Podcast - The Loan Programs Office: Current State of Affairs with Director Jigar Shah

Taite McDonald: Hello, everyone, and thanks for joining today. As many of you know, I'm Taite McDonald, I'm a partner in our Public Policy & Regulation group that specializes in everything clean tech commercialization and the federal government and in particular, the loan programs office. So I'm thrilled to have with me today my longtime friend and DOE executive director of the loan programs office, Jigar Shah. So hi Jigar, thanks for joining us today.

Jigar Shah: Hi, Taite. Great to be here.

Taite McDonald: So we've spent a lot of time speaking together, you separate, so many conferences and so many different things, on why companies should be applying to the loan program office and why companies should get into the loan program office and why it's so important to apply. So instead of repeating what we've both been saying continuously for almost a year now and why now is the time to do it, I really want to talk about and I want to focus today's session on what our current clients are asking us. So as you know, we're working with about a third of your 77 applicant pipeline and those projects are all moving along. But there's a lot of questions we all get along the way. So now that you've built it, now that they've come and you have 77 applicants in the pipeline, what are you going to do to achieve your vision of deploying billions and billions of dollars? So today we'll focus a little bit on the hurdles and just talk about what you're doing to overcome the things that have essentially held these projects up in the past.

Jigar Shah: Yeah, I think that's wonderful. I really appreciate the opportunity to talk about it and look, it's a struggle, right? I mean, we have done an amazing job in the office of getting the office back open for business. We started the year with, you know, a couple of three applications that were active in the loan programs office in 2021. And now we're at 77 active applications and that's after we designated 10 applications inactive, right? Because they have long poles in the tent that they have to go back and fix. And so, you know, for a team of 170 people, right, 77 applications is a lot to process. So, we're excited to get at it, but there's definitely a lot of work to do.

The Elephant in the Room: LPO Process and Government Bureaucracy

Taite McDonald: And I was going to say, I mean, I think the thing that's most important here, especially with where the market, our beloved market that is finally hitting mainstream, is today is that I know we've turned more people down, many more down than we've taken in. So these are good projects that have the potential. But now we just need to get through the process. So I'm going to start with that. The process, the elephant in the room. So the timeline, the government bureaucracy, these projects are notoriously challenging to begin with because they're not yet commercially financeable. And then couple that with government process, they can get hung up. I know I've seen it happen. Projects can get hung up for weeks or months on a moment's notice or really minute issue. So what are you doing to prevent that? And what are you doing to give companies confidence that they're going to move through in a timely manner, even more efficient manner?

Jigar Shah: Well, look I think that we all have to be honest with each other about where we are right, the office has not really been active for 10 years, right? There's certainly been periods of activity, which is great. But in general, when I talk to the 100 or so Fed employees, I have less than 70 or so contractors I have and I say, 'Well, how many of you have closed a loan within the loan programs office?' It's not a long list. Right? And so part of what we have to do is to build back some of those institutions in the knowledge that, you know, some of it's gotten rusty over time. And so we're working hard to do that.

Part of what we have to do is to build back some of those institutions in the knowledge that, you know, some of it's gotten rusty over time. And so we're working hard to do that.

The other part of it, though, is making sure that we're not replicating the sort of decision criteria of the past, right? Remember that when the loan programs office was very active in 2009 to 2011, the credit markets had largely seized up and the loan programs office was the best, you know, and only way really for a lot of these projects to get money. And so we had these perfect 20 year projects with peak power purchase agreements from utilities and all that stuff, and we were still able to put everybody through the wringer. And a lot of those folks still stuck with us through the process because they were like, 'Well, there's no place else to go, so I'm going to have to figure it out, right?' And so today, those perfect projects clearly can get done without working with us. And so the projects that we're working with now are projects that have more merchant risk, more technologies that frankly, the next generation of misunderstood technologies from hydrogen to carbon sequestration and other things. And the best practices that we have all thought about in the electricity markets don't necessarily apply in the carbon markets or in the hydrogen markets or in some of the other markets. So I think there's a lot of folks who work at the loan programs office that are genuinely trying to figure out, 'Well, how do I really do diligence on this deal?' Right. And so where I think we're all working through it together?

