Amid the buzz about federal spending, the federal Department of Energy has a new boss for lending to projects that need to scale.
SunEdison founder Jigar Shah now runs the Loan Program Office, sparking hopes of a national strategy for climate-smart ventures.
Our reporter talked to former leaders and observers to size up what the office has done, and can do, to lever up promising companies.
What will be the next big energy frontier? It’s a question plaguing many environmental professionals, as we consider our race to a 100% clean energy economy. A question that occurs far less frequently (and yields fewer answers) is: how does the new frontier become the norm? Policy experts like Richard Kauffman, former New York State energy czar and advisor to Energy Secretary Steven Chu, have spoken of a lack of financing after a startup’s launch as a “Valley of Death”. How do we rapidly scale these nascent technologies, so that they may overcome the Valley of Death and become fully commercialized? It turns out the federal government’s DOE Loan Programs Office (LPO) exists to do just that: leverage around $40 billion of congressionally directed spending to fund the new, promising technology that the commercial markets won’t support.
After a moribund five years, LPO has vaulted to the top of many energy news outlets with the appointment of Jigar Shah, the clean energy entrepreneur who founded SunEdison and Generate Capital and served as co-host of the popular Energy Gang podcast, as Executive Director of the program. Upon publicly announcing the appointment, DOE Secretary Jennifer Granholm expressed her enthusiasm that the LPO “is back in business.” She elaborated: “I am ready to rev [LPO’s] engines back up so that we can spur the next generation of innovation and deployment.” Shah himself has demonstrated his belief in the office he now runs, describing LPO as “this bridge to bankability” for projects that cannot access traditional private-sector funding sources.
The LPO arranged loans for the first two electric vehicle manufacturing facilities, owned by Nissan and Tesla. It contributed to the advent of utility-scale solar after providing the capital for the first five utility-scale solar PV projects larger than 100 megawatts (MW) in the U.S. Despite this success, the LPO has been almost dormant for nearly ten years, hitting rock bottom during the Trump Administration, in which the President’s Budget repeatedly zeroed out all funding for the program and supplied funding primarily to only one project, the Georgia Power Vogtle nuclear project, which had actually been initiated by the previous Administration.
For Shah, the process of reviving the office may be more complicated than it seems. While LPO has a certain degree of leeway in interpreting its authorizing statute, according to some sources, major changes require the passage of new legislation by Congress. That’s a goal that many consider slow-going at best and insurmountable at worst. With the clock ticking on climate change, legislative deliberation is not exactly something Granholm and Shah can wait around for.
So, with all this promise and financial clout, how can policymakers and private companies take lessons of the past and move forward to capitalize on what could be one of the most influential existing programs at DOE (remember, no further congressional action is required to deliver loans under LPO) in driving the clean energy transition? Will Jigar Shah live up to the hype he has generated, and transform the dormant LPO into a prolific government office that truly sets off a clean energy revolution in the United States?
A Rocky History
The DOE Loan Program Office consists of three programs that finance large-scale clean energy and advanced transportation projects. It achieves this by issuing loan guarantees to advanced fossil energy (including carbon capture and sequestration, or CCS), advanced nuclear energy, and renewable energy and efficient energy; delivering direct loans via its Advanced Technology Vehicles Manufacturing (ATVM) wing; and awarding partial loan guarantees to tribal energy projects through its Tribal Energy Loan Guarantee Program. Perhaps the most infamous project associated with the LPO, and the reason for its downfall about ten years ago, is Solyndra in which the program issued roughly $500 million to a solar manufacturer based out of California in 2009. The project ultimately went bankrupt and critics capitalized on this perceived failure to deliver an onslaught of political attacks.
“The number one attack issue that candidate Romney used against President Obama was Solyndra,” said Peter Davidson, who served as Director of LPO from 2013 to 2015. “Over $80 million of negative campaigning went in. So, there was paralysis within the organization, and everybody wanted to steer clear of any mention of Solyndra and the Loan Program Office.”
