Department of Energy Loan Guarantee Program Update: New Energy Infrastructure Reinvestment Financing Mechanism

The U.S. Department of Energy’s (“DOE”) Innovative Energy Loan Guarantee Program (the “Program”) was conceived in Title XVII of the Energy Policy Act of 2005 (the “Act”) to enable DOE to guarantee loans made for a variety of qualifying advanced energy projects. The Program is administered by DOE’s Loan Programs Office (“LPO”). In recent years, there have been a number of amendments to the Act and efforts by the Biden Administration, DOE and the LPO to reinvigorate the Program. Most recently, the Inflation Reduction Act of 2022 (“IRA 2022”) adds a new “Energy Infrastructure Reinvestment Financing” mechanism (“EIRF”) to the Program, which makes available up to $250,000,000,000 in loan guarantee commitments by the LPO for certain projects.

EIRF Overview

EIRF enables LPO to enter into guarantees, including refinancing, for projects that:

1. retool, repower, repurpose, or replace energy infrastructure that has ceased operations (which may include the remediation of environmental damage associated with energy infrastructure), with an added requirement that any such project involving electricity generation through the use of fossil fuels has controls or technologies to avoid, reduce, utilize or sequester air pollutants and anthropogenic emissions of greenhouse gases; or
2. enable operating energy infrastructure to avoid, reduce, utilize, or sequester air pollutants or anthropogenic emissions of greenhouse gases.

For EIRF-guaranteed projects, the two criteria listed above replace the Act’s “Eligible Projects” requirements, which has the practical effect of enabling EIRF-guaranteed projects to avoid showing that they employ new or significantly improved technologies (which still applies to other Program recipients).

“Energy infrastructure” as used in EIRF is defined as a facility and associated equipment used for (1) the generation or transmission of electric energy or (2) the production, processing, and delivery of fossil fuels, fuels derived from petroleum, or petrochemical feedstocks.

While many of the substantive and procedural requirements that are applicable to other Program recipients will apply to EIRF projects, IRA 2022 includes EIRF-specific application requirements that mandate, among other information required by DOE, an analysis of how the proposed project will engage with and affect associated communities and, in the case of electric utility applicants, assurances that the utility will pass on any financial benefit from the EIRF guarantee to the customers of, or associated communities served by, the utility.

Repayment of EIRF-guaranteed obligations must be made within a tenor that does not exceed 30 years. Loan guarantees cannot be made available for any project unless the President of the United States certifies in advance in writing that the guarantee and the project comply with restrictions on double-dipping. It is likely that the President will delegate authority to make this certification to, for example, the Secretary of Energy. The double-dipping requirement broadly prohibits guarantees being issued to projects that benefit from Federal support, subject to a specific list of exceptions that includes Federal tax credits, location on Federal land (with other applicable criteria), nuclear incident insurance and electric generation projects using transmission facilities owned or operated by a Federal Power Marketing Administration or the Tennessee Valley Authority that have been authorized, approved and financed independently of the project receiving the guarantee. Receipt of federal grants is not included as an exception, so grant recipients would presumably be prohibited from taking on an EIRF guarantee.

As with other revisions made to the Program in IRA 2022, implementation of EIRF will be subject to DOE’s issuance of applicable rules and one or more solicitations for EIRF-eligible projects. The requirements described above will likely be clarified as these processes unfold.

Use of EIRF for Coal-Fired Generating Facilities

One potentially significant application of EIRF is to facilitate earlier retirement by utility owners of coal-fired generating facilities under circumstances that are comparably favorable to affected customers and communities. Right now, utilities have significant coal-fired assets on their balance sheets and face the risk that such assets will be impaired. In the past 10 years certain  utility owners of coal-fired generating facilities have explored the use of a utility securitization structure to recover the remaining book value of these assets. To date, utility securitization transactions have been completed in Michigan (2014) and Wisconsin (2021). Such transactions utilize enabling legislation in a limited number of states to allow issuance by utility owners of long-term debt securities backed by a dedicated charge on utility customer bills. The securities benefit from high credit ratings and low interest rates, which enables utilities to recover the remaining stranded cost of investment in coal-fired facilities over a longer period of time and at a lower cost to ratepayers than would occur under standard regulated rates of return.

EIRF would provide an alternative mechanism for securitization transactions, enabling such refinancings at a low cost over a thirty-year tenor. In states without enabling legislation, EIRF will provide utilities with access to refinancing transactions. In addition, EIRF’s substantive requirements may be more beneficial to customers and communities than comparable requirements in some states’ enabling legislation.

