On Oct. 7, 2009, the U.S. Department of Energy (DOE) issued a new solicitation for applications for loan guarantees to be issued under the American Recovery & Reinvestment Act of 2009 (the “Recovery Act”). This solicitation makes up to $750 million in funding available for DOE guarantees to support private sector loans to energy projects that utilize commercial-scale renewable energy technology, such as wind, hydropower or solar, to generate electric power. Renewable energy industry observers estimate that DOE loan guarantees authorized by this solicitation could support between $4 billion and $8 billion in financing for qualifying renewable energy projects.
In an important shift from previous DOE loan guarantee solicitations, this solicitation requires that the application come from the renewable energy project’s senior lender (or lead lender, in the case of syndicated senior debt), rather than from the project developer. Developers interested in this solicitation will have to select an institutional lender qualified and willing to participate in this program and work through that lender in order to secure DOE support.
This advisory provides some background on the program and a brief overview. It also answers a number of questions renewable energy producers may have about qualifying, program requirements, the application process and program costs.
About the program
The Recovery Act authorized $6 billion for a new DOE program to provide loan guarantees for certain kinds of energy projects. (Congress recently withdrew $2 billion of that authorization to fund the “Cash for Clunkers” program. Renewable energy industry advocates are lobbying to restore that lost authorization.)
Section 1705 of the Act created the Temporary Program for Rapid Deployment of Renewable Energy & Electric Power Transmission Projects, which authorized DOE to provide loan guarantees to support debt financing for three types of projects:
- “Renewable energy systems, including incremental hydropower, that generate electricity or thermal energy, and facilities that manufacture related components”;
- “Electric power transmission projects, including upgrading and reconductoring projects”; and
- “Leading-edge biofuel projects that will use technologies performing at the pilot or demonstration scale that the Secretary 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.”
Section 1705 eligible projects must commence construction no later than Sept. 30, 2011.
Section 1705 was based on DOE’s existing Innovative Technology Loan Guarantee Program, created by the Section 1703 of the Energy Policy Act of 2005. However, the effectiveness of that program has been hampered by the restrictive definition of “new or significantly improved technologies” adopted by DOE, which limited eligibility to projects that use technology employed in fewer than five projects in the United States for less than five years. The Innovative Technology Loan Guarantee Program has also been criticized for the extremely slow pace at which guarantees have been issued.
The new solicitation: What types of projects qualify?
The new solicitation, the first under Section 1705, is open only to commercial-level renewable energy projects. (DOE states in the solicitation that it anticipates issuing a separate solicitation for loan guaranties for renewable energy component manufacturing facilities “in the future.”) Qualifying project types include wind, biomass (both closed- and open-loop), hydropower, landfill gas, trash-to-energy, geothermal and solar facilities. Construction must begin by Sept. 30, 2011. There are a host of other requirements applicable to the design and construction of the project emanating from the Recovery Act and other laws and regulations.
The solicitation also sets forth specific requirements for the financing of the project. DOE requires that the loan to be guaranteed be “‘traditional’ senior secured debt, structured in accordance with customary market terms applicable to a high-quality, limited or non-recourse, long-term, energy project finance transaction and not modified to accommodated tax-oriented investment structures.”
The face value of the senior debt may not be more than 80 percent of total project costs; the guaranteed debt may not be subordinate to any other form of financing; and the project developer or sponsor must have made (or will make) a “significant equity investment” in the project. Moreover, the financial structure for the project must be such that the senior project loan is expected to receive a credit rating equivalent to (or better than) a “BB” from Standard & Poor’s or Fitch (or a “Ba2” from Moody’s), without consideration of the effect of the DOE guaranty. Finally, the loan documents must feature all the “usual and customary provisions that a reasonable and prudent lender would ordinarily require” in connection with such financing.
What are the requirements for a “Lender-Applicant”?
In this new solicitation, DOE has launched its Financial Institution Partnership Program (FIPP)—which imposes requirements that sit on top of those found in the Recovery Act and other applicable laws and regulations. Under the FIPP, a lender—rather than the project developer—applies to DOE for the guarantee.
This Lender-Applicant must be eligible to participant in federal government contracting, must not be delinquent on any federal debt or loan, be eligible to participant in federal loan guarantee transactions, and be in good standing with DOE and other federal loan guarantee programs. The lender must also be able to demonstrate that it has experience in or access to experience in originating and servicing loans for commercial energy projects of a type and size similar to the project seeking the guarantee.
Finally, the lender must be able to provide evidence of experience or capability as a lead lender or underwriter by showing that it has in the past participated in large commercial or energy-related projects.
In the case of a syndicated senior financing package, the lead lender and administrative agent will be the Lender-Applicant, but each lender in the syndicate must be identified and meet DOE eligibility standards.
What is the DOE guaranty?
The solicitation makes clear that the DOE guaranty will be a partial guaranty of the senior project financing and that, once the guaranty is in place, the lender(s) on that loan will continue to share risk with DOE. If DOE approves an application, the face value of the DOE guaranty will apparently be a matter for negotiation, as an element of the term sheet that DOE will negotiate with the successful applicant. The solicitation states that the DOE guaranty will be in an amount “up to”—but not more than—80 percent of the principal amount of the senior debt (and 80 percent of accrued but unpaid interest on such debt).
What is the application process and what are the associated costs?
While the FIPP will reduce some of the burden on DOE of underwriting proposed renewable energy projects, it will increase the importance of prompt action by project developers. Lenders should submit a “Part I Application,” which is to provide a summary-level description of the project, its financing structure, its creditworthiness and its eligibility for a guarantee, as soon as possible. The Part I Application must be accompanied by payment of 25 percent of the nonrefundable $50,000 application fee. DOE promises to respond to each Part I Application within two months.
In its response, DOE will notify the Lender-Applicant if it may proceed with a more detailed “Part II Application.” Part II Applications will be grouped and reviewed in 10 rounds over the next 15 months. The Round 1 deadline for Part II Applications is Nov. 23, 2009; the Round 2 deadline is Jan. 7, 2010; the closing dates for subsequent rounds are identified in the solicitation and are spaced in one-month or six-week intervals. In the interests of securing funding, applicants are encouraged to submit Part II Applications for consideration in the earliest possible round. The remaining 75 percent of the application fee must be paid at that time.
Successful applicants will pay a facility fee of one-half of 1 percent of the guaranteed amount and an annual maintenance fee in the range of $10,000 to $25,000.
What other requirements apply?
Projects that receive guarantees will be subject to review under the National Environmental Policy Act (NEPA). In order to ensure that the necessary NEPA review is completed in a timely manner, the Lender-Applicant may need to work with DOE to develop an effective strategy for timely NEPA compliance. Projects will also be subject to the Recovery Act’s Buy American and Davis-Bacon Act-related requirements, and must follow Office of Management & Budget reporting procedures for use of Recovery Act funds.