United States: DOE Invites Applications For Loan Guarantees To Support Clean Energy Projects And Seeks Comments On Revised Loan Guarantees Regulations

On July 29, 2009, the Department of Energy (DOE) issued two solicitations inviting applications to be filed for loan guarantees under Title XVII of the Energy Policy Act of 2005, as amended by the American Recovery and Reinvestment Act (ARRA). One solicitation makes available $8.5 billion in loan guarantees for innovative renewable energy, energy efficiency, and electricity transmission technologies. The other makes available an unspecified amount of loan guarantee funding for electricity transmission infrastructure projects that use "commercial technologies." Each solicitation requires a new, two-part application and creates a rolling application process that involves multiple rounds of review. The first deadline for submission of Part I applications is September 14, 2009.

On August 7, DOE published proposed regulations that are intended to provide greater flexibility in the determination of an appropriate collateral package to secure guaranteed loan obligations. Specifically, the proposed regulations would delete the requirement for DOE to be "in a first lien position on all assets of the project" and the requirement for DOE to hold "superior rights in and to the property acquired from the recipient of the payment" in the event of a default. The deadline for commenting on the proposed regulations is September 8, 2009.

This Update summarizes key points in the two solicitations, including the amount of funding available, the eligibility requirements, the application process, the application fees, and DOE's review process. This Update also briefly summarizes the proposed changes to the regulations.

The Title XVII Loan Guarantee Program

Loan guarantees were originally authorized under Section 1703 of Title XVII of the Energy Policy Act of 2005 (EPAct), which provides loan guarantees for projects that facilitate accelerated commercialization of energy efficiency, renewable energy, and advanced transmission and distribution technologies. Projects eligible for loan guarantee funds under Section 1703 must "avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gasses; and employ new or significantly improved technologies" in comparison to commercial technologies currently used in the United States.

DOE implemented the Loan Guarantee program by issuing regulations on October 23, 2007. These regulations, codified at 10 C.F.R. Part 609, contain detailed requirements concerning the application process, the required contents of applications, and the terms on which loan guarantees can be awarded.

Earlier this year, ARRA amended Title XVII to include Section 1705. Under Section 1705, federal funds can be used to pay the "credit subsidy cost" of a loan guarantee, thus reducing costs that would otherwise be borne by the applicant. Only three types of projects are eligible for loan guarantee funds under Section 1705: 1) renewable energy systems projects; 2) electric power transmission systems projects; and 3) leading-edge biofuels projects that employ new or significantly improved technology compared to other commercial technologies currently used in the United States. To receive a loan guarantee under Section 1705, a project must create and retain jobs in the United States and must commence construction before September 30, 2011.

In ARRA, Congress appropriated nearly $6 billion to pay the credit subsidy costs for Section 1705 loan guarantees. Recently, Congress reduced that appropriation by $2 billion to extend the "Cash for Clunkers" program. As a result, approximately $4 billion remains to pay the credit subsidy costs for Section 1705 projects.

The solicitations issued on July 29 are the first solicitations issued for the Loan Guarantee program since the enactment of ARRA. They address different types of projects:

Solicitation DE-FOA-140 invites applications for loan guarantees for renewable energy, energy efficiency, and electricity transmission and distribution projects that involve "new or significantly improved technologies." Projects that involve commercial technologies are not eligible. Loan guarantees under this program can be awarded under Section 1703 or under the more restrictive terms of Section 1705.

Solicitation DE-FOA-132 invites applications for loan guarantees for electricity transmission infrastructure projects that involve "commercial technologies." Loan guarantees under this program can be awarded only under Section 1705.

Solicitation # 140: Loan Guarantees for Renewable Energy, Energy Efficiency and Electricity Transmission Projects That Use Innovative Technologies

Funding Available

This solicitation makes available up to $8.5 billion in loan guarantee funding. For projects that meet the requirements of Section 1705, DOE can pay up to $2.5 billion for credit subsidy costs under this solicitation.

Eligible Projects

Eligible projects consist of any project located in the United States or a U.S. territory that employs "New or Significantly Improved Technology that is not currently a Commercial Technology." DOE defines a Commercial Technology as any technology in the commercial marketplace that has been used in three or more commercial projects in the United States in the same way as the proposed project for at least a five-year period when a term sheet is issued.

Projects with foreign ownership or sponsorship are eligible on the condition that they are located in the United States or a U.S. territory.

