[Senate Hearing 111-11]
[From the U.S. Government Publishing Office]
S. Hrg. 111-11
LOAN GUARANTEE PROGRAM
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
TO
RECEIVE TESTIMONY ON THE CURRENT STATE OF THE DEPARTMENT OF ENERGY LOAN
GUARANTEE PROGRAM, AUTHORIZED UNDER
TITLE 17 OF THE ENERGY POLICY ACT OF 2005, AND HOW THE DELIVERY OF
SERVICES TO SUPPORT THE DEPLOYMENT OF CLEAN ENERGY TECHNOLOGIES MIGHT
BE IMPROVED
__________
FEBRUARY 12, 2009
Printed for the use of the
Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
BYRON L. DORGAN, North Dakota LISA MURKOWSKI, Alaska
RON WYDEN, Oregon RICHARD BURR, North Carolina
TIM JOHNSON, South Dakota JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana SAM BROWNBACK, Kansas
MARIA CANTWELL, Washington JAMES E. RISCH, Idaho
ROBERT MENENDEZ, New Jersey JOHN McCAIN, Arizona
BLANCHE L. LINCOLN, Arkansas ROBERT F. BENNETT, Utah
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
EVAN BAYH, Indiana JEFF SESSIONS, Alabama
DEBBIE STABENOW, Michigan BOB CORKER, Tennessee
MARK UDALL, Colorado
JEANNE SHAHEEN, New Hampshire
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
McKie Campbell, Republican Staff Director
Karen K. Billups, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Asselstine, James K., Managing Director, Barclays Capital........ 23
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Book, Kevin, Senior Vice President, Energy Policy, Oil &
Alternative Energy, Friedman, Billings, Ramsey & Company, Inc.. 18
Frantz, David G., Director, Loan Guarantee Program, Department of
Energy......................................................... 4
Karsner, Andy, Distinguished Fellow, Council on Competitiveness,
Former Assistant Secretary of Energy Efficiency and Renewable
Energy, Department of Energy................................... 10
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 2
APPENDIXES
Appendix I
Responses to additional questions................................ 51
Appendix II
Additional material submitted for the record..................... 61
LOAN GUARANTEE PROGRAM
----------
THURSDAY, FEBRUARY 12, 2009
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:03 a.m. in
room SD-366, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. Ok, why don't we get started with the
hearing? Thank you all for being here. The purpose of this
hearing is to focus on the Department of Energy's Loan
Guarantee Program.
This is an exceptionally busy time for all of you. I
appreciate you making the effort to be here and help us
understand the challenges we face in getting these critical
energy related technologies deployed and the role that the Loan
Guarantee Program may play in that effort. Particularly I'd
like to thank David Frantz for coming here today and to give us
the views from the Department, particularly as those views have
shifted in the last month or two.
It's a bit unfair to ask the new administration to address
the implementation problems of this program since they
obviously just came to town and took charge in the last month.
But I believe this is a powerful tool for meeting our energy
security needs. I think it would be a mistake for us to
postpone making needed adjustments any longer than necessary.
Senator Murkowski and I had a chance to speak with
Secretary Chu yesterday. I believe he shares that view. He
indicated that the Department is going to do all it can to move
ahead with a generation of green jobs and beginning the re-
orienting of the economy to fit our national needs as they see
it better. This program is vital to that.
It was an encouraging meeting. I'm satisfied that the
Secretary understands the difficult task ahead and the urgency
that will be required to address it. So we look forward to a
constructive partnership between this committee and the
Department of Energy in getting some of these problems
resolved.
There are a lot of different challenges that we face
related to our energy needs. Putting a price on CO2
will help. I believe policy such as renewable electricity
standard will help. But we need to explore every possible
option. Clearly putting in place an effective Loan Guarantee
Program is part of that.
We have many professionals in the Department of Energy who
have seen any number of potentially world changing technologies
both within our laboratories and other affiliated research
institutions. The gap that seems to exist is in navigating
those technologies through the so called Valley of Death to
widespread commercial deployment. The Loan Guarantee Program we
put in law in 2005 was designed to deal squarely with that
problem. But somewhere along the way the guiding principle of
speed and scale were lost.
I believe the President and Secretary Chu are bringing the
necessary will and sense of urgency to the problem that I
would. I think we need to still ask ourselves if the structure
of the program is what it should be in order for it to succeed.
Can the Department take the necessary risks? The risks that the
private sector is unwilling to take or unable to effectively
price in order to enable these technologies to get over these
initial hurdles and become commercially useful in our economy.
Will they be able to act in a sufficient scale to reduce
the deployment costs that keep these technologies from
effectively competing with entrenched current technologies? So
that's the challenge before us. I think it's an issue we want
to address. If we're able to do an energy bill here in the next
couple months in the Senate we clearly want to be sure that we
are doing everything we can identify to do to make this a
viable part of the solution.
So let me turn to Senator Murkowski for her comments.
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you, Mr. Chairman. I had
envisioned a standing room only crowd this morning on the topic
of the Loan Guarantee Program. Everywhere I go people want to
talk about it. They all have their opinions. I think you and I
would agree that most of those opinions are not exactly
favorable in terms of what has been happening.
We recognize the importance of this program. It certainly
received a great deal of attention over this past year from the
standpoint of global climate change. The Loan Guarantee Program
is an excellent example of the do everything approach. It's
going to help us develop the 21st century energy system that I
think we all recognize our country needs.
The Loan Guarantee Program has been dismissed by some as
merely a Loan Guarantee Program for the nuclear industry. But I
don't believe that is the case. The title 17 program provides
support for a broad portfolio of clean energy technologies,
everything from energy efficiency, to renewables, to pollution
control, vehicle technology, advanced nuclear and carbon
capture projects, truly the whole gamut.
The Loan Guarantee Program was established 4 years ago. But
I think we can see the benefits today as we are trying to
rebuild our battered economy. This program supports the
projects that promise stable, high paying energy sector jobs.
Will help rebuild core infrastructure upon which our future
prosperity depends.
I would state that we are not risking taxpayer dollars with
this program. Instead the fees that are paid by loan guarantee
recipients are designed to cover the costs of potential project
defaults. The energy sector obviously needs this program as
evidenced by just the voluminous number of requests that have
been submitted to the Department of Energy.
We have got a limitation of $42 billion for the program.
Yet DOE has received more than $120 billion in applications.
The solicitations that have been closed so far have been
oversubscribed by two to five times. I think that speaks to the
interest to the demand.
I am hopeful that the renewable energy solicitation will
receive similar interest. I think we have good reason to
believe that it will. Certainly the financial crisis that is
facing the country at this time will only increase the demand
for credit access under this program.
We are here today to discuss the deployment of the Loan
Guarantee Program along with the possible ways to improve upon
it. As the chairman mentioned in our conversation yesterday
with Secretary Chu, when the question was asked, ``What would
you like to hear from the Loan Guarantee hearing?'' He wants to
hear the suggestions from the consuming perspective out there.
Secretary Chu wants to know what it is that we can do
better. This is our opportunity. I would hope that the
witnesses who have been asked to testify here today will be
free with your comments and your suggestions and your
criticisms as well. We should let this be a constructive use of
everyone's time here.
I think there are two points that we need to keep in mind
as we move forward.
First, as I mentioned there is an urgent need for these
services, particularly in light of the credit crisis as we
face. We should ensure that the current programs proceed as
expeditiously as possible. If there are road blocks present, we
need to remove them.
Where the rules are ambiguous we need to clarify them. If
there is a desire to broaden the current program to provide
additional services or achieve policy objectives than it should
be done in a way that does not cause delays in the disposition
of the current applications. We have much invested in the
pipeline. If we're going to be looking to something else, we
should not cause further delay for those that have already
applied.
Second, we have to ensure equitable treatment of the entire
portfolio of clean energy technologies. We shouldn't be sitting
here now determining who the winners and the losers are. We all
have our personal visions of the future and preconception of
what is possible. But it's the complex interaction of market
forces and research and innovation that will determine the
details of our energy future. Our job is to encourage the
pursuit of the greatest diversity of options that are out
there.
Again, Mr. Chairman I want to thank you for calling this
hearing this morning. I look forward to the comments from the
witnesses.
I know that Mr. Asselstine has given testimony before this
committee before. I thank you for that.
Mr. Book and certainly Mr. Karsner have been frequent
guests before the committee. We welcome you back.
Mr. Frantz, it's kind of surprising that this is just your
first testimony before the committee. But I welcome you as well
and look forward to your comments and suggestions as we move
forward. Thank you, Mr. Chairman.
The Chairman. Thank you very much. Let me just briefly
introduce again the panelists. Then we'll take six or 8 minutes
and have each of you summarize the main points you think we
need to understand. Then we'll have questions.
David Frantz is the Director of the Loan Guarantee Program
at the Department of Energy. He will lead off.
Andy Karsner is beside him. He's now a distinguished fellow
with the Council on Competitiveness. But formerly was Assistant
Secretary of Energy for Efficiency and Renewable Energy and a
frequent testifier at our committee which we appreciate.
Kevin Book is Senior Vice President and Senior Analyst on
energy policy issues with Friedman Billings Ramsey and Company
in Arlington, Virginia.
James Asselstine is the Managing Director of Barclays
Capital in New York.
Thank you all very much for being here. David, why don't
you just go ahead and start. We'll just go across the table
there.
STATEMENT OF DAVID G. FRANTZ, DIRECTOR, LOAN GUARANTEE PROGRAM,
DEPARTMENT OF ENERGY
Mr. Frantz. Thank you very much, Mr. Chairman and members
of the committee for inviting us here today to speak to you and
bring you up to date on the current status of the title 17 Loan
Guarantee Program of the Department of Energy.
Mr. Chairman, before I start I would like to extend to you
a personal thanks for your continued involvement and
constructive suggestions as well as the other members of the
committee. Your help has been very instrumental as we have
mobilized and worked to stand up this exciting program for the
U.S. Government. I also would like to just mention
parenthetically that I'll devote my oral comments principally
to bringing you up to date on the program. I would be happy to
discuss specific suggestions for improvement or changes in the
question and answer period to be more responsive and direct to
your interests.
I do want to ensure you, this program is an urgent priority
for Secretary Chu, as you know from your meeting yesterday, as
we face an unprecedented economic crisis that demands
unprecedented action. Secretary Chu is personally reviewing the
program, and has committed to giving this program the
attention, departmental resources and oversight it needs to
succeed.
The Loan Guarantee Program has made progress over this past
year. Nevertheless, Secretary Chu has directed us to accelerate
the process significantly. One immediate priority for Secretary
Chu is simplifying and streamlining the existing application
and evaluation systems. There is every reason to believe we can
do so in order to process loans in less time while still
insisting on a high standard of accountability and protecting
the taxpayers interests.
To make this transformation, Secretary Chu has tasked us to
draw on the experience and success of the private sector as
well as other similar agencies in the U.S. Government who have
administered similar programs. As you well know, the Department
of Energy Loan Guarantee Program can be divided into five parts
representing the five issued solicitations. I'll review those
just very briefly for you here.
The 2006 Mixed Technologies Solicitation closed on November
19, 2008, and we are currently evaluating 11 projects. Getting
these loans funded quickly represents the No. 1 priority of our
program.
The Front-End Nuclear Power Facilities Solicitation closed
on December 2, 2008, with the receipt of two applications.
The Nuclear Power Facilities Solicitation closed on
December 19, 2008, and we are currently evaluating 15
applications for ten specific projects in this area.
The Part One applications for the Fossil Energy
Solicitation were due on December 22, 2008. We received eight
applications under that solicitation. We have, just as of
yesterday, completed our first consultations with each of those
eight applicants.
Finally, the Part One applications for the Advanced
Renewable Solicitation are due on February 26, 2009. Senator
Murkowski referred to that in her comments. We are yet to see
the results of that. I can comment on what we do know at this
stage. But the applications are not in. So that will be of
great interest to us when we close at the end of this month.
I would like to briefly comment on the status of the FY
2006 solicitation because they are our highest priority, and to
hopefully clarify some misinformation that has been in the
public domain.
The LGPO issued a solicitation in August 2006 for pre-
applications only, not full applications. The solicitation was
issued under total loan authority for $4 billion which remains
available until used, essentially for us no year funding. This
was done to determine market interest, although the program had
not yet received an appropriation for standing up the program
office.
In April 2007, administrative funds were appropriated, and
I was hired shortly thereafter from the Overseas Private
Investment Corporation. In October 2007, we issued the final
rulemaking and selected 16 projects deemed financially and
technically qualified from a field of 143 pre-applicants. We
invited those 16 to submit full applications in accordance with
our Final Rule which was published in October of 2007.
Consultations were conducted with each of these applicants to
assist in the application requirements and as well to introduce
them to our policies and procedures for going forward.
Applications from this group of 16 were not immediately
forthcoming. Therefore, the Loan Guarantee Program was
compelled to establish a closing date of November 19, 2008, for
submitting completed applications. As of the closing date we
have received 11 applications out of the 16 that were invited
to apply. So for us essentially, the program went live on
November 19, 2008.
To date, these applications have been reviewed for
completeness, including National Environmental Policy Act (NEPA
compliance issues, and priority due diligence has commenced on
several of these projects identified as our potential early
movers. The LGP is placing the highest priority on these
projects through the due diligence and decision process to
issue loan guarantees this year. The remaining projects require
Environmental Impact Statements, and I think as everyone in the
room is aware, that is going to take a considerable amount of
time. So we are looking for those projects to be closing some
time during the year of 2010.
In the interest of time, I will not go into further
discussion of the FY 2008 Solicitations as I would prefer to
answer or respond to questions that the committee may have with
respect to those specific solicitations and your interest in
each of those.
I would like now to turn very briefly to the staffing
because I think this is a great concern and interest to the
committee. As of today, a cadre of seasoned professionals with
extensive energy experience, principally in project finance,
have been hired. Currently, we have 18 full-time equivalent
Federal employees on board and they are augmented by a seasoned
group of 11 contractors for a total of 29 people. As of
yesterday, a graduate engineer joined us from within the
Department of Energy. So we are fully now at 30 people on the
permanent staff. The Loan Guarantee Program is continuing to
recruit and hire qualified personnel of the highest caliber, as
expeditiously as possible. I might note that while operating
under the terms and conditions of the FY 2009 Continuing
Resolution, the Loan Guarantee Program is constrained in its
ability to achieve the necessary staffing requirements to
complete the due diligence and credit underwriting for those
applicants that we are currently working on. We are hopeful
that the requested funding will be appropriated by March so
that we can avoid any delay in our activities.
I am very proud of the staff as it has accomplished a
prodigious amount of work in a relatively short period of time
while certainly keeping within the ``best practices'' of our
industry. I would also emphasize, as in any organization, we
have learned much and desire to increasingly do better.
We know the industry is anxious for us to approve the
initial loan guarantees. We are committed to an effort that
produces quality loan guarantees while being mindful of
responsible due diligence efforts throughout the vetting
process. We are particularly mindful of the earlier experience
of the Department of Energy's Loan Guarantee Program in the
latter 1970s and to learn from those experiences. Then as now,
the economic uncertainty requires us to be very diligent and
careful in our credit underwriting activities.
In conclusion, we will move as quickly as possible to
implement the program understanding the importance of
scrupulously following the plan established by Congress. While
the Loan Guarantee Program faced significant challenges in the
first few years, clearly today we are facing new circumstances
with a new administration. There certainly is a new sense of
urgency to make these investments.
We are profoundly aware that we are in a position to make
an immediate contribution to assist in the current economic
crisis.
Thank you very much for this opportunity to appear before
you. I will defer to answer questions as appropriate.
[The prepared statement of Mr. Frantz follows:]
Prepared Statement of David G. Frantz, Director, Loan Guarantee
Program, Department of Energy
Mr. Chairman and members of the Committee, thank you for this
opportunity to be before you today to discuss the Department of
Energy's Title XVII Loan Guarantee Program and to provide you with the
current status of the program and the progress we have made to date.
First, I would like extend my appreciation to you Mr. Chairman and
the other members of the Committee for your continued support and
interest in the effective development of the Title XVII Loan Guarantee
Program.
introductory statement
This program is an urgent priority for Secretary Chu as we face an
unprecedented economic crisis that demands action. Secretary Chu is
personally reviewing the program, and has committed to giving this
program the attention, departmental resources and oversight it needs to
succeed while ensuring that taxpayer interests are protected.
This is consistent with President Obama's commitment to acting
boldly and urgently to put Americans back to work and reinvest in our
economy. With more than 600,000 workers losing their jobs last month
alone, Secretary Chu is committed to making this program work better
and faster for the American people. And he is determined to move just
as quickly to implement the important new energy investments included
in the President's economic recovery plan.
The Loan Guarantee Program (LGP) has made progress over this past
year. Nevertheless, Secretary Chu has directed us to accelerate the
process significantly while maintaining appropriate evaluation and due
diligence to protect taxpayer interests. We are moving to significantly
shorten the cycle time from application to loan guarantee to ensure
good projects get funded quickly. We also want to increase the
transparency in the process to attract more good projects and to ensure
the American people that the federal loan guarantees create jobs and
contribute to long-term economic growth and competitiveness.
One immediate priority for Secretary Chu is automating, simplifying
and streamlining the existing application and evaluation systems. There
is every reason to believe we can so that we can process loans in less
time while still insisting on a high standard of accountability, and
protecting taxpayer interests. To make this transformation, Secretary
Chu has tasked us to draw on the experience and success of the private
sector and other agencies who have administered similar loan
guarantees.
Let me quickly review with you the current status of the loan
programs. DOE will provide additional information as warranted as we
implement the program.
As you well know, the DOE Title XVII Loan Guarantee Program can be
divided into five competitive solicitations. The 2006 mixed
technologies solicitation closed in November 2008. We are currently
evaluating 11 projects for $4.0 billion in loan authority. Determining
which of these projects represents a good federal investment and moving
forward to closing on those good projects quickly represents our number
one priority. The front-end nuclear power facilities solicitation
closed in December 2008. We are currently evaluating two proposals for
$2 billion in loan authority. The first nuclear power facilities
solicitation also closed in December 2008. Here we are evaluating 15
proposals for $18.5 billion in loan guarantee authority. The fossil
energy advanced technologies solicitation Part I applications were due
on December 22, 2008. We are evaluating eight projects for $8 billion
in loan guarantee authority. The advanced renewables solicitation
currently has $10B in loan guarantee authority and is scheduled to
close in February 2009 with the exception of the large scale renewable
projects which will close in April 2009. We are putting in place
processes to evaluate and fund acceptable projects on an expedited
basis, while ensuring that taxpayer interests are protected. To
expedite these loans, we are working expeditiously on the credit self-
pay process, to reduce the paper work required, to automate the
application process. The LGP is also working to expedite the NEPA
review for these projects by coordinating with the applicants early in
the process to ensure they submit the necessary information which
allows for early determinations regarding the level of NEPA review
required. We are also dependent on the continuing resolution to fund
project evaluation, so we will monitor the upcoming 2009 appropriation
action closely.
status of fy 2006 solicitation (de-ps01-06lg00001)
The LGP issued a solicitation in August 2006 for pre-applications
only. The solicitation was issued under a total loan authority for $4.0
billion which remains available until used. This was done to determine
market interest although the program had not yet received an
appropriation for standing up the program office or appropriation
authority to issue loan guarantees. On February 15, 2007, the
Continuing Appropriations Act for 2007 was signed into law. This law
provided the final necessary authority, under the Federal Credit Reform
Act, for DOE to implement the Program (including administrative expense
funding). In this Act, Congress also prohibited DOE from entering into
any loan guarantee agreements before program regulations had been
published. I was hired shortly thereafter from the Overseas Private
Investment Corporation. Two months after I arrived, we issued the final
rulemaking and selected 16 projects deemed financially and technically
qualified from 143 pre-applicants and invited those 16 to submit full
applications in accordance with the Final Rule. Consultations were
conducted with each applicant to assist in the application requirements
as well as policies and procedures to be followed.
Applications from this group of 16 were not immediately
forthcoming. Therefore, the LGP was compelled to establish a closing
date of November 19, 2008, for submitting completed applications. As of
the closing date, the LGP received 11 applications out of the 16 that
were invited to apply. These applications represent projects using
renewable energy, fossil energy, and energy efficiency and reliability
technologies.
To date, the applications have been reviewed for completeness,
including NEPA compliance issues, and priority due diligence has
commenced on a total of seven projects identified as potential early
movers. The LGP is placing the highest priority on these projects
through the due diligence and decision process for an ultimate
recommendation to the Secretary on these applications this year. Due to
the size, complexity, and likelihood of significant environmental
effects, the remaining projects require Environmental Impact Statements
(EIS) which means the projects would not reach a final decision until
2010.
fy 2008 solicitations
Pursuant to the requirements of the Consolidated Appropriations
Act, 2008, the LGP submitted a ``FY 2008 Implementation Plan'' to the
Congressional Appropriations Committees in April 2008, allocating $38.5
billion loan guarantee authorization consistent with Congress's
explanatory statement in report language accompanying the Act and with
the President's FY 2009 Budget. This authorization presently expires on
September 30, 2009. When the mandated 45 day Congressional review
period ended, the LGP issued three solicitations on June 30, 2008
covering (1) nuclear facilities for the ``front-end'' of the nuclear
fuel cycle, (2) nuclear power facilities, and (3) energy efficiency,
renewable energy, and advanced transmission and distribution
technologies. On September 22, 2008, the LGP issued a subsequent
solicitation for advanced fossil energy technologies. Given the
complexity of the solicitations, a two part application process was
followed to assist clients' responsiveness to the full application
requirement as directed in the LGP Final Rule.
Let me briefly review the status of each of these solicitations and
applications received to date.
front-end nuclear power facilities solicitation (de-foa-0000007)
As of the Part II submission deadline of December 2, 2008 for
applications supporting Front-End Nuclear Facility projects, the LGP
has received two Part II applications to support two different Front-
End Nuclear Facility Projects. The LGP is in the process of completing
its due diligence on both projects with the expectation of having a
final determination in the near future.
nuclear power facilities solicitation (de-foa-0000006)
As of the Part II submission deadline of December 19, 2008 for
applications supporting Nuclear Power Facilities, the LGP has received
15 Part II applications for 10 specific projects for federal loan
guarantees.
In processing the Nuclear Power Facilities applications, DOE has
applied a ``self-determinant'' system largely predicated upon each
applicant's ``readiness to proceed'' as well as the overall financial
strength of the candidates. Throughout the process, we have been in
communication with the applicants, sharing their strengths and
weaknesses as well as identifying a relative ranking compared to other
applicants. After two ranking reviews we are focusing our efforts among
those applicants most qualified to proceed. We are initiating full due
diligence among a selected number of the applications.
It is important to note that we cannot enter into loan guarantee
agreements relative to any of the projects until the Nuclear Regulatory
Commission has issued the Construction and Operating Licenses (COL)
which are expected to begin being issued in 2011.
fossil energy advanced technologies solicitation (de-foa-0000008)
As of the application submission deadline of December 22, 2008 for
fossil energy advanced technologies, the LGP received eight Part I
applications supporting eight different projects. Two of the projects
are advanced coal based power generation and the balance are industrial
gasification projects focusing on coal to liquids, petcoke to liquids,
petcoke to synthetic natural gas (SNG) and coal to SNG.
Part II application submissions are due March 23, 2009. In the
meantime, the LGP is in active consultations with the applicants to
determine overall credit worthiness, ``readiness to proceed'', and
environmental benefits.
energy efficiency, renewable energy, and advanced transmission and
distribution technologies solicitation (de-foa-0000005)
The application deadline submission date for the energy efficiency,
renewable energy and advanced transmission and distribution
technologies solicitation is February 26, 2009. The deadline for Part
II applications for large-scale integrated renewable projects is April
30, 2009. The LGP is fully prepared to move expeditiously as possible
yet in a careful deliberate fashion to bring those projects identified
as early movers to the due diligence and approval process.
staffing
As of today, a cadre of seasoned professionals with extensive
energy experience, principally in project finance, have been hired.
Currently, 18 full-time equivalent employees are on board and they are
augmented by 11 contractors for a total of 29 people. The LGP is
continuing to recruit and hire qualified personnel of the highest
caliber, as expeditiously as possible, to complete the project
evaluation, environmental compliance with a focus on NEPA, due
diligence, credit underwriting and monitoring and oversight activities.
I might note that while operating under the terms and conditions of the
FY 2009 Continuing Resolution, the Loan Guarantee Program is
constrained in its ability to achieve the necessary staffing
requirements to complete the due diligence and credit underwriting for
those applicants from the 2008 solicitations. We are hopeful that the
requested funding will be appropriated by March so that we can avoid
delaying the evaluation efforts.
I am very proud of the staff as it has accomplished a prodigious
amount of work in a relatively short period of time while certainly
keeping within the ``best practices'' of our industry.
I would like to emphasize to the Committee that we represent
entirely new skill sets, including project financing, credit
underwriting and risk analysis to the Department's personnel force. We
have striven to assimilate ourselves efficiently within the Department.
In addition, we have aggressively reached out to establish interagency
working relationships as we have broken new ground in the
implementation of this important program.
As in any new organization, we have learned much and desire to
increasingly do better. We know the industry is anxious for us to
approve the initial loan guarantees. We are committed to an effort that
produces quality loan guarantees while being mindful of responsible due
diligence efforts throughout the vetting process. We are particularly
mindful of the earlier experience of the Department's Loan Guarantee
Program in the latter 1970's and to learn from those experiences. Then
as now, the economic uncertainty and the significant risk to taxpayers
require us to be very diligent and careful in our credit underwriting
activities.
Since the receipt of completed applications in November 2008, the
LGP staff has focused on expediting necessary and essential processes
with the objective of issuing well structured loan guarantees to
technically and financially sound projects.
conclusion
In conclusion, we recognize the sense of urgency and will move as
quickly as possible to implement the program while ensuring that the
taxpayer's interests are protected. We also understand the importance
of following the Congressional report language in the Consolidated
Appropriations Act of 2008 requiring an Implementation Plan as well as
the conduct of an open and transparent competitive process for the
solicited sectors.
I appreciate the opportunity to appear before you to present these
comments. I will be happy to take any questions that the members of the
Committee may have.
The Chairman. Thank you very much.
Mr. Karsner, go right ahead.
STATEMENT OF ANDY KARSNER, DISTINGUISHED FELLOW, COUNCIL ON
COMPETITIVENESS, FORMER ASSISTANT SECRETARY OF ENERGY
EFFICIENCY AND RENEWABLE ENERGY, DEPARTMENT OF ENERGY
Mr. Karsner. Thank you, Mr. Chairman, Senator Murkowski,
distinguished members of the committee. It's a privilege to
have the opportunity to appear before you today to discuss the
critical need to rationalize Federal Government support for
deployment of clean energy technologies. As a former Assistant
Secretary of Energy I had the honor of appearing before this
committee on numerous occasions and working closely with the
members and their staff to craft meaningful and enduring
bipartisan legislation. So I'm especially pleased and honored
to return to testify on this important matter.
Mr. Chairman, the intent of the hearing is to examine the
progress of DOE's Loan Program. My former colleagues at DOE
including this fine gentleman who just testified, Director
David Frantz, are dedicated, patriotic, public servants who've
invested very long hours away from their families and friends.
Are sincerely and personally committed to standing up this
program under enormous constraints and very long odds.
I believe that the painfully slow and unacceptable rate of
progress in issuing the loan guarantees substantially reflects
institutional barriers, organizational intransigence and
interagency, bureaucratic dysfunction that can only be overcome
by a new entity that permanently leaves behind the existing
legacy management systems. However even as the new and
important energy title begins to take shape this year I would
strongly encourage Congress to do whatever is necessary to
immediately jump start the existing program. Give Secretary Chu
and Director Frantz the necessary tools to strengthen their
hand in reforming the rules of implementation and the statute
if necessary.
Such reforms would immediately include eliminating the
upfront fees, lifting the arbitrary deadlines of application
submissions and addressing regulatory barriers to project
development. Loan guarantees should be offered through an open
window with rolling applications based upon available capacity
to fund on a timely basis.
Second, the fees placed upon renewable energy projects, in
particular, are artificially high, disproportionate and
unreasonable. The title 17 program was elegantly written to
allow either appropriations to cover the credit subsidy cost or
for applicants to self pay their own cost in relation to the
project. Conventionally to encourage competition amongst the
larger pool of applicants and to stimulate greater interest in
the energy industry and the participants these fees would be
collectable upon closing of the transactions and simply rolled
into the project cost. The present method of asking applicants
to pay exorbitant sums for the privilege of filing applications
that empirically linger for years with no predictable pathway
or time table to a financial closing is unacceptable at best
and attracts the wrong applicants at worst.
Finally, in order for clean energy projects to be
successfully brought online in a timeframe that supports the
President's stated goals. DOE will need policy and expanded
statutory tools to expedite citing, permitting and grid
integration that is deemed to be in the national interest. Even
if we are able to disperse financing from Federal loan
guarantees on a timely basis, we will likely fall short of our
national objectives if we fail to substantially reform Federal
eminent domain authority and establish environmental review
waivers over transmission and clean energy generating
facilities that enable the reduction of greenhouse gas
emissions under the terms of the statute.
All of the effort to undertake and accelerate the Loan
Guarantee Program may be rendered mute if we fail to
comprehensively deal with the protracted and litigious citing
and permitting obstacle courses that these projects face.
Ultimately undermine America's best interest. Even if it
requires modification of the existing statute itself or FICRA,
DOE must be empowered to rectify on an emergency basis the
obvious deficiencies that are barriers to disbursement funds
and new construction even as a clean energy bank is established
in parallel.
Mr. Chairman, in the last Congress you introduced
legislation to address this issue. I applaud your strong,
bipartisan leadership along with that of Senator Murkowski in
identifying the need for systemic change and making it a
priority for this committee and this Congress. In addition I
also want to thank Senators Dorgan and Bennett who've been at
the forefront, working hard to expand an enhanced loan
guarantees in the current stimulus package.
Despite the continued bureaucratic obstacles placed in
front of the program and the good people that run it, it
undoubtedly remains one of the most transformative, cost
effective and immediate ways to stimulate domestic, clean
energy development. This committee's bipartisan leadership on
the matter is deeply appreciated by all those in the clean
energy community. I look forward to continue to support these
efforts as drafts are promulgated.
In September the Council on Competitiveness explicitly
endorsed the creation of a clean energy bank to provide debt
financing and drive private investment in the development of
sustainable energy solutions and their supporting
infrastructure. Then Secretary Chu was a council member and was
a key voice in putting forward these recommendations. I should
also note that while serving as Assistant Secretary I met with
many groups across the political spectrum who are pursuing
institutional reform of DOE's outdated capacities through a
clean energy bank.
Prominently amongst these are the Center for American
Progress, led by John Deutsch and John Podesta.
The MIT Energy Task Force, led by Dr. Ernie Moniz and
Melanie Kenderline.
The United States Chamber of Commerce, led by now National
Security Advisor General James Jones and my former colleague
Assistant Secretary Karen Harbert.
The Secure America's Future Energy Group, led by CEO of
FedEx Fred Smith and General P.X. Kelley.
It's notable that all these individuals have served in
appointed positions directly impacting energy technology and
national security.
I am here testifying today before the committee because of
my strong belief that our current energy institutions are not
sufficiently agile or equipped with the capability to
promulgate. To deploy solutions at a pace or a scale
commensurate with the magnitude of the challenges that we
currently face. Let me be perfectly clear. The United States
Department of Energy, under its present constraints in its
present form, is inadequate to satisfy the mission of national
security for which it originated and for which we now aspire it
to perform.
