United States: DOE Invites Applications For Loan Guarantees For Renewable Energy Projects That Use “Commercial Technology”

On October 7, 2009, the Department of Energy (DOE) issued a solicitation inviting the submission of applications for loan guarantees for "commercial technology renewable energy" (CTRE) projects. This solicitation was issued under Section 1705 of Title XVII of the Energy Policy Act of 2005, as amended by the American Recovery and Reinvestment Act (ARRA).

This solicitation is significant because:

• It is the first loan guarantee solicitation open to renewable energy generation projects that use "commercial technology"; and
• It is the first loan guarantee solicitation issued under DOE's new Financial Institutions Partnership Program (FIPP) and requires applications to be filed by private lenders, not by borrowers or project sponsors.

The solicitation establishes a rolling application process with a two-part application and ten rounds of review. Applicants can submit a Part I application at any time. Part II applications can be filed as early as November 23, 2009 and as late as January 2011. To receive a loan guarantee, the project must commence construction by September 30, 2011.

This Update provides an overview of the Section 1705 loan guarantee program and describes important aspects of the CTRE solicitation, including key differences between this solicitation and previous solicitations, eligibility requirements, financial terms, the application process, the role of National Environmental Policy Act (NEPA) reviews, and application fees and expenses.

DOE will be hosting a webinar on this solicitation on Thursday, October 22, at 12:00 Eastern daylight time. To register, click here.

Loan Guarantees Under Section 1705

The DOE is authorized to issue loan guarantees for renewable energy projects and certain other projects under Title XVII of the Energy Policy Act of 2005, as amended (the Act). Loan guarantees can be issued under Section 1703 or Section 1705 of the Act.

Section 1703 was enacted as part of the Energy Policy Act of 2005. Section 1703 authorizes loan guarantees for renewable energy projects and certain other projects. To be eligible for a loan guarantee under Section 1703, a project 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. Section 1703 does not specify a deadline by which projects must commence construction.

Section 1705 was added to Title XVII by ARRA in February 2009. Section 1705 authorizes loan guarantees for only three specific types of projects:

• Renewable energy systems, including incremental hydropower, that generate electricity or thermal energy, and facilities that manufacture related components;
• Electric power transmission systems, including upgrading and reconductoring projects; and
• Leading edge biofuel projects using technologies at the pilot or demonstration scale that DOE determines are likely to become commercial technologies. These technologies will produce transportation fuels that substantially reduce life-cycle greenhouse gas emissions compared to other transportation fuels.

Section 1705 differs from Section 1703 in several ways. Some of the differences are beneficial to the applicant, while others impose stricter requirements. Differences include:

• Projects that receive loan guarantees under Section 1705 must employ "commercial technologies." By contrast, loan guarantees under Section 1703 are available only for projects that employ "new or significantly improved technologies."
• Projects that receive loan guarantees under Section 1705 must commence construction before September 30, 2011—less than two years from now. Thus the ability to implement a project takes on even greater importance under Section 1705.
• Projects that receive loan guarantees under Section 1705 must comply with the Davis-Bacon Act, which requires payment of the "prevailing wage" to all laborers and mechanics performing work on the project. Compliance with this requirement raises construction costs, which must be accounted for in the application for a loan guarantee.
• Projects that receive loan guarantees under Section 1705 are not required to pay the "credit subsidy cost" of a loan guarantee. The credit subsidy cost is the cost to the federal government of assuming the risk of default on a loan. For Section 1705 loan guarantees, the credit subsidy cost is paid with federal funds appropriated by Congress in ARRA. By contrast, the borrower must pay the credit subsidy cost at closing for loan guarantees issued under Section 1703.

Previous Solicitations Under Section 1705

On July 29, 2009, DOE issued two solicitations inviting applications for loan guarantees.

