The most important of all the American Recovery and Reinvestment Act of 2009 (the "Stimulus Act" or "ARRA") initiatives could be the reformulation of the DoE Renewable Energy Loan Guarantee Program. This could be true not because of what facilities actually commence construction before the September 30, 2011, cut off established by ARRA, but because it could be the precursor of several new forms of public-private partnerships ("P3") for alternative/renewable energy and for cleantech. While difficult economic situations and their legislative fixes come and go, innovative ways of doing business take root and proliferate.

Several factors point to this possible conclusion:

• The scope of the definition of renewable energy is comprehensive, and overlaps some of the categories eligible for tax exempt finance and/or for the incentives (such as the grant program for up-front monetization of renewable energy tax credits which otherwise would have to be earned via production over time).
• There are respects in which the Federal government either is "privatizing" its own loan reviewing activities or devolving such privatization to eligible state development finance organizations, in either case creating a broader range for private participation in public-private partnerships.
• A model is established for creation of a separate entity, outside of the Department of Energy, which can use a variety of public credit support mechanisms to assist privately sponsored/privately structured projects--in the energy efficiency as well as the energy production spheres. It is a model which the Senate is seeking to execute.

How can all of this be attributed to one section (§ 1705) of the ARRA? That statute basically adapted a notably unsuccessful Federal program to credit-enhance project financing of innovative new technology proposals already substantially market-worthy. ARRA refocused the program on commercially feasible, "shovel ready," renewable energy finance projects that could be sources of near term job creation.

It did so in conjunction with other provisions of ARRA designed to facilitate new commingling of certain types of renewable energy incentives. The ban against tax exempt treatment of interest on debt on Federally-guaranteed projects remains. But the statute did leave open the right to combine U.S. Treasury "grants," i.e., monetization of tax credit incentives, for use with projects issuing public guaranteed debt. While effectively mandating private equity contributions at a minimum of 20% of project costs, it did not preclude utilizing public assistance from state or local entities to reduce overall debt requirements. There are no restrictions on projects whose underlying credit support is derived from contracts or other arrangements with public entities. Effectively up to 64% of project debt can be Federally guaranteed.

Some of the loan guarantee program's specifics point in the direction of a wider definition of "renewable energy" at least on the energy production side. While energy efficiency and conservation are not covered by the statutory definition, included as loan-guarantee-financeable were several typed of projects which produce thermal energy, rather than electric energy. As a consequence thereby, included in the loan guarantee eligible definition are many technologies which can serve the needs of different types of public jurisdictions, such as district heating and cooling, solid waste combustion, waste gasification, and cogeneration. (These activities are also, in turn, eligible for other Federal incentives under the expansive energy efficiency provisions of the Stimulus Act (many of which are implemented at the state and local level). In effect, the range of public-private cooperation in the field of "energy" was broadened in a way that may be expected to be carried forward by future programs and developers.

In addition, building on the framework of the prior statute--but looking outward to the practices of other Federal agencies' rule-making -- with grudging assistance from the Office of Management & Budget -- the DoE approved a new type of implementation mechanism for the Loan Guarantee Program: the Financial Institutions Partnership Program ("FIPP"). FIPP is aimed at streamlining the old, arduous, fully governmentally-administered, loan guarantee program. Its specific innovation (for DoE, through not for certain other Federal agencies) is the delegation to selected financial institutions, which meet the DoE standards for review capability, the responsibility of vetting qualified projects and presenting them to the DoE. While the carrot to the sponsoring institutions is obviously the fees from private clients, there is an important requirement as well. To be a qualified lender, a bank or other institution must be prepared to have "skin in the game", i.e., to hold a portion of the debt issued for the project which was not guaranteed by the Federal government. There is no incremental fee charged for the Federal loan guarantees. DoE loan guarantees are not subordinate to any other loan guarantees. The intention clearly is to assure that qualified lenders do not become merely deal conveyor belts, with no surviving interest in the projects which they champion.

Under the first FIPP solicitation, would-be qualified lenders must appear at the Federal government's doorstep with a fully structured project financing from a developer in hand, with all of the pieces assembled except the applied-for Federal guarantee for a portion of the debt, which would, of course, serve to materially lower the price of project debt. The lender's service to the Federal government and to itself is performance of the "due diligence" which goes into the packaging of marketable deals. (This is a different model than either the privatization concessions or public-private partnerships which have characterized, for example, the municipal services area.) In effect, FIPP re-arranges the risk allocation of a P3 in a different manner between government-financial institution-user than had previously been the case.

