September 15, 2021

Innovation Is In Again: DOE Loan Programs Office Back at the Helm

Holland & Knight Alert
Taite R. McDonald | Reese Goldsmith | Saqib Z. Hossain | Hannah M. Coulter

Highlights

  • Authorized in 2005 to lend nearly $70 billion to innovative clean energy projects, the U.S. Department of Energy (DOE) Loan Programs Office (LPO) still has more than 60 percent of its lending authority remaining.
  • LPO funding programs have experienced legislative and administrative changes enabling more innovative clean technology companies to apply for funds.
  • While the LPO remains much more complex than government grant programs, interested companies should conduct a comprehensive evaluation to determine if a proposed project is eligible for funding.

U.S. Department of Energy (DOE) Loan Programs Office (LPO) is one of the nation's premier energy infrastructure programs. Authorized in 2005 to lend nearly $70 billion to innovative clean energy projects, the LPO still has more than 60 percent of its lending authority remaining. Congress could also unlock additional funding later this year as political will for clean technology investments has strengthened.

The LPO was an active investor in early-stage clean tech during the Obama Administration, paving the way for the growth of greenhouse gas (GHG) reducing technologies that are in use today. The program slowed investment activity in recent years as congressional and White House support waned. However, the winds have shifted, creating a resurgence in LPO activity.

As noted in previous alerts, the Biden Administration appointed Executive Director Jigar Shah to lead the office. (See Holland & Knight's previous alert, "DOE Loan Programs Update: New Leadership and Potential Legislative Expansions," March 30, 2021.) The LPO's renewed mission is to act as Congress originally intended – by filling gaps in private sector investments and creating a bridge to finance-ability for the clean tech market. Leveraging the LPO to the greatest extent possible will prove pivotal to achieve the Biden Administration's clean tech objectives, as the commercial deployment of the innovative energy technologies and advanced manufacturing is necessary for the U.S. to achieve net-zero carbon emissions by 2050.

Accordingly, the LPO again represents an impossible-to-ignore opportunity for innovative technologies, as well as emerging and existing American manufacturers, to cross the barrier from development to deployment of new improved technologies – known as the innovation "valley of death." The chart below outlines each of the three LPO programs – all of which are likely to expend remaining resources over the course of the Biden Administration – and each program's lending authority.

DOE LPO: $42.3 Billion in Loan Capacity Available

 

Title XVII

$24 billion

Advanced Fossil Energy

$8.5 billion in loan guarantees

Advanced Nuclear Energy

$10.9 billion in loan guarantees

Renewable Energy and Efficient Energy

Up to $4.5 billion in loan guarantees

Advanced Technology Vehicles Manufacturing (ATVM)

$17.7 billion in direct loans

Tribal Energy Projects

Up to $2 billion in partial loan guarantees

 

Improvements Unlocking LPO

In addition to the Biden Administration's aggressive position with regard to the LPO, there have been a handful of legislative improvements to formally unlock barriers that have developed over the past decade. Below are some of the pivotal changes affecting the LPO for both the Title XVII and ATVM programs. These enacted and proposed modifications to DOE's existing loan programs offer an effective and immediate path for the investment of federal resources to deploy clean energy technologies.

First, as noted in our previous alerts, the Energy Act of 2020 featured improvements to the LPO, most specifically with regard to timing for payments of fees that had proven prohibitive for applicants. However, the Energy Act of 2020 did not include reforms to ATVM despite nearly a decade of program stagnation, which intensified congressional initiatives to expand the program. Those, and other initiatives have come to fruition via the Senate-passed Infrastructure Investment and Jobs Act, which was the result of bipartisan negotiations.

Building on the success of the reforms brought by the Energy Act of 2020, the Senate-passed Infrastructure Investment and Jobs Act provides for improved energy infrastructure investment through federally backed debt capital, which is further detailed below. Thus, if enacted, this legislation is poised to invigorate and expand the LPO to serve as a viable option for even more emerging clean technology companies.

Additional opportunities are presented with the upcoming, but trickier and more partisan budget reconciliation measure, which allows for the passage of legislation in the Senate with 51 votes rather than 60. The U.S. Senate Committee on Energy and Natural Resources has been given a $198 billion allocation for the reconciliation measure, and a portion is expected to go to financing for domestic manufacturing of clean energy and auto supply chain technologies.