Commercial Readiness Requirement

Although commercial readiness is not a statutory requirement for eligibility, it is required under this solicitation. Section II.E of the solicitation specifically states that projects must be fully developed and ready to proceed to commercialization. To be considered commercially ready, projects must have been successfully demonstrated at both the pilot and demonstration scale. Additionally, applicants will be required to include in their application a minimum of six months of validated operating and performance data, including 1,000 to 2,000 hours of operation data for the demonstration project, and demonstration plant technical results, such as operating efficiency and yield. This data must be included in Part I of the application.

Site Selection

Applicants are required to show in their application that a site has been selected for the proposed project and that the applicant has control of this site through either ownership, an option to purchase the land or a lease.

Technology Categories

Proposed projects must fall within one of the nine designated technology categories, including: 1) Alternative Fuel Vehicles; 2) Biomass; 3) Efficient Electricity Transmission, Distribution and Storage; 4) Energy Efficient Building Technologies and Applications; 5) Geothermal; 6) Hydrogen and Fuel Cell Technologies; 7) Energy Efficiency Projects; 8) Solar; and 9) Wind and Hydropower.

Project sponsors may not submit an application for multiple projects using the same technology, but may submit separate applications for projects employing different technology or that are different types of projects (i.e., manufacturing vs. stand-alone).

Application Process

DOE will employ a two-part application process to review all applications. The objective of this process is to identify and accelerate the review of projects that meet DOE's eligibility criteria, including whether the project is a New or Significantly Improved Technology and the project's technical readiness for commercial application in the near future.

Part I of the application must include a summary of the project and address its eligibility, status of financing, and progression to date regarding site preparation and permitting, among other things. Based on Part I, DOE will inform the applicant whether the proposal meets the eligibility requirements and other mandatory requirements.

Part II of the application may be submitted at any time after being informed by DOE that the proposal is eligible and meets all mandatory requirements. Part II includes more detailed information and provides the basis for DOE to conduct its merit review. All Part II applications filed with DOE during any round of review will be competitively evaluated against all other filings submitted in the same round. Based on Part II, DOE will decide whether to invite an applicant to enter into negotiations on the terms of a loan guarantee agreement.

Part II applications will be reviewed based on the following merit criteria: (1) creditworthiness (30%), including the financial viability of the proposed project and adequacy of the applicant's funding sources; (2) applicant capabilities, technical approach and work plan (20%); (3) environmental benefits (15%); (4) technical relevance and merit (15%), including the use of New or Significantly Improved Technologies; (5) construction factors (10%); and (6) legal and regulatory factors (10%). A mandatory factor in determining whether an applicant will receive funds will be the applicant's ability to repay the principal and interest of a loan guarantee.

If DOE invites an applicant to begin negotiations, DOE and the applicant will then engage in the due diligence, underwriting and negotiations phase of the application process. At this point, DOE will conduct further review of the applicant's technical information, business and financial plans, proposed organizational structure and staffing, project risks, and environmental impacts of the proposed project, among other things.

Further information regarding the requirements for Part I and Part II applications may be found in Attachments A1 and A2 of the solicitation.

NEPA Review

As part of the application process, DOE must comply with the requirements of the National Environmental Policy Act (NEPA). The solicitation states that due to the commercial size of the projects, successful projects will be ineligible for the lowest level of NEPA review – a categorical exclusion (CE). For selected projects, DOE will determine whether an Environmental Assessment (EA) or Environmental Impact Statement (EIS) is needed under NEPA and may opt to use a third party to assist in the preparation of the EA or EIS, in which case the applicant would be responsible for the associated costs of using a third-party consultant.

Application Deadlines

In total, DOE will have seven rounds for Part I and Part II of the application process under this solicitation. Part I and Part II applications will be reviewed on a rolling basis, with applications submitted in earlier rounds receiving priority in review. The following is a list of the submission due dates.

Although DOE has set deadlines for Part I and Part II of the application process, this funding solicitation will remain open regardless of these deadlines until all $8.5 billion is awarded.

Application Fees

DOE requires applicants to submit a nonrefundable filing fee with their applications. There is a $75,000 application fee for applications requesting loan guarantee amounts up to $150 million. For projects seeking loan guarantees between $150 million and $500 million, the application fee is $100,000, and for projects above $500 million, the total application fee is $125,000. The initial 25% of the application fee must be paid contemporaneously with the submission of Part I of the application. The remaining 75% of the application fee will be paid contemporaneously with the filing of Part II of the application. DOE intends to use part of these fees to cover the internal costs of conducting its financial and technical reviews.

In addition, DOE intends to use independent consultants and outside legal counsel to aid in the review and awarding of loan guarantee awards. Under its program, DOE may opt to use outside consultants and legal counsel at any time following submission of Part I of the application. Project applicants will be required to enter into a payment agreement with DOE to make periodic payments for the fees and expenses associated with any outside consultants or counsel DOE chooses to employ. The solicitation for the program does not specify an upper limit on the amount of fees or expenses the applicant could be required to pay for work done by outside consultants or counsel.

