Department of Energy Loan Guarantee Program 2009 Briefer

Title XVII of the Energy Policy Act of 2005 authorized the Department of Energy (DOE) Loan Guarantee Program to provide loan guarantees for innovative technologies. Under the program projects must “avoid, reduce or sequester air pollutants or greenhouse gases; employ new or significantly improved technologies and provide a reasonable prospect of repayment.” While the program was intended for emerging energy technologies, mature energy industries like coal and nuclear are eligible as well.

Currently the program has $51 billion in available budget authority. The first allotment came in the FY07 Continuing Resolution which provided $4 billion for the program. Then in 2008, the Omnibus Appropriations bill provided $38.5 billion for the program, earmarking it for specific technologies that included nuclear facilities, coal gasification, coal power generation with carbon capture and storage, and renewable energy and transmission projects. The recently passed 2009 Omnibus mirrored the ’08 appropriation but added $8.5 billion to the previously awarded authority for the renewable energy portion of the loan guarantees. With this addition and the existing 2007 authority, the program has a $51 billion budget cap (see chart below).

Under its current budget cap the program provides $20.5 billion for the nuclear industry with $18.5 for nuclear facilities and $2.0 billion for uranium enrichment projects.¹ The Congressional Budget Office considers the risk of default on nuclear loan guarantees to be very high, well above 50%.² In addition, although the loan guarantee program is designed to be self-financing and DOE is tasked with estimating the administrative and the subsidy cost (the net present value of the anticipated costs of defaults) of the loans, the Congressional Budget Office projects that the Department of Energy will likely underestimate these costs.

Loan Guarantee Budget Authority History

Background Loan Guarantee Program:

• Created in Title XVII of the Energy Policy Act of 2005 (EPACT) the Department of Energy Loan Guarantee Program was established to provide federal loan guarantees for innovative energy technologies. Projects must “avoid, reduce or sequester air pollutants or greenhouse gases; employ new or significantly improved technologies and provide a reasonable prospect of repayment.”
• EPACT directs that the cost of the guarantee be financed through the collection of a borrower’s fee or appropriated by Congress.
• As required by Congress, DOE issued a final rule on the program in October 2007 further detailing the processes and parameters of the program.
• Under EPACT and the final rule the DOE can provide a loan guarantee up to 80% of the total project cost. The DOE Inspector General found that this will “result in significant risk to the Government and, therefore the American taxpayer.”
• DOE requested $9 billion for the program in their FY08 budget request and $38.5 billion in their FY09 budget request.
• Appropriators provided the program with a $4 billion allotment in the Fiscal Year 2007 Continuing Resolution and $38.5 billion in the report language of the Consolidated Omnibus Appropriations bill for 2008. In FY09 Omnibus, Congress extended the existing $38.5 billion in budget authority provided in the 2008 Omnibus and added an additional $8.5 billion for the renewable and transmission section.
• The Congressional Budget Office has estimated that the subsidy cost of the loan guarantees will be estimated at least 1% lower than costs.
• Of the program’s $51 billion in existing budget authority $47 billion is for designated projects- see breakout below:
  

Loan Guarantee Project Breakouts

Recent Findings from GAO
Last July, GAO released a comprehensive review of the Loan Guarantee Program and several of the report’s findings should be of significant concern to the Administration, including the lack of a clear process for reviewing applicants, uncertainty in program costs and financial risks to the federal government, and a lack of internal structure and other safeguards.⁶

Summary of Report Findings:

• DOE currently lacks the resources and internal structure to review and process loan guarantee applications.
  
• Despite plans to consult with outside experts in financial, legal, environmental and other fields to successfully implement the program, DOE has yet to determine what the programs needs are or to begin to establish contracts with outside consultants.
  
• DOE has staffing and management issues—DOE has only 7 staff members for this program, despite an allotment of 15 staff for 2008.
  
• DOE plans to accept non-cash equity such as land or other assets—this is not clear in the final rule but is confirmed by the Director of the program in the GAO report. Because of this omission in the regulation, GAO believes applicants may not be clear on what constitutes “equity".
  
• Currently the LGP lacks performance measures to track the program’s effectiveness and to account for the program’s full administrative costs.
  
• DOE has not established a system to find lenders or oversee loans.
  
• In a 2007 report, GAO recommended DOE establish procedures to assess the costs of the program; DOE has yet to establish a process to assess costs.
  
• Because of the large scope and nature of the program, estimating accurate subsidy costs for projects will be difficult.
  
• Projects will vary in cost and size, cover a range of technologies, and come from a broad range of sponsors with different levels of experience; therefore the DOE is likely to misestimate individual projects’ cost.
  
• If the DOE misestimates loan guarantee fees relative to costs, taxpayers will pay the difference.
  
• The DOE incentivizes risky projects. Despite higher fees, the benefit of a guarantee is highest for borrowers with greater risks. GAO finds that the energy portfolio supported by the program may be skewed towards risky projects as a result.
  
• GAO estimates a 50% default rate for projects and a 50% recovery rate with a 25% loss to federal taxpayers

¹Department of Energy Loan Guarantee Program, “Title XVII 2008 Omnibus Report Language,” http://www.lgprogram.energy.gov/appro/rptLanguage.pdf.
²Congressional Budget Office, “S. 14 Energy Policy Act of 2003: Cost estimate”, May 2003, http://www.cbo.gov/doc.cfm?index=4206&type=0.
³The $38.5 billion in budget authority provided in the 2008 omnibus expired but the 2009 Omnibus reallocated this budget authority with no time limitation
⁴The 2009 Omnibus renewed the authority provided in the 2008 Omnibus and added an additional $8.5 bill for
⁵“$6,000,000,000 of loan guarantees are for coal based power generation and industrial gasification activities at retrofitted and new facilities that incorporate carbon capture and sequestration or other beneficial uses of carbon”
⁶Government Accountability Office, July 2008, http://www.gao.gov/highlights/d08750high.pdf

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