A second form implementation of the loan guarantee program has recently been outlined in DoE's Request for Information ("RFI") for "Financial Institutions Partnering Program: Partnerships With Public and Non-Profit Development Finance Organization Co-Lending Opportunities" (so-called "DFOs"). The RFI was designed to identify which DFOs may have the ability to perform the functions that qualified private financial institutions under FIPP can, and also have the financial strength to retain a portion of the non Federally guaranteed debt (i.e., at least 5% of project costs for the life of the loan) for their own accounts.

It is important to recognize the proposed characteristics of participating DFOs which the regulations contemplate. The DoE welcomes DFOs proposing innovative and collaborative lending mechanisms that utilize regional, local, and other partnerships.

The DFOs must already be legally empowered to invest public capital or funds and/or guarantee third party investment. They cannot be debt and equity providers in the same transaction. DFO means of obtaining funds for injection into projects is more circumscribed. Investment of project financed type conduit debt is limited to those DFOs able to show a track record of low defaults on other types of analogous conduit issue fields. Overall, DFOs may not simply be in the business of putting their own or an affiliated governmental or non-profit's capital at risk. Additionally, DFOs may not be just "conduit financing institutions"; those that are principally in the grant or equity investment aspects of financing are discouraged from being investors. For DFOs, it is primarily corporate, full recourse rather than project financing, which is DoE's targeted sweet spot. They may also, however, take advantage in structuring projects of available state and assistance programs, or (if they are so empowered) apply their moral obligation backstop to debt issued in conjunction with projects which are not Federally guaranteed.

The information from sponsors to be elicited by the DFO, and the documentation developed for packages submitted to the DoE, are to be of equivalent quality to that received for negotiated project financings or other forms of commercial financing. DoE must find that DFOs meet institutional performance standards imposed by FIPP on third party lenders. All of DoE's criteria for potential DFOs are at once broad in potential scope of DFO makeup, stringent in identification of DFO characteristics, and extremely demanding in their performance level requirements.

It is more or less novel for the Federal government to reach out to the states to facilitate (even realize fees on) a program designed for the development of projects for private parties. It is creative to seek to synthesize project developments with the local incentives as well. It represents, in short, an expanded model for public-private partnerships based on investment, while not foreclosing service arrangements with public or not-for-profit facilities.

What is being done in the energy loan guarantee area represents potential intellectual capital for design of future P3s. But the institutional superstructure created thereby potentially remains as merely a temporary edifice erected in the Great Recession and receding from sight as the perceived linkage of renewable energy and job creation possibly fades into night on September 30, 2011.

But that is not necessarily so. Currently proposed as part of the Senate's version of an energy bill is the concept of an established free-standing "CEDA" (Clean Energy Deployment Administration) operated independently of the Department of Energy. Broadly speaking, CEDA would be able to extend loan guarantees on an on-going basis, and to build upon the innovation of the Department of Energy Loan Guarantee Program. It would draw on the lessons learned by the Overseas Private Investment Corporation and the Export-Import Bank, with respect to assisted project and corporate financing in tandem with private institutions. While it has not, up until now, been contemplated that CEDA could guarantee tax exempt debt issued for otherwise eligible energy facilities, that idea is being given some play. Far from being a relic of ARRA, CEDA could prove to be the new launching pad for public-private partnerships in the energy field using lessons learned in the ARRA loan guarantee program.

In sum, the DoE Loan Guarantee Program may prove to point the way to different and more effective form of public-private partnerships, for the following reasons:

• Encompassing energy sectoral definitions--with overlaps with other non-energy activities;
• Involving roles for financial institutions in a manner consistent with sound economics;
• Involvement of Federal-state collaboration with the private sector;
• Potential linkage of governmentally assisted P3s with government buying power;
• Consistency and compatibility with other available tax and incentives;
• Resulting innovation in the provision of public services.

In sum, moving the shovel ready present projects to a sustainable model for public-private partnerships.

Other Posts by: Roger Feldman

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