Podcast – Loan Programs Office Updates: A Look Ahead

Taite McDonald: For those of you who don't know, I am Taite McDonald, a partner at Holland & Knight, and I have spent the better part of my career talking about the Loan Program Office, and obviously that is more exciting than ever. So I'm pleased to have Jigar Shah, the executive director of the Loan Programs Office, here with us again today. And so today, we are going to cover an update, per usual, and we're also going to talk about some recent changes with the program and what to expect over the next 12 to 18 months. So with that, hello, Jigar. Thanks for coming on today.

Jigar Shah: Hey, Taite, it's always wonderful to be here. One fun fact I just learned about the Loan Programs Office is that the name, Loan Programs Office, is not in statute, so we can change it without congressional approval. I have no idea what to change it to. So I think we're leaving it as the Loan Programs Office, but if anyone has any great ideas, let us know.

Taite McDonald: I think we should keep it the same. We've come this far, we're not changing the name. I've finally got everybody accustomed to what does LPO mean. So on that, let's jump right into program status. So you had an amazing first quarter of the year. We finally started to see a lot of loans come out the other side. I know from deals we are working on, we are going to see more in the next few months, but why don't you give us an overview of what you see as program status as of Q1 2023?

LPO Update: Q1 2023

Jigar Shah: Yeah. No, it's been, you know, frankly, a very busy time. I think that we have today 135 active loan applications seeking roughly $124 billion of proceeds, so that's roughly $900 million per loan application. And usually it's at sort of a 50/50 debt to value, so that's roughly $250 billion worth of projects. I mean, just to put that in perspective, the entire solar and wind industry on an annual basis is 100 billion, right? So, I mean, this is a big reflection of what's happening in the country, which is wonderful to see. In terms of the breakdown of that, it's probably $90+ billion of that is in Title 17, and then, you know, $30 billion or so is in ATVM, the Advanced Technology Vehicle Manufacturing program. And so what we're seeing, you know, like a pretty wide and diverse set of sectors going after 10 or 17, whereas Advanced Technology Vehicle Manufacturing program is mostly battery manufacturing and then critical minerals and recycling.

Taite McDonald: Yeah, and that's what I was going to say. I think for purposes of today's discussion, we have a lot to talk about on Title 17 and a little less to talk about on ATVM. So I think we should jump right into updates on Title 17 and what we see really transpiring and occurring and what to expect for the remainder of 2023.

Jigar Shah: Yeah, I mean, I think that when you think about the way the office is set up and you know how the Loan Programs Office works, we really do work like a typical commercial bank. And as I've said in recent news articles, I think that of the 135 active applications we have, I'd say 35 of them are actually ready to get through the office the first time through. It's like a quarter, right? 35 over 135 is sort of a quarter, right? And it's not to say anything negative about the other 100 applications. We don't let people apply to the Loan Programs Office if we don't think they have a good project. So we think all 135 applications represent good projects, but we have an absolute standard, which you know is called a reasonable prospect of repayment, and I would say the vast majority of the teams don't know how to explain to us, you know, how they meet that standard or how they meet the statute, and so it's one of those weird things where I feel like we want to help everyone raise the bar and get to the standard they need to get to, but right now, I see roughly 35 deals getting through over the next 12 months.

I think that when you think about the way the office is set up and you know how the Loan Programs Office works, we really do work like a typical commercial bank. And as I've said in recent news articles, I think that of the 135 active applications we have, I'd say 35 of them are actually ready to get through the office the first time through.

Taite McDonald: So that is quite funny because you already answered my next question, or one of the questions I had on the docket in terms of what do you need to be one of those 35 projects. We see all the time, in fact I was explaining to someone this morning, we can start with a very solid project, but the key to getting through is making sure you're improving that project and amplifying that project and building that project up to that 90 to 95 percent of financeability that I think you need to get through the program. But you're doing that in a measured and consistent way to get the deal to actually get over the finish line. So it's been great to watch the projects that are getting into that 35 bucket, but I also do think it's really important for folks like us to talk about how do you get into that bucket of 35, because every deal can do it, like you said, otherwise we wouldn't be taking them on. You wouldn't be accepting them. Every deal can do it, but you just need to continue to strengthen the deal to ensure you can meet the reasonable prospect of repayment all the way through signing of a conditional commitment. So I think this is a really important. I'm sure we'll have a lot of applicants listening to this, and I think that's a really important point for us to both confirm here and in the public sphere, because every deal can get there. You just need to, like we talked, we've talked about it other times, you need to listen to the folks taking you through the Loan Program Office. What are they saying that you need to do to get through the process? So maybe comment a little bit on how you're here to help and how we're here to help out together. Why don't we talk about that?