The pattern reinforced itself. “The whole program had essentially been shut down, post-Solyndra,” continued Davidson. “There was no office, there was no Director, there were no loans, there was no loan processing.” “My mission,” he said, “was to restart the program, because we still had over $25 billion in loan authority [and] huge amounts of capital to be deployed for climate solutions.” Davidson and his team accomplished this via a two-pronged approach. The first was to instill confidence in the program again by initiating a public outreach operation to collect all the data from LPO’s portfolio and publish results. In doing so, Davidson’s team demonstrated that the program, on a debt basis, has actually contributed more money to the Treasury and taxpayers than it has cost them. The second was to, quite simply, start approving loans again. Before exiting LPO in 2015, Davidson led the office in approving the first loan for offshore wind, the Cape Wind Project, which ultimately was discontinued by the developer because of local opposition. In addition to that loan, the office put out additional ATVM loans and one nuclear loan.
Even with some emerging bipartisan enthusiasm for moving past Solyndra and reviving the LPO, Shah has other problems to address. For Title XVII, the program that funds nuclear, advanced fossil, and renewable energy projects, constraints and significant heartburn mark what can often be a lengthy process from initial application to delivery of a loan. Shah himself has lamented that the steps can take over a year, resulting in thousands of dollars paid to D.C. lobbyists to walk a borrower through the process. Others agree about this significant impediment. “The time factor is quite considerable,” said Kauffman. “When I was at DOE, I used to say it was like painting the Golden Gate Bridge. By the time you were done, you really needed to begin again because your due diligence might be a year out of date.”
The program has gone through a transformation, driven by internal interpretations of what can be done.
Another issue that arose from this timeline, he said, is that power purchase agreements (PPAs) had to be negotiated before borrowers knew whether or not they would receive a loan. This hindered the ability for some of the low-cost financing provided by LPO to be passed on to customers (i.e. the American public) in the form of lower electricity prices. That’s a significant issue with the timeline, then, in that the developer needs a higher level of certainty earlier in the process as they negotiate their PPAs. “The process is not optimized to lower the cost of renewable power to customers,” Kauffman said.
While application fees and timelines play a role in this heartburn, one of the greatest hurdles is the requirement that potential borrowers pay what is called a credit subsidy. The government established this provision to cover risk of estimated shortfalls in loan repayments. Specifically, the credit subsidy is calculated using the net present value of the long-term cost to the U.S. government of the loan guarantee. Using information about the borrower, LPO estimates payment shortfalls based on perceived risk – that is the credit subsidy cost, which must be paid in cash by the applicant. As part of President Obama’s recovery plan after the 2008 recession, Congress appropriated millions of dollars to cover the credit subsidy cost of potential borrowers. It has not appropriated additional money since.
“The same thing needs to happen in these stimulus bills,” said Davidson, referring to President Biden’s proposed stimulus package. The credit subsidy cost represents a particular challenge to smaller, newer developers who have higher perceived risk and can amount to millions of dollars required to be paid upfront. “So, it ranges completely on the credit condition of the borrower, which is not what we want,” continued Davidson. “That means the only people that get money are the big corporations.” Key to putting out a large number of smaller loans, as Jigar Shah has stated is his intention, will be alleviating some of the burden of the credit subsidies on these newer developers that don’t have as high credit.
Room for Change
Ideally, Shah can address some of LPO’s historic pitfalls internally without action from Congress by shifting the focus toward more deployment, getting a larger number of smaller loans out the door, and streamlining the application process. How doable is that, without legislation? In one former staffer’s eyes, it’s quite manageable. “The program has gone through a lot of transformation, primarily driven by internal interpretations, I would say, of what can be done,” said Sydney Bopp, a former LPO staffer. Indeed, Peter Davidson transformed the program’s outreach by taking a look at how LPO was interfacing with the public and crafting an accessible, positive story of LPO’s success, all without action from Congress. Davidson’s efforts have been picked up by news outlets, which now frequently allude to the fact that, despite some high-profile failures, LPO is actually operating at a net-positive.
Looking ahead, there are some key areas where Granholm and Shah can hit the ground running. In the early years, internal interpretation of LPO’s authorizing statute constrained staff’s ability to conduct rigorous outreach with private sector entities. As a go-around, staff began to convey information about LPO solicitations to state and local governments, who could then conduct outreach with the private sector. That internal guidance evolved over time to become more flexible. According to one former DOE official, staff at the program are now talking to upwards of one hundred companies a month and taking a much more proactive approach to engagement. Can Shah capitalize on this new leeway to boost involvement and interest from the private sector? It would certainly seem so.
