric Power Transmission Projects.” As the Rapid Deployment Loan Guarantee Program is authorized under Title XVII of EPACT 2005, rules promulgated by DOE as part of the EPACT 2005 Loan Guarantee Program will likely be applicable to the Rapid Deployment Loan Guarantee Program until additional guidance is provided. The ARRA authorizes $6 billion in loan guarantee funding for the following Section 1705-eligible project categories:

  • Renewable energy systems, including incremental hydropower, that generate electricity or thermal energy and facilities that manufacture related components;
  • Electric power transmission systems, including upgrading and reconductoring projects;
  • Leading edge biofuel projects that will use technologies performing at the pilot or demonstration scale that the Secretary of Energy determines are likely to become commercial technologies and will produce transportation fuels that substantially reduce life-cycle greenhouse gas emissions compared to other transportation fuels (guarantee funding limited to $500 million);

Importantly, Rapid Deployment Loan Guarantee Program funding is not limited by innovative technology eligibility requirements of the DOE’s existing Innovative Technology Loan Guarantee Program. For example, as a result of the enactment of the ARRA, developers of wind, solar and other Section 1705-eligible projects will be eligible for loan guarantees without the need to demonstrate to the DOE that their project employs innovative technologies. The ARRA does require that each loan guarantee recipient provide “reasonable assurances” that laborers and mechanics working on the project will be paid federal Davis-Bacon prevailing-wage rates.

Implementing Rapid Deployment Under EPACT 2005’s Loan Guarantee Program

While Secretary Chu’s announcement suggests that DOE will be making changes to more expediently disburse funding for Rapid Deployment Loan Guarantee Program-eligible projects, the majority of the EPACT 2005 Loan Guarantee Program’s terms and conditions and rules will likely remain applicable to obtain a DOE Rapid Deployment Loan Program Guarantee.

For reference, under EPACT 2005,

  • No guarantee can be made unless there is a reasonable prospect of repayment of the principal and interest on the obligation by the borrower, and the amount of the obligation was sufficient to carry out the project;
  • The guarantee will only be issued for up to 80 percent of the estimated project costs;
  • The term of the obligation can not exceed the lesser of 30 years or 90 percent of the projected useful life of the asset financed by the obligation;
  • In the event of default, the rights of the federal government, as guarantor, would be superior to any other person with respect to property acquired pursuant to a guarantee.

Further, applicants will also be subject to the more detailed rules promulgated by DOE in October 2007 to oversee the program, except to the extent they are prospectively revised to implement the Rapid Deployment Loan Guarantee Program. Key provisions of the promulgated rules include,

  • The project must be built within the United States;
  • The project must generally be commercially viable and not for research and development purposes (note Rapid Deployment Loan Guarantee Program exception for biofuels);
  • The applicant must pay a credit subsidy cost fee to DOE equal to the risk-adjusted present value of the net payments from the government under the loan guarantee (although prospective Rapid Deployment Rules may modify when and how this fee is paid);
  • Project sponsors must take a significant equity stake in the project before the project can receive a loan guarantee;
  • Preference is given to applications where loan guarantees would represent a comparatively smaller percentage of project costs;
  • DOE will guarantee 100 percent of a loan for a project, provided the loan or debt instrument being guaranteed does not constitute more than 80 percent of the total project costs.

The Rapid Deployment Loan Guarantee Program provides new opportunities for eligible renewable energy and renewable energy component manufacturing projects as well as eligible transmission and biofuels projects. In addition, loan guarantees for Section 1705-eligible projects are available without the project developer demonstrating that the project employs innovative technologies.