 I'm sure we'll have a lot of applicants listening to this, and I think that's a really important point for us to both confirm here and in the public sphere, because every deal can get there. You just need to, like we talked, we've talked about it other times, you need to listen to the folks taking you through the Loan Program Office. 

Jigar Shah: Yeah, I mean, I do understand where people are coming from, right? For a lot of these applicants, they've raised $200 million of equity in the private sector. Some of them have raised billions of dollars in the private sector. And they think of themselves as highly successful people, which they are. And they get really defensive when we tell them that the way that they filled out the application was incorrect or the source of the innovation that they highlighted is not one that qualifies for the Loan Programs Office because they've highlighted business model innovation, not technical innovation. Even though they have technical innovation, they just didn't write it down in the application. Or, you know, one of the applicants I'm fighting with now has five locations, of which they've only identified two. Well, I can't complete the NEPA unless they identify all five locations. And so they're like, "Well, but Jigar, you know, we want the right to change the other three applications." I said, "Well, I didn't tell you that you couldn't change the location after you give me the other three, but if you don't give them to me at all, then your project is stalled." They're like, "Oh, I guess I didn't understand that for three weeks." I was like, "I thought I was pretty clear about the what you have to do, right?" And so there's a way to get many of these projects through, not because we're finding loopholes or whatever else, but because they're truly innovative projects. They're doing extraordinary work. But the way that they explain their company to the equity investors doesn't work for our program. They have to really describe what they're doing to our program so they can meet the statutory requirements and meet a reasonable prospect of repayment.

Taite McDonald: Well, and that's what we always say. It doesn't mean it's a no. It means we have to explain it a different way because this is a government program at the end of the day. It is very similar to if you are a bank with a credit committee, at the end of the day, certain things need to be presented in a certain way to be able to move through the process. And I think that's a really good reminder for folks to hear from you, because it doesn't mean it's a no, it's a "we may have to classify this a different way to move through and we need to report to the government." And a lot of times it's a page overview. It's not that complicated, but we need to sit back and do it instead of fighting the government and changing the government, because we all know that doesn't work.

Jigar Shah: Yeah, well, it certainly doesn't work. And the other thing is that we are trying to help people because ultimately, you know and I know that for as much as we've streamlined the Loan Programs Office, it's still a bear to get through, right? And so, like the people who are using this program are here because they need the program to be able to create good quality American jobs and, you know, really bring wealth creation to our country. And so they need the program. And so we're trying to figure out how to make it work because, like, look, I mean, if they can get commercial debt, they would, right? It's not like we're a picnic to get through. So it's one of those things where I think people just get very defensive, and instead of getting defensive, they just need to hear what we're saying and recognize that we really are trying to create more American jobs.

And the other thing is that we are trying to help people because ultimately, you know and I know that for as much as we've streamlined the Loan Programs Office, it's still a bear to get through, right? And so, like the people who are using this program are here because they need the program to be able to create good quality American jobs and, you know, really bring wealth creation to our country. 

Taite McDonald: You said it's not a picnic. On that note, we are all here to help applicants listening, and there is a path forward. I think the most important thing is these deals can get done, it is just a process that takes time and we all need to work together to get there. So let's talk a little bit about Title 17 and improvements in the Title 17 process, recent changes in the Title 17 process. Why don't I turn it over to you to talk a little bit about Title 17?

