Yesterday, the Department of Energy (DOE) announced $750 million in new funding for its loan guarantee program, and introduced its new Financial Institution Partnership Program (FIPP). DOE expects this additional funding to support between $4 and $8 billion in loans. This is a big deal, but you might be forgiven, after reading the DOE’s opaque press release and various other sources, for not having any idea what the big deal is.
The basic parameters of this solicitation are defined by Section 1705 of Title XVII of the Energy Policy Act of 2005, which was added by the American Recovery and Reinvestment Act (ARRA): the DOE will provide a loan guarantee for up to 80% of the project costs for eligible renewable energy projects, and will use the funds appropriated under the ARRA to pay the “credit subsidy cost” (essentially, the cost of the risk associated with a loan guarantee). The (non-excludive) list of eligible projects included in the solicitation is familiar: wind, closed-loop biomass, open-loop biomass, geothermal, landfill gas, trash to energy, hydropower (including incremental hydropower), and solar. (§ 1705 also includes electric transmission systems and leading edge biofuels projects, but these are not included in this solicitation). Eligible projects must begin construction by September 30, 2011, when the DOE’s authority to issue loan guarantees under § 1705 expires. The DOE has issued solicitations under § 1705, and its predecessor, § 1703 as recently as this July.
There are two main differences in this solicitation that make it a big deal.
First, this solicitation includes projects that use commercially available technology, whereas previous solicitations required project to use technology that was "not commercially available.” This expands eligibility to include traditional renewable energy projects that don’t include fancy new technology.
Second, applicants under this solicitation are not project developers, but financial institutions, or groups of financial institutions, who will propose a lending structure and project(s) together to the DOE. “Proposed Borrowers and Projects Sponsors may not apply directly to DOE, but must instead work with financial institutions, who then apply to DOE to access the loan guarantee.” This is the FIPP, a program that’s been a topic of discussion for a long time, mostly rumor, a little conjecture, but now laid out in some detail.
Under the previous application process, project sponsors were subject to exacting review by the DOE (taking, famously, as long as three years), and once they obtained the loan guarantee, would then seek out lenders, guarantee in hand. This process led to a number of problems, not least that DOE lacked the internal expertise to fully evaluate the rush of projects brought on by a huge influx of ARRA funds.
Under FIPP, Lender-Applicants will construct a Guaranteed Obligation, “fundamentally structured as a fully private, market-based project or corporate finance loan” with a credit rating of BB from Standard & Poor’s or equivalent, absent a loan guarantee from the DOE. Lenders evaluate and get internal credit approval for the Obligation using their own internal policies and procedures for comparable senior debt transactions. In addition, the Lender must make sure that the Project, the obligation and documentation meet the various § 1705 requirements and reporting standards.
The Lender-Applicant then submits and application to the DOE. Instead of evaluating a project’s viability directly, DOE will determine whether or not the Lender Applicant meets specified requirements, and “evaluate the Lender-Applicant’s analysis of the proposed Borrower’s ability to repay.” If the application is accepted, Lender-Applicants will be required to share in a “significant amount” of the risk of the loan guarantee with the DOE on a pari-passu basis (the previous rules required that DOE’s interest be senior to all other lenders, limiting both the both the structure of and interest in any guaranteed financing arrangement). The solicitation(pdf) includes a number of detailed requirements that will add complexity to the process of structuring transactions and applying for loan guarantees.
The DOE will begin accepting relatively simple Part I Applications for loan guarantees under this solicitation immediately. The Part I Application provides a general overview of the project, financing structure and current status; DOE will review this application and advise applicants whether they should submit the substantially more thorough Part II application. Part II Applications will be reviewed competitively in ten rounds, with the first Part II application due November 23, 2010.
DOE also expects to use the FIPP program for loan guarantees for commercial renewable energy manufacturing projects in the future, though no date was given. There’s also no word yet on any plans to restore the $2 billion in loan guarantee funding used to extend the Cash for Clunkers program.
