"The Loan Arranger: Time to Rescue Clean Energy Funding"
Congress Should Continue to Fund the Department of Energy Loan Guarantee Program
Officials with First Solar and Public Service Company of NM gather after the dedication of the utility’s 2-megawatt photovoltaic solar array in Albuquerque in April. First Solar’s new project will increase efficiencies and help make solar power more cost competitive. The project received a DOE loan.
by Richard Capterton and Steve Spinner
What do the world’s biggest wind farm, the world’s biggest solar photovoltaic, or PV, project, and the world’s first commercial-scale cellulosic ethanol plant have in common? These projects—and dozens of other innovative clean energy projects across the country—are moving forward because of the Department of Energy’s Loan Guarantee Program.
In two short years the Loan Guarantee Program has proven to be much more than a financing tool. It is a job-creation tool, a clean energy commercialization tool, an innovation tool, and a private capital leveraging tool all rolled into one. The program has financed more than 40 projects costing more than $60 billion and created nearly 70,000 jobs while only costing the government $2.5 billion.
These projects are critical in helping America compete in the worldwide clean energy race, especially given that developing countries like China are now investing more in clean energy than developed countries. In fact, over the last 12 months the China Development Bank Corporation has offered twice as much financing support as the Loan Guarantee Program. While China’s government is likely to finance more than $30 billion in renewable projects each year going forward, the United States government is at serious risk of financing zero.
Unfortunately, key elements of the Loan Guarantee Program are out of money, and they will draw to a close at the end of September without congressional action. Instead of letting this key economic tool shrink, Congress should continue to strengthen the clean energy economy by appropriating more money for the program within the fiscal year 2012 budget. Congress should also this year establish a Clean Energy Deployment Administration (or Green Bank) as a permanent financing tool for clean energy projects.
What does the Loan Guarantee Program do?
The Loan Guarantee Program was created as part of the Energy Policy Act of 2005. The program leverages federal dollars by allowing the Department of Energy to guarantee the debt of privately owned clean energy developers and manufacturing companies instead of investing directly into these companies through grants or tax subsidies.
In other words, the government makes a guarantee to the private lender—say a commercial bank, insurance company, or even the Federal Financing Bank—that if a project developer or manufacturing company is not able to pay back its loan to the lender the government will step in and repay the outstanding balance.
The loan guarantee is critical to financing clean energy projects because private investors are either unable to fund projects that require this much capital—this is the case with many venture capitalists—or are unwilling to lend money to projects that use first-of-a-kind technology not fully proven at commercial scale—as is the case with most banks. This financing challenge is known as the “Valley of Death” since many companies never move through the commercialization stage. This problem is exacerbated during credit crunches when financing for projects with any technological risk—such as traditional wind farms—is not available on reasonable terms.
The government takes on the risk that some borrowers might not fully pay back the loan when it issues a loan guarantee. The government accounts for this risk by estimating how much it will likely have to pay out for the guarantee in the future and then putting that much money in a special account to cover losses. These expected payments are known as the “credit subsidy cost,” which is often stated as a percentage of the size of the loan that’s guaranteed.
The American Recovery and Reinvestment Act, also called the stimulus bill, made a noteworthy commitment to deploying U.S. commercial clean energy technology in 2009 by appropriating $2.5 billion to cover the credit subsidy cost for loan guarantees for renewable energy, advanced biofuels, and upgrades to our nation’s transmission system. This new part of the loan guarantee program is known as Section 1705.
Section 1705 is a success
The Section 1705 program has faced many well-known challenges. In the beginning deals moved slowly as DOE set up internal processes; built professional teams to conduct thorough due diligence on the financial, market, environmental, legal, and technical viability of projects; and managed how to work with the Office of Management and Budget and Treasury Department.
Despite these herculean challenges, though, this “embattled” program has by all business metrics proven an outright success. Even the most controversial loan guarantee recipient—Solyndra, a solar manufacturer—is seeing an operational turnaround, as recently reported by Time Magazine.
Congress unleashed a massive wave of financing for clean energy projects by creating Section 1705 and appropriating money to cover the credit subsidy costs. This includes projects in all clean energy sectors, in both manufacturing and energy generation, and in all parts of the country—all while creating jobs and reducing emissions.
Even though Congress created the Loan Guarantee Program in 2005, implementation delays during the previous administration meant the program wasn’t up and running until early 2009. But in just two years the government fully staffed the Loan Programs Office and guaranteed nearly $40 billion in loans. These loans will ultimately result in almost 70,000 new jobs for Americans.
The Section 1705 program in particular drove the overall success of the Loan Guarantee Program. It alone financed 32 projects in more than 20 states, ultimately creating 22,000 direct jobs. Best of all, the government only spent $2.5 billion to mobilize more than $20 billion in private capital.
These are world-class projects that represent the cutting edge of the clean energy economy. Some examples of innovative projects that received loan guarantees in just the last four weeks include:
- POET Energy is building the first commercial-scale cellulosic ethanol plant (Project Liberty, located in Iowa) that converts corncobs, leaves, and husks to ethanol. Project Liberty, which will create over 200 jobs and displace 13.5 million gallons of gasoline annually, received a $105 million loan guarantee and will ultimately generate over 25 million gallons of ethanol per year.
