Digging Deeper into DOE's $1B of New Clean Energy Loan Guarantees

Addressing participants at the National Clean Energy Summit 8.0 in Las Vegas on Aug. 24, President Barack Obama announced that the U.S. Department of Energy's Loan Programs Office (LPO) is making an additional $1 billion of loan guarantees available for distributed clean energy projects. The federal loan guarantees are to be divided equally between advanced fossil energy (AFE) and renewable energy and efficient energy (REEE) project solicitations.

The president also announced that the LPO has published supplements regarding associated REEE and AFE project solicitations. Those supplements offer prospective applicants guidance as to the financial terms of the loan guarantees and the types of distributed clean energy technologies and projects DOE is authorized to support.

Renewable Energy World spoke with Howard Shafferman, partner and practice leader for Ballard Spahr's Energy and Project Finance Group, to gain deeper insight into the details of the new loan guaranty solicitations, as well as their significance within the context of the Obama administration's evolving energy policy.

A $1 Billion Spur to Clean Energy Project Development

The latest addition to President Obama's plan to combat climate change, the $1 billion in distributed clean energy loan guarantees is meant to help finance projects that make use of innovative and renewable or efficient energy that can avoid, reduce or sequester anthropogenic greenhouse gas emissions. They will be available following a 45-day period of Congressional notification, DOE said.

Adding another $1 billion of AFE and REEE solicitations to the $4 billion previously authorized is just the latest example of President Obama making clean energy and energy efficiency one of his highest priorities.

Despite the substantial economic, community and environmental benefits, banks and other project lenders are often unwilling to finance commercial-scale clean energy projects due to a lack of performance and credit history, according to DOE.

“The LPO’s announcement will help overcome market barriers and accelerate deployment of innovative distributed energy technologies by making $1 billion of loan guarantee authority available through the existing Title XVII program and providing guidance on the types of financial structures it can support for distributed energy projects,” DOE explained.

Setting a typically low bar in terms of use of innovative technology, among others, those include wind or rooftop solar-plus-energy storage, smart grid projects, combined heat and power and methane capture at oil and gas sites and facilities, Ballard Spahr summarized in its energy policy update.

Stiff Transaction Fees

Shafferman pointed out that the distributed energy loan guarantees will be best suited for large projects or a large tranche of distributed energy projects, as the transaction fees that developers apply for and are awarded loan guarantees are high – a $50,000 upfront application fee, then another $350,000 for those who make it through to the next stage of the process. That's for those applying for loan guarantees of $150 million or more, however.

Project developers applying for loan guarantees of less than $150 million will only need to pay a total of $150,000 if they make it to the second round. On top of those is a percentage fee when the loan guaranty is issued – a so-called facility fee – and finally a recurring maintenance fee.

The fixed fees are significant enough to dissuade some project developers from applying, or in some cases even make smaller commercial-scale projects uneconomic.

“It will be interesting to see if this announcement attracts distributed energy projects that are large – large enough so that transaction costs aren't a barrier,” Shafferman said. “Pursuing loan guarantees for smaller ones just wouldn't make sense.”

DOE and LPO recognized this issue. Loan guaranty applicants are required to file a Master Business Plan within which they can pool multiple projects. “I think that is going to be the 'secret sauce' – rolling up a sufficient number of projects to make the loan guarantee opportunity attractive, notwithstanding the fixed transaction costs,” Shafferman said.

Reducing Emissions, Forging a Low-Carbon Economy

The new loan guarantees, along with other significant actions the president has taken over his two terms in office, demonstrate that the president and his administration are not shy about reimagining a new structure for the U.S. power industry – one that incorporates distributed clean energy assets, whether cleaner fossil fuel or renewables, Shafferman said.

“All of these projects will encourage distributed energy, in which utilities have not participated in significantly so far,” he added “It's clear the administration is supportive of that distributed model as well as other approaches that can encourage provision of clean electricity.”

Even if the loan guarantees are for fossil fuels – half of which are – innovation and higher efficiency should translate into lower emissions, reduced pollution, increased climate change mitigation and power grid resilience, Shafferman concluded.