The House will take the lead on drafting the reconciliation measure, and the U.S. House Committee on Energy and Commerce – with broad jurisdiction – has been allocated $486.5 billion. The U.S. House Committee on the Budget has issued statements that the reconciliation measure will invest in clean energy, efficiency, electrification and climate justice by incentivizing private sector development and investment. It remains to be seen exactly how much of the reconciliation measure will be allocated towards further unleashing the LPO's investment power.

Title XVII Innovative Energy Loan Guarantee Program

Legislative Expansions

Authorized by the Energy Policy Act of 2005, the Title XVII Innovative Energy Loan Guarantee Program enables the DOE to issue loan guarantees for first-of-a-kind commercial-scale deployments of advanced fossil, advanced nuclear, renewable energy, energy efficiency and distributed energy projects in the United States. Technologies that could fall within the current solicitations include carbon capture, direct air capture, small modular nuclear reactors, uprates and upgrades for existing nuclear plants, energy storage, efficient end-use technologies and retrofits of existing renewable facilities.

Title XVII was recently reformed by the Energy Act of 2020. Though seemingly minor, these reforms are significant for potential applicants exploring program opportunities. Specifically, the act allowed for annual appropriations to be used to cover application fees, credit subsidy and other costs to applicants. The act also adjusted the fee schedule so that the upfront costs of program participation are less burdensome for project developers. Finally, the reforms broadened eligibility categories and formalized some of the ongoing internal functions of the program.

The Senate-passed Infrastructure Investment and Jobs Act features two key reforms to LPO. The first reform is a clarification of the reasonable prospect of repayment criteria for Title XVII. Currently, the enacting statute for Title XVII only states that a project must have a reasonable prospect of repayment for a loan guaranteed by the LPO without defining the phrase. What constitutes a reasonable prospect of repayment is now clarified, giving applicants to the program an understanding of the showing that must be made to the program in order to qualify for a guarantee.

The second reform is an expansion of eligibility for Title XVII to include projects that increase the domestic supply of critical minerals through production, processing, manufacturing, recycling or fabrication of mineral alternatives. However, while now eligible, Congress will still need to provide new appropriations for these newly eligible projects. The proposed reconciliation measure may be an opportunity for Congress to fund newly eligible projects, expand overall program authority and address credit subsidy costs.

Administrative Changes: Revised Title XVII Application Process

The program has also taken steps using its administrative authority to make the LPO more accessible. In June 2021, the LPO unveiled a streamlined application process for Title XVII to implement the reforms noted above in the Energy Act of 2020. This change has opened access to smaller, earlier-stage companies that possess innovative clean tech but may have found the upfront costs and requirements for competitive application process to be prohibitive.

No Upfront Application Fees: Effective Jan. 1, 2021, applicants who reach the financial close of a Title XVII loan guarantee will be charged an origination fee that will be sufficient to cover applicable administrative expenses (i.e., review, due diligence). Previously, all applicants were required to submit nonrefundable fees upon submission of Part I and II applications, as well as pay additional costs at different phases of the due diligence process.

The origination fee charged to the applicant will cover the following costs:

  • Application fee to cover costs associated with financial and technical review of applications; the fee is $150,000 for projects that request a loan amount that less than $150 million, or $400,000 for projects that are greater than $150 million
  • Facility fee to cover the underwriting process following the Part I and II application and is calculated as a percentage of the requested loan amount
  • Third-party consultants fee to reimburse out-of-pockets of third-party consultants at DOE during the due-diligence phase

Streamlined Part I Process: In addition to statutory reforms, the LPO streamlined the application process for Title XVII solicitations. The program is now focused on reviewing a project's potential to avoid, reduce or sequester GHG emissions and asks for the financial justification for the project later in the process. For Part I applications, the LPO review will focus on evaluating if the project:

  1. qualifies as an eligible technology under the solicitation
  2. avoids, reduces or sequesters anthropogenic emissions of GHGs or air pollutants
  3. employs "new or significantly improved technology" as compared to "commercial technology" in service in the United States (i.e., an "innovative technology")
  4. is located in the United States

For the Part I application, the LPO also made optional two items previously required in the solicitations in to reduce potential barriers to application submission: Section G regarding Business and Financial Plans, and the Application Validation Statement concerning reasonable prospect of repayment in Section H. A complete and up-to-date Section G and Section H will be required for the Part II application.

