Department of Energy Loan Guarantee Program Update: Loan Programs Office Issues Updated Title 17 Clean Energy Financing Program Guidance

On May 19, 2023, the US Department of Energy’s (“DOE”) Loan Programs Office (“LPO”) issued updated Program Guidance (the “Program Guidance”) for the Title 17 Clean Energy Financing Program (the “Program”). The Program, which was originally conceived in Title 17 of the Energy Policy Act of 2005 and has been periodically expanded and refined since, enables DOE acting through LPO to guarantee third party loans made in support of a variety of qualifying energy-related projects. Most recently, the Inflation Reduction Act of 2022 (“IRA 2022”) increased LPO’s aggregate loan authority, appropriated funds to support issuing new loans across several LPO programs and enabled a new “Energy Infrastructure Reinvestment Financing” mechanism (“EIRF”), described in further detail here. Under the expanded Program, LPO has been authorized to disburse and administer guarantees for loans to clean energy, facility decarbonization and energy infrastructure reinvestment projects with an aggregate principal amount of over $300 billion.

The Program Guidance serves as a comprehensive, user-friendly guidance document for potential loan guarantee applicants and others seeking to better understand the Program and the opportunities available thereunder. In recent years, LPO has energetically positioned itself, including through the significant body of blog and video posts on its website and other media appearances, as a communicative office that is eager to educate and work with interested Program participants. The Program Guidance was released concurrently with an interim final rule amending the regulations applicable to the Program at 10 CFR Part 609, a short overview handout summarizing the Program’s offerings and requirements, and updated instructions for Part I and Part II of the Program’s application process. The Program Guidance and related materials consolidate and replace previous solicitations issued by LPO relating to the Program. The interim final rule became effective on May 30, 2023, though comments, data and information regarding the interim final rule will be accepted by DOE until July 31, 2023. A final rule is expected thereafter.

One of the Program’s stated goals is to serve as a “Bridge to Bankability” for projects that otherwise might have difficulty attracting commercial loans. A project receiving a loan guarantee under the Program should have reduced interest expense when compared with commercial loans without such a guarantee, is likely to benefit from relatively favorable terms and conditions and should have a better chance demonstrating its viability in debt and equity markets for subsequent iterations. Nevertheless, in order to qualify, projects must have a reasonable prospect of repayment, meet current national security and economic competitiveness objectives, and satisfy other Program requirements discussed further below.

LPO is geared to work with an impressive breadth of technologies, including multifaceted projects installed at more than one location. Section III of the Program Guidance contains detailed eligibility requirements and a number of hypothetical examples of projects across four applicable categories: Innovative Energy Projects, Innovative Supply Chain Projects, State Energy Financing Institution-Supported Projects and EIRF Projects. Some intriguing project types described in these materials that illustrate the Program’s breadth include:

• virtual power plants comprised of various types of distributed energy resources,
• direct air capture facilities,
• high-voltage direct current transmission lines,
• production of iron ore pellets for low-emissions steelmaking,
• the manufacturing of solar cells, micro-reactors and their fuel and advanced grid components,
• electrolyzer facility construction supporting the manufacture of low-carbon ammonia for fertilizer production and textile manufacturing, among other uses,
• state-supported projects to improve existing housing, build new housing or deploy community solar facilities,
• replacements of existing power plants with renewables, storage, nuclear or industrial facilities, including environmental remediation, and
• reconductoring of existing transmission lines.

Some of the key terms and conditions, and other characteristics, of loan guarantees issued under the Program are as follows:

• The Program Guidance indicates that projects borrowing from the Federal Financing Bank under the Program should typically expect a fixed interest rate pegged to US Treasury rates (matched to loan tenor), plus 0.375% and a “Risk-Based Charge” that generally allows LPO flexibility to increase interest rates to reflect borrower creditworthiness. See the discussion below regarding how applicants can receive loans from the Federal Financing Bank. Creditworthiness determinations no longer require a credit rating during the application process for projects having costs in excess of $25 million, although LPO may require a credit assessment or credit rating at its discretion.
• Loan guarantees may cover up to 80% of eligible project costs (ineligible project costs include, among other things, research, development and demonstration costs in respect of readying innovative technologies, costs incurred during the project’s operating period and any ability to finance the credit subsidy cost and certain other federal fees described below) and up to 90% of loans from commercial lenders (or up to 100% of the loan if the lender is the Federal Financing Bank). The impact of these two restrictions is that the effective maximum guaranteed obligation in respect of commercial loans is 72% of eligible project costs. However, cash flow and credit are considered in calculating leverage ratios, and many projects ultimately receive guarantees for 50% to 70% of project costs.
• The maximum tenor of the guaranteed debt and other debt of the borrower is the lesser of 30 years or (for projects other than EIRF projects) 90% of the project’s expected useful life, but tenors are frequently shorter.
• Guaranteed loans may not be subordinated in payment or lien priority to other financing and must be secured (although they may share first-lien position pari passu with other lenders).
• Only term debt may be guaranteed—i.e., revolving loans may not be guaranteed.
• Guaranteed loans are typically structured as limited recourse project financings, but other structures may be used (including secured corporate lending, securitizations and transactions involving tax equity).
• There is no minimum guaranteed loan size, but due to the fixed costs of utilizing the Program, loan guarantees are typically in excess of $100 million.
• Borrowers must comply with various federal and programmatic requirements, including prevailing-wage requirements, the Cargo-Preference Act, NEPA requirements and, for borrowers who are “non-federal entities” (i.e., states, local governments, Indian tribes, institutions of higher education and non-profit organizations, but generally not for-profit organizations), requirements under the Build America, Buy America Act.
• Project sponsors must provide significant equity to the project, although not necessarily at the time of financial closing or in the form of cash.
• Loans must be made by an “Eligible Lender”—generally, the Federal Financing Bank or a commercial institution satisfying certain regulatory requirements. Applicants can work with LPO to receive a direct loan from the Federal Financing Bank. LPO handles all coordination with the Federal Financing Bank and no action is required of the applicant beyond the LPO application and approval process.
• Participation in the Program is disallowed insofar as applicable projects have benefited directly or indirectly from certain other forms of federal support, including grants, cooperative agreements or other loan guarantees from federal agencies or entities (including DOE), federal agencies or entities serving as a customer or off-taker of the project’s products or services, or other federal contracts, including acquisitions, leases and other arrangements, that support the project. Specific exceptions apply to the disallowance, including, most importantly, the project’s ability to benefit from federal tax credits (including by direct payment).