The proposal of a quasi-governmental agency focused on
clean energy financing rather than clean energy research and
development would be a transformational change. But it is not a
novel one across the U.S. Government. Indeed our government is
already doing this for other priorities that we have be it
export, trade, student loans or development of the Third World.
As many of you know before entering government service I
was in energy infrastructure developer, as I am now, then
specializing in emerging markets project finance. I can tell
you from personal experience, as Director Frantz can from his
background at OPEC. That if I wanted to build a renewable
project using the balance sheet of the Federal Government that
the taxpayer is already on the hook, on a revolving basis for
any of the technologies under the portfolio that I recently
managed.
Meaning that if I wanted to go into the EX-IM bank on any
day of the week and get a loan guarantee up to 105 percent to
project finance a biomass project, for example in North Africa,
I could do that, or if I wanted to co-fund or arrange equity
with David, when he was at OPEC or a direct loan, I could do
that. If I wanted walking around money for a feasibility study
up to $500,000 I could go to the Trade Development Agency and
do that. All for the same technology projects with the one
caveat, that they not be built within the borders of the United
States of America.
We have got to align our priorities. Reorganize our
institutions to face down these problems. Because our problems
are not merely qualitative, they are quantitative. We have to
establish credible metrics and milestones to move forward and
heighten the probability of achieving these goals.
This administration's plan to double renewable energy in
the next 36 months, for example, is ambitious. But I believe it
is achievable. I would go further and say it is doable. It is
desirable if we move with urgency in orienting the government's
nexus with the private sector in a manner that can catalyze
unprecedented, continuous, consistent, capital formation.
This concludes my comments, Mr. Chairman. I'd be pleased to
answer any questions you may have.
[The prepared statement of Mr. Karsner follows:]
Prepared Statement of Andy Karsner, Distinguished Fellow, Council on
Competitiveness, Former Assistant Secretary of Energy Efficiency and
Renewable Energy, Department of Energy
Mr. Chairman, Senator Murkowski, and Members of the Committee, it
is a privilege to have the opportunity to appear before you this
morning to discuss the critical need for rational federal government
support for the deployment of clean energy technologies. As the former
Assistant Secretary of Energy Efficiency and Renewable Energy at the
Department of Energy, I had the honor of appearing before this
committee on numerous occasions and working closely with members and
their staffs to craft meaningful bipartisan legislation. I am pleased
and honored to be returning to testify on this important matter.
Since leaving government service, I have been named a Distinguished
Fellow for the Council on Competitiveness. The Council is the only
place where CEO's, labor leaders, National Laboratory directors, and
university presidents are working together to ensure that Americans
prosper in an increasingly challenging global economy. Because energy
transformation is fundamental to the mission of economic development
and competitveness, the Council has launched an Energy Security,
Innovation & Sustainability Initiative (ESISI) designed to enhance the
business case for sustainable energy solutions, and ultimately harness
market forces to transform our nation's energy production and use.
Mr. Chairman, the intent of this hearing is to examine the progress
of DOE's loan guarantee program. I would venture a guess that the
examination is not a lengthy one. Despite the need for a bridge between
private capital and public priorities, despite the importance of
accelerating market penetration for clean energy technologies, despite
the clear emphasis that Congress has placed on loan guarantees, very
little progress has been made since the Energy Policy Act was signed
into law in almost four years ago. Not a penny of the more than $42
billion in authority has been used. It is not my intent to name names,
or to blame individuals. My former colleagues at DOE are dedicated
public servants who have invested long hours and are sincerely
committed to standing up this program. Rather, I believe that the
painfully slow and unacceptable rate of progress on loan guarantees
substantially reflects institutional barriers, organizational
intransigence, and bureaucratic dysfunction. The present artificial and
unfortunate barriers to successfully administering the program in a
predictable, transparent, objective, and timely manner, as Congress and
this Committee had originally intended when it authored Title XVII into
law, are a direct result of these deficiencies, but they are
correctable. Accordingly, even as a new and important Energy Title
begins to take shape this year and looks to create a Clean Energy Bank
reporting to the Energy Secretary to succeed and supplant the present
program, I would strongly encourage Congress to do what is necessary
immediately to jump start the existing program and give Secretary Chu
necessary tools that strengthen his hand in reforming the rules of
implementation.
Such reform would immediately include eliminating the upfront fees
and lifting the arbitrary deadlines of application submissions. A loan
guarantee program that is conducted through random, discrete
solicitations in no way correlates to the ongoing development of
technology. Rather, the federal financing mechanisms for explicit
policy purposes should be offered through an open window with rolling
applications based upon available capacity to fund on a timely basis.
The fees placed upon renewable energy projects are artificially high
and unreasonable, and are unduly high hurdles that prevent the good
projects from coming forward. The statute was elegantly written to
allow either appropriations to cover credit subsidy costs or for
applicants to self-pay the costs in relation to their project.
Conventionally, were DOE operating in a user-friendly mode, seeking to
encourage competition among a larger pool of applicants with greater
interest in the energy industry, these fees would be collectible upon
closing of the transactions and rolled into the project costs. The
present method of asking applicants to pay exorbitant sums for the
privilege of filing applications that empirically linger for years with
no predictable pathway or timetable to closing is unacceptable at best
and attracts the wrong applicants at worst.
In order for clean energy projects to be funded, constructed and
successfully brought online in a timeframe that supports the
President's stated goals, DOE will need new policy and expanded
statutory tools to expedite siting, permitting and grid integration
that is deemed to be in the national interest. Even if we are able to
disburse financing from federal loan guarantees on a timely basis, we
will likely fall short of our national objectives if we fail to
substantially reform federal eminent domain authority and establish
environmental review waivers over transmission and clean energy
generating facilities that enable reductions in greenhouse gas
emissions under the terms of the statue.
All of the efforts undertaken to accelerate the loan guarantee
program may be rendered moot if we fail to comprehensive deal with the
protracted and litigious sitting and permitting obstacle course that
undermine American com in modernizing its national grid aspirations for
a robust clean energy marketplace. The sighting and permitting process
for new, greenfield projects of any kind in the United States, and
particularly for large scale clean energy projects, presently and
unattractively inhibits the development process beyond norms seen
anywhere in the world. DOE must be empowered to rectify, on an
emergency basis, the obvious deficiencies that are barriers to
disbursement of funds and new construction even as institutional and
organizational changes enable the establishment of a Clean Energy Bank
in parallel.
It is my view, having worked meticulously in support of every
effort to successfully stand up and make effective the DOE Loan
Guarantee Program, that this mission can only be solved by modernizing
and reorienting the government's energy financing efforts to interact
with private markets using successful quasi-governmental models already
deployed by the federal government with great impact and positive
effect. Tinkering around the edges and incremental reforms may only
prolong the inevitable and ultimately risk politicizing the
administration of such large volumes of capital, meant to be directed
towards technology diffusion. I recognize that prioritizing the
enablement of private sector investment is not necessarily the center
of Congress' immediate focus, but as I have testified on many
occasions, the fact remains that achieving transformational change in
the way we solve our energy and environmental dilemmas will require the
involvement of both the public and private sector, if we are going to
attain our goals in the near-term.
Although no single technology solution exists to address our
nation's energy security and environmental responsibilities, all
elements of the solution share a common basis: increased market
penetration, diffusion of clean energy technology, and accelerated,
continuous and consistent capital formation.
While the private sector is the appropriate and most efficient
means of delivering the solutions to the market at scale, only the
government can play the indispensable role of availing the federal
balance sheet and bridging market inefficiencies and imperfections. I
believe that an independent, non-partisan, quasi-governmental entity,
like a clean energy bank, should play an essential role of helping to
achieve our national energy goals and fulfill the national security
mission of DOE.
Mr. Chairman, in the last Congress, you introduced legislation to
address this issue, and I applaud your strong bipartisan leadership,
along with that of Sen. Murkowski, in identifying the need for systemic
change and making it a priority for this Committee and Congress. As you
know, this is a matter the Department of Energy fully embraced and
sought to push forward in the course of the last Administration, though
unfortunately we were unable to convince others in the interagency
process of its urgency. I am hopeful that legislation establishing a
new, nimble Clean Energy Bank will be enacted this year, with a broad
grant of authority that allows clean energy financing transactions to
take place as a regularized and routine course of business. Ideally,
this would be an entity that is net-positive to the Treasury, or at
least be self-sustaining.
In addition, I also want to thank of Senators Dorgan and Bennett,
working to expand and enhance loan guarantees in the stimulus package.
Despite the continued bureaucratic obstacles placed in front of the
program, it undoubtedly remains one of the most cost-effective and
immediate ways to stimulate domestic clean energy development. Their
leadership on this matter, and many similar issues of paramount
importance to our energy future, is deeply appreciated by the clean
energy community and I look forward to continuing to support these
efforts.
In September, the Council on Competitiveness explicitly endorsed
the creation of a Clean Energy Bank to provide debt financing and drive
private investment in the development of sustainable energy solutions
and supporting infrastructure. The Council recommended that it be
modeled on the U.S. Export-Import Bank and Overseas Private Investment
Corporation, to provide long-term financing--including loan guarantees,
lines of credit, equity investments and insurance--for the market
deployment of breakthrough energy efficiency and clean energy products,
technologies, services and projects that reduce, avoid or sequester
carbon. This recommendation was part of the Council's 100-Day Energy
Action plan, which I strongly endorse and would ask for its inclusion
in the record. I should also note that then-Council Member, Secretary
Steven Chu, was instrumental participant and leader in guiding the
Council's recommendations.
Additionally, I have also been advising Securing America's Future
Energy and its Energy Security Leadership Council--a distinguished
group of business executives and national security leaders led by
General P.X. Kelley (Ret.), 28th Commandant of the Marine Corps, and
Frederick W. Smith, Chairman, President and CEO of FedEx Corporation--
as they advocate a comprehensive solution to our nation's energy
security challenges.
The Council's recommendations include a wide range of policies to
fundamentally reform and expand both public and private research,
development, and deployment. Included in those recommendations is the
establishment of an Energy Technology Authority, or ETA, of the United
States: a market-driven source of private financing and public-private
partnering for the most promising energy technology innovations,
similar to quasi-governmental investment organizations such as the
Overseas Private Investment Corporation and U.S. Export-Import Bank.
The ETA is fundamentally similar to the Clean Energy Investment Bank
under discussion here today. It would possess the full backing of the
United States government, but would be managed and organized like a
private corporation. After an initial capitalization, the corporation
would be self-sustaining, generating revenue through projects,
interest, and fees, thereby minimizing future appropriations. The ETA's
core mission would be to accelerate and scale capital formation for
clean and renewable energy production and distribution.
I should also note that, while serving as Assistant Secretary, I
met with many groups who are pursuing institutional reform of DOE's
capacities to accelerate and scale the diffusion and immersion of clean
energy technology. Prominently among these are the Center for American
Progress, led by John Deutsch; the MIT Energy Task Force, led by Dr.
Ernie Moniz and Melanie Kenderdine. It is notable that all of these
individuals have served in senior appointed positions directly
impacting energy technology. Given that at all these credible voices
are all saying that a different structure for clean energy diffusion at
scale is necessary, the time for action is here.
For the past 30 years, DOE has successfully decreased the price of
clean energy through research and development, but these national
energy goals inherently demand accelerated market penetration and
significant capital formation and growth in a new and risky technology
arena. Meeting these ambitious goals will require tremendous investment
in emerging technologies. A Booz Allen Hamilton analysis concluded that
approximately $1.4 trillion of capital investment is needed through
2030 for clean energy to meet our goals. This is based on reaching pre-
stimulus government goals in the areas of electric generation,
transmission, renewable fuels, and alternative fuel vehicles. The
International Energy Agency estimates this number to be $1.5 trillion,
McKinsey Global Institute is $1.1 billion, net of savings from
efficiency, and American Society of Civil Engineers estimate is $1.6
trillion. Some estimates indicate that achieving the President's stated
objectives of doubling renewable energy in the next 36 months, $134
billion of new capital investment will be required by 2011, and $217
billion by 2012. No matter which estimate one uses, there's little
argument that it will take an unprecedented amount of capital to
address our national energy goals.
Additionally, while the need for clean energy investment is on the
order of $80 billion per year between now and 2030, 2007 the U.S. only
saw $15 billion in clean energy asset investment according to New
Energy Finance. Clearly, a significant gap exists. These numbers
underscore the need for every public dollar appropriated to have a
multiplier of private investment.
Congress has sought to incentivize deployment of clean energy
technologies through tax incentives, which is an important, but
limited, lever to influence financial decisions. Tax incentives can
only be used by entities with regular tax liability, reducing the
number of players who can participate. Many financial institutions and
utilities have limited capacity to use tax incentives. While tax policy
continues to play an essential, if outsized, role in encouraging
domestic clean energy development, a wholly different approach is be
needed to ensure that vital investments are made now, and in the coming
months, to significantly accelerate the rate and scale of clean energy
project development, enabling critical policy goals and the President's
stated objectives to be met.
Of course, clean energy development may persist at the present
growth rates in the United States in a business as usual scenario. The
key issue for this Committee, and the Congress, is realizing the
benefits of timeframe. How quickly does the United States want to build
up and solidify clean energy development? How soon do we want those
jobs and that manufacturing here, in America? How quickly do we want to
start avoiding greenhouse gas emissions and changing the profile of
energy generation in the U.S.? I believe the answer to those questions
is: Now. We can not wait any longer, and we should avoid a paradigm in
which investment happens only because the cost of energy is so
exorbitantly high. We know that we, as a nation, want cleaner energy
and the economic growth that comes with those new industries. The
private sector is ready to invest, if those investments can be
rationalized, replicated, and scaled. The Federal government can
provide the vital bridge between public policy and private capital, if
it is properly organized and empowered to conduct business in a
substantially different way.
Real change only comes with systemic change. Our institutions, and
DOE in particular, have a mid-20th Century Cold War posture--all of its
systems are focused on fighting the last war, overcoming the last
energy crisis, and short-term firefighting, rather than a managed
transition that develops domestic energy in a sustainable manner, while
ensuring our national security. Our current energy institutions are not
sufficiently agile or equipped with the capability to promulgate and
deploy solutions at a pace or scale commensurate with magnitude of the
challenges we face. This is true of energy security and it certainly
true of economic development and environmental mitigation. Let me
underscore the point. The Department of Energy is inadequate in its
present form to satisfy the mission of energy security for which we
aspire for it to perform.
The proposal of a quasi-government agency focused on clean energy
financing, rather than energy research and development, would be a
transformational change--but not a novel one. Indeed, our government is
already doing this. Before entering government service, as many of you
know, I was an energy infrastructure developer in the private sector,
specializing in emerging markets project finance. I can tell you, from
personal experience, that if I wanted to build a renewable energy
project using any of the technologies that emerged from my portfolio at
DOE, the United States Government already has a basket of tools to
assist me, and the taxpayer is already on the hook to extend the full
faith and credit of the Treasury in support of my project. For example,
it has been my experience that if I want government-backed loan
guarantees, insurance, or even funding for feasibility and siting
studies necessary to build a commercial scale clean energy project, I
could do so through multiple institutions with a constantly open door
across Washington--with one condition. I must build that project
outside the borders of our country. Right now, the Federal balance
sheet is available to support project development all over the world,
but not within our own borders. I say that not to criticize the Export-
Import Bank or the Overseas Private Development Corporation. Rather,
those entities are models that demonstrate the opportunity to
significantly alter the government's ability to accelerate the rate and
scale of clean energy investment in the U.S., bringing those jobs and
those benefits to our citizenry.
Traditional federal agencies, however, are not designed to
effectively manage complex financial transactions involving such large
sums of money, particularly on a fixed timetable. However, by reducing
investment risk and lowering the cost of capital, the Federal
Government can leverage private capital to multiply its impact and
achieve our national goals. A clean energy quasi-governmental entity
fills these gaps by offering professional risk management of debt and
securitization products, and potentially a full suite of financial
services, in support of a robust national energy policy based upon
national security, environmental stewardship, and global economic
competitiveness.
Our problems are not merely qualitative, they are quantitative, and
we must establish credible metrics and milestones to heighten the
probability of achieving our goals. The Administration's plans to
double renewable energy, for example, are ambitious, but they are
achievable, if we move with urgency in orienting the government's nexus
with the private sector in a manner that can catalyze unprecedented,
continuous, consistent capital formation. In order to understand the
need for such a quasi-governmental entity focused on clean energy
development, I'd like to discuss the unique obstacles that clean energy
technologies face in securing private financing, as well as the
particular role that a Clean Energy Bank could fulfill.
clean energy investment challenges
Before achieving any impact on our national energy goals, an
advanced energy technology must evolve from a laboratory experiment, to
a technology venture, to an infrastructure development project. The
transitions between these stages present unique challenges that the
private sector often struggles to overcome. Incremental research and
development funding improves the quantity and quality of technologies
coming off the lab bench, but does not address the economic, political
and technological risks between a technology venture and a large-scale
infrastructure project.
On the positive side, however, free access to abundant sun, wind,
hydro, biomass, and geothermal heat has a fundamental economic
advantage over traditional energy sources. While clean energy assets
currently cost more per unit of production capacity, the larger future
profits realized by lower operating and production costs and zero
exposure to fuel price volatility economically justify the investment
if appropriate financing is readily available. On the security front,
clean energy--with the exception of biofuels imports--is generated from
domestic resources which reduces geopolitical leverage surrounding
strategic energy commodities and shields the U.S. economy from the
detrimental impact of global commodity price volatility and
accumulating trade deficits.
Large-scale development of energy infrastructure of any type is a
capital intensive business to begin with, requiring debt and stable or
predictable cash flows. As indicated earlier, clean energy solutions
bear significant risks unique to the infancy of the industry.
Overcoming these risks is critical to access to the finance markets.
Financial mechanisms are in place to accelerate research and
development and project implementation for established technologies,
but financing for commercialization of new technologies often falls
short based upon risk perception. Many of these risks may be resolved
by time, but the urgency of our energy challenges does not grant us the
luxury to wait and see.
why a clean energy quasi-governmental entity makes sense
Familiarity with the magnitude and complexity of the challenges
associated with emerging energy technologies is needed to devise an
appropriate investment strategy. While investment in clean energy
technologies is wholly consistent with DOE's mission, the strictures of
federal agencies inhibit the flexibility and acquisition of skills
necessary to effectively manage the complex financial transactions
involved in accelerating capital formation at such a large scale and in
a consequential timeframe. An independent, quasi-governmental agency
would be able to more effectively administer financial services, and
would avoid the improbable task of reforming an existing Federal
entity.
Existing quasi-governmental agencies possess sophisticated capital
risk management expertise, and have established a strong track record
for an entity of this type furthering national goals. However, existing
administrative entities would need substantial changes to their
charters to accommodate the task of domestic energy investment and lack
the deep domain expertise for managing energy security. A new quasi-
governmental agency modeled after successful examples could combine a
domestic energy focus with capital formation skills and investment
flexibility allowing the Federal Government to work effectively with
the financial community to develop profitable investment-grade projects
that further U.S. energy goals.
potential roles and activities of a clean energy quasi-governmental
entity
The venture capital community invests relatively small amounts of
money (almost exclusively specialized in early stage equity) into
companies in anticipation of where the market is headed. Private equity
and capital markets (both equity and debt) investors fund much larger
projects where the market is presently active. Through a Clean Energy
Bank, the Federal Government would be able to accelerate the transition
from venture capital funding to large-scale private and public equity
by managing the early-stage and scale-up risks on a macro basis, and
thus lowering the cost of capital. By seeking to catalyze investment
rather than maximize profit on a micro basis, the entity could
dramatically accelerate the market penetration of clean energy
technologies.
A clean energy quasi-governmental entity could accomplish three
main policy goals: 1) consistently, continuously and transparently
accelerate and scale capital formation for clean, domestic energy
projects; 2) provide management stability, flexibility, agility,
expertise, and experience to ensure maximum efficiency and leveraging
of taxpayer investments; and 3) rationalize the Federal portfolio by
availing time tested tools to today's critical national need for clean
energy.
To fulfill its capital formation role, such an entity would
mitigate risks facing investors in the production and distribution of
clean energy, and increase the amount and rate of private capital
deployed in a time frame that is consequential to addressing climate
change and our overdependence on foreign oil.
In the area of management agility and experience, the entity could
provide the effective capital risk management--largely unavailable in
Federal Agencies--necessary for rapid commercialization of clean energy
technologies.
Finally, the entity's activities would rationalize the Federal
portfolio by applying to clean energy development the policy priorities
and tools presently used to support robust US exports, third world
development goals and student loans.
A quasi-governmental entity could invest in the full breadth of
clean energy technologies, including both renewable generation and
energy efficient technologies. These include but are not limited to
biofuels, solar (photovoltaic and concentrating solar power), wind,
geothermal, nuclear, clean coal, hydrogen, and energy efficient
technologies for vehicles, industry, and buildings. Different from
DOE's historical focus on lowering the cost of energy technology, the
entity could focus on increased market penetration and driving
economies of scale in the private sector. To this end, the entity could
offer a variety of debt and risk management products, potentially
including direct loans, loan guarantees, working capital loans, lines
of credit, delayed payment project financing, insurance,
securitization, and innovative financial products designed to
accurately capture life-cycle costs. The portfolio of financial
services could extend across a number of market segments, to meet the
specific needs of power generation, alternative fuels, distributed
generation, transmission, and manufacturing, among others.
The market has begun to respond to the need for clean energy
capital investment, with worldwide investment more than doubling in
recent years, but the baseline is small and unprecedented growth is
required. A clean energy quasi-governmental entity could offer
mechanisms aimed at catalyzing the private markets and thus accelerate
the maturity of the clean energy industry to achieve these goals. The
impact of the earlier investment would be similar to the growth effect
of compound interest with far greater paybacks for the nation.
Considering that all of this can be achieved in a manner that is
consistently net positive revenue to Treasury, rather than an
annualized cost sink, it is important to commence the effort to
organize, even a preliminary pilot running in parallel to DOE's Loan
Guarantee Program Office to hedge our efforts to efficiently stimulate
the economy.
conclusion
National security, environmental stewardship, and economic growth
goals form the basis of robust U.S. energy policy. National security is
enhanced through diversifying our energy mix and reducing dependence on
petroleum. Environmental stewardship is maintained through the
mitigation of greenhouse gas emissions and other negative environmental
impacts. Achieving global economic competitiveness entails creating a
more flexible, more reliable, and higher capacity national energy
infrastructure, as well as improving the energy productivity of the
U.S. economy and industry.
Independent, quasi-governmental agencies have furthered national
priorities in the past and successfully carried out important roles
that traditional Federal Agencies are not designed to fulfill. The
urgency and scale of energy security and greenhouse gas reduction
requires full access to the federal policy portfolio to accelerate the
immense clean energy investment necessary to meet our nation's goals. A
clean energy quasi-governmental entity combines a domestic energy
mission with capital formation skills to bring emerging clean energy
technologies to market much faster than would occur under traditional
market conditions and put us on track to achieve these objectives.
I look forward to supporting the bipartisan and seasoned leadership
of this Committee in organizing and modernizing our governmental
approaches to our energy challenges in such a way as to reverse decades
of failed expectations and realistically maximize the probability that
America's succeeds in realizing our national aspirations.
The Chairman. Thank you very much for that excellent
testimony.
Mr. Book, go right ahead.
STATEMENT OF KEVIN BOOK, SENIOR VICE PRESIDENT, ENERGY POLICY,
OIL & ALTERNATIVE ENERGY, FRIEDMAN, BILLINGS, RAMSEY & COMPANY,
INC.
Mr. Book. Thank you, Chairman Bingaman, Ranking Member
Murkowski and distinguished members of this committee for the
privilege of contributing to the discussion today. The views I
present are my own. Do not necessarily represent those of my
employer.
I'd actually like to start with sort of a bold statement. I
think that this being number 17 in a list of things in the
Energy Policy Act of 2005 either suggests that there were 16
really, really visionary ideas or maybe there's something lucky
about the number 17. Because I think this is the most visionary
energy policy proposal I've seen in a long time and I look at
them professionally.
What I think is most important about this is actually
written in two very elegant lines of the statute which I'd like
to read. You're offering incentives to:
One, avoid reduced or sequester air pollutants or at the
anthropogenic emissions of greenhouse gases.
Two, employ new or significantly improved technologies as
compared to the commercial technologies in service in the
United States at the time the guarantee is issued.
This perfectly summarizes thousands of pages of research I
forced my clients to read over the years. This is the energy
and environmental challenge the United States faces. I'd like
to suggest that considering a diversity of fuels as this
committee has done in providing a list of ten clean fuels in
title 17 is also very sensible, very visionary solution.
Because it looks not just at what's not just in existence
anywhere today, but what's not commercially in existence here.
Finally, there is actually something going on here that
sounds an awful lot like economic stimulus. You think about it
for what it is. Because effectively if what you're doing is
innovating to make better use of our natural resources
including process efficiency and end user behavior efficiency
gains than you're making much better use of essentially every
input. You're delivering more output at each input unit. The
more efficiently and expanding the economy can fuel its
vehicles, power its factories and heat and cool its buildings,
the more competitive that economy will be in a global market.
Now what's interesting is why this is such an important
policy tool. A lot of the time I think the Federal Government
gets accused of being in a position of picking winners. This is
much more about making winning picks and giving the people who
implement technologies the opportunity to make a winning pick
and in fact, to make that pick, win.
I'll explain that in a little bit of detail in as simple
terms as I can. Going off my script in avoiding the economist
talk seems to be a very useful tool. So I'm going to do that.
If you give a rebate or a subsidy you're generally
affecting something in sort of the numerator. You're talking
about how much something costs. You're making it cheaper.
If you change the interest rate that you charge for a big
investment and these are enormous investments in many cases,
what you're doing is you're changing the pro rata per unit
cost, the fixed cost of that investment over its equipment
life. This is actually very, very important when it comes right
down to what energy is. Let's go back to the script so I don't
make a mistake.
This has a lot to do with the fact that energy is a
commodity. No matter what technology one employs to convert raw
materials into electrons or finished fuels, the prices buyers
pay for the resulting products are almost always the same or
very close to competitive prices. Prices are typically set by
broader markets rather than any individual project sponsor.
My clients, the financial sponsors who buy equity and debt
in these projects, they don't tend to reward people who come up
with very expensive ways to sell commodities. So what can you
do? Well if you make the interest rate lower, you make the
fixed cost of generation cheaper. You've just given a project a
chance to succeed.
You haven't yet picked a winner because you've got a
diversity of different options. You've set yourself in the
place where you actually can go through a variety of other
incentives. On top of this, as needed, to accelerate or
decelerate as some countries have seen, the pace of adoption.
Why debt? Why interest rate? I think there's a couple
things that are probably worth noting here too.
These are enormously expensive projects. At sort of the
high end of the range, we're talking about nuclear and clean
coal technology projects that there's only a couple of
companies in the world right now who are in a position to fund
this out of their cash. Very few who can do it on the equity on
their balance sheet.
So you have to go to the debt market. Therefore this
interest rate self fulfilling prophesy operates. Actually
perhaps the most important thing that I can offer today is that
this is a low cost mechanism for the government provided that
there is, of course, good through diligence done. But maybe not
overly exhaustive diligence because the first word, I believe,
in the description of these technologies is innovative.
Innovation requires an appetite for risk which accepts
failure. It accepts that if you swing for the fences every time
and you get one home run, you have a home run on the board. But
if you strike out looking each time, well, you probably don't
have anything to show for it.
This innovation, this incentive is the very essence of how
we've run our energy industry essentially since it began. I
mean, the oil industry is 150 years old today. We still don't
have a national oil company.
We give private companies incentives to do correct economic
choices, to make rational economic choices. So at the end of
the day, delays are a hindrance. Time is money, after all.
I think it's probably fair. Senator Murkowski, you
mentioned that there have been some strong opinions given about
this program since its inception. I've certainly heard them
from my clients.
I think it's fair to say that this is a very challenging
task. I'll go back on the script again to make sure that I'm
appropriately delicate here. But a Department of Energy that is
a preeminent source of research science has a $24 billion
annual budget for everything including the world's best
national laboratories.
Is expected to give out between now and September 30, $38.5
billion of appropriated funds which add up to about $48 billion
in net project value. That's a very, very, difficult
responsibility. They have shown at a disposition to weight risk
and credit worthiness differently in their different
solicitations.
I think it's very important to see that if you're a more
mature technology, credit worthiness is 50 percent of the
solicitation's initial assessment goals. Then if you're a newer
technology or a riskier technology, perhaps you're not as
mature a company. Therefore a 30 percent weight makes a great
deal of sense.
But I think the question we should probably ask is really
whether or not the world's preeminent research science agency
is the best position to become the world's preeminent loan
administration and credit assurance agency. At the end of the
day it may be prudent to allocate the responsibilities for
execution and portfolio strategy to a new agency or differently
structured entity where lending and risk assessment are already
core competencies. Since I'm an analyst and since analyzing is
sort of what I do, I want just offer a moment of analysis.
I just listened to these two gentlemen. Both of whom I
respect very highly, very gifted public servants who just said
two very different things about the exact same program that
everyone here believes is very important. I apparently believe
is mostimportant.
One of them said, and forgive me for paraphrasing, we are
going to be diligent. We're going to use a rigorous
methodology. We're going to remember what happened in the
1970s.
The other one said, I can walk into the export bank on any
day of the week. So there's solicitation dates and any day of
the week. There's prudence and caution. There's the necessary
disposition for risk and innovation.
Balance here is obviously very important. I don't think you
want government dollars going all the way one way at a time
when energy is such an important national issue. You probably
don't want them going all the way the other way.
So having gone totally off script, probably to the
detriment of my career to the improvement of this audience's
attention span, I will now look forward to any further
questions. Thank you.
[The prepared statement of Mr. Book follows:]
Prepared Statement of Kevin Book, Senior Vice President, Energy Policy,
Oil & Alternative Energy, Friedman, Billings, Ramsey & Company, Inc.
Thank you, Chairman Bingaman, Ranking Member Murkowski, and
distinguished members of this Committee for the privilege of
contributing to your discussion concerning loan guarantees for
innovative energy technologies.
As a macro-level energy analyst for an investment bank, I interpret
domestic and global economic and policy trends for institutional
investors, including crude oil prices, alternative energy economics,
climate mitigation costs, and the energy policy decisions taken by
governments. My testimony today reflects lessons learned in this
capacity, as well as observations drawn from ongoing discussions with
industry contacts and financial investors. The views I will present
today, however, are my own and do not necessarily represent those of my
employer.
a big vision
Let me begin, if I might, with a bold statement. I would suggest
that the innovative energy technology loan incentive program created by
Title XVII of the Energy Policy Act of 2005 (EPAct05) could be the
greatest energy policy achievement in modern American history since the
creation of the Strategic Petroleum Reserve within the Energy Policy
and Conservation Act of 1975 (EPCA).
As this Committee is well aware, Title XVII charges the U.S.
Department of Energy with administration of an incentives program for
10 classes of what are commonly referred to as ``clean'' energy
projects, defined in section 1703 of EPAct05 as projects that:
(1) avoid, reduce, or sequester air pollutants or
anthropogenic emissions of greenhouse gases; and
(2) employ new or significantly improved technologies as
compared to commercial technologies in service in the United
States at the time the guarantee is issued.
Source: U.S. Library of Congress
These two introductory lines of the statute perfectly summarize, in
my view, the long-run strategic challenge that confronts the United
States and all industrial (and industrializing) economies: the
imperative to develop secure, affordable sources of environmentally
friendly power and transportation fuels.