Title 17: Improvements and Process

Jigar Shah: Yeah, let me just start from the very beginning because I feel like some of this stuff gets lost because we get into the details too quickly. Title 17 is one of the original programs at the Loan Programs Office, and a lot of the loans that we currently have in our portfolio, including solar and wind projects, transmission projects, geothermal projects and the Vogel nuclear plant, right here in Title 17. Title 17 was largely conceived of and implemented in 2009, and frankly, a fairly quick rulemaking process. And that rulemaking process really envisioned large, singular projects with 20-year offtake agreements with a utility that, sort of, would get through the office. When you look at all of the micro changes that we've made to the rule from, you know, 2012, 2014, 2015 to try to make the program a little bit more flexible, I'd say that it's sort of, you know, been difficult to do. And then you've got the changes from the 2020 Energy Act and, of course, the Bipartisan Infrastructure Law and now the IRA, and so we decided to really just redo the entire rulemaking, and just to do it from the ground up. We did a request for information last year that was quite broad, that really allowed for all these voices to come in. And we got, you know, pages and pages and pages of comments, which were great, everything from labor and community benefits plans to, you know, what sectors should be covered and how we should think about the reasonable prospect of repayment and how we should think about merchant curves because some sectors can't get offtake agreements. And, you know, and a lot of that stuff is thought about in the 2020 Energy Act and other things, and so we can do it, but putting the meat on the bones was difficult. So what we decided to do is actually, you know, make it a two-part process. So the interim final rule has really been crafted to be responsive to all those comments we received in the RFI, but also as broad as we could possibly make it, because that really is the direction we were given out of the 2020 Energy Act, the bipartisanship law and the Inflation Reduction Act, is let's make Title 17 more inclusive, right? And some of the ways that they wanted it to be inclusive was one, as we discussed, some of these sectors that frankly can't get long-term offtake agreements, we should figure out a way to use forward pricing curves from third party sources and do those deals there. But the other piece of it is that we have strictly thought about innovation through the lens of individual projects. So the first six projects can get funded, two per region. That was sort of in the 2020 Energy Act, but as you think about the next generation of innovations, some of it is EV charging rollouts, right, where you have hundreds of locations. Some of it is virtual power plants, right, in the way that you operate that software. We had this whole concept of a uniform, you know, business plan, which was very confusing for people. And so we've really, I think, simplified the rulemaking process and just made it very broad, so that's what you'll see in the interim final rule. And then we paired it with a guidance document, and the guidance document has a lot of case studies and all of the rich detail that one is looking for around how to implement and how to apply to the Loan Programs Office. And then, you know, as innovation continues to march on, as you know, there are things that I cannot even fathom today that somebody in four years is going to apply to the Loan Programs Office on, and so then that guidance document can be more easily updated if it inadvertently left the technology out while the rulemaking can still last a lot longer because it was done in a way that really reflects the statute and is written in the broadest way possible.

And then you've got the changes from the 2020 Energy Act and, of course, the Bipartisan Infrastructure Law and now the IRA, and so we decided to really just redo the entire rulemaking, and just to do it from the ground up. 

Taite McDonald: So the only thing you missed though, is fees. Can you talk a little bit about these fees?

Let's Talk About Fees

Jigar Shah: Oh, fees. I have definitely been hearing a lot of commentary about fees. So, on the fees side, part of what the 2020 Energy Act suggested to us is that the fees were, you know, a little bit difficult for people to navigate and that there was this distinction between fees and costs. So what we did after the 2020 Energy Act passed is we immediately suspended all of the application fees and costs that we were charging applicants because we just didn't, frankly, you know, have the time to interpret the legislation accurately. And so we went and got a lot of feedback, the RFI for Title 17 was very helpful, and we basically now have a more sort of holistic approach. And so what we found was we've eliminated all of the application fees, and so they're part one and part two. So at the end of part one, as you know, we submit a letter to the applicant saying you actually qualify for the Loan Programs Office, which is very helpful because some applicants come in three years early but put it in a part one application and get that letter, and then use that letter to go out and fundraise for their company, which is great, and we're happy to provide that service for free. Then you've got a part two application, which is really the data room. It's putting together hundreds of files and making sure that you really qualify, as you suggested earlier in the segment, around all the different details, all the different nuances, all the agreements that you have to have signed, all that stuff is there, right? And so we worked pretty hard on putting all of that together. And that is great, right? And that is also free. And then, what we've determined is once we put you into due diligence, right, then the third party sort of technical adviser costs are paid for by the applicant because they're costs, not fees, and they become part of the eligible cost calculation for the project, and it's, frankly, exactly the way a commercial bank would operate as well. These technical adviser costs are born by the applicant, but that doesn't get started until after the part two application is fully approved and the applicant goes into due diligence. And then at the very end of the process, once a conditional commitment is completed, then there are costs around the facility fee and a maintenance fee that we do charge to cover our costs for the office.