- Project Amp will install photovoltaic solar panels on industrial buildings in 28 states and the District of Columbia and ultimately generate 733 megawatts of energy (enough to power about 700,000 homes when operating at its peak performance). Project Amp, which will create at least 1,000 jobs and avoid over 580,000 tons of carbon pollution annually, received a $1.4 billion loan guarantee.
- First Solar’s Antelope Valley, California, project will be the first utility-scale solar plant in the United States to incorporate thin-film technology on a system that tracks the movement of the sun. This technology will increase solar efficiencies and help make solar power more cost competitive. Antelope Valley, which will create 350 jobs and generate 230 MW of energy, received a $680 million loan guarantee.
- 1366 Technologies will reduce silicon waste in the solar manufacturing process, which will dramatically lower the price of solar panels. The company received a $150 million loan guarantee for a manufacturing facility in Massachusetts, which will create 50 construction jobs and 70 permanent jobs.
More demand for guarantees exists
Section 1705 did not have sufficient funds to meet all of the market’s demand for financing despite helping 32 projects move forward. Indeed, there are more than 50 companies who applied for loan guarantees and were turned down—not because their projects weren’t strong but because there was no more money left to cover the credit subsidy costs. These projects are spread across the country, and they will employ thousands of people in good, green jobs.
These companies have good projects and are quality candidates for loan guarantees. But they will require an additional $1.5 billion in appropriations to cover credit subsidy costs. This would be consistent with the demand for financing that was expected when Congress initially gave DOE a sufficient amount of money to cover these projects ($6 billion) only to take money away from the loan guarantee program to pay for Cash for Clunkers ($2 billion) and state aid spending ($1.5 billion), resulting in the $2.5 billion operating budget.
These projects in waiting could move forward if Congress funded the Loan Guarantee Program with just 50 percent of the originally rescinded funds. Unfortunately, they will likely not proceed without congressional action. As it stands these projects will compete for a very small number of guarantees that are available in the existing Loan Guarantee Program, which will be insufficient to meet demand. Right now there is only $170 million allotted to cover credit subsidy costs for renewable energy loan guarantees—about one-tenth of the total need.
This situation is especially unfortunate because some of these companies were developed and supported through the Advanced Research Projects Agency–Energy, or ARPA-E, and other early- and mid-stage grant programs, and they are now ready for commercialization. Just like 1366 Technologies, the solar manufacturer described above that just received a loan guarantee, these companies need nurturing, especially at the deployment phase. It makes little sense for government to fund early-stage research and development then let companies die in the industry’s “Valley of Death,” instead of letting them compete in the clean energy economy.
Early-stage companies commercializing technologies for the first time will always face unique financing challenges. But sometimes credit markets are so constricted that even companies using more common renewable energy technologies will be unable to raise sufficient capital to move projects forward. DOE needs the flexibility to provide some type of financing support—perhaps similar to the existing Financial Institutions Partnership Program—for these projects, too.
At a minimum, Congress needs to provide a winding down level of financial support for these projects to ensure a successful transition to fully private market funded efforts. So when Congress appropriates money for the Loan Guarantee Program it should authorize DOE to use some money for noninnovative renewable energy technologies as well.
In the near future, Congress should create a permanent, full-scale financing authority like a Clean Energy Deployment Administration, or CEDA, to help projects like these move forward. CEDA should offer a full suite of financial instruments that can be targeted to the specific needs of individual companies. Beyond loan guarantees, new clean energy companies would benefit from insurance wraps, warrants, profit participation vehicles, and letters of credit, among other credit enhancements.
This proposal is broadly popular. It previously passed out of the Senate Energy and Natural Resources Committee with bipartisan support and was endorsed by business groups such as the US Chamber of Commerce.
The Loan Programs Office should administer more guarantees
There are now more than 175 financial professionals working in the Loan Programs Office. They are able to close complex deals at an increasing pace. In fact, of the 32 guarantees—including both those that closed and those that received conditional commitments for guarantees—under Section 1705 to date, 12 were announced in June 2011. The leadership of the Loan Guarantee Program has perservered and navigated a cumbersome interagency system.
The incredible pace of financings in the last two months is indicative of how powerful a tool the American people have in the Loan Guarantee Program. Congress must not allow this asset to deteriorate as the Section 1705 program draws to a close at the end of September. DOE will have to let highly qualified staff go without new funding for guarantees, and replacing them will take at least two years. This is time that we cannot afford to waste.
To avoid this scenario, Congress needs to fund the Loan Guarantee Program at a similar level to Section 1705 so that the program remains operational and maintains momentum until a permanent financing tool—such as CEDA—is implemented. Given their record over the past few years the Loan Guarantee Program team possesses an expertise in finance to make it a safe and efficient way to ensure both continuity and that CEDA gets up and running quickly.
Congress shouldn’t let dozens of good clean energy projects die and waste all of the experience gained from Section 1705. It should put thousands of Americans back to work in clean energy by fully funding the Loan Guarantee Program.
Richard W. Caperton is a Senior Policy Analyst with the Energy Opportunity team and Steven J. Spinner is a Senior Fellow at American Progress. This is a CAP cross-post.