February 26, 2009
The American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”)
expands the existing Department of Energy (“DOE”) loan guarantee program (the
“Guarantee Program”) for certain renewable energy and transmission projects.
Before the passage of the Stimulus Act, the Guarantee Program applied only to
projects that employed New or Significantly Improved Technologies, and did not
apply to any projects that implemented technology that was in general commercial
use in the United States. Dubbed a “temporary program for [the] rapid deployment
of renewable energy and electric power transmission projects,” the Stimulus Act
removes this restriction and appropriates an additional US$6 billion  to three
specific categories of projects  that begin construction on or before September
30, 2011, which include (i) renewable energy systems  used to generate
electricity or thermal energy, (ii) electric power transmission systems, and
(iii) leading edge biofuel projects (the “Eligible Projects”). Construction of
all Eligible Projects is subject to the “prevailing wage” requirement, which may
increase project development costs. There are additional statutory restrictions
with respect to transmission and biofuel projects.
The Guarantee Program largely will continue to operate under the DOE’s
current rules, regulations, and guidelines. The enabling legislation for the
existing Guarantee Program was included within the Energy Policy Act of 2005.
DOE issued its rules governing the Guarantee Program in October 2007. DOE has
conducted three rounds of solicitations under the pre-existing Guarantee Program
pursuant to which it has committed to guarantee approximately US$40.5 billion.
Despite these commitments, DOE has not closed any guarantees under the
pre-existing Guarantee Program as of the date of this memo. Notably, the new
Secretary of the DOE, Steven Chu, has committed to restructuring the way in
which DOE processes loan guarantee applications. He expects DOE to offer its
first solicitation with respect to the Eligible Projects (i.e. the newly
appropriated US$6 billion) in summer 2009 and to close US$4 billion in
guarantees for Eligible Projects by the end of 2010. Of course, to comply with
the spirit of the Stimulus Act, DOE will need to process applications more
efficiently, given that its authority to issue loan guarantees for Eligible
Project terminates as of September 30, 2011.
As noted above, other than supplanting the definition of “Eligible Project”
under the current Guarantee Program regime, the other parameters of the existing
Guarantee Program are expected to remain. Some of the material requirements are
- The Eligible Project must be located in the United States, which expressly
includes Puerto Rico, the Virgin Islands, Guam, American Samoa, and any other
territory or possession of the United State of America. Foreign sponsorship of a
project is permitted under the current Guarantee Program.
- The guaranteed loan cannot exceed 80% of the total project cost.
- The term of the guaranteed loan cannot exceed 30 years.
- The project sponsors must procure a credit rating of the project (without
the guarantee) from a nationally recognized rating agency if the project costs
total more than US$25 million. This clearly poses a challenge in terms of time
and cost, but the dollar threshold potentially could increase under the revised
Guarantee Program given that proven and not only innovative technologies now
will be permitted.
- If the DOE guarantees 100% of the project’s debt, then the Treasury’s
Federal Financing Bank must be the lender.
- If the DOE guarantees more than 90% of the project’s debt, then the
guaranteed portion of the debt cannot be separated or “stripped” from the
non-guaranteed portion of the debt for syndication or resale in the secondary
- Credit Subsidy Cost: This is the required fee that the Treasury must
collect that is equal to the present value of estimated payments the government
would make in the event of a default under the guaranteed loan (involves a
default risk analysis on a project-by-project basis). Congress has appropriated
US$6 billion for loan guarantees with respect to Eligible Projects, but this is
intended to cover only the credit subsidy cost. A conservative estimate (figures
still are not public because no loans have closed under the current Guarantee
Program) with respect to the current Guarantee Program is an average credit
subsidy cost of 10%, but Eligible Projects now include proven (not only
“innovative”) technologies, which means this figure presumably will decrease. As
such, if the average credit subsidy cost with respect to Eligible Projects is
6%, then there will be US$100 billion in financing available.