Likelihood of Project Success

Taite McDonald: Well and, I mean, that's the issue. Can we get there? Can we get there on these in a market that is so, that issues are arising? We need to be flexible on issues. We need to take merchant risk. We need to get folks comfortable with the fact that these transactions are not commercially financeable and they are much different to your point than even the transaction staff has closed before. So can we really get there? I question some days.

Jigar Shah: Well, I mean, I hope so. Like, I think that the good thing about the loan programs office is we have extraordinary staff, right? So we have people who have been in and around government lending institutions from Ex-Im Bank to loan programs office for many, many years. And so they know what they're doing. I think the challenge that they have is that, you know, that they're tiptoeing around what the mandate is, right? Because the mandate is very obvious on standard solar and wind projects with, you know, power purchase agreements. The mandate is not obvious in the rest, as you know, the Energy Act of 2020 says that we can use market reports that are approved by the secretary to take merchant risk and accept merchant curbs, right? But it's not like we've done that 20 times in the past. So each time we do it, you know, folks want me to get personally involved in making sure that they're doing it right, which makes total sense because they don't have past precedent to rely on.

But it's not like we've done that 20 times in the past. So each time we do it, you know, folks want me to get personally involved in making sure that they're doing it right, which makes total sense because they don't have past precedent to rely on.

But I'd say that we're moving through the office fairly quickly. I'd say that roughly a third of the applications I think of the 77 are in a position where they have all of their pieces in place and can actually be processed efficiently. They can answer questions quickly and we can get to probably a six to eight month sort of process within the office. And I don't think that's terrible. I mean, in my opinion, for these kinds of difficult transactions of the commercial bank would also take six eight months to process the loan. So I don't think that part of it is difficult. I think the harder part is actually setting expectations on both sides, both the applicant and the loan programs office, right? So I mean, I'm doing my part on the loan programs office side, but I also think the applicants are like, 'Hey, we're trendy. We just raised three hundred million dollars of equity in a SPAC. Look how awesome we are. We're ready for commercial debt.' I was like, Great, that's equity. Where debt? There are two different things that we're optimizing for two different things and I think getting people to understand that the reasonable prospect of repayment is an actual thing, and it's not something we can just gloss over and work our way through. We actually don't want to lose money on these deals, right? But I think that in general, the expectations matters, right? Because then it leads to people not questioning each other's motives, but instead like trying to find, you know, levelheaded solutions to get past the problem in front of us.

Taite McDonald: Yeah. And I think I mean, so it was in IHAA, the bipartisan bill, and I know who wrote that, AKA: us, the new language because we had to. We had to look at these transactions to define reasonable prospect of repayment in a manner that Congress originally intended. That also matched the current market to accomplish the original intent of the program. But it's hard, so I'm asking that to you to spark the conversation. I agree, I tell people all the time we need precedent to move through. Once we have precedent, this will become easier. But it's the first time you're looking. I mean, there are transactions that have looked at hybrid approaches, as you know, and there are merchant transactions that didn't go well, but that went a lot worse than the 30 year PPA transactions. Not all of them, of course. But we need this hybrid approach and moving a hybrid approach in with this current market through the program, Rome wasn't built in a day, LPO can't be rebuilt in a day. So I say that joking, but we also strongly agree. But I could not agree more. And we tell this all the time, the companies and staff need to go in it together, knowing it's going to be hard, knowing that there's going to be a lot of hurdles to overcome. And we just have to work together like adults to move things, be the professionals we are to move things forward and get these transactions done because they are good for the future. They are what we need for the future of our country. And I couldn't agree more that you have such a dedicated staff and have built that up. But of course, now we all have to do the hard work of doing it.

Relationship with Office of Management and Budget and the Credit Review Board

Taite McDonald: OK, so next one, what about OMB and Credit Review Board? Because I know after I get through that last question, that's the question I get from clients next. So what can you say on that today?