Use of the Program requires payment of a potentially significant credit subsidy cost that is determined using a confidential federal government model. The credit subsidy cost is the net present value of the guarantee’s estimated long-term cost to the government, net of certain expenses. The credit subsidy cost is expressed as a percentage of the guaranteed loan amount and generally cannot be funded with the proceeds of the guaranteed loan. Importantly, the Program Guidance and the revised regulations at 10 CFR 609.6(d) indicate that credit subsidy costs are determined as of and due on the date of the conditional commitment. Note that the timing for the determination of credit subsidy cost is a significant revision to earlier Program requirements, in that credit subsidy costs had previously been determined as of and due at the time of closing a loan guarantee, thus exposing potential borrowers to greater uncertainty in the loan guarantee application process. To the extent appropriated funds are available, they will be allocated to pay the credit subsidy costs at such time; otherwise, borrowers are responsible (subject to possible refund or adjustment thereafter, depending upon applicable terms and conditions). The Program Guidance states that adequate appropriated funds are expected to be available and that DOE will provide significant advance notice to the public and applicants prior to their exhaustion. Borrowers should note that IRA 2022 appropriated approximately $8.6 billion for credit subsidy costs supporting up to $290 billion in total Program principal. Borrowers should also consider that the “Risk-Based Charges” described above, if imposed, might affect sizing of the credit subsidy cost.

On May 22, 2023, LPO also released guidance regarding certain fees and charges to be collected from borrowers under the Program. Under the Program’s early requirements, application fees were collected from borrowers in connection with the submission of applications. These fees have now been eliminated. Current fees and expenses now include the following:

• Facility Fee: A one-time, non-refundable Facility Fee, equal to 0.6% of the principal amount of the guaranteed obligation (net of capitalized interest) up to $2 billion, plus 0.1% of the principal amount of the guaranteed obligation (net of capitalized interest) in excess of $2 billion, will be collected at financial closing.
• Third-Party Expenses: Borrowers are responsible for LPO’s third-party advisor expenses (such as legal, technical and financial advisory services) incurred in evaluating, structuring and closing a loan guarantee. LPO will reinstate its temporarily-suspended practice of requiring Borrower Support Letters at the time such third-party advisors are engaged, and the Program Guidance clarifies that such third-party advisor costs are separate from Facility Fees, are due as agreed between LPO and the borrower and may be financed as part of the applicable transaction.
• Maintenance Fees: Maintenance Fees remain due annually after execution of a loan guarantee agreement and typically range between $150,000 to $200,000 per year (although they may be higher in some cases).

Facility Fees, Maintenance Fees and other fees charged by or paid to DOE relating to the Program may not be financed with federal funds or the proceeds of a DOE-guaranteed loan.

Project sponsors who seek to engage with LPO are encouraged to enter into no-fee, no-commitment consultations, which precede the formal application process and enable LPO and its potential borrowers to vet project eligibility and address other potential issues in advance. The Program is operated under an open solicitation for applications. The loan process includes the aforementioned pre-application consultations, a two-phase application and review period, due diligence and term sheet negotiations, a conditional commitment and financial closing. The process up until conditional commitment commonly takes up to a year. Conditional commitments may last for up to two years.

LPO’s loan authority and related appropriations under IRA 2022, and its ability to enter into conditional commitments, expire after September 30, 2026, which serves as the only currently applicable deadline for use of the Program. As of May 2023, LPO has 150 received active applications requesting $127.7 billion in loans across three LPO programs (the Title 17 Clean Energy Financing Program, the Advanced Technology Vehicles Manufacturing Loan Program and the Tribal Energy Loan Guarantee Program). On June 7, 2023, LPO hosted a webinar discussing the Program Guidance and posted a recording and related materials.