Moreover, I would suggest that this Committee has shown great
vision in outlining a diversity of potential technology solutions and
fuel sources--inclusive of those already in existence, but not yet
commercially viable within the U.S.--as this reflects the ways in which
global trade flows and overseas innovation clusters can enable new
investment opportunities that benefit energy use and resource
management goals here at home.
Last, I would suggest that the chartered goals of Title XVII
reflect not just an energy or environmental policy so much as a
strategy for sustainable, long-term economic growth. Innovations that
enable us to make better use of available natural resources, including
those that improve our process efficiency and facilitate end-user
efficiency behaviors, are the very definition of economic stimulus,
because they will increase economic output per unit of input. The more
efficiently an expanding economy can fuel its vehicles, power its
factories, and heat and cool its buildings, the more competitive that
economy will be in a global market.
big numbers
This government prosecutes its energy policy largely through market
mechanisms that encourage private investment, including direct
subsidies, tax credits, cost-sharing, and rebates. All of these can be
successful in encouraging adoption and commercialization of clean
energy technologies, but the daunting scale of energy investments
requires most project sponsors to raise money to expand their
operations. New projects require funding for infrastructure, legal and
permitting costs and, in some cases, advance purchases of fuel. Even
when credit markets are functioning properly, this may not be as easy
as it sounds.
This has a lot to do with the fact that energy is a commodity. No
matter what technology one employs to convert raw materials into
electrons or finished fuels, the prices buyers pay for the resulting
products are almost always the same, or very close to competitive
prices. These prices are typically set by broader markets, rather than
any individual project sponsor. As a result, the financial investors
who purchase debt and equity in energy projects are not typically eager
to provide financing to entrepreneurs who propose expensive ways to
manufacture commodities. It can be especially difficult for project
sponsors to convince the men and women who manage other people's money
to invest in risky, expensive ways to manufacture commodities.
The energy industry is a world of big numbers where a single unit
of infrastructure can carry an eye-popping price tag. Consider nuclear
power. We will not have hard data until a new nuclear power plant is
actually built in this country, but recent applications to local
regulators for new reactors have presented project cost estimates that
range between $7,000 and $10,000 per kilowatt of capacity. For a 1,000
megawatt plant, that comes to between $7 and $10 billion. There aren't
very many companies in the world that have enough cash on their balance
sheets to sponsor multi-billion-dollar projects. Quite frankly, there
aren't that many companies in the world with public equity valuations
sufficient to finance projects at this scale by issuing new or
repurchased shares of stock. Moreover, even when equity valuations
might be sufficient to cover project costs, it is not always
financially efficient for mature or diversified businesses to cede
disproportionate shares of equity ownership or to fund operations
without the tax shield conferred by debt. Project sponsors tend, as a
result, to rely on debt financing for energy infrastructure.
Reliance on debt financing creates an unfortunate irony: interest
rates can be self-fulfilling prophesies. Commercial lenders typically
demand higher rates of return for projects that are less creditworthy
or characterized by higher-than-average technology and execution risks.
But high interest rates increase an innovative project's fixed cost
burden, diminishing its competitiveness relative to incumbent
technologies on a per-unit basis.
Figure 1, below, offers a simple representation of the difference
in the fixed cost component of clean energy production that results for
interest rate differentials. (In the interest of simplicity, Figure 1
does not take into account debt tax shields, depreciation,
amortization, and consolidated enterprise impacts.)
Although a real-world generation cost model would also consider
variable costs like rent, operations, maintenance, fuel, and insurance,
the foregoing example should be adequate to illustrate how a 5%
interest rate differential can mushroom into a 23% competitive
disadvantage over a 25-year operating life, even when variable costs
are exactly the same. High debt costs may prove particularly burdensome
to the competitive viability of clean energy technologies that do not
require significant variable cost inputs, either because they rely on
renewable sources (like wind and sun) or employ high-efficiency
technologies that minimize the proportional impact of fuel and
environmental compliance costs.
time is money, but this is a lot of money
Loan guarantees offer the federal government a low-cost mechanism
for giving incentives to clean energy technology projects at the same
time that the government improves those projects' chances of successful
competition with incumbent infrastructure and processes, but this
theoretically low execution cost profile carries with it a daunting
obligation: adequate due diligence to minimize the risk that a project
fails and the debt burden falls on the U.S. taxpayer.
Time, as the saying goes, is money for project developers who have
already undertaken debt obligations but require further financing to
reach the point of commercial execution. Injecting a three-year delay
into the simple example above increases the fixed cost of generation by
between 3% and 6%. Unsurprisingly, some would-be project sponsors have
expressed their frustration with the latency associated with a process
that began with the August 2005 passage of EPAct05, continued with an
initial solicitation in August 2006, followed by invitations in October
2007 and further solicitations in June, September, and October of 2008,
but has yet to provide assurance for a single commercial loan to a
clean energy project sponsor.
On the other hand, it seems reasonable that an agency like the
Department of Energy, which operates on a $24 billion annual budget,
might be cautious about awarding $38.5 billion in taxpayer-backed debt
obligations for projects that theoretically cost an aggregated $48.2
billion (assuming 80% debt financing), particularly when annual funding
for the entire USDA Business & Industry Guaranteed Loan Program, the
largest comparable program operated within a nonfinancial government
agency, totals $1 billion per year. It may not actually be feasible to
expect the Department of Energy, the world's preeminent source for
precompetitive research science, to deliver comparable excellence in
administering loans and credit assurance at the scale required by clean
energy projects.
More importantly, despite a clear recognition by the Department
that some innovations require risk (as evidenced by solicitations that
assign greater weighting to project sponsors' creditworthiness for
technologies that are more mature), it may be difficult for any
responsible steward of appropriations-based spending to properly
structure a portfolio of investments that balances execution risk with
innovation rewards by accepting a minimum failure rate. This suggests
that it may be prudent to allocate the responsibility for execution and
portfolio strategy to an agency or a new entity where lending and risk
assessment are already a core competency.
Mr. Chairman, this concludes my prepared testimony. I will look
forward to any questions at the appropriate time.
The Chairman. Thank you very much.
Mr. Asselstine, please go right ahead.
STATEMENT OF JAMES K. ASSELSTINE, MANAGING DIRECTOR, BARCLAYS
CAPITAL
Mr. Asselstine. Chairman Bingaman, Ranking Member
Murkowski, members of the committee, thank you for the
opportunity to appear before you today.
Mr. Chairman, in my view the U.S. electric power sector
faces three major imperatives.
First, it must reduce the growth in electricity demand by
improving efficiency and by promoting conservation and demand
side management.
Second, it must reduce its carbon footprint by developing
and deploying low carbon and zero carbon technologies.
Third, it must build significant amounts of new generating
capacity to meet the growth in electricity demand and to
replace older, less efficient generating capacity as well as
new transmission to bring that electricity particularly from
intermittent renewable resources to market.
Meeting these three imperatives will likely require a broad
based portfolio of technologies. The portfolio should include,
in my view, aggressive energy efficiency programs, major
expansion of zero carbon renewable and nuclear generating
capacity, widespread deployment of carbon capture and storage
technologies when they are available, improvements in the
efficiency of existing coal fired power plants, large scale use
of plug in hybrid electric vehicles, development and use of
SMART transmission and distribution technologies and expanded
use of smaller scale distributed power generation. In my view
no single technology provides a complete solution to the
challenges that we face, rather all the elements in the
portfolio are needed given the inherent risks, challenges and
uncertainties with the individual technologies.
Developing and deploying this portfolio of technologies
will require a sustained capital investment over at least the
next 20 years on a level that is unprecedented for the electric
power industry. One study estimates that approximately $1.5 to
$2 trillion in new investment will be required by 2030 for new
generating capacity, new transmission and distribution,
efficiency programs and environmental controls on operating
plants. To place this estimate in perspective, the current book
value of the entire U.S. electric supply system built up over
approximately the last 60 years is only $750 billion.
The electric power industry will be challenged to manage
investment on this scale, particularly in today's more
constrained and difficult credit markets. The electric sector
is already showing some signs of stress. The investor owned
utilities have already reduced capital spending for 2009 by
about 10 percent on average.
There is also downward pressure on equity returns, largely
because rate increases have not kept pace with rising costs.
Bond spreads are also wider, in some cases significantly wider.
Although all in debt costs are not dramatically higher today
because yields on treasury securities are so low, the cost of
debt will likely be significantly higher tha historical norms
when treasury yields recover if bond spreads remain at their
current levels.
Industry leverage is also beginning to rise. Not to the
level seen in 2003 when debt represented about 61 percent of
the investor owned utilities capital structure. But it has
increased somewhat over the last 3 years. Debt now represents
about 56 percent of the industry's capital structure.
This of course exerts downward pressure on credit ratings.
Only about 40 percent of credit rating actions last year by the
three major agencies were upgrades. The first year since 2004
that credit rating downgrades exceeded or outpaced the rate of
upgrades.
In summary the electric power sector is in the early stages
of a major 20 year capital investment program. Is not as well
positioned for these capital expenditures as it was in the
1970s and 1980s when it last undertook a major capital
expansion. At that time the average electric utility had a
solid single A credit rating. Today the average electric
utility credit rating is in the triple B range.
It seems clear therefore that there is a critical need for
an effective, long term financing platform to ensure deployment
of clean energy technologies and the numbers required and to
accelerate the flow of private capital to achieve a sound
energy and environmental policy. It also seems clear that this
financing authority whether it resides within the Department of
Energy or is constituted as a separate entity must have an
array of tools at its disposal given that the different
technologies present very different financing challenges and
have very different needs.
The Loan Guarantee Program authorized by the 2005 Energy
Policy Act was an important step in the right direction. Loan
Guarantees are a powerful tool and a highly efficient way to
expand the availability of private capital. I believe that an
efficient, timely, workable and appropriately funded Loan
Guarantee Program is essential.
In that regard, Mr. Chairman, my written testimony includes
some suggestions to help improve the effectiveness of the
existing Loan Guarantee Program. In addition, I support the
efforts in the Stimulus Bill to increase funding for the Loan
Guarantee Program to better match the available resources to
the financing demand. But an effective financing platform may
also need the authority to make direct loans, to take an equity
position, to provide insurance against certain project or
technology risks and to provide financing to bridge the gap
between small scale technology demonstration and large scale
technology deployment.
Members of this committee deserve great credit for having
already recognized this need for a broader financing platform.
In 2008, Mr. Chairman, you introduced legislation to create a
21st century energy deployment corporation. Senator Domenici,
formerly the ranking minority member of this committee,
introduced legislation to create a clean energy bank.
Both proposals, in my view, have considerable merit and
address various aspects of the financing challenges facing the
United States and its electric power industry. The two
proposals certainly serve as a good starting point to create
the institutional capability needed to facilitate the financing
of our new electricity infrastructure. Thank you, Mr. Chairman,
that completes my testimony.
[The prepared statement of Mr. Asselstine follows:]
Prepared Statement of James K. Asselstine, Managing Director,
Barclays Capital
Chairman Bingaman, Ranking Member Murkowski, and members of the
committee, thank you for the opportunity to appear before you today.
My name is Jim Asselstine. I am a Managing Director at Barclays
Capital, where I serve as the senior fixed income research analyst
responsible for covering the U.S. electric utility and independent
power sector. In that capacity, I provide fixed income research
coverage for more than 100 U.S. electric utility companies, independent
power producers, and power projects. I also work closely with the large
institutional investors who have traditionally been a principal source
of debt financing for the power industry.
Mr. Chairman, I appreciate your invitation to testify at today's
hearing to discuss the current state of the Department of Energy loan
guarantee program, authorized under Title XVII of the Energy Policy Act
of 2005, and how the delivery of services to support the deployment of
clean energy technologies might be improved.
My testimony will provide a financial community perspective on
three topics:
1. the scope of the challenge facing the United States in
building and modernizing its electricity supply and delivery
infrastructure to meet future electricity needs, sustain
economic growth, and reduce the environmental impact--
particularly the carbon footprint--of electric power
production;
2. the scale of the investment required to rebuild and
modernize America's electric power infrastructure, and the
associated financing challenges this investment poses for the
industry; and
3. how the DOE loan guarantee program might be enhanced to
help the industry meet these financing challenges.
Mr. Chairman, in my view, the U.S. electric power sector faces
three major imperatives. It must reduce the growth in electricity
demand by improving efficiency and by promoting conservation and demand
side management. It must reduce its carbon footprint by developing and
deploying low-carbon and zero-carbon technologies. And, it must build
significant amounts of new generating capacity--to meet growth in
electricity demand and to replace older, less efficient generating
capacity--as well as new transmission to bring that electricity,
particularly from intermittent renewable sources, to market.
Meeting these three imperatives will likely require a broad-based
portfolio of technologies. The portfolio should include: aggressive
energy efficiency programs; major expansion of zero-carbon renewable
and nuclear generating capacity; widespread deployment of carbon
capture and storage technologies, when they are available; improvements
in the efficiency of existing coal-fired power plants; large-scale use
of plug-in hybrid electric vehicles; development and use of ``smart''
transmission and distribution technologies, and expanded use of smaller
scale, distributed power generation. In my view, no single technology
provides a complete solution to the challenges that we face. Rather,
all the elements in the portfolio are needed given the inherent risks,
challenges and uncertainties with the individual technologies.
Developing and deploying this portfolio of technologies will
require a sustained capital investment over at least the next 20 years
on a level that is unprecedented for the electric power industry.
Complying with state or federal requirements to reduce carbon emissions
and mandate renewable portfolio standards will require that we address
the major investment challenge facing the electric power sector. An
enhanced and stable financing framework is essential both to conduct
research, development and demonstration of the technologies in the
portfolio, and to enable large-scale deployment of the new technologies
when they have been developed and demonstrated.
Mr. Chairman, as I discuss more fully below, I do not believe that
our traditional financing tools, techniques, and resources will be
sufficient in themselves to expand reliance on renewables and zero-
carbon technologies and to achieve the necessary reductions in carbon
emissions. The scale of the needed capital investment will require a
joint and coordinated effort by industry, the federal government and
state governments to enhance and expand our existing sources of
financing, including an efficient, timely, workable, and appropriately
funded loan guarantee program.
the challenge facing the u.s. electric power sector
Current Situation.--The U.S. electric grid consists of
approximately one million megawatts of electric generating capacity.
Approximately 45 percent of that capacity is more than 30 years old,
and 20 percent is more than 40 years old.
Of the current one million megawatts (MW) of generation, about
315,000 MW is coal-fired capacity. Two-thirds of that coal-fired
capacity is 30 years old or older; one-third is 40 years old or older.
Approximately 125,000 MW of U.S. generating capacity consists of oil-
and gas-fired power plants, many of which were built in the 1960s and
1970s, and that are inefficient by today's standards.\1\ Much of this
older fossil-fueled generating capacity is not equipped with modern
environmental control technology. Continuing to rely on older, less
efficient generation, which represents one-quarter to one-third of U.S.
generating capacity, frustrates our ability to achieve cleaner air and
reduce carbon emissions.
---------------------------------------------------------------------------
\1\ Power plant efficiency is measured by heat rate--the amount of
heat input required to produce a kilowatt-hour (kWh) of electricity.
Older oil-and gas-fired plants typically have heat rates as high as
11,000-12,000 Btu/kWh. New gas-fired combined cycle plants have heat
rates in the range of 7,000 Btu/kWh. In other words, the older plants
burn almost twice as much fuel (and produce almost twice the emissions)
as the newer, high-efficiency plants.
---------------------------------------------------------------------------
This dependence on older, less efficient generating capacity
reflects the fact that the United States has deferred investment in
new, more efficient, cleaner high-capital-cost renewable, nuclear, and
coal-fired baseload power plants. The core problem--inadequate
investment--extends beyond generating capacity. Transmission investment
started to decline in the late-1970s. By the mid-1990s, the United
States was investing about one-half what it was investing in the
1970s--even though electricity demand and the strain on transmission
capacity increased substantially during that time. Transmission
investment has increased in the last several years (due to tax
treatment changes in the Energy Policy Act of 2005 and higher returns
allowed by the Federal Energy Regulatory Commission), and is now
approaching $8-9 billion a year, as the electric utilities work to
catch up with the demands being placed on the electric grid.
Since the early 1990s, the United States has built a relatively
small amount--approximately 11,000-12,000 megawatts--of new baseload
coal-fired and nuclear generating capacity, and a very large amount of
new gas-fired capacity--approximately 300,000 megawatts. The industry
built gas-fired plants because they represented the lowest investment
risk at a time of major uncertainty in the power business, brought on
by restructuring and deregulation, and at a time in which natural gas
prices were relatively low and stable. However, coal-fired and nuclear
power plants still represent about 70 percent of U.S. electricity
supply and provide the greatest forward price stability. Gas-fired
power plants, on the other hand, have exposed consumers periodically to
higher volatility in electricity prices.
Future Outlook.--In its annual forecast of U.S. energy supply and
demand trends, the U.S. Energy Information Administration (EIA)
forecasts a need for approximately 263,000 MW of new generating
capacity by 2030 to meet growth in electricity demand and to replace
older power plants that are no longer economic. EIA's 2008 Annual
Energy Outlook incorporates the energy efficiency and demand-side
impacts of the Energy Independence and Security Act of 2007. (For
example, EIA's 2008 outlook projects electric demand growth of 1.05%
per year through 2030, a reduction from the 1.5% per year demand growth
forecasted in their 2007 outlook. For reference, growth in electricity
demand between 1998 and 2007 averaged 1.8%/year.)
Even with more aggressive efficiency programs and lower growth
rates in electricity demand than forecast by EIA, the United States
will likely need substantial new generating capacity. In a recent
analysis for the Edison Foundation,\2\ The Brattle Group forecast a
need for 133,000 megawatts of new capacity by 2030 assuming no
mandatory controls on carbon emissions, and 216,000 megawatts by 2030
with carbon limits. (The Brattle Group analysis assumes 0.7 percent per
year growth in peak load, which determines the amount of generating
capacity required. For reference, the Energy Information
Administration's forecast to 2030 is 1.5 percent annual growth in peak
load. Even this is a large drop from historical performance: Annual
growth in peak load between 1996 and 2006 was 2.1 percent.\3\) With the
introduction of carbon controls, the need for new generating capacity
will likely increase: Companies must build more new capacity to meet
demand growth and to replace older coal-, oil-and gas-fired steam
capacity that will be shut down because it will not survive the
transition to a carbon-constrained world.
---------------------------------------------------------------------------
\2\ Transforming America's Electric Power Industry: The Investment
Challenge 2010-2030, The Brattle Group, November 2008. http://
www.brattle.com/_documents/UploadLibrary/Upload725.pdf.
\3\ Recent analysis demonstrates that electricity demand growth can
be reduced significantly from historical levels. In a recent analysis
(Assessment of Achievable Potential from Energy Efficiency and Demand
Response Programs in the U.S. 2010--2030), the Electric Power Research
Institute estimates that energy efficiency and demand response programs
could reduce growth in peak load to 0.83 percent per year. Under
conditions ideally conducive to energy efficiency and demand response
programs, this growth rate might be reduced to as low as 0.53 percent
per year. The same analysis estimates that growth in electricity
consumption could be realistically reduced to 0.83 percent per year
through 2030. Under conditions ideally conducive to energy efficiency
programs, this growth rate might be reduced 0.68 percent per year. This
report is available on the EPRI website at www.epri.com
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Assessments of how to reduce U.S. electric sector carbon emissions
show that there is no single technology that can, by itself, slow and
reverse increases in carbon emissions. Rather, as a recent analysis\4\
by the Electric Power Research Institute (EPRI) shows, a portfolio of
technologies and approaches will likely be required. The EPRI analysis
starts with the EIA forecast of electric sector carbon emissions in
2030 (2.9 billion tons), then assembles a portfolio of technologies and
approaches that could reduce the sector's carbon emissions to 1990
levels (1.8 billion tons) by 2030.
---------------------------------------------------------------------------
\4\ The Power to Reduce CO2 Emissions: the Full
Portfolio--2008 Economic Sensitivity Studies, available on the EPRI
website at www.epri.com
---------------------------------------------------------------------------
The portfolio necessary to achieve the 1990 level of carbon
emissions includes:
1. aggressive efficiency programs to reduce electricity
demand growth from 1.05 percent per year to 0.75 percent per
year;
2. 100,000 MW of new renewable energy capacity (instead of
the 55,000 MW in EIA's reference case);
3. 64,000 MW of new nuclear generating capacity, in addition
to the 100,000 MW now operating;
4. significant improvements in the efficiency of existing
coal-fired power plants and widespread deployment of carbon
capture and storage beyond 2020;
5. significant penetration of plug-in hybrid electric
vehicles,\5\ and
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\5\ The transportation sector represents 31 percent (1.9 billion
tons/year) of U.S. carbon emissions. Increased deployment of plug-in
hybrid electric vehicles would reduce the transportation sector's
carbon footprint and U.S. oil demand, but would increase electricity
requirements. In terms of carbon policy, this strategy would make sense
only if the additional electricity were supplied from carbon-free
sources. Otherwise, PHEVs would reduce the transportation sector's
carbon footprint but increase carbon emissions from the electric
sector.
---------------------------------------------------------------------------
6. increased use of smaller scale, distributed generation, in
place of large central station power plants.
Each of the elements in the portfolio represents maximum feasible
deployment, so failure to develop and deploy the full portfolio would
place unsustainable stress on the other technologies in the portfolio.
investment requirements in the electric power industry
Although each technology has its own challenges, the largest single
challenge across all technologies is financing. Sufficient financing is
an essential enabling requirement, both to conduct research,
development and demonstration of the technologies in the portfolio, and
to finance large-scale deployment of the new technologies when they
have been developed and demonstrated.
Research, Development and Demonstration (R,D&D).--Substantial
increases in energy R,D&D investment will be needed in the years ahead
to create a sustainable electric supply infrastructure. Unfortunately,
recent trends are in the opposite direction. In a February 2007
analysis, the Government Accountability Office found that DOE's budget
authority for renewable, fossil and nuclear energy R&D declined by over
85 percent (in inflation-adjusted terms) from 1978 through 2005. The
need for new technologies to address critical energy needs has not
diminished over the same time period, however, nor have the energy and
environmental imperatives facing the United States become any less
urgent.
EPRI has estimated that the United States must increase investment
in energy R,D&D by $1.4 billion annually between now and 2030 to
develop and demonstrate the technology portfolio necessary to bring
electric sector carbon emissions back to 1990 levels by 2030. That
additional cumulative investment of approximately $32 billion in R,D&D
would reduce by $1 trillion the cost to the U.S. economy of bringing
electric sector emissions back to 1990 levels, according to EPRI's
analysis.
Technology Deployment.--America's electric power industry faces a
daunting investment challenge. Approximately $1.5-2.0 trillion\6\ in
new investment will be required by 2030 for new generating capacity,
new transmission and distribution, efficiency programs, and
environmental controls on operating plants. To place this estimate in
perspective, the current book value of the entire U.S. electricity
supply system, built up over approximately the last 60 years, is only
$750 billion. The electric power industry will be challenged to manage
investment on this scale, particularly in today's more constrained and
challenging credit markets.
---------------------------------------------------------------------------
\6\ The Brattle Group, Transforming America's Power Industry: The
Investment Challenge, 2010-2030, November 2008.
---------------------------------------------------------------------------
The electric sector is already showing some signs of stress. The
investor-owned utilities have already cut capital spending for 2009 by
approximately 10 percent, on average. There is also downward pressure
on equity returns, largely because rate increases have not kept pace
with rising costs. Bond spreads are also wider (in some cases,
significantly wider) and, although all-in debt costs are not
dramatically higher because yields on Treasuries are so low, the cost
of debt will be significantly higher than historical norms when
Treasury yields recover if bond spreads remain at current levels.
Industry leverage is beginning to rise--not to the levels seen in 2003,
when debt represented about 61 percent of the investor-owned utilities'
capital structure--but it has increased somewhat over the last three
years and debt now represents about 56 percent of industry capital
structure. This, of course, exerts downward pressure on credit ratings.
Only about 40 percent of rating actions by the three rating agencies
last year were upgrades--the first year since 2004 that downgrades
outpaced upgrades.
In summary, the electric power sector is in the early stages of a
major, 20-year capital investment program, and is not as well-
positioned for these capital expenditures as it was in the 1970s and
1980s when it last undertook a major capital expansion program. At that
time, the average electric utility had a solid A credit rating. Today,
the average electric utility credit rating is BBB.
addressing the investment challenge
Addressing this investment challenge will require innovative
approaches to financing. Meeting these investment needs will require a
partnership between the private sector and the public sector, combining
all the financing capabilities and tools available to the private
sector, the federal government and state governments.
The financing challenges differ somewhat from technology to
technology, depending on the nature of the risk being managed, the size
of the financings, the maturity of the technology, and other factors.
For renewable energy resources, including wind and solar energy
projects, financing challenges include the availability of both debt
and equity financing to support large-scale project development. In
addition, financial returns are heavily influenced by the availability
of tax benefits in the form of Production Tax Credits, Investment Tax
Credits, and accelerated depreciation. Because many of the renewable
project developers are smaller companies or European utilities, the
ability of these companies to use the tax credits being generated by
the projects is constrained. In addition, the availability of
Production Tax Credits is limited to entities who are owners and
producers of the project and its power output. As a consequence of
these limitations, renewable project developers have increasingly
utilized structured tax partnerships or lease structures, which allow
developers to raise capital from one or more financial partners who
have the capacity to use the tax benefits. The market for these
financing structures has grown rapidly over the past three to four
years, from about $2 billion per year initially, to about $4-5 billion
last year. During this period, a core group of about 10-20 large
financial investors, which include large banks, insurance companies,
and structured finance investors, has developed a detailed
understanding of the technology, structure, and analysis of these
transactions. Unfortunately, as a result of the credit crisis, most of
these financial investors no longer have the capacity to use the tax
benefits from these projects at present. This lack of ``tax equity'' in
the current environment provides a significant constraint on the
ability to finance new renewable energy projects or to refinance
existing projects where construction is nearing completion. Certain
changes being considered in the stimulus bill, such as extending the
availability of tax credits for renewables, allowing a wind project
developer to claim an Investment Tax Credit instead of a Production Tax
Credit, and allowing a five-year carry-back for tax benefits, would be
helpful, as would a provision allowing a renewable project developer to
apply for an equivalent grant from the government in lieu of the tax
benefits. In addition, a principal source of debt financing for these
projects has been several of the large European banks that have
developed expertise in renewable energy project financing, and the
lending capacity of these banks is also somewhat constrained in the
current environment.
The electric utilities and utility holding companies are much
larger entities, and therefore have greater capacity to make use of the
tax credits generated by renewable energy projects. In addition, recent
changes to the tax laws have given the electric utilities greater
flexibility to make use of the Production Tax Credits from renewable
energy projects. These factors, together with the growth of renewable
portfolio standards, are likely to lead to further expansion in
renewable energy development by the utilities, although these projects
will add to the utilities' burden to raise debt and equity financing to
meet their growing capital expenditure needs. The DOE loan guarantee
program can help provide the debt financing needed for these renewable
energy projects, and expanding the available funding under the loan
guarantee program for renewable energy projects, as is being considered
in the stimulus bill, would be useful.
For advanced, high-efficiency coal-based technologies, like
integrated gasification combined cycle (IGCC), which appear to offer
the greatest potential for carbon capture, the risk is largely
technological: The question that most project developers and investors
are considering is, ``will the plant meet performance targets for
reliable commercial operation and, if so, how long will it take to
reach them?'' IGCC plants include a gasifier, a clean-up train, a gas
turbine and a steam turbine. All four technologies must be integrated
and operate together, including the ability to follow load, at high
levels of reliability. Smaller-scale IGCC plants have demonstrated that
the technology can operate at these performance levels, but broad
commercial deployment has yet to occur. Continued federal funding for
research, development and demonstration is likely necessary, and
federal loan guarantees may be necessary to offset the technology risk,
which investors may be unwilling to take.
For advanced nuclear power plants, the financing challenge is not
technology. The advanced light water reactors now being licensed are
evolutionary improvements on today's light water reactors, which have
operated on a sustained basis at high levels of reliability (e.g.,
capacity factors in the 90 percent range) for the last decade. Rather,
the challenge for new nuclear plant financing is one of scale: these
are large capital investments--likely $6-8 billion for a new reactor--
being built by relatively small companies.\7\ The U.S. electric power
sector consists of many relatively small companies, which do not have
the size, financing capability or financial strength to finance power
projects of this scale on their own, in the numbers required--
particularly since the same companies will also be investing in other
forms of generating capacity, transmission and distribution, efficiency
and demand response programs, and environmental controls. New nuclear
projects will likely require financing support to offset the disparity
in scale between project size and company size, and this is especially
true for the plants that would be built by unregulated generation
companies. For nuclear projects, like other capital-intensive baseload
facilities, federal loan guarantees appear to be an effective financing
technique. Loan guarantees allow the companies to use project-finance-
type structures, to employ higher leverage in the project's capital
structure, and to fence off the project's credit risk from the project
sponsor's balance sheet, in whole or in part.
---------------------------------------------------------------------------
\7\ The largest U.S. investor-owned power company has a market
value of approximately $40 billion and a book capitalization of about
$10 billion. The other companies in the sector are significantly
smaller. In comparison, the larger European electric companies are two
or three times larger, and are better able to finance large-scale
projects on balance sheet.
---------------------------------------------------------------------------
It seems clear, therefore, that there is a critical need for an
effective, long-term financing platform to ensure deployment of clean
energy technologies in the numbers required and to accelerate the flow
of private capital to achieve a sound energy and environmental policy.
It also seems clear that this financing authority, whether it resides
within the Department of Energy or is constituted as a separate entity,
must have an array of tools at its disposal, given that different
technologies present very different financing challenges and have very
different needs.
The loan guarantee program authorized by the 2005 Energy Policy Act
was an important step in the right direction, but perhaps only a first
step. Loan guarantees are a powerful tool and a highly efficient way to
expand the availability of private capital, but an effective financing
platform may also need the authority to make direct loans, to take an
equity position, to provide insurance against certain project or
technology risks, and to provide financing to bridge the gap between
small-scale technology demonstration and large-scale technology
deployment.
The Title XVII Loan Guarantee Program.--Although tax stimulus--
either in the form of tax credits or more favorable depreciation
terms--can play an important role in encouraging investment, loan
guarantees can be a very efficient way to mobilize private capital. Tax
benefits have a direct, dollar-for-dollar impact on the federal budget.
Even if the credit subsidy cost associated with a loan guarantee is
appropriated, loan guarantees provide substantial leverage. Tens of
millions of dollars in appropriations to support a loan guarantee
program can leverage tens of billions of dollars in private sector
investment.
For this reason, federal loan guarantees are widely used by the
federal government to support financing of projects that have
substantial public value, and would not otherwise be able to secure
financing on reasonable terms. Federal loan guarantees are used for
ongoing programs--to support rural electrification, development of
transportation infrastructure, shipbuilding, low-income housing and,
through agencies like the Export-Import Bank and the Overseas Private
Investment Corporation, to support U.S. companies developing projects
overseas. Federal loan guarantees are also periodically used in
specific emergency situations--as they were after the September 11,
2001, terrorist attacks to support the U.S. airline industry. Title
XVII of the 2005 Energy Policy Act authorizes the Secretary of Energy
to provide guarantees for up to 80 percent of project cost for projects
that (i) avoid, reduce or sequester air pollutants or greenhouse gases,
and (ii) employ new or significantly improved technologies.
