The Difficulty with DOE Funding

The U.S. DOE controls the majority of federal funding opportunities for ethanol and renewable energy producers. The agency's loan guarantee program was created specifically to provide millions of dollars for renewable energy projects - but in its first four years failed to award a single recipient. What was the hold-up and is a fix on the way?
By Kris Bevill | June 03, 2009
Acquiring financing from the government has never been easy. And for good reason: taxpayers are generally skeptical about how their money should be used for and the government has a system of checks and balances to try to ensure that public money is funneled to the best possible projects and most-deserving applicants. Programs that were formed with the best intentions can sometimes be bogged down by tedious language and rules that—while created as a protectionary measure—can ultimately make a difficult process nearly impossible to navigate. The unintended result is that projects don't get funded and good intentions are never realized.

The U.S. DOE has had its fair share of difficult-to-navigate funding programs. Not to say that the agency is never successful in getting money to the right place at the right time, but historically it has been plagued with too few resources to handle a wide variety of loan and grant programs.

One program in particular that has become notorious for its lack of progress is the agency's loan guarantee program. Created by the Energy Policy Act of 2005, the program was established to provide loan guarantees for renewable energy projects. Title 17 of the act allows the DOE to provide loans for projects if "there is reasonable prospect of repayment of the principal and interest on the obligation by the borrower." If that were the only requirement for projects to qualify for funding, the possibilities would be endless—therefore, additional language is necessary. However, the amount of additional qualifications in the program's guidelines has made it quite difficult for producers to qualify for funding. So difficult, in fact, that in the four years following its formation, not a single loan was granted. In April, newly-appointed Secretary of Energy Stephen Chu announced the first loan guarantee - a $535 million guarantee for a solar project - but by mid-May actual funding still had not made its way to the recipient.

Too Many Rules
BlueFire Ethanol Fuels Inc. CEO Arnold Klann says his company began dealing with the DOE loan guarantee program in 2007. "It's been a long slog, so to speak," he says, attributing most of the problems his company has experienced to the program not being well-founded. "They were kind of making it up as they went along and initially were trying to figure out what [the agency] could do without legislative backing," he says. One of the program's initial requirements included a risk assessment, a step that Klann believes was impractical and disqualified many biofuels projects. "Any first-of-a-kind technologies always have inherent risks, so the ratings agencies would bounce you out or give you the lowest rating," he explains. Low ratings resulted in high premiums for the agency's unfounded guarantees, which Klann says is why BlueFire made the decision to discontinue its bid for a DOE guarantee. "At the end of the day we didn't put it in because we felt we didn't qualify and the principal payments were going to be very high," he says.

"Qualification for the existing DOE loan guarantee program involves an extensive, expensive, time consuming process," says Karen Wong, a global project finance partner at Milbank, Tweed, Hadley & McCloy LLP. "Application packages have regularly been in the thousands of pages [and] must include descriptions of the technical aspects of the project, detailed documentation with respect to financing plans, and draft forms of a majority of project contracts."

As an attorney specializing in financial transactions for the renewable energy and ethanol sectors, Wong has extensive experience in acquiring government financing and has assisted several clients as they weed their way through DOE-related funding projects. She says the program's rulemaking process has been cumbersome and interagency disputes regarding appropriations have further added to its lack of implementation.

Wong points to a specific list of requirements which have posed problems for companies working to secure loan guarantees. "First, loan guarantees are generally limited to 80 percent of project costs and require a significant equity commitment," she says. "In today's constrained capital and credit environment, finding equity investors to bridge the non-guaranteed portion of project costs can be challenging. Second, under the existing Section 1703 program, applicants must pay for the government's credit support. And solicitations thus far have provided that this often significant payment is due when the loan guarantee is issued. Third, even applying for a DOE loan guarantee is expensive. In addition to the time, effort and professional fees associated with an application, applicants are required to pay an application fee - in addition to facility fees and maintenance fees that apply should a project be awarded a loan guarantee.

The current DOE structure exposes the loan guarantee program to political externalities and
dependency on "Year Money," limiting technology choices.

Finally, artificial time constraints have acted as a further limitation for potential applicants. Applications have been accepted only after formal solicitations by the DOE. And these generally, have been over-subscribed. While the solicitation process has allowed the DOE to alert applicants to the type of projects it would like to guarantee, there is no ‘open window' for loan guarantees."

Henry Scott, an associate at Milbank, says that the loan guarantee program has the potential to play a transformative role in the introduction of new technologies to the marketplace. "Many of the projects and technologies seeking loan guarantees involve interesting applications of technologies with significant potential to reshape the energy landscape," he says. "Hopefully new leadership can transform the program and make it live up to its promises and potential."

Risky Business
Flaws in the loan guarantee program's protocol haven't gone unnoticed. In late April, Senate energy committee chairman Jeff Bingaman (D-N.M.) and ranking member Lisa Murkowski (R-Alaska) introduced the "21st Century Energy Technology Deployment Act," which seeks to improve the loan guarantee program. Included in S.949 is the formation of a clean energy investment fund, which would be used to support technology deployment, and a Clean Energy Deployment Administration, which would be an independent administration charged with providing credit for "risky" technology projects. According to a release from the Senate energy committee, this new administration would encourage deployment of technologies that are perceived as too risky by commercial lenders; thus encouraging the advancement of riskier technologies, which have a high potential to address climate and security needs. The senators' vision for CEDA is for it to act as a "clean energy bank" and balance risky investments with revenues from other services and less-risky investments, thus becoming self-sustainable over time. That notion sits well with future cellulosic ethanol producers such as Klann. "The DOE or someone has to step up and take those inherent first-of-a-kind risks," he says. "And they're finally doing it." Klann believes that if the proposed changes are made to the program, more money will certainly be made available for young technologies such as what is being used at BlueFire.

Wong is optimistic about the proposed re-vamp of the program, but warns that it is vital that the new administration be used as a supplement to the loan guarantee program and that Congress not disrupt or further delay pending loan guarantee applications if it approves the merger of the loan guarantee program and CEDA. "While public sector investment is crucial, private sector involvement in the loan guarantee program as holder of guarantee loans is also essential," she says. "The loan guarantee program is key to bringing additional participants to the project finance marketplace."

Several additional welcome changes would be brought about if the bill is passed, according to Wong. Included on her list: the re-definition of "commercial technology" to disqualify demonstration projects, a requirement to review and decide on applications within 180 days of receipt and reduced fees for "breakthrough technologies" projects.

At a Senate committee hearing to discuss modifications to the loan guarantee program, DOE representative Matthew Rogers stated that Chu has made the agency's loan programs an urgent priority and is committed to making them successful. However, he noted, the program will only be successful if the federal government becomes a secondary lender over time. "The goal should be to have the federal government focus on its unique role in accelerating market development for advanced technologies," Rogers testified. "[The loan guarantee program] should not be a long-term financing solution for troubled energy companies—nor should the federal assistance crowd out private lenders who provide better commercial underwriting capabilities than the federal government. The DOE has a clear role to play, and we will provide strong returns to the American taxpayer if we remain focused on our unique role in filling a gap in advanced energy technology markets."

Kris Bevill is the editor of Ethanol Producer Magazine. Reach her at or (701) 373-8044.