The American Recovery and Reinvestment Act of 2009 (the “Act”) makes substantial and highly beneficial adjustments to the Federal Renewable Energy and Electric Power Transmission Loan Guarantee Program (first established under the Energy Policy Act of 2005) (the “Program”). These stimulus adjustments are in the Act’s “Temporary Program for Rapid Development of Renewable Energy and Electric Power Transmission Projects,” and make available, for projects that commence construction prior to Sept. 30, 2011, no-cost federal loan guarantees to finance commercial renewable energy projects and manufacturing facilities for products used in the production of renewable energy, such as wind turbines or components.
Prior Loan Guarantee Program
Until the Recovery Act, the Department of Energy’s Loan Guarantee Program was an idea more in theory than in practice. Since its inception in 2005, only three Department of Energy project solicitations have been issued and not a single renewable energy project has received a loan guarantee. These unfortunate developments occurred because the prior Program charged a borrower for the guarantee, and because projects qualifying for the credit support were limited to new and innovative renewable technologies.
Borrowers Charged Credit Subsidy Fee for Loan Guarantees
Under the prior Program, the government requires that a borrower seeking to benefit from a loan guarantee pay a credit subsidy cost to the Department of Energy for this form of credit enhancement. The Department of Energy has indicated that calculation of this fee must be made on a case-by-case basis in order to take many factors into account, including specific risks for the particular project, the presence of credit rated borrowers, and the current value of the net payments by the Department of Energy pursuant to loan guarantee, allowing for the probability of default by the project. Not surprisingly, there has been significant uncertainty as to the calculation of this credit subsidy cost; and the inability of borrowers and their commercial lenders to accurately gauge the cost of this credit subsidy fee has made it difficult to evaluate whether the Program is worth the expense as well as the substantial efforts required to apply and qualify.
Only New and Innovative Renewable Energy Projects Could Qualify
Additionally, until the Recovery Act, the Program was available only to “noncommercial” renewable energy projects. The Energy Act of 2005 intended to stimulate, through loan guarantees, only those projects that employ “new or significantly improved technology.” Implementing Regulations define “new or significantly improved technology” as that in use at three or fewer commercial projects in the United States where each such project has been in operation fewer than five years by the time a guarantee under the Program is approved. Thus, large-scale commercial wind farms, commercial CSP and PV solar facilities, and many other existing, and effective, renewable energy projects were excluded from the Program.
No Cost Loan Guarantees for Commercial Projects Commenced Prior to September 30, 2011
The Recovery Act modifies the Program to provide for a targeted and time-limited stimulus for commercial as well as innovative renewable energy development and manufacturing. This modification is called the “Temporary Program for Rapid Deployment of Renewable Energy and Electric Power Transmission Projects” (the “Temporary Program”). Loan guarantees under the Temporary Program do not require payment of a credit subsidy cost. As set forth in the Recovery Act, the federal government will pay the full credit support costs of guarantees issued under the Temporary Project, thereby eliminating up front payment by the beneficiary to the government for the cost of the guarantee. Six billion dollars ($6,000,000,000) was allocated under the Recovery Act to underwrite these costs.
The Temporary Program also provides for guarantees in support of the following three expanded categories of projects:
- 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 with other transportation fuels.
Although “renewable energy systems” is not defined in the Act, this broad language is widely believed to represent a compromise between the Senate and House versions of the Temporary Program, and is designed to expand the Program to include, for the first time, guarantees for commercial renewable energy projects, such as wind and energy facilities, and wind and solar equipment manufacturing plants.
Under the Act, these expansive changes are temporary. In order to qualify, a project must commence construction prior to Sept. 30, 2011. Federal wage and other employment-related “strings” remain attached to projects that receive guarantees under this temporary program.
Temporary Program Details and Terms
It is anticipated that the Department of Energy will have application materials for the Temporary Program available as early as May 1, 2009. In the meantime, the Regulations under the existing Program provide some guidance as to the terms of loan guarantees issuable under the Temporary Program. For example, the existing Programs permits guarantees to be issued only where there is reasonable prospect of repayment of the principal and interest on the obligation by the borrower. Furthermore, no guarantee is available under the Program where the commercial loan sought to be guaranteed is in a principal amount in excess of 80 percent of the projected project cost. Subject to this limitation, the Program is authorized to issue guarantees for up to 100 percent of a loan for a project. Such guaranteed loans may have terms of repayment not to exceed 30 years. As in the case of most credit enhancement arrangements, the Department of Energy holds a priority encumbrance on all project assets and collateral pledged as security for the guaranteed loan. Where the DOE only guarantees part of a loan, it is anticipated that the lender and the Department of Energy will execute an inter-creditor agreement to provide for orderly liquidation and disposition of project collateral in the event of project default.