Successful applicants will be required to pay a facility fee upon the execution of a term sheet for the allocated loan guarantee. This fee is a percentage, and in some instances an additional base fee, of the loan guarantee amount.

Successful applicants will also be required to pay a maintenance fee to cover the costs of DOE's administrative expenses in serving and monitoring the loan guarantee throughout construction and operation of the project. This fee will range from $50,000 to $100,000 annually.

Solicitation # 132: Loan Guarantees for Electricity Transmission Infrastructure Projects that Use "Commercial Technology"

Funding Amount

This solicitation makes available loan guarantees solely under Section 1705, which allows DOE to pay for credit subsidy costs. The solicitation does not set a limit on the total amount of loan guarantee authority that can be awarded under this solicitation. It allows up to $750 million to be committed to pay for credit subsidy costs. Payment of $750 million for credit subsidy costs would involve the award of loan guarantees substantially greater than that amount.

Eligible Projects

The only projects eligible under this solicitation are "electric transmission systems projects" that meet all of the following requirements:

• They utilize a "commercial technology"
• They are "reasonably likely," at the time a Part I application is filed, to commence construction by September 30, 2011.
• They meet all applicable requirements of Section 1705, as well as other Title XVII requirements and ARRA requirements.
• They "cannot be financed from private sources on standard commercial terms."

They meet at least one of the following eight criteria:

1. The project involves new or upgraded lines of at least 100 miles of 500 kilovolts (kV) or higher or 150 miles of 345 kV.
2. The project has at least 30 miles of transmission cable under water.
3. The project has a high voltage direct current (DC) component.
4. The project is a major interregional connector.
5. The project is designated as a National Interest Electric Transmission Corridor by DOE under the Energy Policy Act of 2005.
6. The project is associated with offshore generation, such as open ocean wave energy, ocean thermal or offshore wind.
7. The project mitigates a substantial reliability risk for a major population center.
8. A set of improvements to an integrated system within a state or region that together aggregate to meet the criteria in #1 above.

Application Process

The application process for this solicitation also involves a two-part application and several rounds of review. The main difference with this solicitation is that the application process is more compressed:

All Part I applications are required to be filed by September 14, 2009.

There will three rounds of review for Part II applications. The deadlines for these rounds are October 26, 2009; December 10, 2009; and January 25, 2010.

In its review of the Part II applications, DOE will consider the following evaluation factors:

• The viability of the project without guarantees (whether from DOE or otherwise).
• The availability of other federal and state incentives (e.g., incentives other than the DOE loan guarantee).
• The importance of the project in meeting reliability needs (e.g., the reliability needs of the national or local electric grid).
• The effect of the project in meeting the environment (including climate change) and energy goals of the nation, a state or region of the United States (e.g., such goals of the state and/or region in which the project is located).

The DOE's evaluation factors give heavy weight to creditworthiness. Under this solicitation, technical factors will be 30% of the total weighting, programmatic factors will be 20% and financial factors – i.e., creditworthiness – will be 50%.

The application fees for this solicitation are similar to those for Solicitation # 140. The applicant is required to pay an application fee and to pay for the costs of DOE's consultants and outside legal counsel. Successful applicants also must pay a facility fee and maintenance fee.

Proposed Changes to Loan Guarantee Regulations

The DOE's proposed changes to its Loan Guarantee Program regulations are intended to address one of the major impediments to the use of this financing method under the existing regulations – namely, the requirement for DOE to be a "in a first lien position on all assets of the project" and the requirement for DOE to hold "superior rights in and to the property acquired from the recipient of the payment" in the event of a default.

The proposed regulations would remove these requirements, and would include new provisions that specifically authorize DOE to enter into intercreditor agreements that address matters such as priorities and voting rights among lenders.

The comment period on the proposed regulations extends through September 8, 2009. After the comment period has closed, DOE will review comments and then publish final regulations in the Federal Register.

Additional Information

All applicants must have a DUNS number and must be registered in the Central Contractor Registration (CCR) database to be eligible for a loan guarantee. A DUNS number is a unique nine-digit identification number issued by Dun and Bradstreet that can be obtained by accessing http://fedgov.dnb.com/webform. Registration in the CCR database can be completed by visiting http://www.ccr.gov/. DOE recommends that applicants allow 21 days to complete the registration process. For additional information, please refer to our Federal Grants & Loans practice, which includes a background paper with tips for potential applicants.

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