Top 10 Bioeconomy Must-Knows in the Biden Transition

6. The DOE Loan Guarantee Program re-invented, re-programmed, re-vived

If you were counting, there has not been a new closing for a novel project using the DOE Loan Guarantee Program since 2014, we’re told. Despite a stellar less-than-3-percent default rate that any small business lender would kill for. And, despite more than $25 billion in the kitty.

We predict that this is the year that the DOE Loan Program will roar to life.

What is the program? The Title XVII Program was supposed to provide the hard-to-find financing to commercialize innovative, first-of-a-kind technologies. Whether measured by loan activity (zilch) or the default rate (less than 3 percent) we can’t say it was doing a good job of unleashing those high-risk, high-reward technologies. What went wrong with Title 17, and what got fixed this week?

The problem was significant high costs for applying into the Title XVII Program for Phase 1 and Phase 2, along with the excessive time frame to financial closing, have been enormous deterrents for technology innovators and project developers, especially those in early-stage and first-of-a-kind technologies.

Let me give an example to illustrate. Say you are building a $400 million, 100 million gallons bioeconomy project. You pay a $400,000 application fee for a Loan Guarantee. You pay a $4.5 million facility fee to the government for the cost of the LG. You pay at least $19.6 million toward the credit subsidy (the fund that pays off banks in case of defaults), and possibly as much as $28 million more. You pay a $300,000 loan guarantee maintenance fee. In all, as much as $82.1 million for the loan guarantee. And you have to, usually, put up 30 percent or so of the project cost as equity, or $120 million.

At this point, you’re thinking that Visa would probably charge less to put this on a credit card, after all we’re looking at as much as 19 percent of the loan proceeds in fees. But it gets worse. You see, you are not allowed to pay for this out of the loan proceeds. Nor are you allowed to pay for this out of the minimum project equity you had to raise for your project. You had to go raise this as additional equity, and good luck giving anyone any security for their investment because you can’t pledge the project’s assets as collateral, either.

But that’s not the bad news.

The bad news is that, once you’ve paid all those fees, you might wait 50 years to get a loan guarantee closed. The DOE had no time limit, and typical wait times were 2 years. If this Program had been the only thing available to help vaccine development in this pandemic crisis, we might be waiting for years to get out of the lockdowns. Companies might have gone bust handling the fees associated with the loans.

Mark Riedy, general counsel for the American Fuels & Chemicals Coalition, said “This Program amendment is likely the largest win in the history of revising US federal government loan guarantee programs. The changes effected are very broad and can be further expanded and bettered through the inevitable rule-making process that will follow in 2021, as the new Administration is seated and gets up and running.”

Section 9010 represents the Title XVII Program changes, which amend and reform its Renewable Energy, Advanced Fossil Energy and Nuclear Energy subprograms, established through the Energy Policy Act of 2005, to defer the collection of fees and other expenses from applicant borrowers until financial closing, and to potentially reduce such fees, compress the time to financial closing and expand project eligibility. It also adds provisions regarding analysis by the Secretary of the Treasury, application status, outreach, coordination, and reports to Congress.

Section 9010 authorizes funding from fiscal year (“FY”) 2021-2025 for administrative and other expenses in the amount of $32 million for each fiscal year, and additional funding for FY 2021 in the amount of $25 million for administrative expenses not otherwise covered by fees collected from project applicant borrowers in order to reduce their fees payable to DOE. All fees, including the underwriting fees and the credit subsidy cost, are moved to at least financial closing and can be reduced at the discretion of the Secretary of Energy.