Under the Federal Credit Reform Act (FCRA) of 1990, loan guarantees
are scored in the federal budget on a risk-adjusted basis, based on the
budget subsidy cost methodology specified in FCRA. The budget subsidy
cost represents the net present value of the risk-adjusted cost to the
government of the loan guarantee at the time it is issued. In simple
terms, that ``cost'' is the expected payments by the federal government
less expected revenues received by the federal government. Federal
agencies have considerable experience in calculating loan guarantee
costs, and well-established protocols and analytical models for doing
so.
The Title XVII loan guarantee program is unique among federal loan
guarantee programs in that project developers are expected to pay the
budget subsidy cost of the loan guarantee. This ``self-pay'' or ``user-
financing'' feature offsets the risk-adjusted cost to the government of
providing the guarantee. The self-pay amount is retained by the
government regardless of whether the project defaults or not. If there
is no default, the self-pay amount represents a financial return to the
Treasury for agreeing to assume the risk during the period that the
guarantee was in effect. Given a rational approach to implementation,
in which projects are selected based on a high likelihood of commercial
success with the loan guarantees, there should be minimal risk of
default and therefore minimal risk to the taxpayer.
As this Committee is aware from previous hearings, there have been
some implementation difficulties with the Title XVII loan guarantee
program, many of which predate the formation of the Loan Guarantee
Program Office in 2007. For example, this Committee will no doubt
remember, before the loan guarantee office was created, when the
Department of Energy published the proposed rule governing the loan
guarantee program, and the debate over whether DOE would guarantee 100
percent of the debt obligation or only 80 percent. Going forward, given
the importance of the loan guarantee program and the likely volume of
guarantee requests for a wide range of qualifying projects, it will be
important for the Loan Guarantee Program Office, whether it resides as
an independent entity within the Department or as a new institution
outside DOE, to have the dedicated resources it needs to operate
effectively and efficiently. These resources should include its own
legal and financial advisors, who would be better equipped through
their experience and training to interpret the statute and develop
workable regulations. This should reduce the implementation risk going
forward.
conclusion
In conclusion, it appears that the Title XVII program represents a
sound starting point from which to design a broader financing platform,
with additional financing tools, to support the large-scale deployment
of the advanced technologies needed to maintain reliable levels of
electric service and to meet the nation's environmental goals.
Members of this committee deserve great credit for having already
recognized this need. In 2008, Senator Bingaman introduced legislation
to create a 21st Century Energy Deployment Corporation. Senator
Domenici, formerly ranking member of this committee, introduced
legislation to create a Clean Energy Bank. Both proposals have
considerable merit and address various aspects of the financing
challenge facing the United States and its electric power industry. The
two proposals certainly serve as a good starting point to create the
institutional capability needed to facilitate the financing of our new
electricity infrastructure.
Mr. Chairman, again thank you for the opportunity to testify, and
this completes my testimony.
The Chairman. Thank you very much. Thank you all for your
excellent testimony. Let me start with 5 minutes of questions.
Then I'm sure all members will have questions.
One obvious question that arises hearing your testimony is
whether we should see it as our job in this committee and here
in this Congress to take on the problem of how we improve the
effectiveness of the existing Loan Guarantee Program or whether
we should pursue the creation of an entirely new lending
authority, financing authority, along the lines that Andy
Karsner was talking about in the nature of a clean energy bank
or should we do both? Is it possible to do both? I think we've
had some discussion about the subject.
My own view is we do not want to be legislating in a way
that impedes the functioning of what currently exists. At the
same time we don't to pass up the opportunity to take on a
broader objective. enact a broader solution if that's what
required.
So let me ask David Frantz and then Andy and any of the
rest of you to comment on how you come down on that question.
Mr. Frantz. Thank you very much, Mr. Chairman. It is
probably the question to the core of the problem. I think your
question really is in two parts.
In terms of the first part there are clearly some things
that Congress can do that would help us facilitate our activity
as it now stands with frankly, very simple and small changes to
the existing law. The first one Andy alluded to it in his
comments. We are now aware that the self-pay feature for the
credit subsidy cost is an enormous impediment, particularly to
those medium sized and smaller company applicants that we are
dealing with.
So the first suggestion is that this probably should be
removed and we should return to the credit subsidy mechanisms
that are more universally applied to virtually all Federal
programs. That is the credit subsidy cost is appropriated.
Therefore, it is not punitive nor redundant.
The second issue is that we have encountered in our initial
negotiations, particularly with a larger projects in the
nuclear field as well as the larger fossil fuels, that the
superiority of liens in the current law precludes us from
bringing to the table as participants in these projects for
shared cost and shared risk. This includes the Export Credit
agencies throughout the world who are supporting these projects
and are willing to finance and be participants.
Another issue concerns undivided interest which involves
utility participation municipality participation in each of our
projects. A simple fix can be to make the superiority of liens
one of equal participation or what we call in the trade, pari-
passu. Rather than requiring the U.S. Government to have a
superior lien which can preclude these other financing
techniques.
I certainly have not been a detailed student to the extent
that Andy and some others have been in the initiatives for the
much more independent approach. Let me make one important
comment I think that you and I have discussed, Mr. Chairman,
and that is that today, given the urgency of circumstances, I
think it is very important that the existing program must
remain in operation where it currently resides in the
Department of Energy.
Under the circumstances, it is with the number of the
improvements that Andy has suggested in his testimony that we
rely very heavily, particularly as it pertains to ascertaining
risk associated with new and innovative technologies, on the
technical expertise of the Department of Energy. This includes
all the program offices of the Department of Energy. We rely on
their technical advice and consult with them regularly as well
because this is an enormous asset. It is decidedly different
from normal project financings and in contradistinction to
commercial applications. So in the immediate term, the access
to that expertise is very important to us as we try to expedite
this program.
Now, that said, I do believe certainly, that there is room
to consider a separate organization. As I am the only sitting
U.S. Government officer on this panel, I have to be careful
because I do not believe that either the previous
administration or the current administration, as you suggest
Mr. Chairman, has given attention to this consideration.
As you alluded to, I am an alumni of the Overseas Private
Investment Corporation which is probably a model for such a
type of activity. The important aspect is it does indeed
provide a great deal more flexibility and the ability to be
more responsive, no question about it. But as you may be aware,
the Overseas Private Investment Corporation (OPIC) and some of
these other institutions, were founded as a part of the
Marshall Plan of 1949. OPIC was not established as an
independent agency until 1972.
So there clearly is a logical progression. I certainly do
not suggest it has to be that long in the cases that are under
consideration. I do agree with you, to do something that would
be an abrupt change at this point could be in fact, disruptive
or counterproductive to the attention of the current office.
The Chairman. Let me just ask. I know my time is expired
here, but Andy why don't you just give us a short response to
whether you think we should concentrate on improving what
exists, starting something new or can we do both in your
opinion?
Mr. Karsner. Sir, I think you have to do both. I do not
think that there is any amount of tweaks around the fringes
around the current system and the status quo constraints that
would enable it to ultimately mobilize capital and serve the
function for which the statute is intended. Achieve the metrics
that either the President is talking about or that have been
put forward by Congress in terms of anti-projected greenhouse
gas emissions.
So Marshall Plan is an apt reference here. If we state out
that these are what we must do. Now Congress has gone so far as
to commit the National Treasury in unprecedented numbers. It is
really a question of not how much do we spend, but how do we
manage that which we are spending to achieve stated goals.
It cannot be done in the current system. But you have to go
with the tweaks with the mediacy. Whether that is statutory
change, through an amendment. There may be some particularly
with these questions of first leans that were put into title 17
or things that imply the arguments that you may have heard
about on stripping and some of the arguments about lack of
clarity on what, 80 percent of total project.
So clarity verses ambiguity is important. But I would think
that there's a historic opportunity to convene on a bipartisan
basis this committee with senior folks around Secretary Chu and
involve OMB and Treasury to get them all talking together for a
common purpose which is not been the record to date.
The Chairman. Ok. Let me defer to Senator Murkowski. I'll
come back on a future question if others want to comment on
this.
Senator Murkowski. I will follow up with your question, Mr.
Chairman because I think this is what we really want to know.
We recognize that there are flaws within the program. Mr.
Karsner, you said it needs to be institutional reform.
I agree with you. I am not quite sure if the clean energy
bank is the way to go whether we have this quasi agency out
there or not. But I'm concerned that if we just do some tweaks
we will not be really providing what is needed out there to
provide for the level of loan guarantees that we are all
looking for here.
Mr. Book and Mr. Asselstine, I would like for you both to
address whether you feel we should be moving to a different
approach in terms of a quasi agency, clean energy bank. If
possible, to simultaneously make the necessary reforms within
the Department of Energy.
I will state the obvious. We have a stimulus package that
is likely going to be agreed to this week that puts even
greater demands on the Agency, even greater demands on the 30
full-time employees that we have. What is the best path
forward?
Mr. Book, first. Then if we can come back to you at the
end, Mr. Karsner, I would appreciate it.
Mr. Book. Thank you, Senator Murkowski. There seems to be
almost thundering agreement that doing both at once is
possible. It seems like it's the best way to go.
This is the situation where anything that gets the in
process work done faster is good. Anything that slows it down
is probably bad.
Senator Murkowski. Right.
Mr. Book. At the same time the long term strategy, the
strategic framework has to be about solving a problem that
you've defined. If the problem is just to do a little something
around the edges of our clean energy goals than we should
probably continue to keep this around the edges. Otherwise you
may want to make it a central entity that has its own autonomy.
Maybe doesn't have to keep thinking about the next
appropriations line item and become self financing because then
you actually will begin to see the sort of behaviors that begin
to maximize the diffusion of capital.
Senator Murkowski. Mr. Asselstine.
Mr. Asselstine. Senator Murkowski, I'd have to agree that
we should pursue both alternatives simultaneously. There are
clearly some glaring problems with the existing program as it's
being implemented. I would give great credit to Mr. Frantz and
his colleagues in the Loan Guarantee Program Office.
I think they're working diligently to try to move the
program forward. But there are clearly have been some problems.
He's highlighted several of them.
The problem with superiority of leans. One of the companies
that I follow has been very vocal in saying that they abandoned
pursuing the Loan Guarantee Program because the Department
would not be flexible around accommodating the lean that their
existing mortgage bond holders had. So under the Department's
approach, would basically have required that the utility
refinance all of its existing debt in order to qualify for the
Loan Guarantee Program. They threw up their hands. They
basically abandoned the effort, clearly a problem that can be
fixed consistent with protecting the interests of taxpayers in
terms of the Loan Guarantee Program.
The problem of undivided interest participation clearly
something that can and should be fixed immediately. Again,
another utility is contemplating pursuing a project with
partners. Under the Department's interpretation or approach, if
there were a problem for any partner the Department would then
take the entire facility rather than just take the interest of
the undivided interest of the defaulting partner.
The utility looks at that and they basically say, we're now
hostage to the performance of our partners. We could lose our
investment in the project even though we would want to go
forward with it. This kind of inflexibility is a problem I
think, within the existing structure within the Department.
I very much agree that the office itself ought to have its
own legal and financial advisors to deal with some of these
specific problems. But beyond that I do think that this program
is sufficiently important. Will be critical enough given the
magnitude of the investment that this industry has to make over
time to look at the option or the alternative of a separate,
independent entity that would have more flexibility and a
greater ability to accommodate the needs of the industry going
forward rather than leaving the entity within the Department of
Energy.
But by all means fix the immediate problems at the same
time. So that we can try to move the existing program forward.
Senator Murkowski. I have a question for you, Mr. Frantz.
But my time is expired, so I will wait until we come back for a
second round.
The Chairman. Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman. Thank you all for
being here. Mr. Frantz, you point out in your testimony that
you're working on putting in process in place to evaluate and
fund projects to ensure that taxpayer interests are protected
and to expedite applications.
As, I think, we all recognize there are a number of
applicants who've been waiting for a very long time for the
final outcome of the process. One of those companies is a New
Hampshire company called Simichron. It subcontracts with Beacon
Power in Massachusetts. It's one of 16 projects that has been
deemed qualified.
Could you talk a little more about how you expect the
process to play out? Help me better understand what your office
uses when considering applications to achieve the most
objective and beneficial outcome both for the taxpayer and for
technology development?
Mr. Frantz. Certainly, thank you very much Senator for your
question. Clearly what we do as expeditiously as possible, but
very carefully, is to first evaluate the application for
completeness against our Final rule. We actually, as I
indicated or intimated in my comments, do in fact have an open
consultative process so that the applicants are kept informed
once their applications are filed.
We first look at the applications for completeness. Then,
of course, as you might expect, we have to ascertain whether
there is innovative technology employed. That takes just a
matter of a few weeks.
Once that is completed, we condcut our financial and
technical evaluations. I alluded to in my comments that we rely
on the Department's National Laboratories, several of them are
under Andy's former group as well as others, to evaluate the
technology. They do an independent technical evaluation from
us, and we do the financial evaluation.
We try to accomplish that within just a matter of a couple
months. Once that is completed, we go to our Credit Review
Board for the recommendation to proceed to full due diligence.
The due diligence process is very difficult to put a timeframe
on it because it varies decidedly with the complexity of the
project as well as the size of the projects. The due diligence
process can run from a matter of just a couple of months for
these smaller projects. For the larger projects involving
Environmental Impact Statements, for example, the process can
take 18 months to 2 years. The point is that at every step of
the way, we proceed as carefully as possible to ultimately
reach a conclusion.
Now in the case that I alluded to in my comments, among the
group of 11 projects you mentioned one of them, Senator. If in
fact, a project is a manufacturing project and it does not
require an Environment Impact Statement and it only requires an
Environmental Assessment, it can move along much more quickly.
The point is that we effectively just started this process,
as I mentioned, at the end of November and the beginning of
December of 2008 on these projects. The project you mentioned
happens to be in that group of projects. I mentioned a handful
of projects that we now have on a very fast track. These
projects can, in a few months, go through the due diligence
process to an ultimate approval and issuance of a loan
guarantee. Those are projects that are more manufacturing
oriented rather than a large greenfields or stand up projects.
Senator Shaheen. Oh, good. So I can tell Simichron that
they should expect to hear shortly.
Mr. Frantz. We are working with them actually.
Senator Shaheen. Good. Thank you.
The Chairman. Senator Bennett.
Senator Bennett. Thank you very much, Mr. Chairman. Mr.
Karsner, or Andy, I guess is the easier way to address it. You
made reference to the effort that I made along with Senator
Dorgan to try to get this amount of money available for this
increased significantly in the stimulus. We were successful on
the Senate side. It got dropped on in Conference.
The interesting thing to me was that the only opposition
that erupted publicly was that I had somehow gone into the tank
with the nuclear industry. The whole purpose of trying to get
this loan guarantee was because I wanted major new nuclear
plants. Under no circumstances could we do that.
I can deal with that. I don't want to raise that here. But
simply the fact that the anti nuclear folks raised a
significant political attack on the whole program comes into a
discussion of what you're talking about here.
If we had the independent funding agency that has been
talked about here, that strikes me as a good idea. Would that
be more or less subject to the kind of political pressure
generated by these groups, the kinds of television ads that
were produced around in Utah attacking me for the circumstances
I've described? Would it isolate the decision from this kind of
political pressure or would the group be more subjected to this
kind of political pressure in your view, anyone who wants to
respond?
Mr. Karsner. Sir I can only speculate on that. But this is
what I would say is it is certainly meant to be the benefit
that you are de-politicizing the process. There is no question
that political pressure is part and parcel to why the process
has thus far been delayed.
Had it been an objective task to interpret the statute by
an independent quasi governmental agency, like OPEC or EX-IM,
in a regularized fashion then they could have moved very
quickly to establish the appropriate capital risk mechanisms.
Rather it has been a political discussion on risk aversion and
philosophical elements. So that would be one of the chief
benefits of removing this from the political process.
I would add and this is strictly personal opinion. But goes
to what Kevin has said with respect to title 17. What was so
transformative and what gives it such great potential is that
title 17, of all the titles written in all the energy
legislation that has come out of the U.S. Congress, uniquely in
many ways is not interest driven.
It is not for biofuels. It is not for nuclear. It is not
for clean coal. It is attributes driven.
Senator Bennett. Yes.
Mr. Karsner. It is about reducing, avoiding and
sequestering greenhouse gas emissions at a scale and at a rate
that is consequential. So just alleviating all of the inputs
and saying we are going to fund things that get us to the
outcomes we seek is revolutionary. Now to give an independent
objective, non-political institution the capacity to manage an
attributes driven financing mechanism should achieve that
purpose.
Mr. Frantz. Senator, if I may add.
Senator Bennett. Certainly.
Mr. Frantz. Just based on my experience at the Overseas
Private Investment Corporation (OPIC), and in no way
contradicting Andy's comments, but having spent over 10\1/2\
years there, by being an independent agency of the U.S.
Government in no way gives you any immunity from the
distractions, as you might expect, from those who care to
criticize or have some effect on what you are attempting to
accomplish.
Senator Bennett. I understand that. I'm just hoping that it
would make it easier for the entity to make the decision on the
basis of the science rather than the television ads.
Mr. Karsner. There's a big difference between oversight and
annualized appropriations that gate the decisions----
Senator Bennett. Yes.
Mr. Karsner [continuing]. Of the authority.
Senator Bennett. Ok. Mr. Asselstine, you participated in
many large financing and transactions during your career on
Wall Street. How do you answer the critics who say that the
loan guarantee, it's an inappropriate intervention of the
Federal Government in financial markets and distorts the
question of allocating capital?
Mr. Asselstine. My answer Senator would be that given the
magnitude of the investment that needs to be made we need to
look at ways to make the most efficient use of private capital
that's available. One thing that I think we all know today is
that capital is going to be scarcer. It's going to be more
expensive going forward than it certainly has been over the
past 5 or 10 years.
So if you're looking at an industry that has to double its
size over the next 20 years and an industry that actually faces
some institutional challenges because we have many smaller
utilities. We don't have the few very large utilities that you
find for example, in Europe or in Asia. Then the question is
how are we going to allow these companies to do the financing
they need to add the generation that they will need over that
period of time.
The Loan Guarantee Program, in my view, provides an
effective way to enhance the availability of private capital.
It does that because the government, being paid for the risk
that the government is taking, provides credit support for
these projects. Particularly new technologies where there are
questions in investor's minds about the performance of those
technologies at commercial scale or very large projects which
an individual company has a great deal of difficulty financing
on its own. Or for renewables where the companies are
relatively small and don't have broad borrowing flexibility on
their own as well.
In all of those areas the Loan Guarantee Program can
provide the ability to access broader pools of capital. The
reason for that is by the U.S. Government providing credit
support. You access a broader range of investors.
The debt investors, for example in buying the securities
with the loan guarantee are looking at a security that's backed
by the full faith and credit of the Federal Government. That
opens up an enormous pool of capital in terms of providing the
debt financing for these projects. If you use project finance
structures that are 80 percent debt and 20 percent equity it
vastly enhances the ability of individual project sponsors to
go forward with the kind of magnitude of investment that will
be required.
So my answer would be it doesn't really distort capital
deployment. Rather, it enhances the ability to tap into as
broader range of investment capital as possible remembering
that the project's sponsors or owners still have their own
capital at risk. They will put in their own equity investment
into the project.
Other lenders may also provide non-guaranteed debt for the
project as well. So you tap into a broader range of available
sources of capital.
Senator Bennett. In other words it is the private investor
who still makes the decision as to which technology gets backed
rather than the government crowding that decision out.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Stabenow.
Senator Stabenow. Thank you very much, Mr. Chairman for
this hearing. This is a very important issue both the Loan
Guarantee Program and the other loan programs in energy. Also
particularly interested in section 136, retooling, making sure
those loans get out the door as quickly as possible as well.
I've had the same concerns, Mr. Chairman that you have and
our Ranking Member about loan guarantees verses separate
entities verses loans. Right now in Michigan I've been working
with some companies that are qualifying for USDA loan
guarantees for advanced biofuel facilities. But banks won't
participate. So we've just not been able to use the loan
guarantees.
Given the current situation, that we all know about in
terms of capital the lack of availability it seems to me that
we really do need to revisit both. Taking away the barriers on
the Loan Guarantee Program but also focusing on direct loans. I
find the idea of a clean energy bank very intriguing, very
appealing to really look at how we can boldly move forward on
all fronts because there's so many opportunities.
I did have a question, Mr. Frantz, for you that related
specifically to the loan program and manufacturing and how you
view manufacturing. You had mentioned to Senator Shaheen that
manufacturing projects move more quickly. I wanted to explore
what you view as eligible under the Loan Guarantee Program.
I've introduced a separate bill that would provide direct
loans to DOE to administer for entities that invest in
manufacturing facilities. The facilities would have to produce
renewable energy products or invest in energy efficiency gains
of 30 percent or more in their facilities. But it's focused on
the actual manufacture, which where I believe so many of the
jobs are for us in terms of economic boost.
Do you believe that the term in the current statute
employing technology is the same as manufacturing it? Is that
how you're viewing this?
Mr. Frantz. Senator, a very good question. The answer is
perhaps no. When we are talking in the field of the title 17
Loan Guarantee Program, we are really preoccupied with new and
innovative technologies. That is a huge gate in which Andy
alluded to in his comments.
Our role really is bringing technologies from the Office of
Science, for example, through Andy's previous group, through
grants and startups, who have reached a pilot stage, but are
moving into full-scale commercialization. We bridge the Valley
of Death.
There are, interestingly enough, among our first group of
applicants that are the high priority for us, several
manufacturing companies which is very reassuring to us. These
companies are employing new or innovative technologies against
existing technologies in a more improved way. So the point that
you are alluding to, I think, is do we affect on a broader
sense manufacturing employment? That, I think, was addressed in
section 136 of the Energy Independence and Security Act of 2007
which you mentioned the objective is just to refinance or help
assist additional financing for commercially available
technologies. So that, I think, is the big distinction between
the two. Clearly, and I alluded to this in my comments too. One
of the big impediments for us is in National Environmental
Policy Act (NEPA) regulations. In that case, we are looking at
such things as categorical exclusions. However, it is very
difficult to obtain categorical exclusions for something that
is an innovative technology.
Senator Stabenow. I appreciate what you're saying. I really
believe there's a gap here. Because as I was very involved in
helping to write section 136 and understand this is about
retooling existing plans and those kinds of things.
But at the same time we have a whole set of new innovative
technologies that we want made in America. I don't want to be
helping to finance those plants or those facilities going
overseas through import/export bank. We need those here.
When we look at the new plug in electric vehicles----
Mr. Frantz. Right.
Senator Stabenow [continuing]. For instance or solar panels
or wind turbines or whatever, we find that we are losing
manufacturing, not to low wage countries, high wage countries
with very specific manufacturing strategies. Germany, it's one
of our major competitors. So I find that there is a hole here
when we are deploying technologies, but somehow not counting
the manufacturing of that new technology as part of it.
Mr. Chairman, I look forward to working with you on that.
Thank you.
The Chairman. Very good. Thank you very much. I just note
that we appreciate Locklar Seward who is here.
He's in charge of the 136 program. He's here in the front
row. Thank you very much for being here and your good work on
that program.
Let me ask a question. I think everybody who's here has had
a chance to ask questions. So this will be a second round.
We have the 136 program which is a direct loan program. We
have the Loan Guarantee Program that Mr. Frantz is in charge
of. What I believe, Andy, you're advocating for is a separate
entity that would have authority, not just to make loans, not
just to guarantee loans, but to do a variety of other things to
underwrite the financing of energy projects that need to be
constructed and developed.
Could you elaborate a little bit on what are those other
things that a so called clean energy bank or whatever,
financing authority or whatever we called it? What are those
other things that it's important somebody have the authority to
do that the government needs to involve itself in? I'd ask Mr.
Asselstine the same question, Mr. Book or any of the rest of
you.
Mr. Karsner. Senator, I'd almost refer back to Kevin's
response a little bit when he really distinguished that the
guts of what we do at the Department of Energy well is science
and technology and R and D. We didn't actually commence that
task 30 years ago with any anticipation of what we would do the
day the things matured to the point of readiness for
commercialization. So over time we have added on tools.
You have given us authorities that allow us to use the
Federal balance sheet for fundamentally financial transactions
whether they are equity or debt. The biorefineries for example,
where we cost shared equity, 50/50 or 40/60 with a series of
plants. Well, that was a nonreplicable, commercial model.
We did it to stand up and review the science and
technology, but at great cost. There is great return for that,
but it doesn't use that money efficiently or doesn't have the
best oversight capabilities. Really you're dealing with a civil
service agency that is handcuffed from everything outside of
the realm that it does well which is science and technology.
So that's an array of financial products. It would really
be up to the committee. I think with further hearings from the
financial community as to which ones most efficiently use
capital.
Because fundamentally all the use of the balance sheet
comes down to the question of are you lowering the cost of
capital? Are you offering access to the capital? Are you
leveraging the capital enabling life cycle returns for new
energy technologies that don't function on commodities, but
instead function on capital cost and then the freedom of sun
and wind and nuclear, you know, etcetera?
So you're dealing with these new technologies and you need
to have competent financial authorities. David, himself, put it
very well when he said, I'm up to 29 people after 4 years. Now
you consider the hundreds of people that work at EX-IM bank
managing a fraction of the money for an agency that is net
positive to Treasury.
EX-IM bank and OPEC make money for the U.S. Treasury. They
don't cost money. If you take them away you have to do
something to fill that revenue.
Here we're talking about how high can we raise the cost to
try to get the program moving with credit rate subsidies.
Instead of saying why don't we add them like we do for student
loans as origination fees, at the end of the path? So we can't
make those determinations internally.
To be very specific about the problem we have about what we
amend now verses what we ultimately want in a statute, so much
that can be changed now is an interpretation of the rule. David
and his shop are working under the constraints of a rule which
is an interpretation of the statute. That rule took a long time
to promulgate. You know, it took 30 days for Locke's rule to
come out at the end of the administration. It took almost a
year or more for the other rule.
It was very contentious. The interpretations in that rule,
for example, that exclude manufacturing, I personally disagree
with and fought with. The new administration has to look at the
rule and the constraints at which David had no part creating
that rule. Determine whether it is the correct interpretation
of the statute. I would say you could do that with all parties
convening in a way that has occurred through sequential
communication in the past.
So it's not as arduous an exercise when you talk about the
immediate things that could be done because the administration
has a lot of power to interpret that statute and determine the
rule set under which the Loan Guarantee Office would operate.
But ultimately you need to have a lot more than 29 people hired
over 4 years. That's going to remain a civil service
bureaucracy problem whether you change the rules or not. He
needs a lot more resources.
The Chairman. Mr. Asselstine, did you have a comment?
Mr. Asselstine. Just briefly, Mr. Chairman. I agree very
much with Andy's comments. I think that from a financial
perspective having the flexibility to look at a variety of
different financing tools would be advantageous, not just loan
guarantee. But the ability to make direct loans, the ability to
take an equity position, perhaps the ability to ensure
particular technology.
If you look at the different greenhouse gas reducing
technologies that clearly fit within the Loan Guarantee Program
there are different financing challenges today for those
different technologies. If you look at solar and wind, for
example, right now there is an urgent problem in providing
equity given the way that those projects have been financed.
Those projects have typically been financed in tax advantage
structures where financial investors participate to take
advantage of the production tax credits and investment tax
credits.
Right now the group of investors who have formed the core
of that financing capability don't have the capability to use
those tax benefits. So there's an urgent need for equity. The
bankers in my firm who bank that industry tell me you can
extend the production tax credits and investment tax credits,
but unless you solve the equity component problem, there's a
real problem in getting those projects financed today.
The same thing is true to a certain extent for wind
projects. If you look at clean coal technology, I would argue
the big issue there is the technology. Will it work reliably
and on a commercial scale? That's the thing that investors are
concerned about. It's the thing that the companies are
concerned about as well.
So the ability to provide perhaps an insurance around the
technology would be very helpful. You'd get that broader
flexibility, I would argue in an independent organization
rather than in the existing program.
The Chairman. Mr. Book, did you have a comment?
Mr. Book. Yes, thank you, Mr. Chairman. I think there's a
couple of things that I can say, very simply, very quickly in
addition to that.
First, there's a specialization of labor challenge here. I
don't think anyone disputes that someone who spends 15 years in
post graduate work to become a nuclear physicist or a molecular
scientist is a specialist. You can't just have a rule for all
those folks to suddenly become bankers. It would be a
ridiculous thing to do.
You certainly can't have the bankers become the scientists.
When you start a project finance career I believe you spend 2
years in a lot of the investment banks to begin to start your
career. Two years just to get enough education to get started.
It's a very specialized skill sets.
Getting 30 people together in 4 years is no small feat.
It's actually fairly large practice group. It's nowhere near
the size of the challenge I think that Andy and James have
mentioned today.
The second thing is just that the difference in the
financing challenge can be framed a little bit differently also
than just the different types of financing. In terms of a very
big, expensive project, clean coal, nuclear power, something
that it requires billions of dollars potentially in deployment
over the life of the project. The question is whether you do it
at all.
If you can't get financing because you can't get the loan,
you may not actually be able to do it. You will change the cost
profile. But for a while the companies would be project
sponsors. There may not be access to credit without the Federal
Government providing a swift and efficient way of assuring that
credit's worthiness.
Whereas for renewable fuels the promise of renewable fuel
is that you don't have a lot of variable costs. You spend all
the money up front. The wind and the sun and other natural
forces give you energy for the rest of that equipment life.
That means the cost of the money you spend up front is the
cost of the fuel. So again, it's a different type of financial
problem to solve. Both of them are solved by title 17.
What I'm saying is what started out as visionary at a time
of economic expansion has become vital at a time of economic
contraction.
The Chairman. Ok.
Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman. Mr. Frantz,
just a very quick question. I have learned that contained
within the Stimulus package CBO had inserted language that puts
some pretty severe restrictions on the application or the
granting of the loan guarantees that would require the use of
Federal property services or personnel. In taking another look,
that language was included in the conference package.
I think this would very severely hamstring renewable
projects that are cited on Federal lands or any project that
required moving transmission across a Federal highway. To me,
this is quite concerning. Within the department, have you
talked about how we can work with CBO, OMB, and the general
counsel to resolve this issue?
Mr. Frantz. Senator, I think it's a very good question, and
it is upon our desks.
Senator Murkowski. Ok.
Mr. Frantz. As you can well imagine and you alluded to the
sectors, this would impact transmission projects.
Senator Murkowski. Yes.
Mr. Frantz. Many of our consolidated solar panel applicants
are associated with the Bureau of Land Management. So this is a
very severe constraint. It is not certain how you would draw
the lines on what may or may not be some relationship to the
Federal Government on a citing issue.
It is clearly a very serious problem. I am not familiar
with the specific language. But it is one we are aware of as it
will be a very serious impediment to moving our program
forward.
In actuality, Andy may have more experience in dealing with
this issue than I do.
Senator Murkowski. Do you have any comments, Mr. Karsner?
Mr. Karsner. Yes, Senator. I don't have to tell you coming
from the West and the big spaces what it means to exclude all
of the Federal lands for citing when in fact those have the
highest probability. It's really a case of how many ways can we
shoot ourselves in our foot?
Senator Murkowski. Right. Do we really want this Loan
Guarantee Program or not. Some people would say no.
Mr. Karsner. In addition we have put in the most recent
statute, the Energy Independence Security Act, codified the
Executive Orders that I believe the Obama administration will
enforce. Reductions of 30 percent greenhouse gas emissions, 30
percent gains in efficiency, 7 percent mandate for renewables
across the Federal Government. These are historic and
unprecedented.
Now we're going to handicap the private market's ability to
even co-locate with a Federal facility that it's meant to
service. So, you know, we have got to have the managers
managing the accountants. Otherwise the accountants are
managing the management. This has been a chronic problem.
