Almost three years ago in the Energy Policy Act of 2005, Con-
gress gave the U.S. Department of Energy authority to provide
loan guarantees for innovative energy technologies. This au-
was seen by its supporters and Congress as a tool to
art commercialization of climate-friendly energy tech-
s that have been demonstrated at the pilot scale or in
aountries, but not yet commercialized in the U.S.
he loan guarantee program was stalled, but as we enter
appears that the program is about to begin delivering
promise of helping to bring important new greenhouse
ucing technologies to the marketplace. Particularly for
t costly technologies, most notably new nuclear power
some questions about the structure and affordability of
gram remain. Those questions will be front and center
program unfolds in the coming months, but hopes are
at the program is about to kick into high gear.
(Editor’s Note: In Part I, published in the January/February 2008 issue, funding and loan structure were addressed. Archived copies of the issue are available online at www.elp.com.)
Authors
Mary Anne Sullivan, partner in Hogan & Hartson’s energy practice, has more than 25 years of experience as an energy lawyer. She previously served as general counsel of the U. S. Department of Energy and as deputy general counsel for environment and nuclear programs. Currently, her practice focuses on electricity and advanced energy technologies and she has assisted several clients with loan guarantee applications and comments. One client was recently accepted to proceed to the next stage based on its loan guarantee application. Contact Sullivan at masullivan@ hhlaw.com. Sam Walsh is an associate at Hogan & Hartson.
Full faith and credit In their rulemaking comments, Wall Street firms emphasized that a loan guarantee must represent the unconditional commitment of the full faith and credit of the United States if the program is to succeed in attracting affordable private investment to innovative technologies. The final rule seems to have calmed concerns that the guarantees might be conditioned in a way that would preclude the “AAA” rating for the federally guaranteed debt that the program was designed to assure. The guarantees will be absolute, absent fraud or material misrepresentation by the holder of a guaranteed obligation.
Eligible technologies
Congress said that DOE could issue loan guarantees for projects that “(1) avoid, reduce or sequester air pollutants or anthropogenic emissions of greenhouse gases; and (2) employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guarantee is issued.”
Although other projects can qualify under this test, carbon-reducing technologies are likely to receive the bulk of loan guarantees.
On the question of what it means for a technology to be in “general use,” DOE created a generous bright line rule: A technology is in general use only if it is being used in three or more commercial projects in the United States, in the same
by Mary Anne Sullivan and Sam Walsh
general application as the proposed project, and has been in service in each such project for at least five years. DOE abandoned its original proposal, that technologies might be considered in general use merely by virtue of having been ordered for use in multiple facilities, even if they were not yet operational. Since operational risk associated with new technology is of paramount concern to most lenders, DOE’s final definition of general use fits well with the loan guarantee program’s underlying purpose of eliminating barriers to the financing of innovative clean energy technologies.
DOE has established a wide-ranging list of criteria upon which DOE will evaluate loan guarantee applications. Among the selection criteria are:
■ the financial viability of the project
■ the extent to which the technology is widely replicable
■ the importance of the technological improvements and the quantity of emissions reduced
■ the likelihood the project will be ready for full commercial operations within the time frame proposed
■ the equity contribution of the project sponsors
■ the probability the project will produce revenues sufficient to service its debts
■ the capacity and expertise of the sponsors to successfully operate the project
■ a generalized assessment of the market, regulatory, legal, financial, and technological risks associated with the project.
Credit Subsidy Cost
The good news about funding levels and DOE’s more flexible approach to the structuring of loan guarantees is somewhat offset by a couple of difficult issues that the rule does not resolve dealing with the so-called “Credit Subsidy Cost,” and the related credit rating requirements.
EPAct 2005 states that loan guarantees must be either backed by appropriated funds or by payments from the borrower for the full cost of the obligation. Because DOE has not sought and does not intend to seek appropriated funds to cover the costs of administering the loan guarantees, the final rule requires all guarantee recipients to pay a fee to cover the administrative costs of the program and a Credit Subsidy payment intended to reflect the risk to the government of default on the guaranteed loan. These are upfront, non-refundable payments that must be made by a project sponsor.
DOE has stated that the Credit Subsidy Cost for a loan
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