As Congress takes up hearings on the Department of Energy’s loan guarantee program, stemming from the failure of the solar energy company Solyndra, Bloomberg Government takes a deeper look at the the program and the many energy projects that received loan guarantees under Section 1705. The report, “Beyond Solyndra: An Analysis of DOE’s Loan Guarantee Program” (subscription required), energy analyst Alison Williams evaluates the program and shows:
Loan Guarantees As Policy Tools Are Widely Misunderstood —
When the government agrees to a loan guarantee, it promises to pay off the debt if the borrower doesn’t. If the borrower pays the debt, the government incurs no cost for its guarantee. In energy, loan guarantees help new-to-market companies or technologies overcome the so-called “valley of death” — when a company or technology is too established to receive start-up venture capital yet not established enough to afford traditional debt financing.
Lower-Risk Energy Guarantees Far Outweigh Higher-Risk Ones —
This study finds that default is much less likely for power generation projects, which are 87 percent of loan guarantee value under the 1705 program, because DOE required them to find buyers for the generated power. As a result, these projects have a committed revenue stream that gives lenders confidence that project backers will be able to pay off debt. Manufacturing, fuel production and storage projects, which make up the remaining 13 percent of the portfolio value, were not required by DOE to find buyers to receive guarantees.
The Program Planned for Failure —
The DOE was appropriated $2.47 billion in credit subsidy costs—essentially an insurance fund to cover project losses. Beyond the two current project defaults, this fund could cover total defaults of all eight of the remaining higher-risk projects and have money in reserve.
Ending DOE’s Loan-Guarantee Authority Would Not Result In Budget Savings and Would Potentially Hinder Energy Development —
Loan-guarantee commitments are not included in the federal budget, which is limited to direct expenditures. So far, the DOE’s Loan Guarantee Program has paid for itself with fees from applicants. Future overhead would also be paid with applicant fees. Ending DOE’s loan-guarantee authority would have no budgetary impact and may jeopardize the remaining projects under review, calling into question the potential of new-to-market energy projects for renewable, nuclear power, advanced fossil fuel and carbon technology.
By Alison Williams, Energy Analyst, Bloomberg Government