As discussions heat up over how to reduce the deficit in the current fiscal year, many eyes are on the loan guarantee program administered by the U.S. Department of Energy (DOE). A recent proposal from the House of Representatives essentially would cut $2 billion of the current $2.5 billion loan guarantee appropriations because, to date, only $500 million in loan guarantee funds have been obligated to specific projects.

The DOE loan guarantee program was created as part of the Energy Policy Act of 2005. Sections 1703 and 1705 of the American Recovery and Reinvestment Act of 2009 (ARRA) provided for loan guarantees, and ARRA appropriated $6 billion to the DOE loan guarantee program. That initial $6 billion appropriation was later reduced to $2.5 billion — Congress reallocated $2 billion to the “cash for clunkers” program and $1.5 billion to state aid.

DOE estimates that the $2.5 billion loan guarantee program can guarantee up to $71 billion in loans. The loan guarantee program leverages federal dollars by allowing the DOE to guarantee the debt of privately owned clean energy developers and manufacturing companies instead of providing grants or tax subsidies. Section 1703 loan guarantees are available to encourage commercial use of new or significantly improved energy-related technologies, while loan guarantees issued under Section 1705 cover renewable energy and electric power transmission projects. In essence, the loan guarantee program covers the credit subsidy cost for loan guarantees for renewable energy, advanced biofuels, and upgrades to the nation's transmission system.

To date, 10 loan guarantees have been issued, and there are an additional 10 "conditional commitments." However, funds set aside for conditional commitments technically have not been “obligated” and may fall victim to proposed cuts of the loan guarantee program. Apart from talks of budget cuts, DOE's loan guarantee program has recently come under fire for insufficient due diligence and record keeping, as covered in a report by the Inspector General published on March 3, 2011. Nonetheless, proponents of the loan guarantee program posit that the program provides an essential financing tool for bringing emerging technologies to market scale. Regardless of the outcome of the negotiations for the current fiscal year, President Obama's budget proposal for 2012 allocates $200 million in funding to the loan guarantee program, a marked decrease.