Jigar Shah: Well, look, I mean, the job of an executive is to make sure that they're managing their board, right? And so we do a pretty good job, I think, of keeping our credit review board fully informed. They ask great questions, and I think we try really hard to make sure that any policy feedback that they give us, we give to the clients very quickly, the applicants, so that they know what some of the sore spots are for some of the administrative priorities and some of that. And so I think that part, I think, is going pretty well. And then even with the Office of Management, Budget and Treasury, we've been very proactive at writing white papers and explaining to them what this new phase of the loan programs office is going to look like and what kind of risks we're taking and how we're normalizing across all these risks and sectors so that we have one unified point of view on the credit subsidy model, etc. And I mean, the first transaction that we got to conditional commitment, the model of materials one went very smoothly. And my sense is, is that there is a desire on the part of all of the groups to give us a chance to prove that we really know what we're doing here. And then obviously, if we don't bring our A-game, then they're going to call us out on it. But I would say that I mean, the people that we have running this mean, particularly Andrew McCabe over at risk and Chris Green has joined him, but then others in that office as well, they've really done an excellent job of explaining everything in ways that can be digested by people who, frankly, this is 1/50 of their job. And, you know, I think we've brought people along. So I think that part is good and we've even written action memos for the secretaries to say, 'Hey, just to make sure we agreed that we're going to take this much risk,' right?

They ask great questions, and I think we try really hard to make sure that any policy feedback that they give us, we give to the clients very quickly, the applicants, so that they know what some of the sore spots are for some of the administrative priorities and some of that.

Taite McDonald: And that's the thing, the program's designed to take risk. It is built, this is a huge misconception, and but now, I think a lot is out there. The program is actually structured that a portion of the portfolio will not ultimately advance to pay back the loans. And that doesn't mean the taxpayers losing dollars. It's just like a grant is administered to a company at the end of the day. And of course, it's a larger amount. But the point is that the majority of them are paying the money back just like what happened with the current portfolio. So the loss is actually far, the losses from the program have hardly been a year worth of EERE budget, and I don't think people realize that this is money the taxpayer is spending regardless for grants and without a way to get it to market with LPO and without you doing your job and without us helping people like us, helping to manage applicants and of course, the others out there and the companies doing their part of the process. It's not going to get through right, but it's hard. It's hard work and you've got to do it. So I don't say I worry. I know it's a challenge too. I know it's going to be hard too, but I don't think it's a reason to shy away from doing hard things right at the end of the day.

Jigar Shah: Well, yeah, I mean, I certainly agree, and we're not shying away from doing hard things. And the secretary often says that, you know, we have to take a lot of swings a bat, and she's made it very clear that, you know, we are going to have some losses in the portfolio. I think the goal is just to make sure that we're bringing a skeptical lens to everything and that we're asking the applicants to prove it, right. They can't just say it. They actually have to back it up with real data. And we do have to make sure that from a debt perspective that we're being careful around the coverage ratios that we're optimizing for, which are easier to do because we're in a heavy equity environment. I think there's a lot of people who have an expectation that, well, the LPO should just take more risk. And I was like, 'Oh, why don't you just raise more equity,' right? Like, we don't have to make this a 70 percent debt, 30 percent equity deal. We can make it 50 percent equity, 50 percent debt it's still very valuable to the applicant. And I get it, they like to dial the debt amount up as high as possible. Why wouldn't you? But what we're doing is always vintage one out of 10 plans, right? So in the grand scheme of things like making sure that we do things right and we don't over dial the debt actually makes everyone like sort of feel better about the transaction.

I think the goal is just to make sure that we're bringing a skeptical lens to everything and that we're asking the applicants to prove it, right. They can't just say it. They actually have to back it up with real data.

Taite McDonald: Well, I mean, it enables, especially in this equity market, we're not going to have this equity market forever. We need to work with the market we have, to maintain it, to develop a sustainable program for the next generation of transactions. So I mean, the bottom line is we're not going to have that forever. So it's an approach now, right? But it might not be the approach we take in five to ten years. But right now, with where we are with the program and what the market allows, the program is meant to overcome market obstacles, right? So when we can use this at 50 percent debt to overcome a market obstacle and maintain taxpayer dollars, that is what we should be doing to advance transactions. So I actually I really agree with you on that point, and it's something that we tell our clients all the time. Also, because we have supply chain issues, cost projects are going up 20 percent from even a few months ago, six months ago at this point. And then we're going to have cost overruns. Everybody in this industry struggles from cost overruns at some point. So more equity, the better to help everything.