• Renewable Energy Projects (Innovative). One of the July solicitations invited applications for renewable energy projects that use "new or significantly improved" technologies—that is, innovative technologies. That solicitation was issued under Sections 1703 and 1705.
• Energy Transmission Infrastructure Projects (Commercial). The other July solicitation invited applications for electricity transmission infrastructure projects that employ commercial technologies. That solicitation was issued solely under Section 1705.

Both of these July 2009 solicitations required applications to be filed by the project sponsor. Both solicitations remain open. For further information on these previous solicitations, refer to our previous Update entitled " DOE Invites Applications for Loan Guarantees to Support Clean Energy Projects and Seeks Comments on Revised Loan Guarantees Regulations."

The CTRE Solicitation

The solicitation issued on October 7 represents an important new stage in the development of the Loan Guarantee Program. In this solicitation, DOE has streamlined the application process; it has opened up the loan guarantee program to renewable energy projects that use commercial technologies; and it has required applications to be submitted by lenders, not borrowers. These and other aspects of this solicitation are summarized below.

1. What are the main differences between this solicitation and the July solicitations?

There are several important differences between the CTRE solicitation and the loan guarantee solicitations that were issued by DOE in July 2009. These include:

• Focus on Commercial Technology. This solicitation is open only to renewable energy projects that use commercial technology. By contrast, the July solicitation was open to renewable energy projects only if they used innovative ("new or significantly improved") technologies.
• Partnership With Financial Institutions. This solicitation establishes a Financial Institutions Partnership Program (FIPP). Under the FIPP, applications for loan guarantees must be filed by private lenders, not by borrowers or project sponsors. The lender-applicant, not DOE, takes the lead role in developing the overall financial structure of the proposed project and the specific terms of the loan. DOE expects to issue "partial, risk-sharing" loan guarantees under this program.

This solicitation is open for applications from November 2009 through January 2011, with ten rounds of applications during that period. However, while this process allows flexibility regarding the timing of the application, a project can receive a loan guarantee under this solicitation only if DOE finds that construction will commence by September 30, 2011.

2. Do the loan guarantee regulations (10 CFR Part 609) apply to this solicitation?

Unlike previous solicitations, the CTRE solicitation does not require compliance with the DOE's loan guarantee regulations (10 CFR Part 609). DOE appears to have determined that the loan guarantee regulations do not need to be applied to loan guarantees issued under Section 1705, because Section 1705 is a separate program enacted after the regulations were issued. The regulations continue to apply to loan guarantees issued under Section 1703, which was in effect at the time the regulations were issued.

In lieu of the loan guarantee regulations, the CTRE solicitation includes an Attachment G, which is based on 10 CFR Part 609. Attachment G retains the overall format and much of the text of the regulations but includes numerous modifications and deletions to reflect the requirements of the Section 1705 program and the CTRE solicitation.

3. What types of projects are eligible under this solicitation?

This solicitation is open to any "Commercial Technology Renewable Energy Generation Project." Eligible projects include "renewable energy systems, including incremental hydropower, that generate electricity or thermal energy." The solicitation provides the following examples of types of projects that may be eligible:

• Wind facility
• Closed-loop biomass facility
• Open-loop biomass facility
• Geothermal facility
• Landfill gas facility
• Trash-to-energy facility
• Hydropower facility, including incremental hydropower
• Solar facility

The solicitation does not specifically describe the types of solar facilities that would be eligible, but because the solicitation includes projects that "generate electricity or thermal energy," it appears that both solar photovoltaic and solar thermal projects are eligible.

4. What special eligibility requirements apply under this solicitation?

To be eligible for a loan guarantee under Section 1705, a project must (1) involve renewable energy generation in the United States, (2) use a "commercial technology," (3) commence construction by September 30, 2011, and (4) have a credit rating equivalent to a "BB" from Standard & Poor's or Fitch or "Ba2" from Moody's, without consideration of the loan guarantee. These requirements are summarized below.

