As Renewable Projects Evolve, Financing Markets Must Adapt

Issue 7 and Volume 120.

By Mark A McCall, Executive Director, U.S. Department of Energy’s Loan Programs Office

As changes in the U.S. power industry continue to unfold, distributed energy projects are currently driving innovation and transforming U.S. energy markets. Demonstrating the market viability of technologies such as rooftop solar, energy storage, and smart grid technologies would create economic opportunity, strengthen energy security, and reduce greenhouse gas emissions. As generators, consumers, and technologies evolve to realize these benefits, financing markets must quickly and constantly adapt.

The Department of Energy’s (DOE) Loan Programs Office (LPO) helped to finance more than $24 billion of clean energy projects through the Title XVII Clean Energy Loan Guarantee Program between 2009 and 2015. The vast majority of these projects were large, centralized power generation facilities or projects that transmitted or stored electricity from such facilities. However, distributed energy projects can require financial structures that differ from prior structures LPO has used in the past for large and centralized infrastructure projects.

Recognizing the evolution occurring in the power industry, LPO adapted in August 2015 by releasing supplements to its existing approximately $4.5 billion Renewable Energy and Efficient Energy (REEE) Projects and $8.5 billion Advanced Fossil Energy Projects solicitations to provide guidance on the kinds of distributed energy projects and project structures it can support under the Title XVII loan program. As defined in the supplements, distributed energy projects are comprised of installations of facilities utilizing a single technology, or a defined suite of technologies, at multiple sites, deployed pursuant to a master business plan.

As with other types of projects LPO has financed, distributed energy projects using innovative technology face market barriers because commercial lenders are often unwilling or unable to take on the risk of new or innovative technology or project structures until they have a strong history of credit performance and commercial operation. Title XVII of the Energy Policy Act of 2005 addresses these capital constraints in order to accelerate the domestic deployment of such innovative energy technology.

One of the constraints that developers of distributed energy projects may face occurs where the proposed project may be developed in several phases, each of which can operate independently of the others. However, Title XVII requires that credit subsidy cost, a reserve established by the U.S. government to cover the risk of estimated shortfalls in loan repayments (similar to a loan loss reserve established by a commercial bank), be paid at the time of issuance of a loan guarantee, which occurs at closing of a guaranteed loan.

Potential borrowers may wish to secure a guaranteed loan large enough to support all phases of the project, but pay the credit subsidy cost associated with the loan guarantee in installments, concurrent with the availability of the portion of the guaranteed loan applicable to each phase.

For a qualified project that will be developed in phases, and upon receiving a request from an applicant to pay the credit subsidy cost for each phase at the time the guaranteed loan is made available for a phase, DOE would likely issue a separate conditional commitment applicable to each phase of the project (in effect, each phase would be financed with a separate guaranteed loan). In such an instance, at the closing of the guaranteed loan associated with a phase of the project, only the associated credit subsidy cost would be payable.

As advances in power markets continue to emerge, other distributed energy project structures may exist or be developed, and LPO will accept and consider applications for projects that use those structures. Likewise, technology and market changes could unfold that have not been previously envisioned. Financing entities like LPO must keep pace with a changing marketplace to ensure that project sponsors can access the capital needed to deploy new and innovative energy technologies to support increasing consumer demand and maintain U.S. competitiveness in the global market.