On May 30, 2023, the U.S. Department of Energy’s Loan Program Office (the “DOE LPO”) released, for public comment by July 31, 2023, an interim final rule (the “IFR”)1 amending regulations governing DOE’s clean energy loan guarantee programs2. The IFR, which takes effect immediately, makes significant improvements, updates and clarifications, designed to facilitate the submission of applications, by either eligible lenders or project developers, to the DOE LPO for a broad array of newly eligible clean energy project types and accelerate deployment of approximately $290B of loan guarantee authority and approximately $8.6B in appropriations to support credit subsidies, in each case provided under the Inflation Reduction Act of 2022 (the “IRA”) before their expiration on September 30, 2026. The IFR should be reviewed together with nuanced guidance issued by the DOE LPO on May 19, 2023, entitled “Title 17 Program Guidance Clean Energy Program” (“2023 Guidance”)3 detailing requirements and setting forth lists of non-exclusive types of projects for each of the four categories of eligible clean energy projects: Innovative Energy Projects; Innovative Supply Chain Projects; State Energy Financing Institution Projects4 and Energy Infrastructure Reinvestment Projects. The 2023 Guidance includes the following chart providing an overview of their respective Title 17 program categories and requirements.
Key take-aways and programmatic changes from the IFR and the 2023 Guidance are as follows.
- Accelerated Timing for Obligating the DOE LPO.The DOE LPO will now determine the amount of the credit subsidy cost for a loan guarantee and “obligate” appropriated federal funds to pay such credit subsidy cost at the time of conditional commitment, subject to the availability of appropriated funds, rather than at financial closing of the loan guarantee agreement.The DOE LPO no longer may terminate a conditional commitment for any reason prior to the execution of a loan guarantee agreement.These changes provide increased transparency and certainty to loan applicants who have obtained a conditional commitment from the DOE LPO as they proceed to satisfy specified conditions precedent to closing and may also serve to reduce the risk that Eligible Projects, requiring extended time to satisfy closing conditions, will fail to benefit from the credit subsidy appropriation and loan guarantee authorization under the IRA.
- Fees Reduced. The DOE LPO will no longer assess any application fees.This fee was previously imposed to reimburse the DOE LPO for its general administrative expenses.The DOE LPO will continue to access a non-refundable “Facility Fee” of approximately 0.6% of the loan guarantee amount at financial closing and an ongoing post-closing maintenance fee.Further, third party advisors to the DOE engaged to assist with project due diligence and financing must be borne by the applicant.Such costs will be considered “Transaction Costs” and included in the overall “Project Costs” of an Eligible Project.
- Rolling Submissions. The DOE LPO will accept applications as and when submitted, eliminating its earlier solicitation practice with defined submission windows.A detailed explanation of the DOE LPO application process is included in the 2023 Guidance. A project sponsor, together with its subsidiaries and affiliates, may not submit multiple applications for Innovative Energy Projects or Innovative Supply Chain Projects employing the same technology.
- No Mandatory Credit Rating Required.The DOE LPO will no longer routinely mandate, as a condition precedent to its loan guarantee, a rating from a credit rating agency, but reserves the right, “when conditions justify,” to request such a credit assessment in its discretion.5 Credit ratings may be used by the DOE LPO to determine the appropriate interest rate in respect of the loan guarantee or “Risk-Based Charge.”6
- Accelerated Timetable for DOE LPO Review.The DOE LPO is now required to reject incomplete applications within two (2) years of submission, rather than four (4) years.Further, DOE is now required to respond, in writing, to any inquiry by an Applicant about the status of its application within ten (10) days of receipt of such request.
- NEPA, Community Benefits Plan and Other Federal Requirements. The IFR and the 2023 Guidance require projects to undergo “the appropriate environmental review” pursuant to the National Environmental Policy Act (“NEPA”) prior to financial closing.Provisions included in recent legislation raising the federal debt ceiling7 may serve to streamline and accelerate the NEPA review process.The legislation requires that one federal agency be designated to develop and schedule environmental reviews for each project, thereby shortening the time frame on environmental assessments. Eligible projects must also comply with federal Prevailing Wage requirements, the Cargo-Preference Act and Build America, Buy America rules.These requirements may influence early-stage strategy, planning and equipment selection for project developers. Applicants are required to submit a Community Benefits Plan to allow for DOE LPO review based upon their ability to support the administration’s goal of building a clean and equitable energy economy.
- Stripping of Non-Guaranteed Portion of Loan from Guaranteed Portion of Loan in Secondary Debt Market Sales Permitted.In the case that the DOE LPO provides a loan guarantee of a loan or debt provided by an entity other than the Federal Financing Bank, it may not guarantee more than 90% of the principal amount of such loan, leaving at least 10% of the underlying loan “uncovered”. Under prior LPO rules, eligible lenders were not permitted to strip or separate the guaranteed or “covered” portion and the “uncovered” portion of loans when participating, syndicating and/or undertaking other secondary market sales of such loan.This requirement presented challenges to eligible lenders seeking to sell down to different debt market participants not all of which were inclined, or authorized, to assume uncovered project default risk.The IFR importantly reverses this requirement and will likely accelerate the role of project finance banks or bond underwriters serving as “Eligible Lenders” given their ability to separately market stripped covered and uncovered project loans.