Generation in the United States. The project must involve the generation of energy from renewable sources in the United States. Projects involving the manufacturing of equipment for renewable energy projects—e.g., building solar panels or wind turbines—are not eligible for loan guarantees under this solicitation. DOE will be issuing a separate solicitation in the near future for Section 1705 loan guarantees for renewable energy manufacturing projects.

Commercial Technology. The CTRE solicitation is open only to renewable energy generation projects that use "commercial technologies." The solicitation defines a commercial technology as follows:

[A] technology in general use in any commercial marketplace, within or outside the United States, at the time the Term Sheet is issued by DOE. A technology is in general use if it has been installed in and is being used in three or more commercial projects anywhere in the same or substantially similar general application as in the proposed project, and has been in operation in each such commercial project for a period of at least two years. The two-year period shall be measured, for each project, starting on the in service date of the project or facility employing that particular technology.

The term "commercial technology" is defined more broadly in the CTRE solicitation than in the DOE's loan guarantee regulations, which do not apply to this solicitation. The regulations define a commercial technology as one that had been installed "in the United States" for "at least five years." The CTRE solicitation defines a commercial technology as one that has been installed "anywhere" for "at least two years."

Commence Construction by 9/30/11. The CTRE solicitation is open only to projects that will commence construction by September 30, 2011. As defined in the solicitation, the term "commencement of construction" means that the borrower has:

The deadline for commencing construction is defined in statute and thus is an absolute requirement for eligibility under Section 1705. If the borrower does not commence construction by September 30, 2011, DOE will terminate any outstanding loan guarantee for the project. As a condition of approving a loan guarantee, DOE will require the borrower to submit a "certification" on or before September 30, 2011 that construction has begun.

Credit Rating. To be eligible for a loan guarantee under this solicitation, the applicant must demonstrate that the "guaranteed obligation"—i.e., the loan that is subject to the loan guarantee—is expected to have a credit rating from a nationally recognized rating agency at least equivalent to "BB" from Standard & Poor's or Fitch or 'Ba2' from Moody's, without taking into account any DOE loan guarantee. The applicant may satisfy this requirement by providing a private credit rating if the project is project-financed, or a corporate credit rating if the project is corporate-financed.

5. What are the anticipated financial terms of a loan guarantee under this solicitation?

The solicitation states that DOE is seeking "partial, risk-sharing" loan guarantees in which the private lenders share in a "significant amount of the risk" along with DOE. Consistent with that overall approach, DOE states:

For this Solicitation, a guarantee percentage of the Guaranteed Obligation is limited to no more than eighty percent (80%) of the maximum aggregate principal amount of, and interest on, the Guaranteed Obligation during its term.

In addition, for this Solicitation, the Guaranteed Obligation is expected to be "traditional" senior secured debt, structured in accordance with customary market terms applicable to a high quality, limited or non-recourse, long-term, energy project finance transaction and not modified to accommodate tax-oriented investment structures.

. . DOE expects to issue loan guarantees to support projects primarily using limited or nonrecourse project finance structures that satisfy the financing requirements under Title XVII and this Solicitation.

The solicitation also notes that, when DOE is reviewing competing applications, "greater weight will be given to applications that rely upon a smaller guarantee percentage, all else being equal."

6. Who can apply for a loan guarantee under this solicitation?

In contrast to previous solicitations, the CTRE solicitation requires applications to be filed by the lender. The project sponsor/borrower cannot apply directly. If there are multiple lenders, then a single "lead lender" must be identified and serve as the applicant. Required qualifications for the lead lenders and other lenders are defined in Attachment J to the CTRE solicitation.

The CTRE solicitation defines "eligible lender" broadly, so that this term includes a wide variety of entities. The definition includes:

Any person or legal entity formed for the purpose of, or engaged in the business of, lending money, including, but not limited to, commercial banks, savings and loan institutions, insurance companies, factoring companies, investment banks, institutional investors, venture capital investment companies, trusts, or other entities designated as trustees or agents acting on behalf of bondholders or other lenders.

