Originally published May 19, 2008
Keywords: US Department of Energy, DOE, second round loan guarantees, renewable energy projects, innovative technologies, eligible proejct, nuclear power facilities, uranium enrichment, energy efficienty, energy and electric transmission, Loan Guarantee,
In June 2008, the US Department of Energy (DOE) will solicit proposals for the second round of loan guarantees to support renewable energy projects that employ innovative technologies. Title XVII of the Energy Policy Act of 2005 authorized the DOE to provide loan guarantees for the development of innovative technologies (i.e., technologies that are not yet commercially available at the time the guarantee is issued). An "Eligible Project" for a loan guarantee is a project located in the United States that employs a "new or significantly improved technology that is not a commercial technology." The DOE implemented this program with a first round of solicitations, selection of projects and issuance of loan guarantees in 2006 and 2007.
The June 2008 DOE solicitation will seek proposals in three areas: nuclear power facilities; nuclear facilities for the front end of the nuclear fuel cycle, including uranium enrichment; and energy efficiency, renewable energy and electric transmission projects. In this last category, the DOE will seek proposals that employ "new or improved" technologies including: ocean/wave/tidal, solar, wind and geothermal renewable energy projects; advanced electric transmission and distribution; advanced energy storage, grid integration and intermittency; energy-efficient buildings and end-uses; hydrogen and fuel cells; and manufacturing and production.
The DOE process for approving a Loan Guarantee has several distinct steps: (i) Pre-Application; (ii) Application; (iii) Term Sheet; (iv) Execution of a Conditional Commitment; and (v) closing on the Loan Guarantee Agreement.
The DOE review process is one in which the DOE compares various applications and selects those that are most meritorious. Key factors that the DOE will consider include: (i) to what measurable extent the project avoids, reduces or sequesters air pollutants or anthropogenic emissions or greenhouse gases; and (ii) to what extent the new or significantly improved technology, as compared to technology in general use in the United States, is ready to be employed commercially in the United States, can be replicated, yields a commercially viable project or service in the use proposed in the project, has potential to be employed in other commercial projects in the United States, and is or will be available for further commercial use in the United States. The DOE will also consider a number of factors with respect to the financial strength and track record of the sponsors.
In preparing a Pre-Application, sponsors of projects need to anticipate and address several key issues including: whether the technology falls within the parameters of "new" or "significantly improved"; the financial and organizational strength of the sponsors and other project participants; the overall financing plan for the project, including the breakdown between debt and equity, and the portion of the debt to be guaranteed by the DOE; and the overall structuring of the project, including anticipation of the impact of the DOE loan guarantee agreement on the project structuring and financing (e.g., the DOE will require a pledge of project assets and other collateral and will require assurances that intellectual property will be available in the event of a default). The face value of the debt guaranteed by the DOE is limited to no more than 80 percent of the total "Project Costs."
Key elements of the Pre-Application include: (i) a business plan; (ii) a description of the project sponsor, including all entities involved, and the sponsor's experience in project investment, development, construction, operation and maintenance; (iii) a description of the new or significantly improved technology to be employed in the project, including a description both of the significance of the technology to energy use or emission control and how and why the technology is "new" or "significantly improved" compared to technology already in general use in the commercial marketplace in the United States; (iv) an estimate of the total project costs; (v) the time frame for construction and commissioning of the project; (vi) a description of any primary offtake or other revenue generating agreements that will provide the primary sources of revenue for the project, including repayment of the debt obligations for which a guarantee is sought; (vii) a description of the anticipated air pollution and/or anthropogenic greenhouse gas reduction benefits and how these benefits will be measured and validated; (viii) a description of the financing plan, including the amount of the guaranteed obligation as a percentage of total project debt and as a percentage of total project cost; (ix) an explanation of the estimated impact that the loan guarantee will have on the interest rate, debt term and overall financial structure of the project; and (x) a copy of the equity commitment letter(s) from each of the project sponsors.
Following review of the Pre-Application, the DOE may request additional information and meetings with the sponsor. Following the assessment of the Pre-Application, the DOE may invite the applicant to submit a full "Application" or may inform the applicant that the project proposal will not receive further consideration.
The Application requirements build on the information submitted in the Pre-Application. However, there are also a number of additional requirements that sponsors should keep in mind. These include: a description of how the sponsors intend to ensure, to the extent possible, the further commercial availability of the technology in the United States; a detailed description of the engineering and design contractor(s), construction contractor(s), equipment supplier(s) and construction schedules for the project, including the anticipated performance guarantees, performance bonds, liquidated damages and equipment warranties; an analysis of the market for any product to be produced by the project, including relevant economics justifying the analysis, and copies of any contractual agreements for the sale of these products or assurance of the revenues to be generated from sale of these products; an independent engineering report prepared by an engineer with experience in the industry and familiarity with similar projects; a preliminary credit assessment for the project without a loan guarantee from a nationally recognized rating agency for projects where the estimated total project costs exceed $25 million; and a report containing an analysis of the project's potential environmental impact, which will enable the DOE to assess whether the project will comply with all applicable environmental requirements, and will also enable the DOE to undertake and complete any necessary reviews under the National Environmental Policy Act of 1969.
If the applicant is successful at the Application stage, the DOE will prepare a Term Sheet setting out the specific principal terms and conditions that the applicant must meet in order to obtain the loan guarantee. The Term Sheet is then negotiated and, once signed by both the DOE and the Applicant, becomes a Conditional Commitment. Following the Conditional Commitment, the DOE, sponsors and lenders move to the completion of the financing.
Additional information concerning the DOE's solicitation will become available upon the DOE's formal release of the solicitation, which is expected to occur in June.
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