Editor’s note: This article comes from the Project Finance News Wire published by Chadbourne & Parke LLP, and authored by Washington-based Kenneth Hansen. For the full news letter, pick here.
Another $1 billion in federal loan guarantees will be made available for distributed energy projects, such as micro-grids and rooftop solar with batteries, President Obama said in a speech at a Clean Energy Forum in Las Vegas in late August. The loan guarantees are being offered under the existing US Department of Energy loan guarantee program. The additional $1 billion will be added to two existing solicitations: one that was issued in July 2014 for up to about $4.2 billion in loan guarantees for renewable energy projects and another that was issued in December 2013 for up to $8 billion in loan guarantees for advanced fossil energy projects. The plan is to increase the authorized loan guarantees under each solicitation by $500 million.
Solar rooftop and other distributed energy companies that are interested in applying should follow the deadlines and rules for those solicitations. The department acknowledged in a “supplement” issued in conjunction with the Obama speech that distributed energy projects “require financial structures that are different from most of the financing structures that [DOE] has used in the past for financing large, centralized projects” and said it is open to new structures.
To qualify, a developer must offer a “distributed technology” and plan to deploy installations at multiple sites under a master business plan. An eligible project must also still satisfy the threshold criterion for the DOE loan guarantee program, which is to employ an innovative technology, meaning one not already in commercial operation in the United States for more than five years, that reduces greenhouse gas emissions. Loan guarantees are written for a “project.” In stating the requirement that the developer must plan to deploy installations at multiple sites under a master business plan, DOE is removing any doubts about what had been a key concern for distributed generators considering taking advantage of the loan guarantee program.
The DOE loan guarantee rules say that a developer “may not submit a[n] . . . application for multiple projects using the same technology.” Thus, if each installation were to be considered a “project,” which is one possible reading, then financing of distributed generation by this program would not have been feasible. DOE had already in principle cleared that regulatory hurdle when it provided conditional commitments to two distributed generation applications submitted in the first round of loan guarantees written through September 30, 2011. One application was abandoned when DOE concluded that insufficient time remained to complete structuring and documentation of the project prior to the September 30, 2011 statutory deadline.
The other distributed generation project closed, but its implementation required aggregation of utility-scale power purchase agreements that proved in short supply. So, while that project achieved financial closure, it did not proceed to full deployment of the loan guarantee.
Will generation application pass muster if innovative technologies were employed on some sites but not on others? Although the answer is not clear in the supplement, some of the suggestions by way of qualifying technologies in past projects on which loan guarantees have been written were at the system management level, which suggests that each installation might not need to have an on-site innovation. There are good legal grounds and programmatic precedent for the answer that not every site needs to reflect the same, or any, innovative technology as long as the overall project does.
Compliance with the National Environmental Policy Act (NEPA) has been another factor potentially discouraging DOE support of distributed generation projects. A time-consuming environmental impact statement must be prepared before a loan guarantee can be written. DOE’s obligation to comply with NEPA in advance of financial close was sometimes difficult to satisfy for utility-scale projects at a single project site. Where a multitude of sites is contemplated, some (or most) of which may not be known by financial close, NEPA compliance becomes all the more challenging. DOE appears to be feeling its way forward carefully on this front, but it clearly recognizes the problem and appears open to solutions. The supplement the department released in late August opens with the easy case, suggesting “[t]he universe of sites on which the installations would occur would be identified in order to permit DOE to satisfy its obligations under the National Environmental Policy Act . . . and complete other necessary diligence.” It also recognizes this may not be the typical case.
The supplement goes on to say that “in some circumstances it may be sufficient to identify the proposed sites categorically,” meaning to provide a general description of the types of sites that will used, “with conforming site information to be certified by” by the developer and verified or audited by DOE as there are draws on the loan guarantee after closing.
Timing and location
Timing may prove an issue. Many solar rooftop installations are financed today in the tax equity market in order to convert tax benefits on the solar equipment into current cash that can be used to pay capital costs. Tax rules require a closing on the tax equity financing before the equipment is placed in service.
