The US Department of Energy reopened the window in July for applications for federal loan guarantees for innovative renewable energy projects. The window will remain open until January 14, 2015. An estimated $4 billion in financing will be made available. The available funding is estimated rather than exact because of its sources. While $2.5 billion of the total is precisely allocated from guarantee authority provided in the 2007, 2009 and 2011 appropriations statutes, the balance will consist of as much guaranteed financing as can be supported by a 2011 appropriation of $169,660,000 in “credit subsidy cost.” The amount of financing that the appropriation can support depends upon the estimated credit risks of supported projects and is uncertain until those financings close. More about credit subsidy cost below, but first, here is what is available. Eligible Projects Eligible projects must employ an innovative technology for renewable energy, efficient electrical generation, transmission or distribution or energy-efficient end use. The project must avoid, reduce or sequester anthropogenic emissions of greenhouse gases and be located in the United States. The standard to be innovative remains the same as in past DOE loan guarantee solicitations. The project must employ a “new or significantly improved technology as compared to commercial technology in service in the United States at the time the term sheet is issued.” A technology already employed in the United States in three or more projects for more than five years will not count as innovative. Overseas deployments of the technology, regardless of how long-standing, do not reduce a technology’s innovativeness for purposes of this program. The Department of Energy has identified an assortment of potentially -eligible projects, but illustratively only and without prejudice to other projects that meet the eligibility criteria. The following categories of projects are examples of what it thinks of as potentially innovative. Solar Securitizations continued from page 37 SEPTEMBER 2014 PROJECT FINANCE NEWSWIRE 41 One category is advanced grid integration and storage projects, including micro-grid projects that reduce CO2 emissions at a system level and storage projects that enable greater adoption of renewable generation. Another category is new bio-refineries or conversions of existing ethanol plants to produce gasoline, diesel fuel or jet fuel. A third category is landfill gas and waste-to-energy projects. A fourth category is enhancements to existing facilities, like adding turbines to dams that are not used currently to generate electricity or retrofitting existing wind farms. A fifth category is efficiency improvements that reduce energy usage in homes and office buildings or generate steam or electricity from waste heat. Another category is efforts to dispatch, control or stabilize intermittent power to the grid. This is a summary of the list of eligible projects. It is worth looking at the full list before applying because while DOE says that its list is not exhaustive, it also notes, in bold-face type, that for “Eligible Projects that are not on the sample list of potential types of Eligible Projects, DOE encourages Applicants to highlight, in the Project description, the potential for the Project to have a catalytic effect on the commercial deployment of future Renewable Energy Projects and/or Efficient Energy Projects that replicate or extend the innovative feature of the Eligible Project.” Poison Pill The 2009 and 2011 appropriation statutes barred projects from getting DOE loan guarantees that benefit separately from other “federal funds, personnel or property (tangible or intangible).” Several carve-outs in the acts limited the impact of that exclusion. For instance, tax benefits do not disqualify a project, nor does the fact that the project is on federal property if the lease is on arms-length terms. Further, DOE has interpreted the prohibition as applying to immediate benefits to the project applying for support. So, if a project employs a technology that was developed in part with a federal government grant, then that history of federal support would not preclude the project from getting a DOE loan guarantee. The 2007 appropriations statute, which is contributing $1 billion of the guarantee authority being allocated under the latest solicitation, did not include the / continued page 42 therefore, the sales should be treated as sales of Chinese company shares directly. The provincial level office of the State Administration of Taxation in Guangdong released details of two indirect share transfer cases in June. In one, a British Virgin Islands company sold a Hong Kong holding company that owns shares in Guangdong FION Leather Stock Co. Ltd. The second case involved a Hong Kong company selling another intermediate holding company in Hong Kong that also owns shares in FION. The buyer in both cases was in Hong Kong. Hong Kong does not impose a tax on capital gains from selling share. The sales prices for the sales were based solely on the value of the shares held in FION. Another country, India, has also asserted the right to tax foreign sellers on indirect sales of shares in Indian companies. India has been fighting a long-running battle with Vodafone over this issue. (See the May 2012 NewsWire starting on page 15.) ARIZONA remains a battleground for solar rooftop companies. SolarCity and Sunrun asked the state tax court for a declaratory judgment in late June that rooftop solar systems that the companies own and lease to customers in Arizona are not subject to property taxes. By statute, a system that a homeowner owns and uses to generate electricity for his own use is not considered to add to the value of the house for property tax purposes. The Arizona Department of Revenue said in a 2013 memo that this provision does not provide any relief from property taxes to a solar company that owns