As for deployment, Granholm and Shah have a great opportunity with the Advanced Technology Vehicles Manufacturing (ATVM) wing, as well as the newer Tribal Energy Projects program, neither of which is not subject to the same constraints as the Title XVII program for energy. ATVM loans do not have a “new technology requirement”, according to Davidson, so, in essence, LPO operates much more closely to a traditional lending institution in these cases. As the former Governor of Michigan, Secretary Granholm will be taking a close look at harnessing the power of LPO to jumpstart American manufacturing and put us on the path to American-made electric vehicles, and expect Shah to follow this lead. “There’s a tremendous opportunity for Secretary Granholm and for Jigar to use ATVM to help support American manufacturing, American manufacturing jobs, onshoring, reshoring all for the auto sector, which can go pretty far back into the auto supply chain,” said Bopp. This includes the battery supply chain and potentially critical material projects and rare earth processing, an effort that the Trump Administration actually started taking a look at in December 2020.
Considering this, an open question of course turns to whether ATVM can support EV infrastructure. Davidson expressed optimism at this. “ATVM can be a huge player in President Biden’s goals in electrification of the transport sector across the country.” While LPO hasn’t historically delivered loans to electric vehicle supply equipment (EVSE), this persistent barrier to vehicle electrification will undoubtedly spur interest in delivering loans to EVSE buildout. One area that will require congressional action, but that could be a game-changer, is a proposal to expand ATVM to medium- and heavy-duty applications. Currently the program can only fund light-duty projects, but a growing number of policymakers, Democrats and Republicans, are supportive of expanding its use. Legislation has already been introduced to that effect but faces a long and bumpy path to the President’s desk. Regardless, industry should be taking a hard look at ATVM and potential eligibility, as this program, in Bopp’s eyes, is “where [Granholm and Shah] can make the biggest impact right out the gate.”
An additional question is: which technologies stand to gain from a robust LPO led by Jigar Shah? “It lends at the frontiers, so where are the frontiers now that really are not being addressed adequately in the commercial markets?” Davidson specified. “And those are things like carbon capture and sequestration [CCS], some aspects of offshore wind, and certainly everything nuclear.” With more and more climate plans pointing to the necessity of carbon capture as a tool to limiting global temperature rise to 1.5 or even 2 degrees Celsius, accelerating the commercialization of CCS could be crucial. “It’s the perfect role and perfect timing for the Loan Program Office to play a role in accelerating carbon capture sequestration projects,” said Davidson. With some tweaks to Title XVII, he said, the Administration could get a whole lot more done.
It lends at the frontiers, and those are things like carbon capture and sequestration, some offshore wind, and certainly nuclear.
While some of the more ambitious changes may need to await congressional action, the lending capacity here (again, we’re talking billions of dollars) and the political will should not be overlooked, particularly with the promise of internal decisions that could smooth the process for smaller borrowers.
While some changes at LPO appear impossible without further direction from Congress, there’s clear reason for optimism. This comes from indication from actual LPO leaders and staff, as well as the political will and determination from Secretary Granholm and Jigar Shah. However, it is important to remember that as a taxpayer-funded entity, the Biden team needs to achieve buy-in from the American public. There’s no denying that LPO has had its shortfalls and one challenge that any Director of the program will face is how to change the narrative to move on from the demonization of the program after Solyndra and demonstrate not only its future promise, but what it has delivered during its roughly 15 years of existence.
While Davidson certainly set the program on a road to recovery in this manner, more can be done. “I think it’s important for LPO to be considered within the Department as part of the overall innovation cycle,” said Bopp. Given the high-risk projects for which the LPO exists, misses are inevitable. In this context, they can be analyzed to inform future decisions about R&D in the applied program offices. “Having it seen as ‘just deployment’ at DOE and not as part of the full Department is kind of a lost opportunity because there’s so much to learn from the projects that have succeeded or failed,” she concluded. Ultimately, as history has shown us, the politics surrounding LPO can make or break LPO’s future promise and Jigar Shah’s legacy as Executive Director of the program.