Chu Revs Up DOE Loan Process That Was Slow, Costly Under Bush

Jul 27, 2009

The Energy Policy Act of 2005 authorized the secretary of energy to make loan guarantees to qualified renewable energy and energy efficiency projects. It was supposed to add a much needed public boost to the development of U.S. renewable energy and energy efficiency technologies, as well as the economy.

Instead, the Department of Energy sat on billions of dollars in loan potential. Companies applying for the loans spent as much as $10 million on the process and waited as long as three years for a loan guarantee without a single one being granted by the Bush administration.

No longer.

Energy Secretary Steven Chu pledged to speed up action on the loan guarantees earlier this year when Congress expanded the program from $38.5 billion to $100 billion in the recent stimulus package, and he seems to be making good on that promise.

Three loans have been granted in the last seven months and several more are moving forward.

I spoke to Issa Arnita, investor relations director at geothermal developer Raser Technologies, about Raser's experience with the DOE. The company applied for a loan in late February and was approved in June to move to the due diligence phase, considerably faster than previous applicants experienced. The loan guarantee will back $152 million financing, 80% of the cost of a geothermal plant to be built in Utah that will produce 42 megawatts of power.

Arnita says the company is expecting a final answer by the end of this month. The cost was far less than others experienced in the past, too.

"We're actually going to be below $1 million, more like several hundred thousand dollars," says Arnita. "The money that we're applying for with this loan guarantee is under the former administration program, the Bush administration, but the process has been sped up considerably as the Obama administration took over."

This is on par with other DOE loan programs such as the Advanced Technology Vehicles Manufacturing Loan Program (ATVM) that is part of the Energy Independence and Security Act of 2007.

Along with Ford and Nissan, Tesla Motors received approval for two loans last month under that program. Tesla's loans totaled $465 million. The process was quick was but still rigorous. "The government and private sector consultants did a tremendous job of due diligence," says Tesla spokeswoman Rachel Konrad.

Electric vehicle company Fisker Automotive, which has been waiting on a response for its loan guarantee request under the ATVM program, agrees that the process is rigorous, but not unduly difficult or costly. "There's certainly lots of paperwork. The DOE are not just handing money out left and right," says Fisker's Russell Datz.

In comparison to these experiences, take the example of Beacon Power, an energy storage company reporting annual revenues of $68,000. The company spent two years in the active submission process - plus a year before that waiting for the DOE to set up the submission guidelines - and $1 million in legal fees and due diligence costs to secure a $43 million DOE loan guarantee under the Energy Policy Act of 2005, which was granted in the beginning of July.

"We were in the first wave of loan guarantees," says Gene Hunt of Beacon Power Corporation. "There were only 16 companies selected to apply initially and five of them dropped out along the way."

"The DOE was still trying to figure out how to do this," Hunt adds, "but with the arrival of Secretary Chu, who has lit a fire under the program, things are moving more quickly so everyone that follows has benefited from the work that we did."

Solar start-up Solyndra, the first company to receive a loan under the program, had an even more costly experience. The company spent $10 million over three years to secure a $535 million loan guarantee from the DOE in the beginning of 2009, costs included hiring Goldman-Sachs to advise on the loan application, Business Insider reports.

The loan guarantee delays also delayed projects that can add much needed jobs to the economy.

"The focus for the DOE is not only getting clean energy projects in the field, but also job creation," says Hunt. Although he acknowledges that the Beacon Power project is not a huge permanent jobs creator (about 100 temporary construction jobs and an additional 20 permanent jobs, plus indirect hiring by their suppliers) he says that the loan guarantee is also ensuring that their current employees retain their positions.

The Solyndra 500MW solar plant, on the other hand, is expected to employee 3,000 people during its construction phase and 1,000 permanent operations jobs.

Industry Suggests More Improvements to the Process

While there have been improvements, some believe the DOE can still do better, including Energy Secretary Chu. In May, groups representing solar, wind, biomass, geothermal, hydro and nuclear power companies sent a letter to White House officials calling for the DOE and the budget office to make the process easier. In particular, they want to do away with the preliminary credit assessment which can cost hundreds of thousands of dollars.

The letter argues that the credit assessment is not needed for established technologies and that start-ups don't have enough credit information to get a favorable rating. The signatories ask for consolidation of the environmental review process and urge the DOE to accept the review of state and federal permitting agencies.

They also blame disagreements between the DOE and the Office of Management and Budget for some of the current delays:

It is critical that new regulations be developed to implement Section 1705 and to address defects in the existing Section 1703 rules, and we appreciate that DOE is working diligently to develop such regulations. We understand, however, that there are disagreements between DOE and the Office of Management and Budget over these regulations, as evidenced by the fact that DOE's draft revised regulations for the Section 1703 program were submitted to OMB more than two months ago and have not been acted on. Three months have passed since enactment of ARRA, and we have little confidence that ongoing discussions between DOE and the Office of Management and Budget over these regulations will produce a satisfactory result in a timely manner.

There are currently 46 applications with the DOE for renewable energy and efficiency projects. Chu hired Matthew Rogers, a former McKinsey consultant to help accelerate stimulus spending by the DOE. Rogers has implemented a "rolling review process" so new applicants may be granted loans prior to companies that have been waiting.

As it stands currently, the loan guarantees are conditional and require companies to show private investment before federal money is released, something industry would like to see changed. Still, companies are anxious to get the loans, particularly at a time when private investment markets have dried up.

"The loan terms themselves are very attractive, something like the Treasury rate for a fairly long period of time," Bill Capp, Beacon's chief executive officer told Bloomberg in an interview last month, as the company awaited approval. "Even with the delays and the expense, we still think it's our best way of getting that first plant financed."

Where the Money is Going

The DOE will grant up to $10 billion in loan guarantees for new and improved technologies in energy efficiency, renewable energy and advanced transmission and distribution. But the DOE has also recently put out solicitations for the loan guarantee funding that environmentalists may argue should not qualify as renewable and efficiency projects.

Up to $8 billion will go toward carbon reduction, capture and sequestration for coal-based power generation, as well as coal gasification facilities. As much as $18.5 billion will go toward nuclear power facility projects with up to another $2 billion toward "front end" nuclear fuel cycle projects.

The DOE has a two-year extension of the program, giving the department until September 2011 to distribute the funds. With companies still waiting to hear about their loans, they will need to work quickly to fix the program and disperse the loan guarantees to businesses that are at the forefront of the green energy economy.

While industry may not get everything that they are asking of the DOE, if Raser Technologies is any indicator, they are off to a good start.

 

See also:

Federal Loan Rules Stymie Innovation by Shutting Out Small Businesses

Spanish Wind Giant Seeks $500M Slice of US Clean Energy Pie

Duke Considering First New U.S. Nuclear Plant in 30 Years

Surprise: Nissan's Electric Cars to Be Made in the USA

Renewable Energy: 'An Opportunity America Can't Afford to Miss'

 

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