You know, I'm on the Board of Argon National Laboratory
where, you know, we're just being informed that the National
Laboratories who have done all of this critical, technical
review work that David spoke of, and have been doing it for
USDA with respect to clean energy projects. There's an
interpretation that they may be conflicted out. They're no
longer able to service the Department of Energy as a client
because they do R and D research with the car companies or with
the renewable energy companies.
So we are in the land of the bizarre. It will take White
House leadership at the NEC and OMB and Treasury level to
engage with DOE and with this committee to identify these
ambiguities and some of these bizarre accounting notions and
say, what do we want to do with appropriated funds on what time
table to empower David and his team to succeed? That
conversation has not taken place in a holistic, integrated
group method. If anything, I hopeful that this hearing can sort
of induce that new behavior.
Senator Murkowski. I would hope so. Unfortunately with this
particular language there's nothing ambiguous about it.
Mr. Karsner. Yes.
Senator Murkowski. It just says you can't. Basically, it
stops any opportunity that we are attempting to advance in
terms of renewables. To inhibit access to public lands is just
amazing to me.
Mr. Frantz, I have one final question for you. Just about
everyone has suggested that you have done well to get 30 full-
time people within the Department on this program. What do you
really need in order to accomplish what we are expecting?
How many people do you need? Do you have the flexibility to
bring them on and the caliber of individuals that we are
looking for? We are not just looking for someone who has
received a degree in accounting.
We need investment bankers. We need financial analysts. Are
we able to get them? Do you have what you need to do the job?
Mr. Frantz. Senator, a very good question that speaks right
to the heart of what some of the dilemmas that we're really
dealing with. As Andy and the others have alluded to, it is
very difficult for us to move people into Federal service on a
permanent basis. What we have been very successfully in is to
bring necessary expertise on board through a contractor basis.
These are individuals that represent my experience and years in
the industry. They are willing to come on board on a
contracting basis, and we can do that relatively quickly,
perhaps in a matter of just 2 or 3 weeks.
That is how we have been able to respond very quickly,
particularly to the solicitations, especially the nuclear and
large fossil solicitations, where we needed people with very
detailed experience in those areas. But it is a real dilemma to
get people into the Federal service because of the rules that
apply. It takes a great deal of time, quite frankly in the
magnitude of 4 to 6 months. The reason being primarily is the
competitive nature of civil service employment. So you have put
your finger on a major problem.
Back to a point that you have all alluded to and I think it
is an important distinction, these are certainly areas that are
addressed when you have an independent organization. There are
greater flexibilities in an independent agency than being in
the constraint of one of the larger Federal agencies in terms
of things that you can do, and the speed with which you can do
them.
In our case, I have had conversations with the chairman.
Clearly, I think there is a very strong argument in the way of
an immediate fix for us, would be to give us some independent
integrity where we can have our own legal counsel at our
disposal as well as our own human resources and procurement
staff would probably expedite the process for us.
But you have put your finger on a very serious impediment
for speed and responsiveness.
Senator Murkowski. Thank you, Mr. Chairman.
Mr. Karsner. May I add something for the record that David
can't say?
The Chairman. Yes, go right ahead.
[Laughter.]
Mr. Karsner. The Department of Energy's human resource
capacities are catastrophic. They are undermining every element
of the Department's mission. I just finished a tenure of an
excess of 30 months with 17 direct reports on a key portfolio
with less than half of the managers in place. Constantly
rotating heads to fill gaps because of an average, on best,
reported 9-month process to bring someone in if you can believe
there are people on the street that would wait 9 months to come
into the Federal Government.
When we had to go after New Orleans with urgency, we had
government special employees bulk up the SBA and brought in
lawyers and financiers and other people with the appropriate
acumen for a specific purpose. We have got to have war like,
Marshall Plan, serious hats on. There's never, ever been a
shortage anywhere I've ever gone of students, of MBAs, of
bankers. Said how can I help? What can I do to join this
effort?
We have devised more ways to keep them out and repel them
along with the school of shooting ourselves in the foot. So
that is what leads me to say, tweak what we can. But start with
a clean slate. Ensure we have the flexible authorities to get
it right.
The Chairman. Mr. Asselstine, you wanted to make a comment?
Then Senator Bennett has some questions.
Mr. Asselstine. Just a very brief comment, Mr. Chairman. I
think one positive note here. This, as Kevin said, a very
specialized field and a very specialized area in terms of
project finance capabilities.
But given the challenges in my industry lots of those
people are now available.
[Laughter.]
Mr. Asselstine. The contractor approach that Mr. Frantz
described is one that I think could really work to the benefit
of this program. There are very talented, very capable people
out there who are immediately available. I know, who have an
active interest in this area. Who would add greatly to the
capabilities.
Ideally longer term you'd like to move some of those people
into the Federal Government and build this program because this
program is going to have to be around for a long period of
time. But there is an immediate solution to the staffing
problem if we can get through the constraints.
The Chairman. Alright. Thank you.
Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman. Andy, having
served, this is going to sound antediluvian, having served in
the Nixon administration I can tell you that the HR problems
has not changed very much.
[Laughter.]
Senator Bennett. Over 40 years. Mr. Frantz, I understand
that the solicitations have overwhelmed the available
authority. The requests are there even with all of the problems
we've discussed here this morning. If we go ahead and get all
of the things done that we've talked about here this morning so
that it becomes efficient and we've got the right people in
place. They can examine everything.
You come back now to a fundamental decision that may be
beyond the ability of the present office to deal with. That has
to do with the allocation of where are we going to put our
resources. Mr. Asselstine, you talked about the difficulties
dealing with wind and solar. They survive only because of the
tax credits.
If I were on the board of a company that was going to
invest there, I would want to know can they survive if the tax
credits ultimately go away. I had a conversation with someone
in the United Kingdom that was producing alternative renewable
energy. I sat there and listened to the presentation, took off
my Senator's hat, and put on my businessman's hat and thought
if I were a member of the board of his company there's no way
in the world I would vote to proceed with this.
So finally I asked him, why are you doing this? He said,
because we get paid for the carbon credits. It has little or
nothing to do with the science. But we can make money off of
the carbon credits. Now they have a cap and trade system over
there that pays them the money. He said, that's why we're doing
this.
Now if you had an independent agency that had authority. We
clean up all of the impediments. Now the decision is made,
we've got x amount of money for which we can make a loan
guarantee.
We have an application from a wind farm. We have an
application from solar. We have an application from a nuclear
plant.
We have to make the decision or do we have to make the
decision of which one do we put our resources in on the basis
of which one will produce the energy we need on the scale we
need. Because you have reinforced the fact that we're going to
have to have major, major increase in our capacity, not only
because the economy will demand it, but because or present
facilities are getting older and have to be replaced. That
requires money.
Now, Mr. Frantz, you are oversubscribed now. People want
your money. Are you constricted by the statute from saying
we're going to put some money here rather than there?
As I look at the requests, overwhelmingly it's in the
nuclear field. Nnuclear has the best possibility of getting the
scale that we need, maybe not the speed that we need. But over
time if we're going to have to increase the energy output in
this country by 30 percent, something in the next number of
years, we're not going to do it with solar panels.
However much they may work, their addition to the overall
energy demand is going to be in single digits. So we've given
you everything you need. You're now the Tsar of this whole
thing. Do you want a degree of flexibility to be able to say
we're going to put a smaller amount into field A because we
will get more energy if we allocate these loan guarantees in
field B?
Mr. Frantz. A very good question, Senator. Thank you very
much. As you know the allocations themselves are in the report
language in the Energy and Water Development and Related
Agencies Appropriations Act, 2008. It is in the report
language, not in the law. However, the Department took the
position and I happen to personally think it was a good
decision, to respect the allocations that were presented to us
from Congress because it reflected the intent of how Congress
wanted the money to be spent.
Senator Bennett. As one who writes report language I like
that.
[Laughter.]
Mr. Frantz. I think there are really not any surprises
either on what ultimately happened. We all here are aware that
the new nuclear power plants, and we are looking at five new
innovative technologies to employ, represent at least $6 or $7
billion a project or more. That is the range that they are
requesting from us in the process.
The other thing I think that is important, is maybe where
serious consideration needs to be employed. That is the law
requires the Department to evaluate those projects where there
is a reasonable expectation that the Government will be repaid
for the employed debt that the Government is provding a loan
guarantee.
So to answer your question, on the other side of the
ledger, we are working with these utilities who are sponsoring
the nuclear projects. These are all the way up even today, in A
rated categories. So clearly they represent the best bet from a
risk point of view on where money should ultimately be
employed.
Not only to Andy's point of what our overall objective is
and that is purely clean technology, but also for the return on
the invested capital and the most acceptable risk. So there are
clearly elements here that from the standpoint of return that
will drive you to specific sectors perhaps at the detriment of
others. That is, where there is a much higher risk profile,
particularly in Andy's former area of energy efficiency and
renewable technologies, the risk is high compared to what we
are looking at in fossil projects or some of the other
technologies.
I think this is at the heart of one of the real decisions
that has to be addressed. Now what I think the ideal situation
would be is to have it both ways. Then, I think it would be to
have specific guidance from Congress, as you did, with these
allocations. It is very helpful to us, and frankly, we have
welcomed it. It has helped in the discipline of the selection
process. I think it was in discussions in the Recovery Bill at
one point, but I do not know where it ended up.
Perhaps in cases where there would be an availability of a
substantial amount of loan authority, the Secretary, at his
discretion, could have the opportunity under certain
circumstances, to actually move outside of each one of those
allocations where there was a tremendous oversubscription
versus another area where there might be an under subscription
or a marginal break even subscription. I think it is at the
heart of one of the big dilemmas we are dealing with.
Clearly with respect to nuclear, I think I've shared it
with the chairman, the actual numbers of our over
subscriptions. In that area it is astronomical. As you know, at
$18.5 billion we are probably looking, without the correction
that I talked about in the law permitting Export Credit Agency
participation and undivided participation, the most you are
going to get are three nuclear power plants. It is changing a
little bit, from the enormous cost escalations in that sector,
however these projects are still very expensive to construct.
Senator Bennett. Yes. Thank you.
Mr. Karsner. Senator, I'd like to give you a little bit of
variation on that. Let me premise it by saying I'm a believer
that nuclear has to be a part of the portfolio. That if we
continue to let aging plants go toward retirement without
replacement solutions we're going to have a big hole to fill.
But some of the commentary on the excessive risk of the
renewable portfolio which is a constantly moving landscape. It
is not very static. You know, I began my career as a
conventional energy developer.
I can tell you when you talk about boilers and diesel
engines and things that have been around for 100 years or
reactors that have been around for 50 years, you're talking
about relatively static cost curves with a variation coming
through the commoditized through put. As Kevin alluded to with
the renewables you're talking almost exclusively about the
capital cost of the equipment. Now since this loan guarantee
started in 2005 I'm on the board of one of the companies that
is active in Utah, applied materials. We've sold 15 gigawatt
scaled lines of solar manufacturing capacity in China, in
India, around the world.
We can't do it because of a lack of predictability here in
the United States with U.S. nano manufacturing technology. But
the price of solar has plummeted. The trend is continuously
pressurized downward based on scaling. That is not the case
with conventional energy technologies.
So again, we should be technology agnostic going for the
attributes. If it's emission free. If it's secure, if it can be
made affordable or abundant or accessible, we should welcome
it. That's what title 17 does.
But technical assessments by my Vin lab, the national
renewable lab, for the Loan Guarantee Program by way of
example, for the original 16 applicants, 3 or 4 years on are
not current anymore. The technology is actually moving too
fast. The commercial marketplace is changing too quickly.
That's a sign of the success in what we fund in R and D.
That's our goal, continuously pushing those costs down. So it's
a moving landscape.
The numbers in the marketplace of financed projects would
indicate that. You know, wind has been 15, I think maybe
approaching 20 gigawatts in the last decade. Or, sorry, that's
just the last few years, whereas we've managed to fund about 11
gigawatts of coal over 15 years.
So there's a reason why these are coming into the
marketplace faster because the costs are dramatically falling
to cost competiveness. Now the associations won't say that
cause they've got to come up here and tell you that they, you
know, can't survive without a PTC. Because there's nothing else
exists.
There's no carbon policy. There's no other externalities.
You know, there's no continuity.
But the truth is when you start conforming to conventional
project economics that the energy industry has known for years
with conventional project finance with mechanisms like these
loan guarantees. Some with pricing policy ultimately the tax
credit policies should go away and be supplanted because these
technologies are reaching maturity.
Senator Bennett. Thank you.
Mr. Asselstine. Senator Bennett.
The Chairman. Yes, go ahead.
Mr. Asselstine. One quick comment. I think the Congress was
probably right initially to say we want some money allocated to
each of the different technology types. I think that was
prudent and it made sense. But at this point we're at a stage
where certainly by this spring, we'll have a good sense for
what potential projects are available across different
technologies.
Now I think the approach really needs to be, No. 1, provide
sufficient resources to fund meritorious projects.
Two, have the flexibility to be able to allocate the
funding toward projects that are likely to provide the greatest
benefit at moderate risk to the Federal Government.
So having some flexibility to redirect those makes a lot of
sense. I personally agree with you that I think the nuclear
units do need to be part of the mix simply because the
technology is relatively straight forward. Incremental
development or change over what we have today. Those plants are
likely to be built and operated by companies that are very
creditworthy and it will do a good job in the process.
But I also think we need the other components as well.
You're absolutely right about the renewables. If you watch the
cycle of projects in this country when we have the production
tax credits, investment tax credits available, the projects get
built.
As soon as those expire then we don't build anymore until
they're renewed. So you have that cyclicality for the
renewables at the present time, as Andy said, without the
support of a carbon trading program.
Senator Bennett. Yes. Thank you very much.
The Chairman. Senator Murkowski, do you have additional
questions?
Senator Murkowski. No, I do not.
The Chairman. Mr. Bennett, do you have another?
Senator Bennett. No.
The Chairman. Mr. Book, did you have another comment you
wanted to make?
Mr. Book. Yes, very briefly.
The Chairman. Go ahead.
Mr. Book [continuing]. Between everyone and lunch. Just the
part of the vision of title 17 that I most admire is the idea
that innovation doesn't just include the first time you do
something. It includes the first time you do something here. It
can include the first time you use two somethings that you had
before in a different way.
Shortly after I appeared before this committee in December,
I think during that appearance, I spoke about pairing coal with
wind. You could hear the crickets chirp. Then people said, did
you say coal?
But actually the Department of Energy's National Energy
Technology Laboratory or ENREL, one of the two, put out a
recent analysis that said, this is a good way to do both
things. That itself is an innovation. The idea that you have
something as incrementally sequestering or reducing emissions,
the idea that you're using resources that you have that are
secure.
These are the kinds of innovations that are available when
you don't start earmarking things. When you start sort of
deciding what the limits are, I think you need a buffer zone to
protect the technologies that might not otherwise get funded
which is absolutely vital. You cannot ignore the future. But
you also want to make sure that you don't restrict yourself out
of making better use of the present.
The Chairman. Alright. I think this has been very useful
testimony. We have a lot to try to understand here and
hopefully act on.
But thank you all very much for coming. That will conclude
our hearing.
[Whereupon, at 11:52 p.m. the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Responses of James K. Asselstine to Questions From Senator Bingaman
Question 1. Your testimony gave a good sense of the scale of the
challenge we face in this area and outlined the total investments that
might be required. Assuming loan guarantees and other financial
mechanisms were available to fill in the gaps and stimulate that
investment, and assuming complementary regulatory policies like an RES
can be enacted, do you have any thought as to the scale of the
government investment that might be necessary to achieve what you
outlined?
Answer. I believe that federal loan and loan guarantee authority in
the amount of $200 billion would be sufficient to support the
development and deployment of innovative technologies to reduce
greenhouse gas emissions and to implement a renewable energy standard.
This amount would represent about 10 percent of the total capital
expenditures that are likely to be needed by the industry over the next
20 years to meet climate change and renewable energy objectives. I also
believe that some thought should be given to alternative mechanisms
that could permit this authority to be recycled into new projects over
time, thus leveraging the effectiveness of the federal financial
support. For example, it might make sense to use the federal loan
guarantee during the critical construction period for a facility and
then require that the guaranteed debt be refinanced using private
financing after the project has completed an appropriate period of
commercial operation. This would permit the redeployment of the loan
guarantee capacity to multiple projects over time.
Question 2. You stated that loan guarantees are a powerful tool but
not necessarily the only tool that should be available to leverage
private investment. Can you give us any examples of alternative
financial tools that might be applied more effectively for some
technologies? Take efficiency or distributed generation, for example.
Answer. Other financial tools that might be appropriate for some
investments would be the authority on the part of the federal
government to make a preferred equity or a common equity investment in
a particular venture. These tools might be particularly appropriate in
the two areas you mention--energy efficiency and distributed
generation. An equity investment may be more useful and effective than
a loan guarantee to support the development of a new technology to
improve energy efficiency or for a new distributed generation
technology where the prototype equipment would not necessarily itself
generate sufficient cash flow to repay the debt but where the
development of the technology itself could lead to a viable and
profitable business venture over the intermediate term. I believe this
authority to use a variety of financial tools would be most appropriate
if we move toward the concept of a clean energy investment fund
approach.
Responses of James K. Asselstine to Questions From Senator Murkowski
Question 3. The industry and Congress have been waiting anxiously
since 2005 for the current Title XVII Loan Guarantee Program to be
stood up and to begin issuing guarantees. With the possible exception
of Mr. Franz you have each argued for the establishment of some sort of
new agency that would provide a broader array of financial tools to the
clean energy industry. At the same time you have each underscored the
need for government support for clean energy technology in the short
term. While the idea of a new agency may have merit, how do we get from
here to there? How do we avoid waiting another 3-4 years while the
organization gets established? Are there ways that we can facilitate
the current Title XVII program in the near term while working to
establish a broader capability for the future?
Answer. Senator Murkowski, I share your concern that the creation
of a new and more flexible federal financing vehicle for clean energy
technologies not delay either efforts to improve the existing Title
XVII program or the much-needed award of loan guarantees under that
program to worthy projects. To address this problem, I would make two
suggestions. First, with respect to the existing DOE loan guarantee
program, I believe that this Committee should continue its active
oversight of the program to ensure that the Loan Guarantee Program
Office works diligently to complete its reviews and execute term sheets
to deploy its existing loan guarantee authority for renewable energy,
clean coal, and advanced nuclear projects as soon as possible. This
should include continued efforts to press DOE to correct the legal
interpretations that have created conflicts with respect to utility
mortgage bond indentures and joint ownership arrangements. Second, I
would suggest that the Committee consider establishing the new federal
financing vehicle within the Department of Energy, and folding the
existing Loan Guarantee Program Office into the new entity. Creation of
a clean energy investment fund within DOE that incorporates and builds
upon the existing loan guarantee program but that has broader authority
to use a variety of financial tools, the authority to hire its own
internal financial experts and legal advisors, and autonomy from the
rest of DOE would do much to correct the existing institutional
barriers to an effective loan guarantee program without requiring years
to set up a new agency.
Question 4. Is it possible for the Department of Energy to partner
with the private sector to provide an efficient loan guarantee service
while retaining control, or is it necessary to establish a private
entity to make this work?
Answer. As I noted in my previous response, I do not believe it is
necessary to establish a new, private entity to make this work.
Instead, I believe that many of the problems of the existing structure
could be corrected by creating a new financing vehicle within the
Department with greater autonomy than the existing Loan Guarantee
Program Office and with the authority to use a broader array of
financial tools. This would allow the federal government to retain
control of the program. But by creating a more autonomous and flexible
funding vehicle, there may be somewhat greater opportunities for the
government to partner with private lenders on a project-by-project
basis.
Question 5. What legislative fixes are needed to the Title XVII
program to make it function more smoothly? What fixes can be done
administratively?
Answer. I believe that most, if not all, of the changes needed to
make the loan guarantee program function more smoothly can be
accomplished administratively. Thus, I believe that the Secretary of
Energy has ample authority to ensure that the Loan Guarantee Program
Office is staffed adequately, with a mix of full-time employees and
consultants having the requisite project finance expertise, to hold the
Office accountable for completing its reviews in a timely manner, and
to allow the Office to retain its own financial and legal advisors. If
these steps are not taken administratively to correct the existing
problems with the program, then the Committee should consider
addressing the problems legislatively.
Question 6. Is it more important to get the loan guarantee funds
out to a multitude of projects that could be successful, or concentrate
the money on a handful of the best projects that have a high likelihood
of success?
Answer. I would allocate the majority (perhaps 75 percent) of the
available funds to the larger, higher quality projects that have a high
probability of success. By doing this, the Program Office will ensure
the highest return on the government's financial investment while
keeping the risk of default and financial loss to the government as low
as possible. At the same time, I believe that some of the funding
(perhaps 25 percent) should be allocated to smaller, higher risk
renewable energy projects that may offer the opportunity for more
significant technology breakthroughs in developing new clean energy
technologies. In these cases, the higher potential rewards in
developing new technologies to supplement more established technologies
may justify a higher risk of default.
Question 7. Assuming a maximum contingent liability of $100 billion
and that such an expansion were to be enacted by Congress, what do you
believe is an acceptable rate of default for projects participating in
a program of not just loan guarantees, but direct loans and other
financial instruments?
Answer. In general, I believe that the program should be
administered to achieve a default rate of on the order of 5-10 percent.
To achieve this objective, as noted in my previous response, I would
weight the funding in favor of larger, lower risk projects with a lower
default rate, but I would consider some smaller, higher risk
investments in projects that offer the potential for greater technology
advances.
Question 8. I appreciated your description of the array of
technologies needed to establish a 21st Century energy system and the
unique financial challenges faced by each of these technologies. Your
written testimony certainly gives a sobering perspective on the
challenges facing the electric power sector and the need to expand the
current loan guarantee authority. Unfortunately, the expanded loan
guarantee authority included in the Stimulus Package does not include
all of the clean energy technologies in the portfolio you described.
Provided we can resolve the deployment issues with the current Title
XVII program, do you agree that the program's guaranteed loan volume
authority should be increased given the substantial number of requests
the program has already received?
Answer. Yes, I would support an increase in loan volume authority
to $200 billion, and I would remove restrictions limiting the amount of
the available loan volume that can be applied to projects employing
particular technologies. It is clear that the Department has received
qualified applications for loan guarantees from attractive projects
well in excess of the current authorized loan volume, and many of these
projects will be needed if we are to meet the ambitious greenhouse gas
emissions reduction targets now being considered by the Congress. In my
judgment, having a workable, efficient, and adequately funded loan
guarantee program is essential in meeting our climate change objectives
and in substantially increasing the contribution of renewable energy
resources to our energy mix.
Responses of James K. Asselstine to Questions From Senator Corker
Question 9. How have rising ECP (engineering, construction and
procurement) costs affected the DOE management of the program? Does DOE
see a need for Round 1 loan volume increases? If so, how much? How
should mismatched project costs to loan volume problems be handled in
the future?
Answer. Project costs have been increasing, in large part due to
rising commodity and labor costs. Despite the recession, thus far we
have not seen substantial reductions in these project costs. As
indicated in my previous responses, I would favor increasing the
available loan guarantee volume to $200 billion. In addition, I would
suggest that DOE be directed to report periodically to the Congress on
the adequacy of available loan guarantee volumes to meet the
requirements of qualified guarantee applications.
Question 10. In the absence of credit at reasonable commercial
rates, what are the process and resource issues that need to be
addressed to allow ancillary but essential project elements (e.g., CO2
Off-takers in a Carbon Capture and Sequestration project (CCS) to
participate in the core project but under a separate loan guarantee?
Answer. If financing capacity from private sources is not available
at reasonable rates and on reasonable terms for important project
components such as CO2 off-takers for a CCS project, it may be
necessary to expand the scope and authority of the loan guarantee
program to allow such project components to be included in the loan
guarantee or to be assigned a separate loan guarantee.
Question 11. How has the credit crisis affected the DOE loan
guarantee program in general? How has the credit crisis affected the
``credit assessment'' of projects faced with applications under due
diligence this year (2009)?
Answer. If anything, the credit crisis has made the DOE loan
guarantee program even more essential. Because the greenhouse gas
reducing technologies that qualify for funding under the loan guarantee
program use advanced and innovative, rather than well-established,
existing, technologies, traditional private funding for these projects
has become even more difficult and costly with the credit crisis. Thus,
the credit crisis has increased the urgent need for this Committee to
ensure that we have an efficient, effective, and appropriately funded
loan guarantee program to move these projects forward.
Question 12. What does the DOE see as necessary changes to
accommodate the Round 1 applicants under these relatively new economic
circumstances? Does the full self-pay concept or rationale hold up?
Answer. I would suggest two changes to the program to ease the
financial burden on applicants for the loan guarantee program. First, I
would consider postponing the requirement for substantial fee payments
by loan guarantee applicants until the applicant has executed a final,
binding term sheet with DOE. This is consistent with private lending
practice. Second, although I support the requirement to have the loan
guarantee recipient pay the cost of the credit subsidy for the loan
guarantee, I would recommend spreading the subsidy payment over the
term of the loan guarantee rather than requiring an up-front payment as
is currently the case.
Question 13. How can the NEPA process be expedited and accountable?
Answer. I believe that appropriate supervision by the Secretary of
Energy and active oversight by this Committee should be sufficient to
ensure that the Department fulfills its NEPA responsibilities without
delaying the timely award of loan guarantees to well qualified
projects.
______
Responses of Kevin Book to Questions From Senator Bingaman
Question 1. In your testimony you present a compelling case that
simply pushing down the debt costs of a project can have significant
effects on the final costs to the consumer. It seems like the
implication of this, at least to some extent, is that to gain these
benefits beyond what the private market will yield, the lender must be
willing to absorb some of the risk of failure without passing that cost
on to the borrower. Given the constraints of federal budgeting and
appropriations do you believe it is reasonably likely that the loan
guarantee program as it currently exists can take on this risk and
provide sufficient inexpensive debt support at the speed the industries
require?
Answer. Mr. Chairman, the Title XVII program is currently
constrained by the amount of funding appropriated by Congress and
governed by technology-specific limits articulated within the December
2007 appropriations language. Recipients of loan guarantees within
those constraints should be able to generate energy at lower cost and
pass some or all of those savings along to end-users. The current
structure of the program, however, does not appear likely to provide
adequate debt coverage to meet the needs articulated by sponsors of the
most capital-intensive projects (e.g. nuclear power and clean coal),
nor the theoretical demand for renewable projects characterized by
lower overall capital costs but higher generating costs, especially
farm-scale solar power. It seems unfair to evaluate turnaround time for
loan guarantees with only one guarantee issued since the enactment of
the Energy Policy Act of 2005. That said, if the current latency
between initial solicitation and final awards were to continue, it
seems likely that it could further compound the financing challenges
confronting energy project sponsors as a result of tight credit markets
and/or short operating histories.
Question 2. You talk a bit about the core competencies of the
Department and how that might be a mismatch with the necessary skills
in lending and risk management that are the fundamentals of
commercialization. In your opinion, is this an issue of compensation
and personnel, or is there some more fundamental constraint on the
Department that might keep it from developing this competency?
Answer. At its inception, the Department of Energy was chartered to
facilitate the ``integration of major Federal energy functions into a
single department in the executive branch'' [42 U.S.C 7111(5)],
essentially to defragment and focus the nation's research and
development efforts towards greater energy security. Just as the shape
of diamond crystals mirrors the latticework of the underlying carbon
molecules, I would suggest that the Department may organizationally
resemble the methodical and patient practices of thephysical and social
scientists who work within it. While it is possible to anchor a
separately-chartered financing organization within the Department, it
seems unlikely that existing organizational structures will facilitate
the customer focus and risk tolerance typical of modern finance
institutions. In this context, building a freestanding financing body
within the Department is likely to require hiring from outside the
Federal Government and may require compensation in line with industry
norms.
Responses of Kevin Book to Questions From Senator Murkowski
Question 3. The industry and Congress have been waiting anxiously
since 2005 for the current Title XVII Loan Guarantee Program to be
stood up and to begin issuing guarantees. With the possible exception
of Mr. Frantz you have each argued for the establishment of some sort
of new agency that would provide a broader array of financial tools to
the clean energy industry. At the same time you have each underscored
the need for government support for clean energy technology in the
short term. While the idea of a new agency may have merit, how do we
get from here to there? How do we avoid waiting another 3-4 years while
that organization gets established? Are there ways that we can
facilitate the current Title XVII program in the near term while
working to establish a broader capability for the future?
Answer. Senator Murkowski, I see no reason why ongoing Title XVII
activities should not continue on a parallel track with the creation of
a new agency or organizational capability within the Department of
Energy, provided that the transition occurs sooner rather than later.
The more work that continues under the existing program, the harder it
may be for the agency heads performing the transition to coordinate
their due diligence practices, their portfolio-based assessments of
project risk and their ongoing communications regarding new and ongoing
project matters.
Question 4. Is it possible for the Department of Energy to partner
with the private sector to provide an efficient loan guarantee service
while retaining control, or is it necessary to establish a private
entity to make this work?
Answer. The notion of a federally-backed commercial loan is, by
definition, a public-private partnership. The question you ask appears
to be whether or not the lending and the risk assessment and credit
enhancement functions could be performed by the private sector.
In theory, the answer is yes, but with some important caveats. Any
outside guarantor could provide the risk assessment and credit
enhancement functions associated with loan guarantees, but not
necessarily at a cost of capital competitive with loans backed by the
full faith and credit of the United States. Private players might also
wish to form a new special-purpose entity to syndicate default risk,
particularly in light of the challenges facing many of the primary
providers of credit assurance and reinsurance services, potentially
diluting accountability.
Every privately-sponsored ``wrapper'' around a Title XVII loan will
come at a cost that reflects a combination of the lender's financial
reality and the lender's assessment of the borrower's creditworthiness.
Even a well-functioning credit market might not deliver debt costs as
low as those possible under Title XVII or a successor entity/program.
Question 5. What legislative fixes are needed to the Title XVII
program to make it function more smoothly? What fixes can be done
administratively?
Answer. In my view, the most valuable improvement to current
program--whether it be done legislatively or under administrative
authority--might be to decouple the appropriation of funds from
specific technologies and reinforce the technology-agnostic vision
articulated in the original Title XVII program.
A legislative change might be more likely to produce results, in my
view, given the considerable influence over technology choices the
Congress and this Committee, to say nothing of executive branch
appointees--are likely to possess. The most robust way to decouple
politics from technology choice could be to give the Title XVII program
or a successor agency/program the ability to manage its portfolio of
assets as banks and investment funds manage theirs, including the
ability to purchase mission-specificdebt, equity and derivatives to
balance (or rebalance) risks as well as the capability to securitize
and sell debt to ``recycle'' funds into future projects.
Question 6. Is it more important to get the loan guarantee funds
out to a multitude of projects that could be successful, or concentrate
the money on a handful of the best projects that have a high likelihood
of success?
Answer. Senator Murkowski, if we hope to increase energy security,
environmental stewardship and economic growth, we must do everything we
can to encourage the diffusion of technologies that can make a
difference. Commercial-scale, high-cost technologies likely to provide
secure sources of clean energy might well consume the lion's share of
the project portfolio because big projects are expensive, but they also
can make a big difference.
Question 7. Assuming a maximum contingent liability of $100 billion
and that such an expansion were to be enacted by Congress, what do you
believe is an acceptable rate of default for projects participating in
a program of not just loan guarantees, but direct loans and other
financial instruments?
