In Defense of the Imperfect But Important Loan Guarantee Program

20 Jul 2011

By Larry Eisenstat & Steven Wellner

On May 10th, 2011, the US Department of Energy (DOE) announced it will process only a select few of the last pending applications under the Section 1705 Loan Guarantee Program, created by the American Recovery and Reinvestment Act (“Recovery Act”), which is set to expire at the end of September 2011. For those applicants who didn’t make the cut, this was the last in a long series of frustrations in trying to obtain federal backing for their projects. So, as the Section 1705 program winds down, taking with it one of the Recovery Act’s last major energy related initiatives, what’s next for the loan guarantee program? And, has it really been worth all the trouble?

Criticism of the loan guarantee program has been plentiful. To some, the program was remarkably slow to ramp up after its creation in the form of the Section 1703 “innovative technology” program, in the Energy Policy Act of 2005. Processing times were often interminable (frequently running into years) and the OMB’s conservative risk evaluations dramatically increased the cost of the guarantees, thereby frustrating applicants and advocates (both from outside and within DOE) alike. These and other criticisms turned the program into a favorite whipping boy for Recovery Act critics, so much so that when the DOE ostensibly failed to issue guarantees “fast enough,” the $6 billion appropriated for the Section 1705 program was raided like a piggy bank to fund other stimulus initiatives, including the Cash for Clunkers program and a multi-billion dollar state aid bill. 

Although the program’s slow progress was the subject of multiple congressional hearings, and its administrators’ record-keeping practices were criticized in a federal oversight report, it has, so far, survived repeated attempts to eliminate it altogether. In fact, Congress elected to breathe new (if limited) life into the program in April 2011, appropriating $170 million of new funds to cover the credit subsidy costs for renewable and energy efficiency projects under the surviving Section 1703 program. As of June 1st of this year, the DOE has not announced how it intends to allocate those funds, although the appropriation makes clear that some Section 1705 applicants will be eligible to receive them. This should, at least, soften the blow for a few of the projects that didn’t make the September cut.

Given its tumultuous history and the number of projects that failed to secure a Section 1705 guarantee, some question whether the program is worth saving at all. Yet, for all the criticisms, it’s reasonably clear the program has, and continues to serve, a critical role in the financing and development of a variety of high-dollar, technically innovative or otherwise high-risk energy projects. Though some of the awardees might never get to the finish line, even with a loan guarantee, the fact remains that in just over two years since the Recovery Act jumpstarted the loan guarantee program, DOE has issued more than $30 billion in loan guarantees or conditional commitments for those guarantees to projects—ranging from the first new nuclear project in roughly three decades, to innovative large-scale solar and wind projects, to cutting-edge efficient, end-use energy projects. Those $30 billion, in turn, support over $47 billion in total investment. And, as the DOE races to close its remaining guarantees before the end of September, those figures will likely climb closer to $40 billion and $60 billion, respectively. 

Simply put, at least at a macro level, the program is working, however slowly, to move important renewable and other clean energy projects toward financing and construction. In fact, the program’s importance is obvious when one stops to consider the impact on those applicants who failed to obtain an acceptable loan guarantee. For many applicants, the unavailability of a loan guarantee plainly has left them somewhere between being on life support and dead in the water. Most notably, perhaps, is Constellation, which reportedly abandoned its proposed expansion of the Calvert Cliffs nuclear facility after learning the expected cost of the loan guarantee would exceed what it believed the project reasonably could bear. And, more recently, there’s NRG Bluewater, which decided indefinitely to suspend work on a proposed wind project off the coast of Delaware upon learning that DOE didn’t include its application in the group of Section 1705 applications still to be processed. For these projects, and presumably others that successfully proceeded through the program, obtaining a loan guarantee was not simply gravy (i.e. a financial add-on to a pro forma already sufficient to justify a project’s construction)—it was a necessity. Indeed, as noted, obtaining a loan guarantee was a prerequisite even for many applicants with significant access to private capital. In the case of NRG Bluewater’s Delaware project, it was even an executed, long-term power purchase agreement with a major utility.

These high-profile cases and the dogged commitment of other applicants to obtaining a guarantee notwithstanding the program’s drawbacks, suggest that many—and, perhaps, even most—of the loan guarantee recipients wouldn’t have been able to develop, finance, and build their projects without DOE support. Although, admittedly, a rather unsatisfying defense of the loan guarantee program, it’s fair to say that whatever the program’s faults, many project developers are still better off having received the benefit of this arguably flawed program than not at all.

Finally, the success of the loan guarantee program should not be measured primarily by its ability to churn out guarantees, but rather by the value of the guarantees to their recipients and the long-term success of the projects with respect to which guarantees were issued—the latter measure not being fully assessable for some time. We do know that for those developers fortunate enough to obtain a loan guarantee, the program has served and, hopefully, will continue to serve, as a valuable tool in turning innovative and high-risk projects from concept to reality. 


Dickstein Shapiro LLP

http://www.dicksteinshapiro.com


Dickstein Shapiro LLP
Author: Larry Eisenstat & Steven Wellner
Volume: July/August 2011