Administrative Changes: LPO Guidance on Paying Title XVII Credit Subsidy Cost

In July 2021, the LPO issued guidance on paying credit subsidy cost, or the estimated cost to the government of extending or guaranteeing credit, for Title XVII borrowers. The credit subsidy cost equals net present value of estimated cash flows from the government minus estimated cash flows to the government over the life of the loan and excludes administrative costs. This is a customary charge in most federal lending programs. When a project closes financing with the DOE, borrowers are responsible for paying the credit subsidy cost, which can be the largest expense associated with the loan guarantee process.

Per the program's governing statute, the LPO has authority to include a risk-based charge that, together with the principal and interest on the guaranteed loan or at such other times as the DOE may determine, is payable on specified dates during the term of a Guaranteed Obligation. The risk-based charge is intended to make DOE's charges and costs consistent with the commercial markets and other federal credit programs. The risk-based charge, while distinct from the credit subsidy cost, may affect that fee by increasing expected inflows to the government that are considered in calculating the amount of the credit subsidy cost.

The credit subsidy cost is calculated prior to loan closing by the LPO using a model provided by the U.S. Office of Management and Budget (OMB). In the past, Congress has provided additional funds for the payment of credit subsidy cost to the LPO. Should Congress decide to authorize and appropriate additional credit subsidy, LPO financing could become even more attractive to innovative clean tech companies.

ATVM Direct Loan Program

Legislative Expansions

The DOE supports the commercial development of advanced technology vehicles and associated components through its ATVM direct loan program, which, like Title XVII, is administered by the LPO. ATVM was established under Section 136 of the Energy Independence and Security Act of 2007 (EISA). Under ATVM, automobile manufacturers and advanced vehicle automobile component or material manufacturers are eligible to obtain direct loans from the DOE for projects that re-equip, expand or establish manufacturing facilities in the U.S. that produce "ultra-efficient vehicles," light-duty passenger vehicles, light-duty trucks or associated components that meet certain fuel economy standards.

Enactment of the Infrastructure Investment and Jobs Act of 2021 would expand the ATVM program's scope by expanding eligibility to include medium- and heavy-duty vehicles, trains, aircraft, marine transportation and hyperloop technology. However, much like the expanded authority in Title XVII for critical minerals projects, Congress will need to appropriate funds for newly eligible vehicles. As the Biden Administration seeks to electrify the vehicle market 50 percent by 2030, it will be imperative to fund these newly eligible classes of vehicles.

Like Title XVII, the ATVM program is also altered in the bipartisan infrastructure bill to clarify what constitutes a reasonable prospect of repayment. The ATVM program does not currently have the same reasonable prospect of repayment mandate as Title XVII, but the evaluation of reasonable prospect of repayment on an ATVM loan has long been practice for the program. If passed, the bipartisan bill would statutorily require this evaluation.

The reconciliation bill also offers an opportunity to expand funding for the ATVM program. The ATVM enacting statute places an arbitrary $25 billion cumulative loan volume cap on the program. Removing this cap would allow the ATVM program to flourish and accelerate domestic manufacturing for electric vehicles and their components.

Holland & Knight Insights

As outlined above, the LPO is at a critical crossroads of market enthusiasm, political will and urgent demand for investment in clean technology. Already enacted legislation has created a favorable environment for innovative clean tech companies to engage with the federal government. More notably, given the bipartisan program support in both the 2020 Energy Act and the Senate-passed Infrastructure Investment and Jobs Act, this enthusiasm and forward momentum in utilizing the program to its full capacity is not likely to subside anytime soon.

While the LPO remains much more complex than government grant programs, companies interested in the LPO should not hesitate to conduct a comprehensive evaluation to determine if a proposed project is eligible and likely to proceed through the pipeline to funding. The LPO continues to encourage prospective applicants to apply, and numerous companies have done so already. This has made the competitive application process even more competitive for the more than $40 billion in remaining funds.

Holland & Knight will continue to monitor developments and keep clients apprised of legal, regulatory and policy changes for the LPO. If you have any questions, please contact the authors or another member of Holland & Knight's Clean Technology Team.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.


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