While a lender serves as the applicant, the application must still seek a loan guarantee for a specific project. Thus, the project sponsor will still play an important role in developing the application, even though the entity filing the application will be the lender.

7. What are the steps in the application process?

The CTRE solicitation establishes a two-step application process that is different in some important ways from the two-step process defined in the July 2009 solicitations.

Part I. Part I of the application can be filed at any time. Based on the Part I application, DOE will conduct a review focused on the following issues:

After the Part I application is submitted, dialogue is "generally permitted" between DOE and the lender-applicant and, as appropriate, the proposed borrower and project sponsor. DOE will notify each lender-applicant of DOE's determination with regard to the issues listed above. Based on that feedback, the applicant can then decide whether to file a Part II application.

Part II. Part II of the application can be filed at any time after DOE has notified the applicant of the results of DOE's review of Part I of the application. There will be ten rounds of review of Part II applications. Each Part II application is considered together in a competitive process with other Part II applications filed in the same round. The deadline for the first round of Part II applications is November 23, 2009; the deadline for the last round is January 6, 2011. For a full list of the application deadlines for all ten rounds, refer to page 16 of the CTRE solicitation.

8. What role will NEPA requirements play in the application process?

The DOE must comply with the National Environmental Policy Act (NEPA) before granting final approval for a loan guarantee. NEPA is a federal law that requires DOE to consider the environmental impacts of projects that DOE approves, funds or carries out. There are three levels of NEPA review. The highest is an environmental impact statement (EIS); the middle level is an environmental assessment (EA), and the lowest is a categorical exclusion (CE).

NEPA requirements take on special importance in the context of the Section 1705 loan guarantee program. As noted above, projects must commence construction by September 30, 2011 in order to be eligible for a Section 1705 loan guarantee. Given that deadline, DOE has determined that projects requiring an EIS are unlikely to qualify for a Section 1705 loan guarantee:

Lender-Applicants or proposed Borrowers should be advised that projects requiring an EIS (potential 18-24 month processing time) will be unlikely to complete the NEPA review process before the deadline for commencing project construction (September 30, 2011).

DOE will make a preliminary assessment of the level of NEPA review required for a project based on the project description in the Part I application. Based on the solicitation, it appears that DOE will discourage applicants from applying for any project that would require an EIS.

In light of this direction from DOE, applicants may wish to consider ways to modify or redefine proposed projects in order to avoid significant environmental impacts. In addition, applicants may be able to avoid the need for an EIS by incorporating mitigation commitments that are sufficient to reduce a project's impacts to insignificance. It is prudent for applicants to consider NEPA requirements early in the definition of a proposed project, because NEPA reviews can have a major impact on the project's ability to qualify for a loan guarantee.

9. What fees and expenses must applicants pay in the application process?

As with previous solicitations, applicants are required to pay an application fee. The application fee for the CTRE solicitation is $50,000, regardless of the size of the guarantee requested. The applicant must pay 25 percent of that fee with the Part I application and the remaining 75 percent with the Part II application. By contrast, the July 2009 solicitation for renewable energy projects required an application fee that ranged from $75,000 to $125,000, depending on the amount of the requested loan guarantee.

If an application is approved, the borrower would also pay a facility fee and a maintenance fee, both of which are calculated as a percentage of the guaranteed portion of the loan. The borrower is required to pay 20 percent of the facility fee when a term sheet is signed, and the remaining 80 percent at closing.

In addition to these fees, applicants also are "responsible for paying the fees and expenses of any independent consultants and outside legal counsel engaged by DOE in connection with Lender-Applicant's application." But unlike previous solicitations, DOE states in this solicitation that "DOE does not currently plan to utilize independent consultants and outside legal counsel for due diligence, underwriting, negotiation, documentation, operations and other aspects of the loan guarantee process under this Solicitation, but it reserves the right to do so."

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 Web page, which includes a background paper with tips for potential applicants.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.