Using LPO and Grant Programs in a Synergistic Manner to Achieve Net Zero

Taite McDonald: OK. Last but not least, what about IHAA programs? It's a huge task to begin the process of using government programs when you have a loan program and a grant program in a synergistic manner and harmonic manner. So and these are huge grant programs. This is more money than the industry has ever seen. How are you going to do that and get these transactions through or look at these in a way, make sure we're looking at these in a way that really helps us to get to net zero?

Jigar Shah: Yeah, I mean, I think that part of what the secretary has said is that the thinking that has come from the loan programs office is needed to balance out how we put some of these grants out the door right that it's not just about the demonstration of the technology, it's also around what is the strength of the management team. What is their strategic partners look like, right? If we get this right, are they going to build 10 more facilities, right? And I think that, that level of, you know, achieving liftoff within the sector and not just a successful project but actually catalyzing momentum in that sector is something we're looking to do across, you know, the Office of Clean Energy Demonstrations, LPO and all the other programs within that. I think, you know, one of the new authorities that we received at DOE is this CO2 pipeline authority. And part of what we're struggling with is trying to figure out we've got the $8 billion of money for the hydrogen industrial hubs. And a lot of these industrial hubs also want to use CO2 pipelines to remove CO2 from those industrial facilities and bury them in Class VI wells. And how do we actually do a sort of a dig once approach, right, where you have two or three different programs that support the same thing, which is basically decarbonizing the industrial sector in some of these hard to decarbonize sectors? And and you know, there's a lot of challenges there, right? Because DOE is supposed to put out a funding opportunity piece for each individual technology and each individual program. So how do you allow someone to take advantage of two or three programs where there's some cross fertilization of the ideas and the points? And you know, right now, I don't know that there's an easy way to do that.

I think that part of what the secretary has said is that the thinking that has come from the loan programs office is needed to balance out how we put some of these grants out the door right that it's not just about the demonstration of the technology, it's also around what is the strength of the management team.

Weighing Risk and Measuring Success

Taite McDonald: It's beyond it's bigger. I mean, I've done large grants combined with loan guarantees, as you know, and in different ways not combined in the same project, but in a synergistic manner. It is challenging and to do it, but we get through it one day at a time. I actually said that it's my tagline during these projects, we live to fight another day because it really feels like that. But I mean, it's a big job. And yet there is already a big job on the table to restart. Now you have to do this even bigger job and there's a lot of risk, right?

Jigar Shah: Well, I mean, I don't know that there's a lot of risk. I mean, obviously, there's always risk. I'd say that in general, what we've learned over the last 10 years is that we have a lot more confidence in the programs that we have and what they do, right. The loan programs office really was essential in catalyzing utility scale, solar utility scale wind, you know, the EV manufacturing space with Tesla and Fisker. And then you've got the battery Gigafactory space with Nissan and others that we did in the past. So I think that we now have a better understanding of moving away from throwing a bunch of stuff against the wall and see what sticks and instead being more intentional about, 'Hey, if you do it this way and you get private sector feedback in this way, then you're more likely to be successful.' Right. And I think one of the things that requires, as you suggest, is one day at a time, but also is just time regardless, right during era stimulus. There was a real deadline we were trying to do, you know, shovel ready projects. This was the stimulus, etc. I mean, by definition, a lot of people are saying, we don't need a lot of stimulus right now. Right. What we need right now is good planning, and this money is generally five year money that then can be spent in an additional five years past that, right?

I don't know that there's a lot of risk. I mean, obviously, there's always risk. I'd say that in general, what we've learned over the last 10 years is that we have a lot more confidence in the programs that we have and what they do.

Taite McDonald: Yeah. What we need is thoughtfulness.

