The US Department of Energy’s Loan Programs Office (LPO) grew rapidly this year and is now one of the largest and, most successful, clean energy project finance teams in the world. When the Obama administration took office, the DOE loan program had not issued a single loan guarantee since its inception in 2005. Since then, the office has invested in 21 projects, 14 of which were supported in the last year alone. The office has committed or closed nearly $25 billion in loans and loan guarantees, repre­sent­ing more than $40 bil­lion in total project costs. There are also a large number of additional trans­actions in active negotiation.

The results speak for themselves. The projects supported to date will put more than 57,000 Americans to work across 19 states and will avoid nearly 40 million tons of US carbon dioxide emissions per year – the same as taking 25 conventional coal plants offline. The loan programmes have become an essential tool in moving the US to­wards a clean energy economy.

The Loan Programs Office worked hard this year to improve our pro­cesses. During 2010, we more than doubled our number of pro­fessionals. We simpli­fied core programmatic docu­ments like solicitations and term sheets, launched a new web site (http://lpo.energy.gov), and opened an online application sub­mission portal. In addition, LPO simplified the pro­curement process, reconfigured our data tracking efforts, and com­pletely overhauled the speed, frequency, and transparency with which we commu­nicate with applicants.

By better leveraging our resources and re-engineering the application pro­­cess, the office has significantly reduc­ed the amount of time it takes to review applications. Part One intake review time, for example, has dropped from 45 days to eight to ten days. A full project can now be com­pleted from beginning to end in five to six months, a dramatic drop from our initial efforts.

Supporting commercial scale developments

The office administers three separate loan programmes. The Loan Guarantee Program (LGP) includes the Section 1703 programme, which supports the deployment of innovative technologies that avoid, reduce, or sequester greenhouse gas emissions, and the Section 1705 program, which was creat­ed by the American Reinvestment and Recovery Act of 2009 (ARRA) to support both innovative and conventional re­new­able energy projects that have difficulty securing financ­ing in tight credit markets. The Advanced Technology Vehicles Manufacturing (ATVM) Program provides direct loans to facilitate the development of advanced vehicle technologies.

The office is the US federal government’s principal vehicle for increasing clean energy generation in the short- to medium-term. It does this by offering low-cost, long-tenor loans and loan guarantees to accelerate the commercial deployment of innovative and ad­vanc­ed clean ener­gy technologies at scale.

The office’s application process en­sures that projects meet the pro­gramme’s mandates and policy ob­jectives and that they are processed quickly and efficiently. Applications are reviewed for eligibility, and, if invited, are put through a comprehensive due diligence process. The office’s due diligence includes extensive mar­ket, environmental, financial, and tech­nological analyses. As with any project finance effort, we assess the projected revenues, cash flow, health, and pot­ential for success over the life of the loan. LPO also has a statutory obligation to ensure that every project has a reasonable prospect of repaying the loan so that the taxpayer is properly protected. Much of our effort goes toward ensuring that risks to the US taxpayer are mitigated to the fullest extent possible.

The transactional record

The office supports eligible projects from the full range of energy sectors, including solar, wind, nuclear, biofuels, ad­vanced fossil, energy storage, geothermal, hydro, advanced technology vehicles and more.

LPO projects are generally large, complex, and poten­tially transformative. For example, in 2010, we offered con­ditional commitments for loan guarantees to Abengoa Solar, for one of the world’s largest solar thermal plants; Georgia Power Company’s Vogtle project, a 2,200MW nuclear power plant and the nation’s first in the last three decades; and Caithness Shepherds Flat, set to be the world’s largest wind farm, with a capacity of 845MW. To date, the seven generation projects LPO has committed support to will produce almost 4GW of clean energy capacity.

The average renewables project to which the office has committed to date has a total project cost of over $650 million. By comparison, according to the Bloomberg New Energy Finance, the average clean energy project financed by the private sector since 2007 averaged roughly $125 million. LPO generation projects have cumulative project costs of over $19 billion, which, again according to Bloomberg, represents almost double the investment in gen­eration made by the entire private sec­tor in 2009. These seven projects alone approach the $22.6 billion that was invested by the private sector in all clean energy projects in 2008 – the peak financing year to date.