a system independently from the house. The two companies argue that the exemption applies to equipment that is “designed for the production of solar energy primarily for on-site consumption” and, under this standard, the leased systems are exempted from tax. / continued page 43 42 PROJECT FINANCE NEWSWIRE SEPTEMBER 2014 Loan Guarantees continued from page 41 prohibition against other kinds of federal support. The solicitation says: Under the 2007 Appropriations Act, DOE may be able to issue loan guarantees under this solicitation to projects that will benefit from some limited federal support (“Federally Supported Projects”). Under federal budgeting practices the credit subsidy cost estimate must reflect the economic substance taking into account all aspects of a project. Applicants are advised that the credit subsidy cost of a Federally Supported Project with a significant degree of Federal support is likely to be higher, and possibly substantially higher, than the credit subsidy cost of an equivalent project that is not a Federally Supported Project. The main point is a project that is enjoying some other support from federal funds, personnel or property is not disqualified from applying under this solicitation. However, that support might prove costly in terms of escalated credit subsidy costs. Quoting the solicitation, “DOE discourages applicants from investing time and resources on a Federally Supported Project in cases in which the credit subsidy cost would likely be prohibitively expensive such as projects that are sponsored, owned, or controlled by Federal entities, and/or are dependent on Federal offtake.” The 2007 appropriations statute did not appropriate any credit subsidy cost for the DOE to allocate to projects, so it appears that applicants will be responsible to cover 100% of whatever their credit subsidy requirement turns out to be to the extent they benefit from the $1 billion DOE is making available under the 2007 statute. Loan Terms The DOE “guarantees” are, assuming the applicant seeks 100% coverage of the loan, actually loans that are funded by the Federal Financing Bank, an office in the US Treasury. These loans are offered at the rates at which the US government can borrow for debt of a comparable average life, plus a small spread. In the past, that spread was uniformly 37.5 basis points. This time, it depends. DOE has introduced a “credit-based liquidity spread” that will impose an additional spread that grows as the credit quality of the project falls. There is no increment for projects rated AA or better. It then kicks in with a 0.035% increment for projects rated AA-. The supplement rises with the rated credit riskiness of projects up to 1.625% for a project rated B-. The program imposes no minimum required rating other than the statutory requirement of a “reasonable prospect of repayment.” However, given that B- is as far as the DOE illustrated the supplemental spread, one might infer that DOE may not welcome applications that cannot achieve at least that rating. Fees There is a limit to the credit subsidy costs to be paid by the applicant. A factor that haunted past solicitations under the DOE loan guarantee program before 2009, and returns with this one, is that applicants are responsible to pay their own credit subsidy cost. Credit subsidy cost is a risk premium sufficient, on average, to fully compensate the government for any projected losses from issuing the guarantee. It is like an insurance premium. By regulation, it cannot be paid with federally-guaranteed funding so, unless co-financing is involved in the project, it is an equity charge. Further, the amount is not determined until a few days prior to closing. Thus, a potentially substantial equity cost is unknown until just before it is due to be paid. The process for determining the credit subsidy cost was not as transparent in the past as it might have been. However, in the past, the concern for prospective borrowers was timing rather than amount, since the DOE paid 100% of the credit subsidy cost from a Congressional appropriation. The amount was determined in the final days before closing, and some closings were delayed while waiting for DOE and the Office of Management and Budget to agree on the appropriate calculation. Further, since The US Department of Energy is taking applications through January 14 for loan guarantees for innovative renewable energy projects. SEPTEMBER 2014 PROJECT FINANCE NEWSWIRE 43 Congress had initially appropriated more funding than DOE appeared to need, DOE’s incentive was to move the process through OMB quickly rather than to fight hard to minimize the amount that was calculated. That has led to some concern that earlier loan guarantees may have set some precedents with relatively high credit subsidy costs that will carry over into the determinations made under this solicitation. There is good news on that front, one piece of which is that the credit subsidy cost recently determined for the Vogtle nuclear power project was 0%. Also, more generally, notwithstanding early inter-agency conflicts over the very existence of the program, DOE now has established a satisfactory overall success record in its supported projects. Its aggregate loss rate, notwithstanding the huge hit taken with Solyndra, is less than 3%. That track record should support more modest credit subsidy cost determinations. The current costs of admission to the program are one area where the latest solicitation differs markedly, and adversely, from its predecessors for renewable energy and energy efficiency projects. The fee to submit a part I application is $50,000. The part II application fee depends on the amount of financing sought. Applicants seeking up to $150 million in guaranteed loans must pay a part II application fee of $100,000, for a total application fee of $150,000. Applicants seeking more face a part II application fee of $350,000, for a total