Jigar Shah: That's right.

Taite McDonald: And learning from the lessons of the past, because I was going to argue when you said there's no risk because I mean, you look at the CCUS programs from 2009 to 2011, only two out of 11 survived. Like, there is a risk that, that could happen. But we've learned, if you learn, you mitigate the risk.

Jigar Shah: Yeah, I mean, look, can some of the projects fail? Of course they are, and they will. That being said, the two out of the 11 that succeeded are the ones that we're getting a lot more applications for now. Right. The Class VI wells that ADM installed in Illinois are what we're doing more of, and the ones that didn't work out are the ones we're doing less of, right? And so we are learning from the past right demonstration projects and we are scaling those up. But my point is that this whole process to American commercialization is more formulaic than people give it credit for, but not a lot of people really understand it. And so a lot of what the loan programs office is doing, is taking the knowledge that we've gained through managing the portfolio of $35 billion worth of loans and actually starting to bring that back into the rest of DOE to say, 'Hey, like here is what we have learned from the, you know, the difficulties of just people being human' right and what it takes to build these projects, maintain these projects, you know, capital markets and all that stuff. And I think that, you know, we are making really good progress, and I hope that all of the applicants know that they are actually at the vanguard of making this all successful, right? And so, you know, all of their comments into the RFI programs, etc., is what's going to make the IHAA more successful, right? And make sure that we're coordinated between the grant programs and the loan program, right? Because that is how we structure programs is through comments.

I think that, you know, we are making really good progress, and I hope that all of the applicants know that they are actually at the vanguard of making this all successful.

Taite McDonald: And you guys can only do so much? You guys aren't out in industry, the company, I mean, I was having a conversation the other day about it, and the companies need to engage in the process that's why the democratic government was created to move these forward, right the federal grants that are going to be paid by taxpayer dollars. But you need to engage. You're not going to get a check from the federal government. And yes, maybe that happens sometimes in AURA now exactly to your point, the money's not going to get taken away. I mean, so much of that money even in the projects that went back to the government after certain milestones weren't met. So the bottom line, and loan program transactions were. But we need to structure it right. We need to look at it right. We need to make sure projects can be in harmony, even be synergistic, even when it's a challenge. And I don't think any of us can do that by ourselves in one day it's going to take a long time.

Jigar Shah: Yeah, no, I think that's right. But I think what you said is exactly right, which is that this administration is uniquely interested in figuring out exactly where the private sector wants to invest its money, right? And we're willing to shift some of our priorities to match what they're willing to invest large dollars behind because there is an assumption that the private sector has actually thought this through and is allocating billions of dollars, not willy nilly, but through a thoughtful evaluation of all of the applications on the board. And they're not just solving for the best technology, but they're also solving for risk communication and strength of the partners and all that stuff, right? And so I think that if that thoughtfulness is not shared with DOE, then they can't actually expect us to know it.

This administration is uniquely interested in figuring out exactly where the private sector wants to invest its money, right? And we're willing to shift some of our priorities to match what they're willing to invest large dollars behind because there is an assumption that the private sector has actually thought this through and is allocating billions of dollars, not willy nilly, but through a thoughtful evaluation of all of the applications on the board.

Taite McDonald: They can't blame, they can't blame DOE, I tell applicants that, I tell my clients that all the time, you can't blame DOE if you don't talk to DOE, or at least try through multiple different routes. So Jigar, as always, thank you for your time. This was a pleasure today. I know you still have a big job ahead of you, I told you, and I'll tell you again, when I found out it was you taking the job and I said, You have to do this and we have to do this for the future of America. And now the job is even bigger. So thank you again for just your civil service and your willingness to continue to engage with companies. Because I think one thing to sum this up is you can learn lessons from the past based upon what's in history, right? But companies and the government programs need to work together to really make things successful. None of us can do it on their own.

Jigar Shah: Well, you're one of the top facilitators of making sure that happens. So thanks for all of that leadership because it was certainly not always appreciated. And so I appreciate you today.

Taite McDonald: Thank you. I'll end on that one, thank you all for joining today.