Answer. In my view, a properly allocated portfolio that includes
mature, high-cost projects and innovative, smaller-scale projects
should exhibit project-specific default risk in inverse proportion to
project size. In English, we shouldn't be making big, stupid bets; we
should be making big, smart bets and small, stupid bets that are likely
to lead to big, smart bets later on. Taking your $100 billion baseline
and the notion of ``other financial instruments'' into account, the
overall portfolio need not lose money at all, even if, bycharter, its
managers pursued innovative technologies that exhibited a 10-25%
default risk.
Question 8. I am impressed by your statement regarding the
importance of the loan guarantee program to clean energy technology
projects. I am also glad that you mentioned the need for infrastructure
investment to support these projects. I would imagine that the
suppliers that manufacture the equipment and components needed for
clean energy projects might look to the issuance of loan guarantees to
time their own investments in expanded capacity and human resources
required to meet future demands. Is it reasonable to expect the loan
guarantee program to have a broader impact than just the individual
projects and for that impact to be felt even before the projects begin?
Are there changes that can be made to the program, or included in
future legislation, that could further leverage the impact of the
program?
Answer. Senator, many of projects that might receive loan
guarantees under Title XVII or a successor program involve long lead
times precisely because their complex value chains include intermediate
goods suppliers that must ramp up specialized manufacturing processes
and undertake considerable investments in training and productive
capital. The expectation of stable funding and rapid turnaround for
eligible projects is likely to induce related and supporting players
further up the value chain to accelerate their own investments. This
could be particularly true in the cases of high-efficiency vehicles,
clean coal power plants, photovoltaic technologies and nuclear power.
Question 9. From your perspective looking at domestic and global
economic and policy trends there has been some discussion about the
similarities between what we are seeing today and the 1980s, where the
still fresh in the mind oil embargoes, and higher prices of oil led to
greater interest in alternative and renewable energy development, but
eventually lower oil prices reduced investor enthusiasm. After the
recent sky high oil prices refocused our interest, do you see today's
lower oil prices putting these energy sources on the backburner again,
or will there be a sustainable interest in thecontinuation of the loan
guarantee program, and possible a Clean Energy Investment bank
typeentity?
Answer. A well-functioning market that that incorporates non-
commercial traders to provide sufficient liquidity is, in its own
right, a powerful force to encourage future investment. Although it is
impossible to ignore the tremendous social and economic costs of oil
price fluctuations, I would suggest that sound energy policy should be
like any other long-term investment: focused on the trend line, not on
day-to-day fluctuations. We should not day-trade our energy
infrastructure any more than we should day-trade our retirement
portfolios.
The inflation-adjusted oil price trend since the dawn of the
industry 150 years ago exhibits a gentle upward slope on a cumulative
average basis, which should tell us two things. First, that gentle
upward trend disguises the thousands of innovative supply-side
improvements and end-user efficiency gains that have kept the world
well-supplied despite hundreds of interruptions, disruptions and
dislocations; ongoing investment is the only reason we are doing as
well as we are. Second, the trend line still slopes upward in spite of
our technological prowess, which means that the real costs of our most
abundantprimary energy source are rising, a reminder that we will
eventually need to transition to a ``next fuel''.
Technology-agnostic, low-cost loans for innovative technologies
seem a good idea at any oil price.
Responses of Kevin Book to Questions From Senator Corker
Question 10. How have rising ECP (engineering, construction and
procurement) costs affected the DOE management of the program? Does DOE
see a need for Round 1 loan volume increases? If so how much? How
should mismatched project costs to loan volume problems be handled in
the future?
Answer. Senator, I do not feel qualified to speculate on how rising
ECP costs have influenced internal DOE decision-making. My own opinion,
however, is that technology-specific funding constraints that prevent
DOE from responding to industry demands for debt coverage are likely to
distort the hoped-for outcomes envisioned by this Committee in the 2005
Act. Nuclear power provides an example. ``Overnight'' costs for new
nuclear power plants rose from an estimated $2,500/kW to an estimated
$5,000-7,000kW since the Act was enacted. Other incentives in the Act
converge towards an incremental 6,000 MW of capacity (6,000 MW of
production tax credits and standby support for six new reactors). $18.5
billion in debt coverage might have covered as many as nine reactors at
the low end of the ECP range, but might be sufficient to cover only
three to four reactors at the high end of the range.
Question 11. In the absence of credit at reasonable commercial
rates, what are the process and resource issues that need to be
addressed to allow ancillary but essential project elements (e.g., CO2
Off-takers in a Carbon Capture and Sequestration project (CCS)) to
participate in the core project but under a separate loan guarantee?
Answer. Credit terms notwithstanding, the widespread diffusion of
CCS offtake agreements for permanent geological storage may require a
clear framework that defines project sponsors' long-term liability at
injection sites. This has recently become an insurable risk, but
insurance adds yet another operating cost and greater uncertainty for
players downstream from emissions sources. Policy tools like tax
deductibility, publicly traded partnership status (which has been
conferred to CO2 pipelines) and loan guarantees could potentially
mitigate these additional operating costs.
Question 12. How has the credit crisis affected the DOE loan
guarantee program in general? How has the credit crisis affected the
``credit assessment'' of projects faced with applications under due
diligence this year (2009)?
Answer. I would hypothesize that the credit crisis has diminished
the willingness of commercial lenders to underwrite DOE-backed loans
due to concerns about their own capital adequacy. Likewise, many
project sponsors in a variety of capital-intensive industries,
including energy and manufacturing, were downgraded by debt ratings
agencies on the basis of their challenges meeting working capital needs
in a frozen commercial paper market.
Question 13. What does the DOE see as necessary changes to
accommodate the Round 1 applicants under these relatively new economic
circumstances? Does the full self-pay concept or rationale hold-up?
Answer. Senator, I cannot speculate as to DOE's position regarding
changes to the program, but I am happy to offer my view that full self-
pay may prove more challenging to innovative and financially mature
applicants alike given straitened credit terms.
Question 14. How can the NEPA process be expedited and accountable?
Answer. Senator, I interpret your question to reflect concerns that
streamlining the DOE's low-cost lending processes may do little to
encourage the evolution of capture and storage technologies for
commercial scale fossil energy producers as long as these projects face
delays under NEPA review. I would suggest, if I have properly assessed
your intent, that the existence of ``delay risk'' mitigation programs
like ``standby support''--while a key component of encouraging project
sponsors to undertake high-risk endeavors,may also be one of the
signals that lawmakers may wish to review the unanticipated
consequences of the environmental regulations governing energy
projects. This might be a particularly useful counterpoint to a
streamlined Title XVII or successor program.
______
[Responses to the following questions were not received at
the time the hearing went to press:]
Questions for Andy Karsner From Senator Bingaman
Question 1. You express some frustration in your testimony with how
the loan guarantee program took shape under the last Administration. I
expect you might agree that at least some of the implementation
problems were attributable to a certain ambivalence towards the program
at other levels within the Administration. Given the priority and
attention that the President and Secretary are giving this issue, do
you think the program can meet the needs as it is currently
constructed?
Question 2. You have advocated for a quasi-governmental ``Clean
Energy Bank'' to take over the functions of the loan guarantee program.
Beyond the advantage in focus or additional resources that such an
approach might bring, are there specific structural advantages an
independent entity would hold over a similarly focused and strengthened
program within DOE?
Question for Andy Karsner From Senator Stabenow
Question 3. The idea of a clean energy bank sounds promising. I
agree that to make the leap that is required to commercialize and
deploy the next generation of technology to produce energy and create
jobs we need to have an array of financing options at our disposal to
take the necessary risks with the private sector. Can you explain in
more detail how a potential quasi-governmental agency can work with the
traditional structure of DOE to mix new financing expertise with the
extant technological expertise at DOE? Also please describe the
characteristics of the different models that you mentioned in regards
to the EX-IM Bank and the Overseas Private Investment Corporation and
explain which ones are most important for success. Finally, is the
Carbon Trust in the United Kingdom an example of a energy financing
entity that lawmakers should examine as a model for a new clean energy
bank and why or why not?
Questions for Andy Karsner From Senator Murkowski
Question 4. The industry and Congress have been waiting anxiously
since 2005 for the current Title XVII Loan Guarantee Program to be
stood up and to begin issuing guarantees. With the possible exception
of Mr. Frantz you have each argued for the establishment of some sort
of new agency that would provide a broader array of financial tools to
the clean energy industry. At the same time you have each underscored
the need for government support for clean energy technology in the
short term. While the idea of a new agency may have merit, how do we
get from here to there? How do we avoid waiting another 3-4 years while
that organization gets established? Are there ways that we can
facilitate the current Title XVII program in the near term while
working to establish a broader capability for the future?
Question 5. Is it possible for the Department of Energy to partner
with the private sector to provide an efficient loan guarantee service
while retaining control, or is it necessary to establish a private
entity to make this work?
Question 6. What legislative fixes are needed to the Title XVII
program to make it function more smoothly? What fixes can be done
administratively?
Question 7. Is it more important to get the loan guarantee funds
out to a multitude of projects that could be successful, or concentrate
the money on a handful of the best projects that have a high likelihood
of success?
Question 8. Assuming a maximum contingent liability of $100 billion
and that such an expansion were to be enacted by Congress, what do you
believe is an acceptable rate of default for projects participating in
a program of not just loan guarantees, but direct loans and other
financial instruments?
Question 9. In your written testimony you describe the endorsements
of the Council on Competitiveness and the Energy Security Leadership
Council for the creation of quasi-governmental organizations that can
provide financial services for clean energy technology projects beyond
what the Title XVII program can. I am concerned though that your own
description of clean energy investments including ``... sun, wind,
biomass, and geothermal heat ...'' does not seem to include nuclear
energy which already avoids the emission of nearly 700 million metric
tons of carbon dioxide annually. Even in the stimulus package we have
seen the introduction of new loan guarantee authority specifically
targeted to renewable energy while an amendment supporting the broader
portfolio of clean energy technologies under the existing Title XVII
program was removed. Do you agree that nuclear energy and clean coal
technologies also have a place in the clean energy portfolio? And if
so, how can we ensure that the type of quasi-governmental agency you
advocate is equipped to handle the unique financial challenges faced by
each of these technologies?
Questions for Andy Karsner From Senator Corker
Question 10. How have rising ECP (engineering, construction and
procurement) costs affected the DOE management of the program? Does DOE
see a need for Round 1 loan volume increases? If so how much? How
should mismatched project costs to loan volume problems be handled in
the future?
Question 11. In the absence of credit at reasonable commercial
rates, what are the process and resource issues that need to be
addressed to allow ancillary but essential project elements (e.g., CO2
Off-takers in a Carbon Capture and Sequestration project (CCS)) to
participate in the core project but under a separate loan guarantee?
Question 12. How has the credit crisis affected the DOE loan
guarantee program in general? How has the credit crisis affected the
``credit assessment'' of projects faced with applications under due
diligence this year (2009)?
Question 13. What does the DOE see as necessary changes to
accommodate the Round 1 applicants under these relatively new economic
circumstances? Does the full self-pay concept or rationale hold-up?
Question 14. How can the NEPA process be expedited and accountable?
______
Questions for David G. Frantz From Senator Bingaman
Question 1. You have extensive experience in project financing from
your former days at the Overseas Private Investment Corporation. Can
you compare for us the different tools that were available to you there
to support deployment that may have some applicability here?
Question 2. In addition to the loan guarantee program authorized in
the 2005 bill, the 2007 energy bill authorized a sizable new direct
loan program for advanced automotive manufacturing to help push forward
domestic production of fuel efficient vehicles. A significant
difference in that program is that is it was provided with advanced
funding for subsidy costs in October of last year. What advantages or
challenges does this different funding structure present? Are there
lessons we can draw from that program's implementation?
Question for David G. Frantz From Senator Dorgan
Question 3. The Energy Policy Act of 2005 authorized a Title V
Indian Energy Loan Guarantee Program in addition to the Title 17
Program. At last report, the Indian Energy Program was included by DOE
in the Title XVII. However, the Title 17 program was authorized for
innovative technologies, while the Title 5 program was broadly
authorized for any energy development by Indian tribes. What steps have
to taken to ensure that DOE's Loan Guarantee Program includes the
purposes authorized for the Indian Energy Loan Guarantee Program? What
steps have you taken to ensure that Indian tribes have knowledge of the
loan guarantee program and can compete fairly for funding? Would the
Indian Energy Loan Guarantee Program be better served if it was run
separately from the general program, and supervised by the Director for
Indian Energy Policy and Programs?
Questions for David G. Frantz From Senator Stabenow
Question 4. It is not apparent under either the statute or the
Department of Energy (DOE) regulations whether pipelines for carbon
capture would be eligible for a guarantee. As it stands the law seems
broad as it allows ``Carbon capture and sequestration practices and
technologies''. Without CO2 pipelines, the citing and construction of
which involve significant costs, transporting the CO2 to sequestration
sites will be very cost prohibitive. And as you all are aware, carbon
capture will be vital to meeting future greenhouse gas obligations.
Would a project to construct a pipeline to transport CO2 from an
emissions source to a sequestration site (in connection with CO2 EOR),
separate and distinct from the installation of carbon capture equipment
at the emissions source, be eligible for a guarantee under the Title
XVII Loan Guarantee Program (as defined ``Carbon capture and
sequestration practices and technologies,'' EPAct 1703 (b)(5))?
Question 5. In the small town of Morenci, Michigan, there is a
plant called Palm Plastics. Palm Plastics has the distinction of being
one of two sites in America that manufacture plastic shipping pallets
for a company called Intelligent Global Pooling Systems or iGPS. These
iGPS pallets are unique from other pallets in that they are 30% lighter
than conventional pallets, which mean less weight to ship and therefore
result in significant fuel savings and reduced pollution. These pallets
are 100% recyclable, and therefore will never clog landfills. The
growth of plastic shipping pallets throughout our supply chain will go
a long way to save fuel and reduce greenhouse gases. I am proud to have
these green jobs in my state making these pallets and would in fact
like to see these precious manufacturing jobs grow. However, the credit
crisis means that companies like iGPS cannot grow and they, like other
companies, are turning to the federal government for capital. The text
of Title XVII states that these loan guarantees are for projects that--
``avoid, reduce, or sequester air pollutants or anthropogenic emissions
of greenhouse gases: and employ new or significantly improved
technologies as opposed to commercial technologies in service in the US
at the time the guarantee is issued. Commercial technology is defined
as a technology in general use in the marketplace.'' Clearly, the
lighter weight of an all-plastic pallet significantly reduces
pollutants and greenhouse gases. Among the types of ``efficient end-use
energy technologies'' to which the loan guarantee program applies,
would those also include new technologies applicable to the nation's
supply chain, including material transport and pallets, which
significantly reduce pollutants and greenhouse gases?
Questions for David G. Frantz From Senator Murkowski
Question 6. The industry and Congress have been waiting anxiously
since 2005 for the current Title XVII Loan Guarantee Program to be
stood up and to begin issuing guarantees. With the possible exception
of Mr. Frantz you have each argued for the establishment of some sort
of new agency that would provide a broader array of financial tools to
the clean energy industry. At the same time you have each underscored
the need for government support for clean energy technology in the
short term. While the idea of a new agency may have merit, how do we
get from here to there? How do we avoid waiting another 3-4 years while
that organization gets established? Are there ways that we can
facilitate the current Title XVII program in the near term while
working to establish a broader capability for the future?
Question 7. Is it possible for the Department of Energy to partner
with the private sector to provide an efficient loan guarantee service
while retaining control, or is it necessary to establish a private
entity to make this work?
Question 8. What legislative fixes are needed to the Title XVII
program to make it function more smoothly? What fixes can be done
administratively?
Question 9. Is it more important to get the loan guarantee funds
out to a multitude of projects that could be successful, or concentrate
the money on a handful of the best projects that have a high likelihood
of success?
Question 10. Assuming a maximum contingent liability of $100
billion and that such an expansion were to be enacted by Congress, what
do you believe is an acceptable rate of default for projects
participating in a program of not just loan guarantees, but direct
loans and other financial instruments?
Question 11. One criticism of the Loan Guarantee Program has been
that it operates more like a government procurement process rather than
a commercial banking program. This leads to a time consuming
solicitation followed by a lengthy comparative evaluation process
before loan guarantees are issued. With the substantial interest shown
by industry in this program combined by the economy's need for new
investment it seems a more efficient process would be worth pursuing.
Given the broad discretion granted to the Department of Energy under
Title XVII to establish the most efficient process, could the
Department implement a rolling review process similar to that used in
other Federal loan guarantee programs? How do you think this would
impact the Loan Guarantee Program?
Question 12. Would a project to construct a pipeline to transport
CO2 from an emissions source to a sequestration site (in connection
with CO2 EOR), separate and distinct from the installation of carbon
capture equipment at the emissions source, be eligible for a guarantee
under the Title XVII Loan Guarantee Program (as "Carbon capture and
sequestration practices and technologies," EPAct 1703 (b)(5))?
Question 13. When can a decision be expected regarding the
applications to the front end nuclear fuel cycle solicitation?
Questions for David G. Frantz From Senator Burr
Question 14. I understand that DOE has been notifying applicants
for the loan guarantee program about the status of their applications,
in particular whether the applicants are being considered in the
``first tier'' for project structures that ``Accelerate Deployment of
New Nuclear Capacity.''
Question 15. Can you tell us how many applications the Application
Evaluations and Rankings process determined to be first tier and how
many represent ``viable alternatives?''
Question 16. I noted that in one of your responses to an applicant,
you stated, ``We will inform you promptly should this occur (should any
other, more ready project be disqualified or withdraw) or if we receive
additional authority to provide loan guarantees.''
Question 17. What exactly does this mean? Does this mean the DOE is
currently limited in the number of loan guarantees it can provide, not
because of the viability of certain projects, but because Congress has
arbitrarily capped the number of projects that can be provided with
loan guarantees?
Questions for David G. Frantz From Senator Corker
Question 18. Do you believe that DOE should give priority to
eligible and viable projects that are ``shovel ready'' to immediately
address U.S. economic recovery? What specific actions are you taking to
award loan guarantees to project applicants that can achieve rapid
creation of new domestic jobs?
Question 19. If the Department changed the current process of
solicitations to a rolling review process, project applications could
be considered as they are received and decisions could be expedited. Is
there any statutory impediment as to why DOE cannot employ the rolling
review process that has been successfully deployed elsewhere in
business and government? Would you agree that there are projects that
could move more quickly if the Department had such a business model in
place?
Question 20. How have rising ECP (engineering, construction and
procurement) costs affected the DOE management of the program? Does DOE
see a need for Round 1 loan volume increases? If so how much? How
should mismatched project costs to loan volume problems be handled in
the future?
Question 21. In the absence of credit at reasonable commercial
rates, what are the process and resource issues that need to be
addressed to allow ancillary but essential project elements (e.g., CO2
Off-takers in a Carbon Capture and Sequestration project (CCS)) to
participate in the core project but under a separate loan guarantee?
Question 22. How has the credit crisis affected the DOE loan
guarantee program in general? How has the credit crisis affected the
``credit assessment'' of projects faced with applications under due
diligence this year (2009)?
Question 23. What does the DOE see as necessary changes to
accommodate the Round 1 applicants under these relatively new economic
circumstances? Does the full self-pay concept or rationale hold-up?
Question 24. How can the NEPA process be expedited and accountable?
Appendix II
Additional Material Submitted for the Record
----------
Statement of Chris Devers, Chairman, Pauma Band of Mission Indians and
Chairman, Council of Energy Resource Tribes
introduction
Good morning Chairman Bingaman, Ranking Member Murkowski, and
distinguished members of the Committee on Energy and Natural Resources.
My name is Chris Devers and I am the Chairman of the Pauma Band of
Mission Indians. I am also Chairman of the Council of Energy Resource
Tribes (``CERT'').
On behalf of CERT's member tribes I am pleased to submit this
statement for the Committee's consideration relating to the Department
of Energy's Guaranteed Loan Program and matters related to Indian
tribal energy development.
Founded in 1975 during what was then known as the ``Arab Oil
Embargo'', CERT is headquartered in Denver, CO, and boasts 57 member
Indian tribes. CERT's member tribes are actively engaged in the
development and production of renewable and non-renewable sources of
energy from coast to coast. CERT's mission is to support member tribes
in the development of their management capabilities and the use of
their energy resources to foster tribal economic development and
political self-governance. CERT is governed by a Board of Directors
comprised of the principal elected leadership of CERT's member Indian
tribes.
the unfulfilled promise of indian energy
American Indian tribes and their energy resources hold enormous
potential to create jobs, generate revenues, and aid in the American
economy's need for a stable energy supply. Three factors contribute to
this scenario:
The significant reserves of tradition sources of energy such
as oil, gas, and coal, as well as the unleashed potential of
renewable resources owned by Indian tribes;
The pricing environment for energy products; and
The enactment in 2005 of a classically liberal, pro-
production energy policy.
A. Indian Tribal Energy Resources and the Pricing Environment
Indian tribes in the lower 48 states--especially those in the Rocky
Mountain west--own an enormous amount of energy resources. With the
current Federal restrictions on exploring for energy in the Great
Lakes, the eastern portion of the Gulf of Mexico, the California
coastline, and ANWR, Indian tribal resources and lands in the Rockies
present one of the most significant opportunities for domestic
production in the United States.
In what is now a dated analysis, in 2001 the U.S. Department of the
Interior (the Department) estimated the total dollar value of energy
produced from Indian tribal lands for the period 1934-2001 to be $34
billion. These revenues derived from 743 million tons of coal, 6.5
billion cubic feet of natural gas, and 1.6 million barrels of oil. In
terms of undeveloped reserves and undiscovered resources, the
Department also projected that tribal lands could prospectively
generate $875 billion, derived from 53 billion tons of coal, 37 billion
cubic feet of natural gas, and 5.3 million barrels of oil. These
projections were made in 2001 and in the intervening 7 years, the price
of energy products has increased significantly.
If the Department conducted an updated analysis using current
pricing data, the total revenue projection would be increased by
hundreds of billions dollars.
B. The New Indian Tribal Energy Laws
On August 8, 2005, President Bush signed into law the Energy Policy
Act of 2005 (Pub.L. 109-58) which included as title V the Indian Tribal
Energy Development and Self Determination Act. The new law authorizes a
variety of Federal technical and financial assistance to participating
tribes and seeks to reduce administrative obstacles at the Federal
level to greater levels of energy development on tribal lands.
Unlike some congressional enactments, the new Indian tribal energy
law does not discriminate in terms of renewable versus non-renewable
resources. Instead, the law leaves to the Indian tribe and the market
the decision on whether and under what circumstances to develop energy
on tribal lands. The centerpiece of the new law is the authority
provided to the Secretary of the Interior to negotiate and enter
agreements with willing tribes that would govern energy and related
environmental activities on tribal lands.
These agreements, known as Tribal Energy Resource Agreements or
``TERAs'', posit a reduced role for the Secretary and an enhanced role
for the tribe but only if the tribe has the requisite financial,
regulatory, and technical expertise (called ``capacity'' in the new
law) to develop their resources, and regulate the physical environment
in a responsible manner. Once a tribe has an approved TERA, it (and not
the Secretary) may negotiate and enter agreements with outside parties
without the review or approval of the Federal government.
C. The Federal Apparatus is Complete, Next Step Project Development
The new Indian tribal energy law was signed into law in 2005 and
the regulations to implement it went into effect in April 2008. The
Congress has seen fit to appropriate money to fund both the Department
of Interior's Office of Indian Energy and Economic Development, and the
Department of Energy's Office of Indian Policy and Programs.
The Federal side of the equation has been completed, then, and the
next steps involve Indian tribes inventorying their energy resources,
identifying potential projects, and working with energy and financial
partners to bring these projects to completion.
financial assistance for indian energy project development
In the past several years, CERT has been very active on the
legislative and policy front and was instrumental in the development
and passage of the Indian Tribal Energy Development and Self
Determination Act of 2005 as well as the passage of the Energy
Independence and Security Act of 2007.
The 2005 law is particularly important in that it seeks to maximize
tribal decision-making authority and authorizes a comprehensive set of
assistance programs housed in both the Department of Energy and the
Department of the Interior to design, develop, and manage energy
development projects on tribal lands. One of the programs designed to
assist tribes in this regard is the ``Department of Energy Guaranteed
Loan Program'' contained in 25 U.S.C. Sec. 3502(c).
Section 3502 authorizes the Secretary of the Energy to provide loan
guarantees for an amount equal to not more than 90 percent of the
unpaid principal and interest due on any loan made to an Indian tribe
``for energy development.'' The total outstanding amount of loans
guaranteed by the Secretary may not exceed $2 billion.
The loans which are eligible for the guarantee are loans made by
financial institutions subject to examination by the Secretary or loans
made by an Indian tribe, using funds of that tribe.
Sadly, since the enactment of this provision in 2005, the
Department has failed to implement the Indian loan guarantee program.
The Department has also failed to submit to Congress a report on the
financing requirements of Indian tribes for energy development on
Indian land, as required by section 3502(c)(7). These failures have
occurred despite the large number of renewable and non-renewable energy
projects that are poised for development on tribal lands.
observations and recommendations
Section 17 of the Energy Policy Act of 2005 (``Incentives for
Innovative Technologies'') directs the Secretary to issue loan
guarantees in an amount equal to 80 percent of the project cost of the
facility that is subject to the guarantee. Section 1703 lists two
general categories of eligible projects including those that would (1)
avoid, reduce, or sequester greenhouse gas emissions and (2) employ new
or significantly improved technologies as compared to commercial
technologies.
Specific types of projects that would be eligible include the
following:
1. Renewable energy systems;
2. Advanced fossil energy technology;
3. Hydrogen fuel cell technology;
4. Advanced nuclear energy facilities;
5. Carbon capture and sequestration including agricultural
and forestry practices that store and capture carbon;
6. Efficient electrical generation, transmission, and
distribution technologies;
7. Efficient end-use technologies;
8. Production facilities for fuel-efficient vehicles,
including hybrid and advanced diesel vehicles;
9. Pollution control equipment; and
10. Refineries, meaning facilities at which crude oil is
refined into gasoline.
Section 3502's Indian Guaranteed Loan Program has never been
implemented and yet there are scores of projects on tribal lands not
being undertaken delayed because of a lack of financing. At the same
time, there is nothing in the language of Title 17's loan guarantee
appears to suggest that Indian tribes or tribal projects are ineligible
for guarantees issued by the Secretary under the authority of Section
1702.
Accordingly, CERT encourages the Committee to urge the Department
to consult with Indian tribes on the issue of loan guarantees and
project financing on tribal lands.
conclusion
I thank the Chairman and the Committee for this opportunity and
your ongoing support of tribal energy development and the needs of
Indian communities nationwide.
______
Magellan Midstream Partners, L.P.,
Tulsa, OK, February 12, 2009.
Hon. Jeff Bingaman,
Chairman, Senate Committee on Energy and Natural Resource, U.S. Senate,
304 Dirksen Senate Office Building, Washington, DC.
RE: Hearing to examine the Department of Energy Loan Guarantee Program,
authorized under Title 17 of the Energy Policy Act of 2005, and how the
delivery of services to support the deployment of clean energy
technologies might be improved
Dear Chairman Bingaman and Ranking Member Murkowski: Magellan
Midstream Partners, L.P. owns and operates the longest refined
petroleum pipeline in the United States, which crosses thirteen states
and over 8,500 miles of pipeline. We have partnered with Buckeye
Partners, LP, which owns and operates nearly 5,400 miles of refined
petroleum pipeline. Our collective goal is to develop the first ever
``dedicated ethanol pipeline,'' which we call the ``Independence
Pipeline.'' The Independence project is a 1,700 mile, $3.5 billion
renewable fuel pipeline project, which currently originates in
Minnesota and Iowa, travels through seven states, and ends in the New
York Harbor.
The project would create 25,000 jobs per year during construction
of the project, would decrease the cost of delivered ethanol to the
east coast, and would safely and efficiently deliver more than 10
million gallons of ethanol per day to millions of northeastern
motorists.
This large-scale renewable fuel pipeline project is dependent on
expanding the loan guarantee program authorized under Title 17 of the
Energy Policy Act of 2005. This is a huge project and expansion of the
loan guarantee program is necessary if Congress intends to support this
Administration's goal to dramatically increase the utilization of
renewable fuels throughout the United States. There is no doubt,
pipelines offer the safest, most reliable and cost effective method of
transporting the volumes required under the federal renewable fuels
program.
We are pursuing a 90% loan guarantee, which in our view, is
necessary to complete the project.
Throughout the past year, we have met with the Department of Energy
a number of times to better understand whether it is possible to expand
the current loan guarantee program. We believe it is. Although we are
concerned the Department of Energy is reluctant to provide any loan
guarantee higher than 60% of the total cost of a project. In these
difficult economic times, we think it is necessary for Congress and the
Administration to assist industry in building the infrastructure that
will allow our Nation to increase its dependence on domestic energy
supplies. In most cases, a 60% loan guarantee program is not sufficient
to meet the needs of industry.
Secondly, prepayment of the credit subsidy will prove to be
prohibitive for some companies, especially, as in our case, if the size
of the project is $3.5 billion. In order to encourage projects of this
size to move forward, we would encourage you to consider allowing the
credit subsidy to be waived in certain cases. Specifically, Congress
could allow the Secretary of Energy to waive the credit subsidy if
certain priorities that benefit consumers are met.
Congress has indicated renewable fuels will have an increasingly
important role in our domestic energy policy and the growing national
demand for renewable fuels will create potential opportunities to
construct more efficient transportation infrastructure across the
United States. We believe the necessary long-term solution for
efficient renewable fuel transportation is a large-scale pipeline
system. Therefore, we urge you to expand the loan guarantee program to
include funding for renewable fuel pipeline projects.
I look forward to discussing this issue with you and other Senators
in greater detail.
Sincerely,
Bruce W. Heine,
Director of Government and Media Affairs.
______
Statement of Glenn English, Chief Executive Officer, National Rural
Electric Cooperative Association, Arlington, VA
the department of energy loan guarantee program
I am pleased to provide information about a program of great
importance to the members of the National Rural Electric Cooperative
Association--the Department of Energy's (DOE) Loan Guarantee Program.
The Loan Guarantee Program provides a much needed commitment from the
federal government to join with the electric utility industry in
updating the nation's electric generation infrastructure with
technologies that avoid greenhouse gas emissions, including nuclear,
carbon capture and sequestration (CCS) and renewable technologies. I
commend the Committee for their examination of the status of this vital
program, and will comment on a specific aspect that is limiting the
ability of electric cooperatives to participate. Specifically, the DOE
loan guarantee program currently discriminates against joint ownership
structures commonly utilized by electric cooperative, municipal and
investor-owned utilities.
background on electric cooperatives
NRECA is the national service organization representing the
interests of electric cooperative utilities and their consumers. In
addition to advocating consensus views on legislative and regulatory
issues, NRECA provides health care, pension, financial investment and
many other programs for its members.
Electric cooperatives are not-for-profit, private businesses
governed by their consumers (known as ``member-owners''). Today, 930
electric cooperatives serve 42 million consumers in 47 states.
Cooperatives are a unique sector of the electric utility industry,
serving an average of only 7 consumers per mile compared with the 35
customers per mile served by investor-owned utilities (IOUs) and 47
customers per mile served by municipal utilities. To put this in
greater perspective, electric cooperatives serve only 12% of the
population--but maintain 42% of the nation's electricity distribution
lines covering three quarters of the land mass.
electric cooperatives balance increased demand with greenhouse
gas reductions
The electric cooperative sector is growing at twice the rate of the
other utility sectors because people are moving to co-op service areas.
