DOE Provides Funding for US Electricity and Energy Infrastructure | Skadden, Arps, Slate, Meagher & Flom LLP
The loan guarantee and direct lending facilities of the United States Department of Energy (DOE) can be attractive financing options for borrowers who are developing electric vehicle (EV) infrastructure and innovative energy-related technologies and projects. energy, such as offshore wind, transmission, hydrogen, carbon capture and critical minerals. During 2009-2011, the DOE was a lender of choice for financing some of the largest projects in the U.S. renewable energy industry, facilitating over $ 35 billion in loans, and was widely recognized for creating the market. commercial financing for these assets. .
DOE programs that currently provide funding for EV infrastructure and innovative energy-related technologies and projects include:
- Advanced Technology Vehicle Manufacturing (ATVM) loan program. $ 17.7 billion in direct loan authorization;
- Title 17 Innovative Energy (Section 1703) Loan Guarantee Program. Almost $ 24 billion in loan guarantee authorization: $ 8.5 billion for advanced fossil fuels, $ 10.9 billion for advanced nuclear power and $ 4.5 billion for renewable energies and efficient energies; and
- Additional funding authority. $ 2 billion for Tribal Energy Loan Guarantee Program (Partial) and $ 3.25 billion under the Western Area Power Administration Transmission Infrastructure Program.
Both the Trump and Biden administrations have supported DOE programs as a way to promote advanced and innovative technologies.
Although the objectives of these programs vary, they have many common elements and some overlap. Certain projects and technologies, such as hydrogen and critical minerals, may be eligible for both the ATVM loan program and the Title 17 innovative energy loan guarantee program, both of which are described below. .
ATVM loan program
Eligibility. Projects must relate to the manufacture of eligible advanced technology vehicles (ATVs) (that is to say., light-duty vehicles that meet or exceed a 25% improvement in fuel efficiency beyond a 2005 model year benchmark of comparable vehicles and / or ultra-efficient vehicles that achieve fuel efficiency of 75 miles per gallon or equivalent using alternative fuels) or components designed for ATVs and installed to meet ATV performance requirements. Projects must be located in the United States, although foreign ownership is permitted. Eligible projects include new facilities and existing facilities expanded or upgraded, as well as technical integration carried out in the United States. There must also be a reasonable prospect of repayment.
Leverage. Up to 80% of eligible costs.
Tenor. The lesser of 25 years or the useful life of a project.
Interest rate. The applicable US Treasury rate for the term of the loan, with no credit spread.
DOE fees. No administration fees. The borrower must pay the cost of DOE advisers and, at closing, a commission of 10 basis points (bps) on the principal amount of the loan. The costs of subsidizing the credit of the loan are covered by funds allocated by Congress.
Title 17 Loan Guarantee Program for Innovative Energy
Eligibility. Projects must:
- deploy new or significantly improved technologies over commercial technologies in use in the United States;
- avoid, reduce or sequester greenhouse gas emissions or air pollutants;
- be located in the United States or its territories (foreign ownership or sponsorship is permitted); and
- have a reasonable prospect of repayment.
Leverage. Up to 80% of eligible costs.
Tenor. The lesser of 30 years or 90% of a project’s useful life.
Fixed interest rate. Loans guaranteed at 100% by the DOE are issued by the Federal Financing Bank (FFB), with an interest rate equal to the applicable US Treasury rate for the term of the loan, plus an FFB liquidity spread of 37.5 bps (standard for all Title 17 loans), in addition to the applicable credit-based interest rate differential, ranging from 37.5 to 200 basis points (provided a credit rating agency nationally recognized third party awarded the project a grade between AAA and B-).
DOE fees. Application fees of $ 150,000 to $ 400,000, depending on the loan amount, an initial facility fee calculated on the basis of the loan amount and reimbursable fees (such as advice and consultants) payable by the borrower , but only if the loan achieves financial close. At closing, the borrower must also pay the cost of the loan subsidy (or fees) as funds allocated by Congress are not available (see below). After the loan closes, the borrower also pays an annual maintenance fee, as the DOE Loan Programs Office (LPO) monitors the project until final repayment.
Provisions common to DOE funding programs
Loan guarantee and priority. Typically, loans are secured by a first priority lien (at the time the loan is made) over the borrower’s assets, although the collateral may be shared with other senior lenders.
Applicable legal requirements. Loans and loan guarantees must comply with key laws, including:
- the National Environmental Policy Act, requiring the DOE to review the environmental effects of proposed actions (possibly through a categorical exclusion, environmental assessment, or environmental impact statement);
- the Davis-Bacon Act, which requires payment of at least current wages and makes it mandatory to keep certain records; and
- the Cargo Preference Act of 1954, establishing certain requirements for the use of ships flying the United States flag.
The application process includes a pre-application consultation, the formal application process (two-part in the case of the Title 17 Innovative Energy Loan Guarantee Program), and due diligence and negotiation of terms. If the project receives a conditional commitment, the parties proceed to final documentation and closure.
Main problems of the program
Repayment perspective. To date, loan and loan guarantee programs have not provided much guidance on what meets the “reasonable prospect of repayment” requirement. Most or most current loan guarantee projects have long-term drawdown agreements with creditworthy parties extending at least the life of the loan. The Senate Infrastructure Investment and Job Creation Act sets out a number of factors to be assessed in determining whether the “reasonable prospect of payback” test is met.
Cost of the credit subsidy. Federal law requires agencies to estimate the cost to government of providing or securing credit. Known as the “subsidy cost of credit,” this is equal to the net present value of the estimated government cash flows minus the estimated cash flows to the government over the life of the loan, excluding administrative costs. The DOE calculates the cost of the loan subsidy before the loan is closed using a template provided by the Office of Management and Budget.
Congress allocated funds to cover the cost of subsidizing credit under the ATVM loan program and other programs, but only a relatively small amount was allocated to the innovative energy loan guarantee program of the Title 17. In the absence of funds allocated by Congress, borrowers under the Title 17 innovative energy loan guarantee program are required to pay the cost (or fees) of the non-repayable credit grant before or at the time of closing, which is a problem, as the final cost of financing the DOE under the program is not fully known until well before the start of the lending process.
The DOE LPO is authorized to include a risk-based charge on Title 17 innovative energy loan guarantees, as well as the principal and interest of the guaranteed loan, in order to make DOE costs consistent with commercial markets and other federal credit programs. The risk-based fee can reduce the cost of the credit subsidy by increasing the expected government inputs, which are taken into account when calculating the amount of the credit subsidy fee payable by the borrower. This can reduce the uncertainty around the amount of the credit subsidy fee and hence the uncertainty about the borrower’s total costs under the Title 17 innovative energy loan guarantee program.
Other program changes are under consideration
As noted above, the Senate Infrastructure Investment and Jobs Act proposes significant changes to DOE loan and loan guarantee programs. As Congress considers this infrastructure bill and even greater legislative efforts, other significant changes to the ATVM loan program, the Title 17 innovative energy loan guarantee program and others programs may result.
Energy and infrastructure projects analyst Karen Abbott contributed to this article.