Taite McDonald: Yeah. And of course, I brought up the fees because we know that's the part that is, I think that's the only thing I'm hearing about, quite frankly, so far. But what's important to note, there's historically been a lot of back and forth with Congress about who should bear that cost. And this is another iteration of that, thinking through whether the taxpayer should front that cost up front or whether the companies should. So, of course, I see this as the current interpretation. We don't know where Congress will go in response to this, and we'll leave that to applicants and their lobbyists, of which I don't think we are registered on Title 17 application, so we'll leave that. But that's where we are today, and I think it's important for folks to know that's the thought process behind that change because of course it will come as a surprise to many. But it's interesting to see because I've been around for a long time and people have argued it both ways. It's gone both ways. So maybe Congress will change it again, maybe they won't. Maybe this is where we will stay, but I think that interpretation from today's perspective is important to note, given the significant pipeline.

And of course, I brought up the fees because we know that's the part that is, I think that's the only thing I'm hearing about, quite frankly, so far. But what's important to note, there's historically been a lot of back and forth with Congress about who should bear that cost. 

Jigar Shah: I think it strikes the right balance because it allows us to help a lot of the earlier stage projects for free, but the later stage projects that really, you know, want to get the $900 million, you know, loan or $100 million loan from the Loan Programs Office, you know, starts to really put skin in the game to say that, you know, they're going to take the process seriously. And so I think that part has been well received both by, you know, folks that we briefed on the Hill, as well as some of the applicants as well. So I think I think we found a good balance, and in general, I'd say we're not looking to implement this change, though. Currently, we don't charge anything. We're not looking to implement this change though, until we get the interim final rule published and then we finalize the rule. And so the goal here is, I think, to try to get this in place by some sometime like August 1.

Taite McDonald: And from a — what's important to note from an applicant perspective is what they'll probably mean is we'll go back to essentially structuring engagement letters for these third party advisors a little bit different than the government did, because that's what we used to do and we'll certainly be requesting to do that again. OK, and I know we're at the 20 minutes and I know you and I could talk about our LPO for days now, and we probably will be for years, but let's end with what you are most excited about versus what you are continuing to improve. Because from our perspective, where I want to go with this and get your comments on, is it is taking a little bit longer. It's yes, we all need to work together. And yes, it's a lot of work and can be painful some days, I'll just put it out there, but from your perspective, what are you focused on improving and getting done to continue to get these projects across the finish line?

Jigar Shah: I think that, I guess my point of view on this is a little bit different maybe than my predecessors in the sense that I really was focused on making sure that we were really bringing capacity into the Loan Programs Office. And I think we've hired a lot of people, we're up to about 250 staff, and we've got another 100 people that we're hiring this year. So I think that's been good, and getting people up to speed and actually building the institution, whereas I think in our last period of lots of activity from 2009 to 2011, there was a lot of, sort of just forcing deals across the finish line, sharp elbows, you know, and I don't know that is a way to build an institution. So I want to make sure that we're doing it the right way, and that has, admittedly, taken a little longer than I had expected, but I do think the office is far stronger today as a result. And I think you have a lot of motivated employees at the office, and we're actually, I think, doing things the right way. The other thing I'd say, and you guys have been a big champion for the Loan Programs Office for a while, but our infrastructure and the ecosystem around the Loan Programs Office is really weak, right? I mean, I think that I talked to Deloitte the other day, I talked to PWC, and, you know, they've got folks that work on our side of the ledger, right? So like, we hire them sometimes to do stuff, but they actually don't have a dedicated team to help Loan Programs Office applicants. And so you've got FTI, you've got a couple of other players, but if you really have a CFO who is an equity CFO who has no idea how to raise debt, there's not someone you can just pay $50,000 a month to, to help set up your data room and do all that stuff and then get you to the Loan Programs Office. You guys do a lot of great work, don't get me wrong, but on the financial side, some of these companies just have a really weak CFO office, right?