The U.S. Energy Information Administration forecasts that by 2030,
demand for electricity will be 28 percent higher, the equivalent of
adding four Californias to the power grid. In some regions, demand will
soon outstrip supply, according to the North America Electric
Reliability Corporation.
At the same time electric cooperatives are meeting these demands,
co-ops are deploying technologies that will help to meet environmental
goals. Renewable resources, efficiency investments, technologies to
capture and store carbon from coal plants and nuclear energy are all
equally important to meeting demand and reducing greenhouse gas
emissions. These technologies must all be made available in order to
fulfill our mission of providing affordable and reliable electricity,
and to modernize the nation's infrastructure.
The DOE Loan Guarantee program is more important than ever in this
time of scarce lending. Despite the fact that the program has been
severely underfunded, electric cooperatives have pending applications
in partnership with others to finance nuclear projects. Those projects
are already creating jobs that will ramp up in the near term. Electric
cooperatives have also initiated millions of dollars in renewable
electricity projects under the Clean Renewable Energy Bond program,
have been recognized by the Federal Energy Regulatory Commission as
national leaders in deploying ``smart meters'' and are demonstrating
carbon capture technologies. Cooperatives are working in all of these
areas because no stone can be left unturned to both meet increasing
demand for electricity and achieve environmental goals.
the doe loan guarantee program discriminates against joint ownership
Electric cooperatives were pleased to see that the Senate-passed
stimulus bill includes an additional $50 billion in loan guarantee
authority for DOE. This additional authority appropriately reflects the
magnitude of anticipated electricity demand, and I urge conferees to
maintain the Senate authority level. But there is an equally critical
issue yet to be addressed that I would like to bring to the attention
of this Committee. Under DOE's current interpretation of the program,
electric cooperatives and other utilities are severely hampered in
their ability to tap the program, whether it be for nuclear, clean coal
or renewable technologies.
By way of example, one electric cooperative and one public power
system that distributes power to electric cooperative consumers have
applications pending before the Department of Energy for loan
guarantees for nuclear projects, and more electric cooperatives are
expected to seek to tap this program in the near future. Yet, late in
2008, DOE effectively disqualified loan guarantee applicants with
traditional ``undivided ownership'' interest structures (i.e., those
entities jointly owning a project, but financing each ownership
interest independently). The traditional undivided ownership interest
structure is used commonly for large, capital intensive projects such
as base load power plants in order to effect joint ownership of a
single plant among investor-owned, municipal and cooperative utilities.
Such arrangements permit utilities with adjacent service territories to
share risks and size generation resources appropriately to current and
future demand. DOE's interpretation of the loan guarantee statute to
disallow this structure is unnecessarily restrictive and will
disqualify many utilities, including electric cooperatives, municipal
utilities and investor-owned utilities from seeking loan guarantees for
nuclear or other generation resources under this very common structure.
DOE's current interpretation of the statute severely limits the
effectiveness of the guarantee program in a manner that was not
intended by Congress. The federal government, through the U.S
Department of Agriculture Rural Utilities Service has been accepting
``undivided ownership'' structures for decades. As a practical matter,
DOE's interpretation will make the DOE loan guarantee program
unavailable for many new power plants. If these projects are to move
forward without a DOE loan and with today's scarce private lending at
high rates, the price tag for the new power projects--and thus their
costs to ratepayers--could nearly double.
Electric cooperatives submitted preliminary applications in
September of 2008 seeking loan guarantees under a traditional undivided
ownership interest structure, and paid a non-refundable $200,000 fee.
DOE initially informed these applicants that they were highly ranked in
the queue for funds, but surprised them in December of 2008 by
asserting that traditional undivided ownership interest structures were
unacceptable. This assertion came just four days prior to the deadline
for final applications. Co-ops and other applicants, with much time and
money already invested in joint venture projects, had little choice but
to move ahead and pay an additional, non-refundable $600,000 fee for
submitting the final application. The applications have been submitted
in hopes that DOE's interpretation can be corrected to accommodate
undivided ownership interest structures.
The payment of this fee demonstrates that co-ops are committed to
critical new capacity with low or zero greenhouse gas emissions. I urge
Congress and DOE to demonstrate that they share this commitment and to
develop a solution as soon as possible this year that will prevent
discrimination against joint ownership structures, keep projects moving
forward and limit the need for private financing that will be costly
for ratepayers. Time is of the essence in resolving the issue, as
applicants are responding to an unanticipated, adverse decision by DOE
despite being far along in project spending and commitments.
conclusion
I commend the Senate Energy and Natural Resources Committee for
this hearing examining the DOE Loan Guarantee program. The program is
increasingly important to electric cooperatives as we take on the
challenge of meeting increased demand while doing our part to reduce
greenhouse gas emissions. I look forward to the opportunity to work
with this Committee to overcome the obstacles to participation by
undivided ownership interest structures in the DOE loan guarantee
program.
______
Statement of David Arfin, Vice President of Customer Financing
SolarCity, Inc.
Chairman Bingaman, Senator Murkowski and Honored Committee Members:
Thank you for the opportunity to share SolarCity's perspective on
opportunities for the Department of Energy's Title XVII Loan Guarantee
Program to help drive a robust, domestic renewable energy industry.
This hearing is both timely and important, given the program's
challenges to date and the possibility it may expand dramatically as
part of the pending economic recovery legislation.
SolarCity is a young company with some notable achievements driven
by a vision for helping to create a clean, renewable energy society. In
our first two and a half years, SolarCity has grown into the largest
residential solar installer in the United States, by reservation
volume. We directly employ more than 300 workers in three states
(California, Arizona and Oregon) and estimate that we have helped to
create 2,000 indirect American jobs. We are actively planning for rapid
national expansion by partnering with local contractors and hope to
more than triple these numbers in the next three years. All of the
solar panels we install are manufactured in the U.S. Our efforts have
been recognized by the Aspen Institute's Energy and Environment Award,
and our growth has received national media attention, featured by PBS,
NPR, Fox Business News, CNBC, the Wall Street Journal, the New York
Times and hundreds of other media outlets.
The key drivers of SolarCity's growth have been three-fold: a) a
business model that combines private investment and public incentives
and doesn't overburden either resource ; b) a scalable operations model
and technology innovations that have driven down the cost of
installations while delivering consistently reliable performance; and
c) our ability to provide turn-key solar energy solutions for
homeowners and businesses who want to go solar, simplifying a maze of
financial and regulatory issues and enabling our customers to lower
their electricity costs. By touching so many homes and businesses with
relatively small systems, we create construction jobs that can't be
outsourced, and allow more citizens to reduce greenhouse gas pollution
and alleviate dependence on foreign energy sources.
Given the current state of the capital markets, we are delighted
that Congress is considering ways to expand the Title XVII loan
guarantee program to include a broader universe of commercial renewable
energy technologies. When coupled with the pending changes allowing for
a grant in lieu of the Investment Tax Credit, the result can be a very
effective means of revitalizing a critical domestic industry that has
become crippled by the current credit crisis and recent collapse of the
tax equity markets.
As you consider ways to ensure the most effective implementation of
this program, we believe there are four overarching areas that are
important for Congress to consider in its deliberations, with a view
toward the Department of Energy's administration of Title XVII:
The new loan guarantee program envisioned under Section 1705
of the pending House and Senate economic recovery proposals
should allow small renewable energy installations to be
aggregated into larger portfolios and efficiently processed by
the Department of Energy.--Residential installations are
generally small, averaging four to five kilowatts per home.
These installations result in consumer savings, reduce
homeowners' carbon footprint and create green jobs in the
process--consistent with the President's policy goals for the
economic recovery package. We do not wish to overburden the
program office with many applications for small projects. Thus,
in order for companies like SolarCity to make efficient use of
the new renewable energy loan guarantee program, the Department
of Energy should allow aggregation of these smaller projects
into larger ``buckets'' in the administration process; we
suggest that the minimum ``bucket'' for submission to the
program be $2 million.
Prioritize near-term projects that are vital to timely job
retention and creation.--Administration of the renewable loan
guarantee program must quickly prioritize shovel-ready projects
that can create jobs in the first half of 2009. SolarCity, for
example, has hundreds of projects ready to be installed at
customer sites. Our ``green collar'' jobs are not limited to
the installation sector; SolarCity employs two workers in the
customer service, sales and finance areas for every pair of
``boots on the roof''. To guarantee maximum impact of the new
loan guarantee program, we suggest the Department of Energy
prioritize projects that can be permitted, built and placed in
service now. As these projects begin to move forward, it will
help boost confidence and thaw frozen credit markets.
Encourage certainty, throughput and visibility.--It is
critical that the new loan guarantee program be both credible
and creditable to the public and to renewable developers alike.
Once certain viability thresholds have been met, sponsors for
those renewable energy projects of less than $5 million should
be guaranteed a ``place in the queue,'' prior to construction
and the placed-in-service date. Similar to the ratemaking
practice of ``construction work in progress''--which allows
utilities to get recovery of their expenses prior to the actual
start date of construction--renewable energy developers need
capital to enable them to move forward.
Another important factor is the need for a fast response,
particularly for smaller projects. We need a short,
standardized form and predictable outcomes with reasonable
processing times. Certainty and simplicity are critical if the
program is to have the intended impact on renewable energy
project development during these difficult economic times.
Reliable loan support will be a key factor in attracting
private project capital.
In addition, it will be extremely difficult for the program
to move at a predictable, acceptable pace if we add additional
agency approval processes, such as one whereby the Office of
Management and Budget must approve each transaction already
reviewed by the Department of Energy. This program needs to
move forward expeditiously to adopt rules that will allow money
to flow to developers, and not get bogged down in overlapping
and duplicative inter-agency administrative reviews.
Allow flexibility for projects that receive federal
guarantees.--The solar industry needs flexibility in financing
mechanisms at this critical time, when private capital remains
difficult to find despite the proven nature of existing
technologies and business models. Receiving a cash grant for 30
percent of a project's cost (or a bundle of projects' cost)
should not preclude developers from receiving a federally-
guaranteed loan through the new DOE program for the balance of
the project costs. Similarly, solar assets have an expected
life of 30 years; as such, loan guarantees with a minimum term
of 20 years would be most useful in the current fiscal climate.
Thank you for the opportunity to submit this testimony. SolarCity
has a proven track record of delivering solar solutions, and we are
eager to continue making these benefits accessible to consumers and
workers across the nation. As Congress and the new Administration look
for ways to ensure continued growth of the renewable energy sector in
these challenging economic times, we stand ready to assist you by
providing the perspectives of an innovative start-up company navigating
the current capital market realities.
Thank you for your consideration.
______
Dear Senator Bingaman and members of the committee: The undersigned
companies offer this testimony for inclusion in the record of your
February 12th hearing on the Department of Energy's Loan Guarantee
Program. We appreciate your interest in and leadership on this issue.
In 2006, the Department of Energy issued its first round
solicitation (``Round 1'') inviting pre-applications for loan
guarantees under the EPAct 2005 Loan Guarantee Program. Out of a
reported 143 responses to its Round 1 loan guarantee solicitation, DOE
selected 16 projects in late 2007 and invited those projects to submit
formal applications in November 2008. In late 2008 DOE apparently
accepted completed Round 1 applications from 11 different clean energy
projects. Each of the undersigned companies has participated in Round 1
and expended substantial time and resources over the past three years
to become one of the 11 projects farthest along in the loan guarantee
process. Given our status as selected Loan Guarantee Program
beneficiaries with the most advanced projects in the country, we
believe we are uniquely positioned to offer these comments for your
consideration as you explore how the EPAct 2005 Loan Guarantee Program
can be improved.
The Round 1 projects, given their advanced stage of development,
are uniquely positioned to advance critical national energy policy
goals while also providing significant near-term stimulus to our
economy. The near term deployment of the innovative clean energy
technologies represented by the Round 1 projects is threatened by the
broader financial and credit crises. With targeted fixes, the Round 1
solicitation is ready to provide timely economic stimulus while
commercializing clean energy technologies. We respectfully observe that
with the following few modifications to the current loan guarantee
program, the Round 1 projects will be able to move forward quickly to
achieve the goals of the loan guarantee program while adding thousands
of good jobs around the country.
Fully fund all pending Round 1 guarantees.--It is essential that
the volume allocation for the first round solicitation be sufficient
for the selected projects. The existing appropriation of a volume
allocation of $4 billion is far short of what would be needed to fund
the Round 1 projects. Applicants have been notified that inadequate
funding has been provided for Round 1. This jeopardizes the
implementation of the most advanced projects in the loan guarantee
program and the substantial job creation associated with those projects
unless the Round 1 allocation is increased. Increasing the authorized
volume of guarantees for Round 1, or re-allocating a portion of the
volume previously authorized for later round solicitations to Round 1,
would ensure that all Round 1 projects are fully funded and can proceed
in a timely way.
Further, the increased volume should also provide levels and access
to capital for essential projects directly related to the core Round 1
project. For example, the credit crisis has destroyed pre-credit crisis
project assumptions about separately and commercially financed CO2 off-
taker investments. Off-takers should be allowed access to capital in
amounts, at rates and with Federal processes that are aligned with the
core project FLG process.
Appropriate the credit subsidy cost of Round 1 projects.--In the
absence of an appropriation to cover the credit subsidy cost of
projects under section 1702(b) of EPAct, each of the projects
participating in the loan guarantee program will be required to provide
funding to cover the credit subsidy cost determined by the loan
guarantee office. Private funding of the credit subsidy cost impedes
the ability to rapidly commercialize the cutting edge technologies
represented by the Round 1 projects, defeating one of the core purposes
of the loan guarantee program. The credit subsidy cost will materially
increase the cost of projects, and will be particularly difficult for
projects that might include participation by non-profit public
entities, such as municipal or cooperative utilities. Appropriating the
credit subsidy cost for the Round 1 projects will ensure that they move
forward quickly.
Require fees to be paid only upon issuance of the guarantee.--The
current program rules require a Facility Fee, which can be substantial,
to be paid upon credit board approval, far in advance of the closing of
a transaction and actual issuance of the loan guarantee. Instead, the
rules should provide that such fees are to be collected upon actual
issuance of the loan guarantee, and that issuance of the final loan
guarantee is conditioned on payment in full of such fees.
Ensure that the currently pending Round 1 projects proceed through
the existing loan guarantee program process.--Current Round 1
applications have been in process since 2006 and have made substantial
progress working through all of the requirements necessary for any loan
guarantee program recipient. To the extent any separate or parallel
loan guarantee program might be established it is imperative that
current applications in process not be undermined since the Round 1
projects will be the first to achieve the EPAct 2005 loan guarantee
program goals and can create jobs now.
We believe these enhancements to the program will ensure
implementation of a successful loan guarantee program. It appears that
DOE's loan guarantee office is now appropriately staffed to move the
Round 1 projects through the process efficiently provided that
sufficient volume is appropriated to cover all of the Round 1 projects.
While the rulemaking and office staffing processes may have taken
longer than hoped, they were essential to setting up a program that
will work.
Thank you very much for the opportunity to provide comments and
help ensure the loan guarantee program achieves its vital goals.
BrightSource Energy, Inc.,
The Mesaba Energy Project, a subsidiary of Excelsior Energy Inc.,
TX Energy (Eastman Chemical Company),
SAGE Electrochromics, Inc.,
Westbank Biofuels Project (Endicott Biofuels II, LLC).
______
Statement of Marvin S. Fertel, Acting President and Chief Executive
Officer, Nuclear Energy Institute
The Nuclear Energy Institute appreciates the opportunity to provide
this testimony for the record of the committee's hearing on the loan
guarantee program authorized by the Energy Policy Act of 2005,
administered by the Department of Energy (DOE).
The Nuclear Energy Institute (NEI) is responsible for establishing
unified nuclear industry policy on regulatory, financial, technical and
legislative issues affecting the industry. NEI members include all
companies licensed to operate commercial nuclear power plants in the
United States, nuclear plant designers, major architect/engineering
firms, fuel fabrication facilities, materials licensees, and other
organizations and individuals involved in the nuclear energy industry.
In this statement, NEI will discuss:
1. the importance of the Title XVII loan guarantee program in
supporting the financing of new nuclear power plants and other
technologies
2. some of the difficulties encountered during implementation
of the loan guarantee program, and
3. suggestions on how to improve implementation and
restructure the program for long-term success.
i. the importance of the loan guarantee program
The loan guarantee program created by Title XVII of the Energy
Policy Act is an essential and appropriate mechanism to enable
financing of clean energy technologies. In fact, an effective and
workable loan guarantee program is significantly more important today
than it was when the Energy Policy Act was enacted in 2005.
Loan guarantees are a powerful tool and an efficient way to
mobilize private capital. The federal government manages a loan
guarantee portfolio of approximately $1.1 trillion, to ensure necessary
investment in critical national needs, including shipbuilding,
transportation infrastructure, exports of U.S. goods and services,
affordable housing, and many other purposes. Supporting investment in
critical energy infrastructure (including new nuclear power plants) is
a national imperative, and there is no reason that the energy loan
guarantee program cannot be as successful as the Export-Import Bank and
other federal loan guarantee programs.
The Title XVII loan guarantee program includes 10 technologies that
are eligible for loan guarantees. They include renewable energy
systems, advanced fossil energy technology (including coal
gasification), hydrogen fuel cell technology for residential,
industrial, or transportation applications, advanced nuclear energy
facilities, efficient electrical generation, transmission, and
distribution technologies, efficient end-use energy technologies,
production facilities for fuel efficient vehicles, including hybrid and
advanced diesel vehicles, and pollution control equipment. Each of
these technologies presents different financing challenges.
Nuclear power is a capital-intensive technology. NEI estimates a
new nuclear power plant could cost $6-8 billion, including financing
costs. This large capital investment does not mean that new nuclear
plants will not be competitive. Capital cost is certainly an important
factor in financing, but it is not the sole determinant of a plant's
competitive position. What matters is the cost of electricity from the
plant at the time it starts commercial operation relative to the other
alternatives available at that time. Based on NEI's own modeling, on
the financial analysis performed by companies developing new nuclear
projects, and on independent analysis by others, NEI believes that new
nuclear capacity will be competitive and profitable.
For new nuclear power plants, the financing challenge is
structural. The U.S. electric power sector consists of many relatively
small companies, which do not have the size, financing capability or
financial strength to finance power projects of this scale on their
own, in the numbers required. Loan guarantees offset the disparity in
scale between project size and company size. Loan guarantees allow the
companies to use project-finance-type structures, to employ higher
leverage in the project's capital structure, and to insulate the
project sponsor's balance sheet from the project's credit risk, in
whole or in part. Absent the loan guarantee, financing one of these
projects on balance sheet could have negative consequences: stress on
cash flow, stress on credit quality, earnings-per-share dilution from
issuance of new equity.
The financing challenges are, of course, somewhat different for the
regulated integrated utilities than for the merchant generating
companies in those states that have restructured. But these challenges
can be managed, with appropriate rate treatment from state regulators
or credit support from the federal government's loan guarantee program,
or a combination of both.
Supportive state policies include recovery of development costs as
they are incurred, and Construction Work in Progress or CWIP, which
allows recovery of financing costs during construction. Many of the
states where new nuclear plants are planned--including Florida,
Virginia, Texas, Louisiana, Mississippi, North Carolina and South
Carolina--have passed legislation or implemented new regulations to
encourage construction of new nuclear power plants by providing
financing support and assurance of investment recovery. By itself,
however, this state support is not sufficient. The federal government
must also provide financing support for deployment of clean energy
technologies in the numbers necessary to address growing U.S.
electricity needs and reduce carbon emissions.
The Title XVII loan guarantee program also represents an innovative
departure from other federal loan guarantee programs. It is structured
to be self-financing, so that companies receiving loan guarantees pay
the cost to the government of providing the guarantee, and all
administrative costs. For this reason, a Title XVII loan guarantee
program is not a subsidy. In a well-managed program, in which projects
are selected based on creditworthiness, extensive due diligence and
strong credit metrics, there is minimal risk of default, and minimal
risk to the taxpayer. In fact, the federal government will receive
substantial payments from project sponsors.
ii. difficulties with implementation of the title xvii loan
guarantee program
Since enactment of the Energy Policy Act in August 2005, achieving
workable implementation of the Title XVII loan guarantee program has
been a challenge. In part, this reflects the previous Administration's
initial skepticism about the program. The previous Administration's
reluctance to implement an effective and workable program is evident
from the amount of time--two years after enactment of the Energy Policy
Act--before it established a Loan Guarantee Program Office and
announced the appointment of a permanent director in August 2007. Many
of NEI's concerns about implementation, including major disagreements
over interpretation of the statutory language by the Department of
Energy, are amply documented in NEI's comments on the Notice of
Proposed Rulemaking, filed with DOE in July 2007. Many of those
concerns were not addressed in the Final Rule promulgated later that
year.
The implementation difficulties encountered by NEI member companies
developing new nuclear projects thus predate formation of the Loan
Guarantee Program Office. In fact, NEI is impressed with what a
relatively small staff, operating under chronic budgetary constraints,
have been able to accomplish in the time--slightly more than a year--
that they have been at work. In that short period of time, the Loan
Guarantee Program Office has developed internal management procedures
and protocols; developed criteria to evaluate the creditworthiness and
merit of loan guarantee applications; reviewed 143 applications
received pursuant to an August 2006 solicitation and down-selected to
16 projects for further negotiation; prepared and issued three major
solicitations; issued a request for proposals for the legal advisers,
financial advisers and technical experts needed to assist with due
diligence in reviewing loan guarantee applications; and developed the
analytical model necessary to calculate the credit subsidy cost that
will be paid by project sponsors.
Despite this significant progress, implementation of the program by
the Executive Branch continues to be difficult, for reasons outside the
control of the Loan Guarantee Program Office. One of the major
difficulties stems from an unnecessarily narrow and restrictive reading
of the original statutory language by the DOE Office of General
Counsel. Section 1702(g)(2)(B) of Title XVII asserts that ``[t]he
rights of the Secretary, with respect to any property acquired pursuant
to a guarantee or related agreements, shall be superior to the rights
of any other person with respect to the property.'' The DOE Office of
General Counsel has consistently misinterpreted this section as a
prohibition on pari passu financing structures, and a requirement that
the Secretary must have a first lien position on the entire project.
Counsel for NEI and many of the project sponsors, with substantial
experience in project finance, believe that Section 1702(g)(2)(B) gives
the Secretary a ``superior right'' to the property he guarantees, not
to the entire project.
If a nuclear project has multiple co-owners, each holding an
undivided interest in the project, DOE insists that a default by any
co-owner (such as abandoning the project during construction, or
failing to meet its share of debt service during commercial operation)
would constitute a default under every co-owner's obligations, allowing
DOE to foreclose on all project collateral. The effect is to make each
co-owner responsible for the others' obligations or to risk loss of its
own interests. Aside from any business concerns such terms might raise,
state law, federal tax law or both prohibit such cross-collateral or
cross-default arrangements. This legal interpretation--which flows from
the misinterpretation of the ``superior right'' provision discussed
above--impacts four of the five top-ranked nuclear power projects now
pursuing Title XVII loan guarantees.
The DOE's position is thus a major obstacle to co-financing of
nuclear projects. Projects financed as undivided interests cannot
proceed if this interpretation stands. Financing from export credit
agencies in other countries like France and Japan, would be equally
difficult. This result makes little sense since such co-financing will
leverage the existing loan volume of $18.5 billion, and reduce the risk
to which the Department of Energy is exposed.
One company developing a new nuclear project was sufficiently
frustrated by its discussions with DOE on these matters that, after
investing significant capital in developing a Part I application and
paying the $200,000 filing fee, it elected not to file a a Part II
application.
Insufficient Loan Volume
The omnibus appropriations legislation for FY2008 authorized $38.5
billion in loan volume for the loan guarantee program--$18.5 billion
for nuclear power projects, $2 billion for uranium enrichment projects,
and the balance for advanced coal, renewable energy and energy
efficiency projects. The authority in the FY2008 omnibus expires at the
end of the 2009 fiscal year.
This loan volume is clearly inadequate. DOE has issued
solicitations inviting loan guarantee applications for all these
technologies and, in all cases, it appears that the available loan
volume is significantly oversubscribed. For example, the initial
nuclear power solicitation resulted in requests from 14 projects
seeking $122 billion in loan guarantees, with only $18.5 billion
available. NEI understands that 10 nuclear power projects submitted
Part II loan guarantee applications, which represented $93.2 billion in
loan volume. Two enrichment projects submitted Part II applications,
seeking $4.8 billion in loan guarantees, with only $2 billion
available. NEI also understands that the solicitation for innovative
coal projects resulted in requests for $17.4 billion in loan volume,
more than twice the $8 billion available. The solicitation for
renewable energy, energy efficiency and transmission projects is still
open (the deadline for applications is February 25), but the
expectation is that demand will exceed available loan volume, partly
because traditional sources of financing for renewable energy projects
are seriously constrained by the banking crisis.
It is, therefore, essential that limitations on loan volume--if
necessary at all in a program where project sponsors pay the credit
subsidy cost--should be commensurate with the size, number and
financing needs of the projects. In the case of nuclear power, with
projects costs in the $6-8 billion range, $18.5 billion is not
sufficient.
iii. improvements to the loan guarantee program
The Title XVII loan guarantee program authorized by the 2005 Energy
Policy Act was an important step in the right direction. That program
was designed to jump-start construction of the first few innovative
clean energy projects that use ``technologies that are new or
significantly improved as compared to commercial technologies in
service in the United States at the time the guarantee is issued.''\1\
---------------------------------------------------------------------------
\1\ Energy Policy Act of 2005, Section 1703(a)(2)
---------------------------------------------------------------------------
That goal remains as valid now as it was in 2005, but today the
United States faces a larger, additional challenge--financing large-
scale deployment of clean energy technologies, modernizing the U.S.
electric power supply and delivery system, and reducing carbon
emissions. This is estimated to require investment of $1.5-2.0 trillion
between 2010 and 2030.
In NEI's view, the scale of the challenge requires a broader
financing platform than the program established by Title XVII. An
effective, long-term financing platform is necessary to ensure
deployment of clean energy technologies in the numbers required, and to
accelerate the flow of private capital to clean technology deployment.
During the 110th Congress, Senator Bingaman introduced legislation
to create a 21st Century Energy Deployment Corporation. Senator
Domenici, ranking member of this committee during the last Congress,
introduced legislation to create a Clean Energy Bank. Both proposals
address aspects of the financing challenge facing the United States and
its electric power industry.
Establishing an entirely new institution is a heroic undertaking,
however, and it is not clear that such an initiative is necessary. NEI
sees no reason why the existing Title XVII program and the DOE Loan
Guarantee Program Office could not serve as a foundation on which to
build a larger, independent institution within the Department of
Energy. There is precedent for such independent entities, equipped with
all the resources necessary to accomplish their missions, in the
Federal Energy Regulatory Commission and the Energy Information
Administration. This approach could have significant advantages:
1. An independent clean energy financing authority within DOE
could take advantage of technical resources available within
the Department, to supplement its due diligence on prospective
projects and to identify promising technologies emerging from
the research, development and demonstration pipeline that might
be candidates for loan guarantee support to enable and speed
deployment.
2. An independent entity within DOE would have the resources
necessary to implement its mission effectively, including its
own legal and financial advisers with the training and
experience necessary for a financing organization. Providing
the independent entity with its own resources would eliminate
the difficulties encountered during implementation of the Title
XVII program.
3. Programmatic oversight in Congress would remain with the
Energy Committees, which have significantly more experience
with energy policy challenges, and in structuring the
institutions necessary to address those challenges.
iv. conclusion
In conclusion, NEI believes that the energy loan guarantee program
created by the 2005 Energy Policy Act is as essential today as it was
in 2005. NEI also believes that U.S. energy and environmental
challenges justify a significant expansion of the program.
______
Statement of Laura Miller, Director of Projects, Texas, the Summit
Power Group
Mr. Chairman and Members of the Committee, thank you for this
opportunity to testify regarding the Federal loan guarantee program for
carbon-sparing, advanced-technology energy projects. My name is Laura
Miller. I joined the Summit Power Group after serving as the Mayor of
Dallas, Texas, and leading a coalition of Texas mayors who two years
ago fought the construction of new pulverized-coal-fired power plants
with no carbon capture.
By contrast, Summit is developing a coal gasification project in
Texas with such a high carbon capture rate that the project's resulting
CO2 emissions will be even lower than those of a state-of-
the-art combined cycle natural gas-fired power plant. That's why I
joined up. Our Texas project will include two warranted and
commercially proven Siemens gasifiers, each 500 MWth, and a 1-on-1 F-
class Siemens combined cycle power plant. In addition to power, the
project will produce commercial quantities of ammonia/urea for
fertilizer, argon gas, sulfuric acid--and three million tons per year
of captured, pipeline quality CO2. Unlike the first
generation of IGCC (integrated gasification combined cycle) projects
proposed years earlier, Summit's Texas Clean Energy Project will have
very high warranted levels of performance, availability, and
reliability--and a long-term operations and maintenance agreement with
Siemens to assure that these high levels of performance, availability,
and reliability continue.
Summit develops power projects for utilities, independent power
producers, and other project owners. Donald Paul Hodel, our Chairman,
and Earl Gjelde, our CEO, founded Summit after Mr. Hodel served as
Secretary of Energy and Secretary of the Interior for President Reagan,
with Mr. Gjelde as his second in command at both posts. Obviously,
others who have a different political persuasion have since joined
Summit--me included--but one thing we share completely is a
determination to provide electricity in the most clean and efficient
manner possible. All Summit projects are highly efficient, climate
friendly, and helpful to America's energy independence and national
security. We develop wind energy projects. We develop low-emission
natural gas-fired projects. And we have just launched a new business
line--utility-scale photovoltaic (PV) solar energy projects. None of
these Summit projects has needed or applied for a Federal loan
guarantee.
I am testifying today about the Texas Clean Energy Project (TCEP),
the project I mentioned earlier, which we are developing at the former
FutureGen site near Midland-Odessa. It is the first Summit project that
uses coal, and it is one of several gasification projects Summit is
developing with carbon capture. With a Federal loan guarantee, this
plant can be built as a commercial project--not as a science
experiment. It will capture more carbon than any commercial power plant
yet built anywhere in the world. It will have lower carbon emissions
per megawatthour of useful power produced than any commercial plant yet
operating on fossil fuels anywhere else in the world. People will flock
to see it, and they should, since it will represent a true milestone in
carbon management.
Summit planned this project in a way that would not require a
Federal loan guarantee. But in today's unexpected and unprecedented
financial market conditions, without a Federal loan guarantee this
project will not get built--at least not in the foreseeable future.
Capital is simply not available: The capital exists, but there is no
market access to it. Not only will carbon capture be delayed as a
result, but thousands of construction jobs and hundreds of permanent
jobs--and the entire economic stimulus created by a project costing
nearly two billion dollars--will be foregone on a project that we
consider ``shovel ready,'' thanks to the hard work of many Texans and
past efforts at the site by the FutureGen Alliance.
Representatives of other projects will testify on specific issues
with the existing Federal loan guarantee (FLG) program--the application
fees, the risk premium payment, and so forth. Those are important
matters. But Summit's message here today is simple: The single most
important feature of the FLG program is simply that it exists. It needs
to continue to exist, and with increased support--not reduced support.
And it needs to continue to be available for carbon capture projects
like this--not just for nuclear and renewable energy. Without it, and
despite everything Summit and others do to promote renewable energy,
any realistic hope of meeting current carbon reduction and energy
independence goals for the U.S. and the world will simply disappear,
swallowed up by today's global financial crisis. In terms of climate
policy and national security alike, that would be a tragedy--in my
view, a catastrophe.