- The borrower must grant to the United States a first priority security
interest in the project’s assets; provided, however, the DOE has determined that
it has the authority to enter into intercreditor arrangements when it does not
guarantee 100% of the project debt. The DOE may enter into a pari passu
structure with holders of the non-guaranteed portion of the debt, but DOE must
control the disposition of project assets. This means that the DOE will have
sole authority to decide whether to liquidate the project assets in the event of
the borrower’s default.
The DOE awards Guarantee Program loan guarantees through a competitive
process that compares one application against another, though this might change
slightly given Secretary’s Chu goal of streamlining the review process. He
intends to evaluate applications on a rolling basis to expedite the review,
which by necessity will reduce the extent to which the DOE can compare one
application against another. We anticipate that making pre-application and
application (see below) sooner rather than later would benefit an applicant,
given that the Secretary presumably will set periodic deadlines by which his
staff must make decisions. Finally, the DOE has stated expressly that, all other
things being equal, it favors projects that require a smaller percentage of its
debt to be guaranteed.
The application process generally involves the following steps:
- Pre-Application: Requires general information about the project, its sponsor(s), and the financing plan. The DOE likely will not require an
application fee at this stage.
- Application: Some of the pre-applicants will be invited to submit
applications. The DOE received 143 pre-applications in its first solicitation
(2006) under the Guarantee Program, but invited only 16 pre-applicants to submit
applications. The “applications” require far greater detail as to the project
and the financing plan. The DOE may require a fee at this point; however, to
generate more applications, the DOE currently is considering making such fees
contingent upon an award and including such fees in the closing.
- Term Sheet: The successful applicant will receive a DOE-issued term
sheet setting forth the material terms and conditions of a definitive loan
- Execution of a Conditional Commitment: Once the applicant, DOE, and
qualified lender agree on the material terms of the term sheet, the term sheet
becomes a “conditional commitment.”
- Execution of the Loan Guarantee Agreement: Once the conditions of the
“conditional commitment” are met, the parties will execute an agreement
incorporating the terms thereof. The DOE has no obligation until the parties
execute the definitive agreement.
The extent to which the DOE weighs against an applicant its usage of the
other incentives in the Stimulus Act, including the tax credits and grants,
remains to be seen. The statutory provisions do not make claiming tax credits or
grants mutually exclusive of obtaining a loan guarantee. On the other hand, the
DOE’s final rules for its existing Guarantee Program do note that the DOE will
consider whether and to what extent a project relies on such financing,
presumably because of the somewhat contingent nature of the same.
In considering whether to participate in the Guaranty Program, borrowers
should consider a number of issues, including the following:
- Will the borrower know that it will receive a guarantee from DOE in a
time frame that works for structuring the financing for the project in
- Will the EA and/or EIS requirement for projects slow down project
- For conventional renewable projects without unusual technologies, will
the cost, time and potential difficulty of participating in the Guaranty
Program be worth it, or will the potential interest rate benefit of the
guaranty be insufficient to justify the potential costs and delays that may
be required to get the guaranty?
- How will projects that apply for the Guaranty Program be prioritized and
chosen for funding? The existing Guaranty Program has both technological and
financial criteria, including, most importantly, the requirement for New or
Significantly Improved Technology. With that criteria eliminated, will
financially viable projects be evaluated simply on a first-come,
first-served basis, or on the basis of some other criteria?
Secretary Chu has promised a more effective process at DOE for the new
Guaranty Program, so the above concerns may not come to pass, but companies
should consider them.
For more information on this and related regulatory and business matters,
please visit the McGuireWoods
Stimulus Package section, or contact the members of our
Regulatory & Utilities industry group.
1. Though the appropriation is in the amount
of US$6 billion, this translates into US$60-$120 million in loan guarantees.
2. The existing Guarantee Program applies to
ten different categories of projects, including, but not limited to, renewable
energy systems, advanced nuclear facilities, pollution control equipment, and
advanced fossil energy technology.
3. The Stimulus Act does not define “renewable
energy systems,” but DOE’s first solicitation under the existing Guarantee
Program (which had the “general-use” restriction) referenced biomass, wind,
solar, and hydroelectric projects.
4. Notably, only $500,000,000 may be used for
biofuel projects, which means the bulk of the funds will go towards renewable
energy and transmission projects.