And I think you have a lot of motivated employees at the office, and we're actually, I think, doing things the right way. 

Taite McDonald: Well, they just haven't done it before. So it's new, and a process.

Jigar Shah: Yeah, and so they need someone that they could just hire to like, help them get through. That's how EXIM Bank works. You just hire a bank, the bank actually fills out the application for you, and it's conforming, right, and you don't actually have to know about how EXIM Bank works, but I think that our ecosystem in general at the Loan Programs Office continues to be weak, and so you can't just pay money to get through the office by getting, you know, other folks on board. And so I think that is something that we continue to struggle with and we want to work harder on. The last thing I'd say is that, you know, when you look at the Title 17 program, you have 1703, which is generally fairly familiar, it's got an innovation component, you know, we have to establish that, etc. But then you have this new 1706 program, and the 1706 program is going to bring us some entrepreneurs and innovators, right? So we've got people who've bottled coal plants and old coal mine land and some other stuff and are building things, but we also have over $30 billion of loan applications that we're working on with electric utilities. We're starting to get natural gas utilities interested in working with us. We've got a few pipeline owners who've come to us saying we have an old pipeline that basically no one is using anymore because a more efficient pipeline was built, and so we'd like to take our old pipeline and redo it so it can carry ammonia, or hydrogen, or CO2. We've got refineries around the country who are saying, hey, we're probably going to shut down over the next seven or eight years because there's a big maintenance cycle coming up. We have all this disturbed land around us. We'd like to do, you know, one of these other types of projects, sustainable aviation fuels or other things on our land and, you know, be able to use 1706. And so you're starting to see a lot of creative applications coming in from established players, which frankly, the Loan Programs Office has had some of that in the Advanced Technology Vehicle Manufacturing program, but not a lot of it. And so it's great to see that the 1706 program has been able to really get people inspired. Coal to nuclear, we've got a couple of utilities that want to do that. So that's been great to see. There's just this broadening of the pool of applicants that are interested in our programs.

Taite McDonald: Right. And I will say, because we often disagree, of course, we are always here to pay to help you through. And we do a pretty good job with it.

Jigar Shah: You do a great job. We're happy to partner with you.

Taite McDonald: To continue to build the structure around. So I have to say that. But the key, I mean, I will say on that note, what we are gearing up for and what we are most excited about is the next iteration after we get through our pipeline now, which will still take time and patience and energy the past year, but the 1706 road, to build really a long program with longevity and a project pipeline with longevity, so I know we have not been taking applicants through 1706 as intensely yet as the other, as the remainder of the pipeline, but to me that's what will create the foundation and longevity for the program, in addition to moving the rest of these deals through. So I'm glad we ended with 1706, because I see that as critical to the future and the longevity of the program. And I, like, I've not heard you say yet, built an institution which I, the day Jigar Shah says build institution of the Loan Program Office, I know I've done something in D.C., because we used to actually fight about the purpose and the Loan Program Office, and if it should be around, but of course that is not, and now we have a strong program that will become an institution. So on that note, thanks for coming again. Any other closing words?

Final Thoughts

Jigar Shah: No. I mean, this is really great. And, you know, I think one last thing I would say, I guess, is that we just have a tremendous amount of programming that we have planned for this year. So whether it's National Clean Energy Week, or I think we're going to, you know, put together some programming around that, just like we did for the Global Clean Energy Action Forum last year in Pittsburgh, we were in, you know, strong force at CERAWeek, you know, we did a lot of work at the NARUC Meeting. And so I think that there are a lot of opportunities to come see us in person, and really take us up on it, because this stuff is really confusing. It's really hard. And ultimately, I do think it requires that personal touch to, you know, make sure that we're cutting down on miscommunication and building up, you know, trust between the offices and so that we can really best serve people so, you know, take the time to invest in, you know, meeting us in person.

And so I think that there are a lot of opportunities to come see us in person, and really take us up on it, because this stuff is really confusing. 

Taite McDonald: Not rocket science, but it is a process.

Jigar Shah: Wonderful. Thanks so much, Taite.