Other Program Requirements

Given language in the EIRF statute, it is likely that most of the regulations that apply to the Program will also apply to EIRF, although a definitive consideration of this subject will have to wait until issuance of updated regulations and EIRF solicitations. Under current regulations, any Program guarantee recipient may finance up to 80% of “project costs”, which generally include development, construction and related costs and exclude, among other things, operating costs, commissions, certain affiliate payments, research, development and demonstration costs and costs that are excessive or not directly required to carry out the project.

To begin the application process, LPO encourages potential borrowers to request no-fee, no-commitment consultations. There is a formal application phase whereby a potential borrower submits information and prescribed deliverables in stages for DOE review. As described above, EIRF projects will need to satisfy additional requirements during the application process. DOE and the potential borrower will enter into a term sheet, which initiates a conditional commitment of up to two years by DOE to guarantee a loan. During such period, the commitment is generally terminable by the Secretary of Energy. The potential borrower must keep DOE apprised of changes to the financing arrangements and the project, which are in many cases subject to DOE approval.

There are fees and other amounts which will be due to DOE in connection with a loan guarantee. Borrowers must reimburse DOE for its out-of-pocket expenses, including fees charged by external advisors. There is also an application fee in the amount of $150,000, or $400,000 if the application is to guarantee a loan amount of more than $150 million. There is a facility fee that covers the underwriting process and is calculated as a percentage of the requested loan amount (1% of the principal portion of the guaranteed loan up to $150 million, and 0.6% for amounts in excess thereof). Reimbursements of out-of-pocket expenses, the application fee and the facility fee described above are payable not later than financial closing (and may be due in part earlier). Maintenance fees are payable annually after financial closing and expected to be up to $500,000 per year under each of the three currently open Program solicitations.

There is also a significant credit subsidy cost that is determined just prior to (and due no later than) financial closing, using a confidential Federal government model. The credit subsidy cost is the net present value at the time the loan guarantee is issued of the guarantee’s estimated long-term cost to the government, and it is expressed as a percentage of the guaranteed loan amount. Such subsidy cost generally cannot be funded with the proceeds of the guaranteed loan. Appropriated government funds must be paid by DOE, where available, to satisfy the credit subsidy cost, and IRA 2022 appropriates $5,000,000,000 for this purpose under EIRF.  Sponsors should, however, plan for the possibility that they will bear credit subsidy costs in excess of appropriations. In addition, DOE may require a “risk-based charge”, intended to make DOE’s charges and costs consistent with the commercial markets and other federal credit programs, payable during the term of the loan. Such charge would be considered in determining the size of the credit subsidy cost.

Potential borrowers should keep in mind a few distinctions as compared with commercial loans. A loan guarantee agreement under the Program may include terms and conditions ensuring that DOE has access to intellectual property rights, data and technology in default scenarios. Some information provided to DOE will be made publicly available. There are also additional compliance requirements, including prevailing wage requirements for construction work. Finally, borrowers generally must obtain credit ratings during the application process if project costs will be in excess of $25 million.

Potential lenders under a DOE-guaranteed loan should also note some key points. Assignments and participations by lenders are subject to regulatory requirements and, in some cases, DOE consent. DOE generally will not be obligated to pay premiums, default penalties or prepayment penalties in default scenarios. Subordinating guaranteed loan obligations is generally not permitted. In addition, depending upon whether DOE guarantees more or less than 90% of the underlying loan obligation, the guaranteed portion may or may not be permitted to be “stripped” from the non-guaranteed portion for purposes of participation, syndication and other resale. Only the Federal Financing Bank may lend in respect of a project for which DOE guarantees 100% of the underlying loan obligation. Any non-guaranteed portion of the loan must be repaid pro rata and on the same amortization schedule as the guaranteed portion. Other financing arrangements of the borrower or relating to the project with shorter amortization periods will be subject to DOE review.

USDA Assistance for Rural Electric Cooperatives

Separately, IRA 2022 also will make available under the U.S. Department of Agriculture (“USDA”) some $9,700,000,000 of loans and other financial assistance to certain electric cooperatives for the long-term resiliency, reliability and affordability of rural electric systems. Such loans and assistance are for the purpose of achieving “the greatest reduction” in carbon dioxide, methane and nitrous oxide emissions associated with rural electric systems through the purchase of renewable energy, renewable energy systems, zero-emissions systems and carbon capture and storage systems, deploying such systems, or making energy efficiency improvements to electric generation and transmission systems of the electric cooperative. No cooperative may receive more than ten percent of the entire amount made available under this USDA program. Grants (not loans) are limited to twenty-five percent of the total project costs of the cooperative carrying out the applicable project.