DOE Loan Guarantee Part 2
There are three key differences between the DOE Title XVII Loan Guarantee Programand the USDA and SBA (and most other) loan guarantee programs.
First, one does not need to first find a bank to provide the loan and cooperate with the bank in submitting a loan guarantee application. While the DOE Loan Program Office (LPO) welcomes and even encourages the participation of private sector lenders, which allows the LPO to leverage its funds to support additional projects, the funding for DOE loan guarantees comes from the Federal Financing Bank (FBB).
Hence, the loan guarantee application is the loan application as well. Interest rates for loans from the FBB are tied to 10-year Treasuries for 10-year loans and 20-year Treasuries for 20-year loanswhich typically are in the 2% to 2.5% per annum range.
Second, there is no cap on the loan amount that can be requested. The costs of making a DOE loan application (see Third below) make it impractical to apply for a loan of $35 to $40 million or less. Proposals for billion dollar projects, however, will be considered. DOE has made several awards in excess of $1 billion, including:
--$1.6 billion for Ivanpah's 392-MW concentrating solar power (CSP) plant in the California Mohave Desert,
-- $1.5 billion for the Desert Sunlight 550-MW photovoltaic (PV) solar generation plant in Riverside, California and
-- $6.5 billion for the Municipal Electric Authority of Georgia (MEAG Power) to build the nation's next generation of advanced nuclear reactorsat the Alvin W. Vogtle Electric Generating site in Waynesboro, Georgia.
For a history of the DOE Loan Guarantee Program go to:
For list of projects that have been funded by technology, go to:
Third, while there is no cost to apply for the other federal loan guarantee programs, several significant fees are required to apply for, close and maintain and monitor the DOE loan guarantee for the life of the loan.
These fees are outlined in each of the Loan Program Office's solicitations. They include: Part I and Part II application fees that together total $150,000 to $400,000 depending on the size of the loan request, a credit subsidy fee that cannot be financed as part of the loan and must be paid in full at closing as well as an annual maintenance fee of up to $500,000 per year.
Even with these costs taken into account, a DOE loan guarantee of $50 million or more over its 20-year life span is less expensive than any other form of financing.
These fees are necessary due to the way in which Congress structured the program. While significant non-expiring funds have been appropriated by Congress to the DOE loan guarantee program, Congress wanted these funds to go in their entirety toward the commercial deployment of innovative technologies. Only very limited funding was authorized for the operations of the Loan Program Office (LPO). Hence, the LPO must charge fees to cover the costs of operating the loan program.
The credit subsidy cost was imposed by Congress to hedge against potential losses as a result of providing debt financing to risky, first-of-their-kind projects that in many cases are being developed by startup companies without significant, or any, financial histories and without established credit or a credit rating.
The intent of the DOE Loan Guarantee Program, established under Title XVII, Incentives for Innovative Technologies, of the Energy Policy Act (EPAct) of 2005, is to take risks on new technologies that traditional lenders would avoid. By doing this, the DOE loan guarantee program provides a "bridge over the valley of death" where good ideas and promising technologies go to die because they cannot find the funding necessary to move from development to commercialization.
Congress determinedit was an appropriate role for the U.S. Government to take this risk. The upside of this risk, and its reward, is to enable new technologies to flourish and enter the marketplace, which can provide significant benefit to the American public by creating jobs, strengthening the global competitiveness of the U.S. and providing cleaner, more efficient and more economical ways to produce and conserve energy.
It was understood at the time that the legislation was written that there might be some failures, maybe many failures. But there also was the recognition that the long term benefits that would accrue from even one technology that would not have been commercialized without the program would more than offset any failures that had to be written off as losses.
This recognition was short lived. Despite the fact the the LPO has only a 2% failure rate that any bank that lends money would envy and the program has made a profit for taxpayers, the moment there was a high profile loss, Congress pounced, hearings and investigations were held and the program still suffers from a black eye with many members of Congress and commentators.
On the other hand, due in large part to the loans made by the LPO, solar and wind power now are competitive with or cheaper that fossil fuels, and a startup car company that was virtually unknown at the time of its application has paid off its loan early and become an exciting, cutting edge company that attracted almost half a million people when its latest model was announced who lined up to pay $1000 to reserve a car that will not be available until 2018.
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