DOE Loan Program offers financing option for developers investing in new renewable technology

The U.S. Department of Energy’s federal loan program for project developers is generating more activity as the pace of the energy transition intensifies, program directors have provided some clarification into exactly what the program offers, who is eligible, and how it can be a viable project financing option for developers.

The DOE’s loan program is a federal financing program with USD 40bn in available debt capital across three sub-branches with further stratification among energy project categories. For instance, the program offers USD 4.5bn in debt capital for renewable energy and “efficient energy” projects, but offers nearly quadruple that (USD 17.7bn) for its advanced technology vehicle manufacturing program. It also has set aside USD 2bn for tribal energy projects, which can include a broad range of project and energy types including fossil fuels, renewables, transmission and storage as long as the projects are majority-owned by a Native American tribe.

Under the loan program, the DOE operates similarly to any private firm. It vets its potential partners and their projects like any bank would, but it also offers some key benefits along with certain requirements that make it a unique financing option beyond its federal status.

A key selling point for the DOE Loan Program is clear; the department is comfortable with a higher degree of risk than most investors. Unlike many private financiers, the DOE is interested in projects before they are completed and, in some cases, even under construction. In fact, the program is often engaged in talks with developers before they even have a specific project in mind, much less a site plan, environmental review and offtaker.

By being engaged early in the process, DOE program directors say they are able to verify the viability of each project and developer as well as their applicability to the loan program. And because of the DOE’s sizable technical team, the department is less concerned about risk going into negotiations because of its confidence that it can properly diagnose project viability. DOE officials argue that this level of comprehension is part of the value proposition on offer and add that a DOE financing proposal may even be a useful tool for developers to leverage when negotiating siting and offtake agreements. That said, although the DOE does engage with developers early in the development process, it does recommend that developers refrain from formally applying for a loan until the project is finalized and ready for construction.

Project timelines between initial application and financial close vary under the DOE program. DOE officials say ultimately the timeline depends on project readiness. Many projects get through the process as quickly as a few months. Some have even been closed within two. Others have taken multiple years.

In order for a project to be applicable to the DOE Loan Program, it must utilize technology that has been implemented on at least a modular scale to verify viability. But this requirement can create a relatively delicate balancing act for developers interested in applying because the program also only applies to what the DOE defines as “innovative projects.”

What makes a project innovative?

The DOE defines innovation as technology that provides an improvement over existing commercial tech. While this can include incremental technology investments in well-established fields like solar and wind, it also applies to those less established sectors like pumped hydro storage and offshore wind and software enhancements like virtual power plants. One DOE director also noted that the department is “open to conversation” regarding distributed generation projects, but that in order to qualify each project must be able to present a “unified theme” such as a common offtaker or geography.

While the threshold for innovation in established technologies can be relatively low, the DOE does require a measurable improvement in the process or product over commercial technology, which it defines as tech that is being used in three or more commercial projects in the U.S.

Notably, DOE directors say that they do not consider the federal loan program to be in competition with private lenders. In fact, they actually encourage developers to bring in other lenders as projects advance and more conventional lenders become interested. This practice is particularly common with large projects.

While the DOE is willing to take up the vast majority of the commercial risk sharing percentage for any project that successfully meets its requirements, it does cap itself at 90 percent requiring any developer to secure supplemental financing. The DOE is also unwilling to take on merchant risk