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November 5, 2010

White House Memo: Shift Renewable Loan Funds To Tax Grants

In an acknowledgement that the Energy Department’s loan guarantee program for renewable energy projects is underperforming compared to another key federal clean energy incentive, senior White House advisors last week asked President Obama to consider asking Congress later this month to shift billions of dollars in unobligated loan guarantee appropriations to a program that allows renewable energy developers to receive direct cash grants in lieu of federal tax credits from the U.S. Treasury.

In an October 25 memorandum to the president, obtained by The Energy Daily, the advisors suggest the president could ask Congress in the lame duck session to rescind the loan guarantee program, which expires at the end of 2011, and reprogram up to $2.5 billion in unobligated appropriations to the Treasury grant program. Congress also would have to extend the grant program, which was established in Section 1603 of the American Recovery and Reinvestment Act (ARRA) but is set to expire at the end of this year.

The memo was authored by Carol Browner, director of the White House Office of Energy and Climate Change Policy, Vice President Joe Biden’s chief of staff, Ron Klain, and National Economic Council Director Lawrence Summers. The White House did not respond to requests for comment on the document.

The memo noted that through October 25, the loan guarantee program, authorized in section 1705 of the ARRA, has led to loan guarantee approvals for only 4 projects, representing up to 1,600 megawatts of renewable capacity. In sharp contrast, the 1603 Treasury grant program has helped spur 3,851 projects—including 203 wind projects and more than 3,500 solar projects, with an installed capacity of about 8,600 MW, the memo said.

In addition, the memo noted that it has taken government agencies an average of six months or longer to review loan guarantee applications from developers—in large part because each project must be weighed on a case-by-case basis reflecting the type of project and its particular risks. The memo also said that Treasury, the White House Office of Management and Budget and the Energy Department must conduct difficult, time-consuming negotiations with applicants on loan guarantee terms.

In contrast, the Section 1603 grant program has required an average review period of only four to six weeks for each project, the memo said.

At the same time, the loan guarantee program is at risk of expiring before DOE can dole out the remaining loan guarantee dollars to applicants. To date, DOE has obligated only about 2.5 percent of the $2.5 billion in appropriations for the loan guarantee program, while an additional nine projects have received conditional approvals. If DOE closes these deals, the memo said, the total obligation would be between $500 and $900 million.

The administration already has shifted some $3.5 billion of the original $6 billion appropriated to the renewable loan guarantee program to fund other programs, including the “cash-for-clunkers” initiative meant to entice owners of gas-guzzling cars to purchase new vehicles with better fuel economy.

While contending that reprogramming the remaining loan guarantee funds to extend the Treasury grant program would be more effective in deploying more renewables, the memo acknowledged the move could anger key supporters of the loan guarantee program, notably House Speaker Nancy Pelosi (D-Calif.) and Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.).

“Sen. Bingaman, who views 1705 as ‘his program,’ would strongly oppose” moving the loan guarantee money to the Treasury grant program, the memo said. In addition, choosing this option “[c]ould signal the failure of a Recovery Act program that has been featured prominently by the administration,” it continued.

Further, the advisors acknowledged that it could be difficult to get Congress to agree to the move, saying a reprogramming effort “entails the risk that Congress accepts the 1705 rescission but fails to deliver the 1605 extension.”

A key and well-documented hang-up plaguing the loan guarantee program is the ongoing friction between DOE, Treasury and OMB over the terms of each loan guarantee, particularly the amount of credit subsidies applicants must pay to cover a portion of the cost of the incentive.

In a tacit acknowledgement of the interagency friction, the memo suggested that Obama should consider—as an alternative to asking Congress to shift the loan guarantee funds to the grant program—limiting Treasury’s and OMB’s review of loan guarantee applications, in effect streamlining the process “to have OMB and Treasury play roles akin to what they do for other credit programs, such as [the Overseas Private Investment Corporation] and [the Export-Import Bank].”

The memo said that while this approach might please some members of Congress if it results in swifter approval of loan guarantees, it would still carry the risk of having the loan guarantee program expire before all the available appropriations have been obligated.

In a third alternative, the advisors said that Treasury and OMB have proposed establishing “a clear set of policy principles—and associated metrics for evaluation”—for the loan guarantee program.

These principles, the memo said, would address “risks” associated with the loan guarantee program. These risks include “double dipping” by companies in various federal and state subsidy programs, which the memo said has resulted in total government subsidies for loan guarantee recipients exceeding 60 percent of project costs; “skin in the game,” a reference to “the relatively small private equity (as low as 10 percent) developers put into projects;” and “non-incremental investment,” a reference to the fact that some projects that have received loans probably would have been built even without the incentive.

To illustrate these concerns, the memo offered up for evidence the $1.9 billion, 885 megawatt Shepherds Flat wind farm in Oregon, announced with great fanfare last month by Energy Secretary Steven Chu. The project received $500 million in Treasury grants, $200 million in accelerated depreciation on federal and state taxes and a $300 million DOE loan guarantee and will receive a premium for its power under Oregon’s renewable energy mandate worth an estimated $220 million.

Taken together, these subsidies would give the project an estimated $1.238 billion in assistance—more than 65 percent of the project’s estimated cost—while project developer Caithness Energy LLC will have put in equity totaling 11 percent. The memo added that the Shepherds Flat project would earn return on equity of 30 percent.

“This project would likely move without the loan guarantee,” the memo said. “The economics are favorable for wind investment given tax credits and state renewable energy standards.”

Changing the loan guarantee program to establish new policy principles by which Treasury and OMB weigh applications also would carry political risks for the White House, the memo noted.

“Some members of Congress may criticize this effort to limit the application of the loan guarantee program,” the memo said. “The White House will bear this criticism.”

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