Speaking for myself, one old-technology, pulverized coal plant--
with few pollution controls and zero carbon capture--is currently being
built in China every week. India is not far behind. In 2006, China
surpassed the United States in the amount of carbon dioxide it produces
for the first time in history. Since coal is plentiful and cheap, coal-
fired power plants will continue to be built around the globe--
including the United States where, despite strong opposition from
environmental groups, business leaders and elected officials, a number
are currently under construction, including three in Texas. The
international technology bar must, and can be, raised. Each week that
passes without a coal gasification plant with carbon capture and
sequestration breaking ground allows yet another sub-par coal plant to
be built that will needlessly foul the world's air, soil and water as
it operates 24 hours a day, 365 days a year, for up to five decades.
The time to build clean-coal plants with carbon capture is not today.
It was yesterday.
For Summit, the key issue our large-scale carbon capture project
faces is not technological. The technology is commercially proven and
warranted. Nor is the issue the cost of capital, at least not
primarily. The issue is simply access to capital. For large, new,
carbon-sparing energy projects, the necessary capital--particularly the
necessary project debt--will simply not be available while the global
financial crisis persists.
Summit set out to develop TCEP as a project financed in
conventional private capital markets, taking advantage of Federal
carbon-reduction incentives but without relying on major Federal
subsidies. Then the outside world delivered major blows to the
project's economics. First, we saw huge increases in construction and
raw materials costs. That made TCEP more expensive. Then the price of
natural gas plunged. That made power produced from natural gas less
expensive by comparison. The price of oil also plunged, and that
reduced projected prices for captured carbon dioxide. In today's pre-
cap and trade world, using captured CO2 for enhanced oil
recovery is the only significant and commercially-available way to both
sequester carbon and help cover the costs of doing so--including the
costs of independent monitoring, measurement, and verification (MMV) to
assure that CO2, once injected into the ground, will stay
there.
All those outside problems made state tax relief and other local
incentives vital to our project economics. The State of Texas has been
very responsive, and seems poised to grant all reasonable incentives
within the State's power for high carbon capture projects such as TCEP.
These same problems also made other Federal incentive programs more
important, too. These include Section 48A investment tax credits,
Section 45Q credits for carbon dioxide that is actually captured and
sequestered, and clarification of depreciation rules, so that that
gasification projects with high carbon capture rates will be
depreciated properly, like chemical plants and refineries, not like
conventional natural gas-fired power plants.
But none of these problems--rising construction and materials
costs, falling natural gas prices, and falling prices for captured
CO2--required Summit to seek a Federal loan guarantee.
Indeed, we did not apply for one. What requires Summit to do so now is
a related but different problem, the national--and indeed global--
financial market collapse. Conventional financing for projects with
such large capital costs is simply unavailable now from the private
sector. It is unrealistic, and much too expensive, to try to build such
projects on an all-equity, no-debt basis. But the debt is not
available; lenders are not lending. People who still have good jobs
can't borrow money even to buy a house. No one can borrow a billion
dollars or more to build a carbon capture project, even where--as
here--the project's components are each commercially proven and
warranted.
So it is vital that the FLG program continue, that it be expanded,
and that it be available for carbon capture projects such as Summit's
Texas Clean Energy Project--not just for nuclear plants and renewable
energy projects, as important and useful as those technologies may be.
The U.S. and the Western World will not provide the leadership needed
to reduce carbon emissions from coal-fired power projects in China and
India, or elsewhere in the world, by building more nuclear plants and
wind farms, whatever their virtues. But if we capture and sequester
carbon produced in the responsible use of coal, with new power
generation technology not yet in worldwide use, then our leadership may
make a difference. That is Summit's hope, and my personal hope.
Yet you have heard it said--repeatedly--that no plant such as
Summit's has yet been built. And, therefore, clean coal does not exist.
That's thoroughly misleading--and not an argument that should be made
in a discussion about increasing Federal loan guarantees for clean-coal
projects. To declare that ``no such plant has yet been built'' is
equivalent to having declared, in July 1969, ``No human has ever set
foot on the moon.'' By that date, humans had been lofted into space and
returned safely. Spacecraft had orbited and landed on the moon. Most
important, years of effort to string these successes together, and
actually land a human on the moon, were then on the verge of success.
No human had ever set foot on the moon. But that was about to change.
Here, the gasification of coal has been carried out successfully
for decades--actually, for more than a century. In horse and buggy
days, ``town gas'' from gasified coal fueled our nation's street lamps.
Power generation equipment has also been operated smoothly,
successfully, and cleanly on the much cleaner synthesis gas, or
``syngas,'' produced today. Carbon capture from gasification facilities
has also been carried out successfully for decades, including in the
United States--specifically North Dakota, as the good Senator and
Committee member from that state knows best. Senator Dorgan can also
tell you about the transportation of liquefied carbon dioxide by
pipeline, which his state does as well, along with the geological
injection of large volumes of carbon dioxide, including CO2
from gasification. In the Permian Basin of Texas alone, many million
tons of CO2 have been injected, over more than thirty years.
In fact, CO2 injection is the only method of enhanced oil
recovery that results in CO2 being geologically sequestered.
What is now ready to happen--and that has not yet happened--is to
string these successes together into a single large integrated project
that gasifies coal, generates electric power, produces other commercial
products from syngas, and captures carbon that is ultimately
sequestered. Projects that do this are finally ready to be built, and
to begin capturing and sequestering carbon. Summit's Texas Clean Energy
Project is just such a project. We are ready to proceed with it. Rather
than say, ``no such project has yet been built,'' people should instead
recognize that such projects are imminent and should help them get
built.
We will need a Federal loan guarantee--which is not what we had
hoped. Properly administered, however, the FLG program is one response
to the current financial crisis that should not cost the Federal
government money. A borrower under the FLG program receives a loan, not
a grant. The borrower must repay the loan, at a higher interest rate
than the government's own borrowing rate. The government should make
money on the loan. This is entirely appropriate. Again, the issue
preventing these projects from being built today is not the borrowing
rate--the issue is the lack of any borrowing being available, at all,
in the private capital markets. I can't speak for every potential
project. But if Summit's TCEP project can gain a Federal loan
guarantee, the interest rate we anticipate being required to pay will
not stand as a major impediment to successful completion and operation
of the project.
Thank you for this opportunity to testify. My Summit colleagues and
I welcome your questions, and we appreciate your thoughtful
policymaking and support on this vital matter.
______
OptiSolar,
Hayward, CA, February 11, 2009.
Hon. Jeff Bingaman,
Chairman, Senate Energy and Natural Resources Committee, 304 Dirksen
Senate Building, Washington, DC.
Re: OptiSolar Inc.'s Written Testimony Regarding the Department of
Energy Loan Guarantee Program for the February 12, 2009 Senate Energy
and Natural Resources Committee Meeting
Dear Senator Bingaman, Please accept this as OptiSolar Inc.'s
written testimony regarding the current state of the Department of
Energy Loan Guarantee Program and how the delivery of services to
support the deployment of clean energy technologies might be improved.
The Department of Energy's program for Loan Guarantees for Projects
that Employ Innovative Energy Efficiency, Renewable Energy, and
Advanced Transmission and Distribution Technologies (``Innovative
Energy Program'') supports the commercialization of new, clean energy
technologies and the resulting environmental benefits. The program has
the potential to stimulate employment growth as well as improve the
nation's energy independence. But the program's goals are undermined by
the imposition of extraordinarily high up-front program costs on
program applicants, potentially totaling tens of millions of dollars,
and the indeterminate time frame for consideration of applications. If
the Department of Energy funded the program's costs, as it does for
other similar programs, more applicants could participate in the
Innovative Energy Program. If there were a specific schedule for
expedited review of the applications, applicants could depend on the
program for shovel-ready projects, such as OptiSolar Inc.'s solar panel
manufacturing project, described below. Each of these improvements
would make the program more effective in achieving its goals.
(i) about optisolar's solar photovoltaic panel manufacturing project
OptiSolar Inc. (``OptiSolar'') is a vertically integrated utility
scale solar electricity generation company that manufactures solar
panels using amorphous silicon thin film photovoltaic technology.
OptiSolar plans to submit an application for a Department of Energy
(``DOE'') loan guarantee under the Innovative Energy Program in
response to Solicitation Reference Number: DE-FOA-0000005, issued
pursuant to the Code of Federal Regulations, Title 10, Chapter II,
Section 609 (the ``Final Rule'').
OptiSolar will use the guaranteed loan to complete construction of
its photovoltaic panel manufacturing facility and the acquisition of
solar panel manufacturing equipment for the facility (the ``Project'').
OptiSolar has already invested approximately $75 million in the
Project, which is located in Sacramento County, California. Once the
proceeds of the guaranteed loan are disbursed, OptiSolar will
immediately reinstate hundreds of construction jobs for work that it
suspended due to the financial crisis, and will ultimately create over
1,000 permanent manufacturing jobs.
OptiSolar has been operating photovoltaic solar module development
equipment in Hayward, CA since 2006. OptiSolar successfully completed
construction of its manufacturing facility in Hayward in the first
quarter of 2008. It began installing photovoltaic solar module
manufacturing lines, the first of which began its operating ramp in
March, 2008. The second manufacturing line was installed and began its
operating ramp in August, 2008. Both lines are currently producing
photovoltaic solar panels which were used to construct OptiSolar's
first solar farm in Sacramento, California, and are being used to
construct OptiSolar's first commercial solar farm. in Ontario, Canada.
OptiSolar began construction work on the Project in March 2008.
OptiSolar has largely completed the first phase of construction to
prepare the Project to receive its first photovoltaic module
manufacturing line, including site demolition, earthwork and exterior
improvements, concrete pours, masonry work, steel installation,
architectural interior finishes, process piping, fire protection,
underground utilities, HVAC and mechanical equipment, gas and equipment
pads, interior electrical work, electrical work in support of a planned
69 kV substation, fire alarm system installation, facility monitoring
system installation, and gas monitoring system installation. Much of
the manufacturing equipment for the first photovoltaic module
production line has already been received at the Project site.
OptiSolar was in the process of raising additional equity for the
development of the Project when the financial crisis struck. Despite
the low risk of investing in OptiSolar's proven manufacturing process,
financing parties have been forced to scale back their commitments
dramatically or withdraw them completely. In December 2008, in response
to the general financial crisis, OptiSolar suspended construction on
the Project. On Friday, January 9, 2009, OptiSolar gave termination
notices to almost 300 employees, approximately 50% of its workforce, a
great many of whom were working on the Project. OptiSolar reluctantly
took this drastic step in an effort to preserve its core business and
ability to ultimately execute on its business plan for the large-scale
manufacture of photovoltaic solar panels and the development of large-
scale solar fauns. OptiSolar is prepared to immediately recommence
construction and begin installation of its first photovoltaic module
manufacturing line upon the first disbursement of the guaranteed loan,
immediately rescuing hundreds of construction jobs.
(ii) improvements to the doe innovative energy loan guarantee program
The Innovative Energy Program, as it exists today, offers a distant
promise of a solution to the financial crisis and the deployment of
new, innovative clean energy technologies, and places several nearly-
insurmountable hurdles in the way of that promise. With some changes.
the Innovative Energy Program within the DOE Loan Guarantee Program
could become a key solution in both the economic recovery and the
development of a renewable energy infrastructure in the United States.
(A) Innovative Enemy ProLiram Applicants Should Not Be Subject to High
Application Costs
Congress should appropriate funds to reduce the application fee for
the Innovative Energy Program and to conduct the credit analysis
necessary to determine the viability of applicants' projects.
Section 609.6(b)(21) of the Final Rule and Section F(12) of
Attachment A of the Innovative Energy Program solicitation requires
applicants to submit a preliminary credit assessment with their
application for a loan guarantee.\1\ Together, the cost for the
services of a rating agency to provide a credit assessment and the
application fee total approximately S300,000, in OptiSolar's case.
Applicants are expected to incur about half of these expenses, in
OptiSolar's case, approximately $150,000, before even knowing whether
DOE will select their applications for due diligence and project
underwriting. The Final Rule asks applicants to gamble cash that they
urgently need for other uses in a high-stakes wager for government
assistance. This part of the Final Rule will inhibit worthy applicants
from seeking guarantees through the program, and thus hinder the
ability of the program to achieve its goals.
---------------------------------------------------------------------------
\1\ ``An Application must include, at a minimum, the following
information and materials:... A preliminary credit assessment for the
project without a loan guarantee from a nationally recognized rating
agency for projects where the estimated total Project Costs exceed $25
million.'' Final Rule Section 609.6(b)(21).
---------------------------------------------------------------------------
(B) Innovative Energy Program Applicants Should Not Bear DOE
Administrative Fees and Costs or Credit Subsidy Costs
Congress should appropriate funds to cover the costs of
administering the Innovative Energy Program and the credit subsidy cost
for borrowers under the Innovative Energy Program.
Sections 609.8(d) and (e) of the Final Rule require applicants to
pay for DOE's administrative costs and, when no Congressional
appropriation has been made, for the credit subsidy cost (which is
essentially a cash reserve for the DOE to cover potential program
defaults). In OptiSolar's case, those fees and costs that can be easily
estimated--a 1% facility fee and the cost of DOE's lawyers and
consultants--alone will approach $4 million even before OptiSolar
receives a firm commitment from the DOE for a loan guarantee. The
credit subsidy cost remains unknown to an applicant until immediately
before the loan is disbursed--after the applicant has incurred millions
of dollars in other fees and expenses. This unknown credit subsidy cost
could, in certain scenarios, reach into the tens of millions of
dollars. These parts of the Final Rule will inhibit worthy applicants
from seeking guarantees and hinder the ability of the program to
achieve its goals.
(C) DOE Should Expedite the Disbursement of Loans
Congress should require DOE to expedite the review of applications
under the Innovative Energy Program. Currently, the Innovative Energy
Program does not impose any timeline for DOE to evaluate applications,
select applicants to receive loan guarantees, and close on the relevant
financings. Applicants such as OptiSolar cannot rely on the program to
execute projects in the near term. because a decision on the guarantee
could take months or years. Given the current effort in Congress to
quickly inject capital into the markets to create jobs, build renewable
energy capacity, and generate economic growth, the Innovative Energy
Program should expedite the review of loan guarantee applications.
(D) An Existing DOE Program Has Similar Characteristics to the Proposed
Improvements
DOE already administers a program which has the improvements
proposed above for the Innovative Energy Program. It is the DOE's
Advanced Technology Vehicles Manufacturing Incentive Program (the
``ATVM Program''), The ATVM Program authorizes the DOE to make direct
loans for the purpose of re-equipping, expanding, or establishing
manufacturing facilities for advanced technology vehicles and
components.\2\ In September, 2008, Congress modified the ATVM Program
so that applicants are not required to pay any application fee, nor are
they required to submit a rating agency credit assessment at any point
in the application process.\3\ ATVM Program borrowers only pay a 0.1%
fee on their loan and do not pay for the credit subsidy cost, because
Congress has appropriated funds to cover the cost.\4\ The ATVM Program
demonstrates how the Innovative Energy Program would work with the
improvements proposed above.
---------------------------------------------------------------------------
\2\ As authorized by Section 136 of the Energy Security Act of
2007, Pub. L. 110-140 (December 19, 2007).
\3\ See 10 CFR Part 611 Subpart B. Section 611.101: Federal
Register. Vol. 73. No. 219. pp. 66733-34 (Wednesday, Nov. 12, 2008).
See also Federal Register, Vol. 73, No. 219. pp. 66729, paragraph H.
\4\ Section 129(a) and 129(c) of the Consolidated Security.
Disaster Assistance, and Continuing Appropriations Act. 2009. Pub. L.
110-329 (September 30. 2008). See also Federal Register Vol. 73, No.
219. pp. 66721-66722 and 66729. paragraph H (November 12. 2008).
---------------------------------------------------------------------------
III. The Financial Crisis and the Goals of the Economic Stimulus Weigh
in Favor of Improving the Innovative Energy Program
The world has changed since the Final Rule was issued in June of
2008, and the renewable energy industry has been impacted just as
severely as the automotive industry. On January 8, 2009, President
Obama, in a speech to the nation as President-elect, noted that
``Manufacturing has hit a twenty-eight year low. Many businesses cannot
borrow or make payroll.'' Solid companies face cash shortages due to
malfunctioning capital markets, and the nation recognizes that, as
President Obama said in his January 8th speech. ``. . . doing too
little or nothing at all . . . will lead to an even greater deficit of
jobs, incomes, and confidence in our economy. It is true that we cannot
depend on government alone to create jobs or long-term growth. but at
this particular moment, only government can provide the short-term
boost necessary . . .'' OptiSolar is not alone in facing a financial
contraction of extraordinary duration that inhibits its ability to
expand its manufacturing capacity for renewable energy technology.
The DOE created the Innovative Energy Program pursuant to Title
XVII of the Energy Policy Act of 2005 (the ``Act'') in order ``to
encourage commercial use in the United States of new or significantly
improved energy related technologies and to achieve substantial
environmental benefits. DOE believes that commercial use of these
technologies will help sustain and promote economic growth, produce a
more stable and secure energy supply and economy for the United States,
and improve the environment.'' (Federal Register Vol. 72, No. 204, p.
60116 (Tuesday, October 23, 2007).)
Imposing the current fees and costs of the Innovative Energy
Program on applicants and the absence of a timeline for the award of
guaranteed loans undercut the program's goals. First, the Innovative
Energy Program is designed to ``enable project developers to bridge the
financing gap between pilot and demonstration projects to full
commercially viable projects that employ new or significantly improved
energy technologies.'' (Press Release by the Department of Energy, June
30, 2008.) These projects could otherwise have difficulty making it
from the demonstration stage to the commercialization stage of
development fast enough to benefit from economies of scale, due to
perceived risk. Penalizing applicants with a credit subsidy cost that
increases with the level of perceived risk undercuts this goal. Second,
even absent the current financial crisis that has sapped the cash
reserves of even the most established companies, new companies are
hard-pressed to come up with millions of dollars to cover fees and
costs on a speculative basis, before they have a commitment from DOE to
guarantee a loan and before their (by definition) pre-commercial
technologies have started generating revenues. Finally, near-term,
shovel-ready projects, such as OptiSolar's solar panel manufacturing
project, will languish due to the current financial crisis, unless the
review of program applications is expedited.
The nation has an interest in improving the renewable energy
infrastructure in the United States, creating jobs, diversifying the
nation's energy mix, and increasing the manufacturing base of clean
energy technologies. The proposed changes to the Innovative Energy
Program would help achieve these goals. For these reasons, OptiSolar
encourages the adoption of the proposed changes. Thank you for your
consideration.
Sincerely,
Randall Goldstein,
Chief Executive Officer.
______
Statement of Edward J. Driscoll, Chief Executive Officer,
Rational Energies
Mr. Chairman, Ranking Member Murkowski, and Members of the
Committee:
We appreciate the opportunity to share our thoughts and concerns
regarding the Department of Energy's (DOE) Title XVII Loan Guarantee
Program (Program) with the Committee. We believe the Program has the
potential to accelerate significantly the commercialization of new
technologies that will create new jobs; reduce our nation's dependence
on foreign oil; improve the environment; and create sustainable
alternative energy businesses. However, as currently structured, the
Program makes it extremely difficult for early stage companies to
utilize the program effectively as a means to achieve its intended
purpose.
rational energies clean diesel project
Rational Energies LLC is a Minnesota based company that has
designed a process for converting municipal solid waste (MSW) into
renewable clean diesel (RC diesel) that meets the ASTM D975 fuel
quality specification. We are currently engaged in a project to
construct a $300M MSW to RC diesel plant to be located in Empire
Township, Minnesota. The plant will produce just over 28M gallons per
year of RC diesel; enough to supply the municipal bus fleet in the Twin
Cities and many of the school buses with a fully compatible diesel
product that provides up to 80% reduction in greenhouse gas emissions.
Additionally, the plant will prevent almost 700,000 tons of garbage per
year from being dumped in landfills, which would equate to a
substantial reduction in the formation of methane (a high GWP
greenhouse gas). This project will result immediately in an estimated
40 jobs for design and engineering, 250 jobs during construction, and
90 mostly ``head of household'' jobs when operational. Major elements
of the project, including feedstock, technology, product sales, plant
design engineering, EPC contractor and land, are all in place. The
Minnesota State environmental permitting process has been initiated,
and construction can begin when permitting is complete in 12 to 18
months. Our project has the support of Empire Township, local counties,
the State of Minnesota, local garbage haulers, one of our local bus
companies, and the University Of Minnesota.
The Program has the potential to be a good fit for Rational
Energies, LLC, because we are proposing the construction of a plant
based on technologies that have never before been integrated into a
commercial scale operating plant. Private financial institutions are
normally reluctant to invest in new technologies, and the current
financial crisis has restricted private capital even further.
We have considered applying to the Program as it currently exists
but have not because several of the program elements make it difficult
to utilize:
First, the credit subsidy costs require a significant capital
expenditure for which we can demonstrate no return on
investment to our investors. Private equity sources funding
early stage companies generally will not tolerate this use of
capital.
Second, the fixed solicitation deadline forces technology
development efforts into a limited timeframe that can restrict
applicants from being able to provide the best possible data
for a given application.
Third, there is no mechanism in the Program that provides
early stage companies financial support or incentives to employ
the due diligence efforts of outside experts needed to ``bridge
the gap'' between applicant claims and bankable expectations.
This is a cost that private investors are usually unwilling to
cover. If the federal government were willing to provide these
funds in the form of grants or loans, we believe it would have
the effect of accelerating the development of many projects.
recommendations
We recommend to the Committee and to the Department of Energy that
the Title XVII Loan Guarantee Program be modified to make it more
accessible to development stage companies in the following ways:
First, end the requirement for the applicant to fund the
credit subsidy payment. This will ease the financial burden of
early stage companies in applying for the program. This appears
to have been incorporated in the American Reinvestment and
Recovery Act's (ARRA) temporary program to incentivize the
development of renewable energy systems and electronic
transmission systems, as well as leading edge biofuels that
have been demonstrated and have commercial promise to
substantially reduce greenhouse gas emissions. Additionally,
Secretary Chu has recently indicated that, in an effort to
reduce up-front costs, the DOE will seek to restructure credit
subsidies so that they are paid for over the life of the loan.
Second, modify the solicitation format to provide for a more
natural technology and business cycle. We believe this would
have two benefits: (1) it would allow the DOE a more even flow
of applications to process and ease the burden on staff; and
(2) it would allow companies to complete applications as their
development schedules permit, easing the need to rush data or
information into reviewers' hands just to meet an arbitrary
deadline. Secretary Chu recently announced the rolling
appraisal of applications as one of the DOE's proposed reforms
to the program.
Third, provide a means to pre-screen applicants and provide
some assistance in the form of grants to complete financial and
technical due diligence validation to those that appear worthy
of financial support. Grants up to $5M should be adequate for
the majority of alternative energy projects.
conclusion
If the United States is to retain its economic and technological
competitiveness, while at the same time making a significant
contribution to reducing its overall greenhouse gas emissions, it is
essential that a more robust deployment of clean energy technologies
occur at an accelerated pace. Along those lines, we believe the DOE can
be an effective force in stimulating the economy, particularly as it
relates to the development of alternative fuels. The DOE has the
capacity to provide capital where the private equity markets are
unwilling or unable. If properly modified, we believe that the existing
DOE Program could quickly move to fund projects like the Rational
Energies Clean Diesel Project that will provide immediate, sustainable
``head of household'' jobs that cannot be exported outside the U.S.
Thank you for your time and consideration.
______
Statement of Michael J. McInnis, Managing Director, the Erora
Group, L.L.C.
Mr. Chairman, Ranking Member Murkowski, and Members of the
Committee:
We appreciate the opportunity to share our suggestions about how to
encourage the rapid deployment of clean energy technologies. We believe
it is essential for Congress and the Department of Energy to reform
existing loan guarantee and grant programs. If reformed correctly,
these programs can serve to accomplish broader objectives, including
economic stimulus, and will encourage the growth of a new industry,
creating green jobs, reducing our dependence on foreign sources of
energy, and addressing issues respecting greenhouse gases. Unless
Congress and the Department of Energy act, the construction of new
projects and the anticipated economic stimulus to local economies
across the country will continue to be delayed, or may be permanently
shelved, as a consequence of the frozen capital markets.
cash creek gasification project
We are in the final stages of developing the Cash Creek
Gasification Project in Henderson County, Kentucky. The project will
create 1,000-1,500 construction jobs and 200-300 new permanent
employment positions, while supporting thousands of manufacturing jobs
related to equipment purchases. When operational, the project will
gasify 2.8 million tons of coal per year, producing natural gas and
generating electricity in a natural gas combined cycle plant. Once
built, the plant will be the cleanest coal-fueled facility in the
country, with a greenhouse gas emissions profile similar to that of a
natural gas combined cycle facility. In fact, the facility will capture
nearly 100% of the carbon dioxide resulting from the gasification
process and greater than 75% on a plant-wide basis. The captured carbon
dioxide can then be transported by pipeline to support enhanced oil
recovery in other parts of the country or could be geologically
sequestered as that opportunity arises.
Our facility has in hand, or soon will have secured, all the
necessary permits to commence construction, including all required
water use and air quality permits. By working with local chapters of
the AFL-CIO and executing a project labor agreement, we have ensured
that a trained workforce will be ready to commence construction.
During the course of developing the Cash Creek project, we
contemplated applying for a loan guarantee under the existing title 17
program. We determined, perhaps to our detriment, that such an
application was not warranted due to the extraordinary costs of
preparing the application coupled with uncertainties in the application
process. It is against this backdrop that we respectfully offer the
following recommendations.
recommendations
We recommend that the Department revise the regulations that
implement title 17 of the Energy Policy Act of 2005 to address two
important issues. First and foremost, we believe that the Secretary
should issue an additional project solicitation and prioritize the
award of loan guarantees based on a project's greenhouse gas emissions
profile and how soon the project will have all permits necessary to
commence construction. Implemented in this way, the title 17 loan
guarantee program not only would serve as a catalyst to stimulate the
economy by supporting shovel-ready projects, but also would encourage
applicants to develop the cleanest possible projects. Second, the
Department should revise the implementing regulations to streamline the
application process and to address the implementation problems that
discouraged us and other companies from seeking loan guarantees as a
tool to bring commercially available technology to market.
In addition, by making modest changes to section 703 of the Energy
Independence and Security Act of 2007, Congress not only would
encourage the development of technologies for the large-scale capture
of carbon dioxide from industrial sources, but also would speed their
deployment.
Given current and foreseeable credit market conditions, federal
loan guarantees and grants will be essential to developing and
deploying large-scale gasification and carbon capture and storage (CCS)
projects. We believe it is essential for Congress to increase funding
for the loan guarantee and grant programs, and to encourage the
Secretary of Energy to issue an additional project solicitation and
move quickly to support projects that offer a great deal of promise in
reducing our dependence on foreign sources of oil and moving us towards
a less carbon-intensive future. We set forth below, in further detail,
suggestions about how current law and regulations could be improved to
encourage the rapid deployment of clean energy technologies, such as
those embodied in the Cash Creek Gasification Project.
title 17 loan guarantee program
We have considered but so far have not sought loan guarantees for
the Cash Creek Gasification Project in part because we would have to
invest millions of dollars in preparing our submission without any
clear sense of the amount of the credit subsidy cost we would have to
bear in return for receiving a loan guarantee. Under the agency's
implementing regulations, to comply with the Federal Credit Reform Act,
an applicant must agree to make a non-refundable payment to the
Department to cover the credit subsidy cost of a guarantee (in the
absence of an appropriation that otherwise would cover it).
Unfortunately, there is no way to discern this cost in advance of
making an application. Moreover, an applicant will only receive a non-
binding estimate from the Department when it issues a term sheet, which
will occur only after an applicant has spent several million dollars
preparing an application for a project of the size and scope of the
Cash Creek Gasification Project. Even when we had access to adequate
sources of project funding, we decided not to file an application
because we faced too much economic uncertainty about whether the credit
subsidy cost would make our project either uneconomic or significantly
less economic. In the current economic environment, the risks
associated with the credit subsidy cost process are too great to bear.
In order to help bring new projects with the greatest potential
benefits to fruition quickly, we have three suggestions.
First, in awarding loan guarantees, the Secretary should give
priority to those that have the cleanest greenhouse gas emissions
profiles and are shovel-ready, irrespective of when an application was
or is filed. As noted above, by implementing the title 17 loan
guarantee program in this way the Department not only will stimulate
the economy by supporting shovel-ready projects, but also will
encourage applicants to develop the cleanest possible projects.
Second, the application process should be streamlined and the
amount of information that must be submitted should be scaled back so
that the application process will not be unreasonably expensive and
burdensome. In addition, some application requirements ignore the
realities of the marketplace. For example, an application
prioritization process that requires that the applicant proffer a power
sales agreement ignores the fact that there is a liquid and transparent
market for power in which utilities and others participate.
Prioritization based on power sales potentially precludes the
development of these technologies by limiting the flexibility of
utilities in how they procure their power supplies. Finally, as part of
this effort, the Department should provide potential applicants with
more precise information about the likely credit subsidy payment that
will be required for proposed projects. Alternatively, Congress should
appropriate sufficient funds to cover the credit subsidy cost (as it
did with respect to the advanced technology vehicles manufacturing
program last year). By providing greater certainty and reducing the
paperwork burden, the Department will have eliminated barriers to
applicants that otherwise would bring forward good projects.
Third, with these changes and given the current state of the
economy, we believe that it is appropriate that there be an additional
solicitation (round of applications) to encourage participation by
applicants that meet the revised criteria.
carbon capture grant program
As drafted, section 703 of EISA is focused principally on
demonstration projects, rather than deployable projects, that would
capture ``a high percentage'' of carbon dioxide. Thanks to the promise
of carbon capture and sequestration, the prospect of coal gasification
plants with the emissions profile of natural gas plants is no longer a
distant reality. In fact, shovel-ready projects that would fulfill this
promise, such as the Cash Creek Gasification Project, would be going
forward, but for the absence of liquidity in the project finance
markets. The stimulative effect of rapidly deploying CCS technology
(and coal gasification technology) will spur economic growth and create
thousands of jobs as new facilities come on-line and existing
facilities are retrofitted to use commercially available technology to
substantially reduce greenhouse gas emissions.
We recommend two changes to section 703 to encourage not only
research and development projects, but also deployable projects that
are using state-of-the art technology: Revise section 703(a)(1) to make
clear that the Secretary should carry out a program to ``demonstrate
and deploy commercially available technologies'' for the large-scale
capture of carbon dioxide from industrial sources; and revise section
703(B) to provide priority in the award of grants to projects for which
all applicable permits have been issued or soon will be issued and for
which at least 75% of the carbon dioxide will be captured and
sequestered. With these changes, the law (and implementing regulations)
would complement a recalibrated title 17 loan guarantee program by
encouraging the award of grants to shovel-ready projects with the best
greenhouse gas emissions profiles.
conclusion
If the United States is to retain its economic and technological
competitiveness, while at the same time making a significant
contribution to reducing its overall greenhouse gas emissions, it is
essential that large scale commercially viable CCS and coal
gasification technologies be deployed. By improving the loan guarantee
program, amending section 703, and enacting new legislation, including
Chairman Bingaman's proposed 21st Century Energy Technology Deployment
Act, Congress can address the problems caused by the current credit
crisis and meet the twin goals of creating new green energy jobs and
placing a down payment on technology that will make the United States
more energy efficient and energy independent.