application fee of $400,000. In contrast, the part I application fee under past solicitations for renewable energy projects was, for up to $150 million in financing, $18,750. The corresponding part II Application fee was $56,250, for a total application fee of $75,000. Previously, the maximum application fee for applications for more than $500 million in financing was $31,250 for the part I application and $93,750 for the part II, for a total application fee of $125,000. Thus, the application fees have doubled to more than trebled, depending upon the amount of financing sought. Successful applicants are also required to pay a facility fee of which 25% is due at issuance of the conditional commitment, with the balance due at financial close. That fee consists of 1% of the first $150 million of financing committed plus 0.6% of any additional amount. Thus, for instance, for an application for $150 million of DOE guaranteed loans, a facility fee of $375,000 would be due at conditional commitment with an additional $1,125,000 due at closing. The state has started sending valuation notices to rooftop companies as a step toward collecting taxes starting in 2015. The tax would run $152 a year for a typical system, eating up about 42% of the $360 in annual savings a homeowner realizes by adding solar. Leases may require homeowners to reimburse the solar company for such taxes. The solar company must value the system for property tax purposes at 20% of its depreciated cost. Separately, Arizona Public Service asked the Arizona Corporation Commission in July for permission to install 20 megawatts of solar rooftop systems on about 3,000 homes and put the costs into rate base. The systems would be used to supply electricity to the grid. The utility would pay customers $30 a month to lease their rooftops for 20 years. Many solar companies believe regulated utilities have an unfair advantage in competing for solar customers if they can put the systems into rate base. The commission will have to decide. Last year, it rejected a request by Arizona Public Service to let the utility charge solar rooftop customers a back-up charge of $50 to $100 a month for remaining connected to the grid and to credit solar customers who send excess electricity to the grid through net metering only at the wholesale rate rather than the retail rate for electricity. The commission approved a charge of roughly $5 a month for the average customer and said it would revisit both the backup charge and net metering in the next rate case the utility files. A SOLAR ROOFTOP COMPANY that entered into a long-term power contract to supply electricity to a city building in Dubuque, Iowa is not violating the monopoly the local utility holds to make retail electricity sales in the area, the Iowa Supreme Court said in July. The decision is important because it suggests a path for solar rooftop / continued page 45 / continued page 44 44 PROJECT FINANCE NEWSWIRE SEPTEMBER 2014 This is roughly equivalent to what was required in past solicitations. DOE also charges an annual fee for post-closing monitoring. Under the current solicitation, that monitoring fee will be “up to $500,000” per annum per project. That is up by a factor of five to 10 times versus past solicitations, where the monitoring fees fell in a range from $50,000 to $100,000. Apparently DOE expects these new projects to be more expensive to monitor than their predecessors. As before, applicants will also be responsible to cover the costs of DOE’s advisers, consisting of external counsel, independent engineers, insurance consultants and also, in some cases, financial advisers and market consultants. Application Process As in all DOE loan guarantee solicitations since 2008, the application process unfolds in two rounds. Applicants first submit a part I application containing information that the DOE believes will suffice to determine both whether the proposed project qualifies for support and its likely attractiveness for support in comparison with other applications. DOE then conducts a comparative review of the full cohort of applications that arrives by a given part I application deadline. Here, those deadlines are October 1, 2014 and January 14, 2015. The projects deemed worthy of further consideration will be invited to submit part II applications, providing more substantial technical and financial data, which in this round will be subjected to more substantial DOE diligence, including in due course, if all goes well with the application, by DOE’s external advisers, for whose fees the applicant will be responsible. A happy characteristic of this solicitation is that, unlike the prior rounds, there is no deadline for achieving financial close. In 2011, dozens of successful part I and part II applicants, including projects for which DOE advisers had been appointed and were being paid, received “Dear John” letters from DOE reflecting DOE’s judgment that, notwithstanding the assorted merits of those projects, they lacked a realistic prospect of achieving closure by the statutory deadline. One could have imagined a firestorm of protest, and sending those letters constituted an act of real courage, as well as good sense, by the DOE. In fact, there was little pushback. And DOE seems to have made the cut at about the right spot. Most of the projects invited to continue in the process successfully achieved financial close before — and in several cases just hardly before — the deadline. Twenty-eight projects beat the deadline, while roughly 40 received the Dear John letters. One has to wonder how many projects DOE might have been able to support absent the deadline. If the former round of the loan guarantee program is prologue, then one can predict substantial demand for the next wave of loan guarantees, and, without the deadline to cull out deserving projects with less of a head start, this round of applicants may well enjoy a higher success rate.