The tax equity investors fund groups of systems over time as each “tranche” of systems reaches completion. DOE would rather wait in some cases to fund the guaranteed loan after all the equipment envisioned under the master business plan has been installed and fully tested. Its supplement says, “In instances where the equipment supply and the construction process pose greater than normal risk, [DOE] would look more favorably on [projects] structured in a manner to permit loan disbursements for project costs only after the relevant installation and/or pool of installations is completed and tested in accordance with the requirements of the Engineering, Construction, and Procurement Contract (“EPC”) and offtake agreements.”
Perhaps DOE will not take this position for rooftop solar installations since the equipment supply and construction process do not pose “greater than normal risk.” If the position does apply, then the loan guarantees may prove more useful as a potential source of refinancing rather original coverage for installation costs. In that sense, this position by DOE evidences another step forward for the loan guarantee program. In the program’s initial rounds, DOE was unwilling merely to refinance projects that were already underway, since this was a failure of “additionality”: its participation was not really making something possible that would have failed to occur in the private market. It is a step forward for DOE to have concluded that offering financing at completion of installations can DOE made clear in the supplement that it considers multiple installations at multiple locations a single “project” when done under a master business plan. Thus, key to a successful application will be putting together a master business plan that ties together each installation as a component of the overall project.
All systems installed under the plan will have to use the same technology or technologies. Multiple unrelated installations using unrelated technologies would not qualify. The bigger issue may be whether rooftop solar systems can satisfy the requirement to use a technology that has not already been in commercial use in the US for more than five years. The loan guarantee program “does not offer low-cost financing for proven commercial technology,” the supplement warns. Thus, projects limited to purely commercially-established technologies need not apply. However, the supplement opens an interesting door when it says, “For example, standard rooftop solar or energy efficiency technology is not eligible unless at least a portion of the Project meets the . . . ‘innovation’ requirements.” It has been well established in the development of the DOE loan guarantee program to date that a project need not be innovative in all respects. The projects on which loan guarantees have been written so far are basically single-site operations, so their qualifying innovations were present on site. While a new type of battery or inverter would probably allow a project to qualify, would a distributed be a critical inducement to moving a project forward and that the mere fact that physical completion may precede disbursement of DOE funding does not mean that access to DOE funding was not critical to the project happening. Eligible projects must be in the United States or US territories.
At least one site must be identified in the application, according to the supplement. This requirement seems unnecessary, since the restriction to US projects is well understood among project participants and it will no doubt be stated explicitly in the conditions precedent to disbursement of the loan guarantee that each financed site is in a qualifying location. Based on the precedent of a proposed cross-border transmission line that was at one point under consideration for the DOE loan guarantee program financing, an offshore element should not preclude DOE financing for the US-based portion of the project.
Use of proceeds
The supplement warns applicants that DOE will not allow “relending” of loan guarantee proceeds. However, as long as the developer is responsible for the loan and provides adequate security, it is not clear why DOE should be troubled by a degree of on-lending of DOE loan proceeds. Some likely structures, including leasing structures specifically mentioned by DOE as examples of what might be acceptable, are arguably the equivalent of on-lending. That is, an arrangement in which the developer installs systems, leases them to building owners and is paid over time through rental payments, the arrival of which depend on the creditworthiness of the building owner, is the functional equivalent of the developer having financed, in part with DOE loan proceeds, a loan to the building owner.
One could imagine a portion of DOE loan proceeds being used to fund a revolving short-term loan facility available to distributed generation customers, where such proceeds remained a fully-secured, senior payment obligation of the developer to DOE. In a discussion of “Example B,” DOE notes that it “would also anticipate looking through a . . . lease, power purchase agreement or other revenue contract structure to ensure that the [developer] is not merely relending DOE-guaranteed loan proceeds to project hosts for unreasonable profit.” This suggests that some relending might be possible if not on terms that would provide an “unreasonable profit.”
The supplement indicates DOE’s willingness to consider alternative financing structures. It could be worth exploring with the department whether some on-lending might be possible — especially if it is not provided with too great a spread and does not undermine DOE’s recourse to the developer. Another prohibition is against the “capitalization of state Green Banks.” However, the program is clearly open to complementing the capital of state green banks as a co-lender and to benefiting from their creditworthiness, thereby reducing DOE’s repayment risk and, with it, the “credit subsidy cost,” or fee, that the developer must pay for the loan guarantee. While the DOE program “is not a vehicle to capitalize state green banks,” it does offer them a way to leverage their capital.