We have a robust pipeline of pro­jects in line to receive conditional com­mitments over the next few months. These include, among others, renew­able generation projects in solar, wind, and geothermal; biorefineries; clean energy manufacturing facilities; nuc­ear plants; and advanc­ed fossil facilities.

The programmes also help develop a domestic energy supply chain. For example, the Department of Energy recently provided a $117 million loan guarantee for First Wind’s Kahuku Wind Power. The project includes the development of an innovative 30MW wind power plant on the Hawaiian island of Oahu that will supply electricity to approximately 7,700 households per year. The wind facili­ty, which will use battery energy storage system tech­nology to support grid stability and reliability, has resulted in approximately $115 million in additional investment in energy, industrial and logistics products, services and direct labor at more than 100 US-based firms.

The project’s supply chain reaches companies in more than 20 states. Clipper Windpower, based in California, will build the 12 turbines used on the project, while Xtreme Power, using the company’s manufacturing facilities in Texas and Oklahoma, will build the project’s 10MW battery. In addition, more than $4 million will be invested in logistics networks for turbine transport via trains, ships and trucks.

Bridging the funding gap

Well-designed government regulations are essential to encouraging and facilitating such deployment, but only the private sector can provide the type of massive, sustained investment that is needed. However, there remain structural and economic impediments to deploying private capital in this sector. Clean energy technology is relatively immature and there are significant technology scaling, construction, completion, and execution risks associated with many of these projects.

These structural impediments have been exacerbated by the recent economic downturn and uneven recovery and capital remains in short supply. The tax equity market – one of the principal sources of equity for renewables projects – has shrunk by more than half since 2007. Even those institutions that are lending have reduced their appetite for risk, resulting in reduced liquidity in the market. The National Venture Capital Association and PricewaterhouseCoopers recently concluded third quarter 2010 venture capital investment in clean energy would drop 31% over the year before.

In conjunction with the 1603 Treasury cash grants and 48(c) tax credits, DOE loan programmes represent the federal government’s principal tools for addressing this credit shortage and facilitating large-scale expansion of the United States’ existing clean energy infrastructure and manufacturing base. Loan guarantees facilitate this development, in part, by lowering the risks and cost of capital for projects using innovative technologies, making them more com­petitive with conventional technologies, and thus more attractive to lend­ers and equity investors.

Often, the projects backed by the office are able to raise additional funds as a direct or indirect result of the government’s guarantee. BrightSource Energy recently broke ground on a massive 370MW solar thermal plant – the largest of its kind in the world. The project, which is supported with an offer of $1.4 billion in loan guarantees from the Department of Energy, recently attracted NRG Energy as an investor, which will invest up to $300 million over the next three years.

Similarly, the loan programmes have succeeded in reviving private sector debt capital – particularly through the Finan­cial Institution Partnership Program (FIPP). FIPP is currently offered under ARRA and, through it, DOE works in tandem with private sector lenders to leverage their institutional expertise and financial capacity in evaluating and managing loan guarantees for eligible projects. FIPP is designed to increase lending capacity in the private markets while bridg­ing the gap between innovative projects that inherently tend to carry more risk and established commercial technology projects with risk profiles that banks are more likely to assume. Under FIPP, the applicant is a private sector lender – not a project sponsor – that has identified a project that it is prepared to underwrite. Because the projects are typically more mature and viable projects from a lender perspective, the office guarantees only up to 80% of total project debt, so as not to encroach on the private sector opportunity. To date, the office has provided FIPP financing to both wind and geothermal projects.

Conclusion

The DOE loan programmes have already had a significant and meaningful impact on United States’ clean energy landscape. With most of the growing pains typical of any start-up behind it, we are now primed to process transactions at the scale and scope that was envisioned when these programs were created. We look forward to building on our success in 2011, and beyond. n