The U.S. Department of Energy Loan Programs Office operates as a bank with a big portfolio and a big mission. The program has $32 billion invested in energy projects—and is looking to fund an additional $40 billion in new projects. The LPO is the Federal government’s largest project finance division and employs 190 people. It made its first loan in 2009.
CleanTech Alliance members met on September 2 with Peter Davidson, Executive Director of the Loan Programs Office. Their mission is to find energy investments that make market sense on their own, but have technical risk. The LPO has internal and other expertise that allows them to assess technical risk more finely than other lenders—and make loans that other lenders will not. The LPO both makes loans and issues loan guarantees.
The Program is designed to establish new technologies that are ready for the market—based on their review of the technology—but are not yet fundable by traditional lenders. These projects are intended to demonstrate that the technologies will work on a commercial scale, proving to future commercial lenders that risk levels are reasonable to accept.
Future Loans
The LPO is looking to place $40 billion in loans in four categories. They are accepting applications in each category except Nuclear Energy.
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Advanced Fossil Energy ($8 billion) loans may cover Advanced Resource Development, Low Carbon Power Systems, Carbon Capture, or Efficiency Improvements. The LPO can finance early deployment of technology in the US (one of the first three deployments), even if the technology is not new. Combined heat and power and micro grid projects might be financed.
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Renewable Energy and Energy Efficiency ($4 billion) loans may be extended for Advanced Grid Integration & Storage, Drop-in Biofuels, Waste-to-Energy, Enhancement of Existing Facilities, or Efficiency Improvements.
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Nuclear Energy ($12 billion) has no open solicitations.
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Advanced Technology Vehicles Manufacturing ($16 billion) is a broad category. Loans in this area might be made for building new ATVM facilities in the US or reequipping, modernizing, or expanding existing facilities. Qualified Component Manufacturing or Engineering Integration performed in the US for ATVs or qualifying components would qualify. Mr. Davidson indicated a broad range of interests in this program including light weight vehicles, vehicle parts, composites, and carbon fiber. There are no fees on these loans and lower interest.
Projects that are eligible must meet four criteria:
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They must utilize and innovative technology or system.
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They must reduce, avoid, or sequester greenhouse gases
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They must be located in the U.S. (but can be foreign owned)
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They must be able to repay the loan principal and interest.
The maximum deal size is $4 billion. Some deals have been as small as $25 million and there is no minimum size. The average deal is $900 million.
Lending terms can be as long as thirty years. Interest rates are based on the equivalent US Treasury rate plus a spread of 50 to 150 basis points and are fixed. The LPO can guarantee up to 80 percent of the project cost, but most projects have at least 35 percent equity. Co-lending with commercial lenders is encouraged but not required. There are no personal guarantees.
The application process is in two parts. There is a two-month turnaround for the initial part, during which the LPO determines if the proposed project meets the four initial criteria (see above).
The second part of the process is the full due diligence review. This takes from 3-4 months and requires payment of a fee of $100,000. If the project is larger than $300 million, the fee escalates to $350,000.
The Loan Program Office, over its history, has enjoyed support from both sides of the political aisle. It was established in 2005 under President Bush. In 2008-09, under President Obama, the LPO placed $16 billion in funding as a result of the Stimulus Act, primarily in solar projects. These projects, which averaged $1-$3 billion and 150-200 megawatts deployed were successful in demonstrating that the technology was commercially financeable. Today new projects are entirely financed by commercial lenders.
Congress set up the program with an expectation of losses of $10 billion. To date, the program has lent $32 billion with losses of only two percent. Thus far, the LPO has been successful in that, of the losses incurred, none have been from improperly evaluated technical risks.
Mr. Davidson was appointed by President Obama in May of 2013 to head the LPO. Prior to leading the LPO, Mr. Davidson was Senior Advisor for Energy and Economic Development at the Port Authority of New York and New Jersey and was the Executive Director of New York State’s economic development agency, the Empire State Development Corporation. Prior to his government service, Mr. Davidson was an entrepreneur who founded and managed six companies in Spanish language and other niche markets, broadcasting, publishing, marketing and digital preferred services. Early in his career he was an executive in the investment banking division of Morgan Stanley & Co.