- Clarification of Definition of “Project Costs”.Given that the DOE LPO may not issue loan guarantees in an amount greater than 80% of a project’s “Project Costs”, developers may benefit from a more inclusive and clear definition thereof.The IFR and 2023 Guidance now expressly include in such Project Costs, among other costs and expenses, an eligible project’s “Transaction Costs”.8
- Expansion of Eligible Innovative Project Types.The IFR expands the scope of eligibility to projects that employ innovative technologies that support the production, storage, consumption, or transportation of energy, including of associated critical minerals.In addition, the updated regulations allow for a more flexible determination of innovation in case regional variation significantly affects the deployment of a technology.9
- Foreign Collaboration Considerations.The 2023 Guidance includes a provision permitting the DOE LPO, in the case of an investment in critical infrastructure and the manufacturing of critical technology, to consider risks of undue foreign influence.In the case that such risks cannot be sufficiently mitigated, the DOE LPO may elect to not provide the requested loan guarantee.This new requirement includes advance disclosure following financial closing of any potential collaboration, defined to involve provision to, or from, a borrower of a “thing of value”, with foreign organizations or governments.A “thing of value” is in turn, expansively defined.DOE LPO’s discretion appears to be broader than the current analysis undertaken by the US Committee on Foreign Investment in the US (CFIUS).
Energy Infrastructure Reinvestment Program
Importantly, by providing further programmatic details and requirements with respect to the new $250B Energy Infrastructure Reinvestment Loan Guarantee Program (“EIR Program”) enacted under the IRA, the 2023 Guidance and the IFR, should serve to accelerate developer interest and familiarity therewith. The EIR Program under Section 1706 supports the retooling, repowering, repurposing or replacement of energy infrastructure that has ceased operations, or enables operating energy infrastructure to avoid, reduce, utilize or sequester air pollutants or emission of greenhouse gases. “
- Definition of Energy Infrastructure.“Energy Infrastructure” is defined as facilities and associated equipment used for the generation or transmission of electrical energy or the production, processing and delivery of fossil fuels, fuels derived from petroleum, or petrochemical feedstocks. EIR Projects that will invest in Energy Infrastructure that has ceased operations and which will generate electricity through the use of fossil fuels is required to have controls or technologies to avoid, reduce, utilize, or sequester air pollutants and anthropogenic emissions of greenhouse gases.
- Refinancing of Existing Indebtedness.In DOE’s sole discretion, the cost of refinancing outstanding indebtedness that is directly associated with an Eligible Project may be considered a Project Cost, including the principal amount of such indebtedness, accrued interest thereon, and any reasonable and customary prepayment premium or breakage costs; provided that DOE determines that the refinancing furthers the purpose of an Eligible Project.
- Project Costs.For EIR projects, the cost of remediation of environmental damage associated with the Energy Infrastructure constitutes an eligible project’s “Project Cost.”
The 2023 Guidance includes the following non-exclusive list of possible projects that might benefit from EIR loan guarantees:
- Retired power plant or other qualifying Energy Infrastructure retooled, repowered, repurposed, or replaced with:
- Renewable energy and storage
- Distributed energy (i.e., virtual power plant)
- Transmission connection to off-site clean energy (e.g., onshore or offshore renewable energy)
- Nuclear energy
- Fossil or biomass generation with carbon capture and sequestration
- New manufacturing facilities for clean energy products or services
- Repowering of nuclear power plant to resume operations
- Retrofitting of fossil-fuel power plant with carbon capture and sequestration
- Upgrades to wind farms to increase output
- Transmission reconductoring to expand transfer capacity
- Coal ash remediation with site redevelopment
- Oil & gas pipeline repurposing (e.g., hydrogen, CO2 pipelines)
- Refinery retrofit or upgrades (e.g., biofuels, hydrogen)
- Energy Infrastructure repurposing for industrial decarbonization (e.g., low-carbon cement, etc.)
- Decarbonization of existing petrochemical facilities
Additional Federal Incentives Available for Clean Energy Projects
Developers benefiting from DOE LPO loan guarantees for their clean energy projects are not precluded from receipt of clean energy tax credits available under the Internal Revenue Code (the “IRC”), including, without limitation, Section 45V for clean hydrogen production, 45Q for carbon capture and sequestration, the IRA’s new technology-neutral, zero-emission PTC and ITC tax credits and tax credits for new nuclear power10. It is anticipated, in many instances, that monetization of federal tax credits, through direct pay, tax credit transfer or traditional tax equity partnerships, available to Eligible Projects will be a significant revenue stream supporting repayment of guaranteed loans.
Baker Botts LLP attorneys have substantial experience working with clients involved in energy infrastructure. We have a top-rated and highly recognized multi-disciplinary, global energy sector practice. Our most recent, notable accolade includes a Band 1 ranking in Energy Transition by Chambers USA 2023. We are available to answer any of your questions with respect to the foregoing.
2See Sections 1703 and 1706 of Title XVII of the Energy Policy Act of 2005.
4State Energy Financing Institution Projects or “SEFI” projects are defined as projects that support deployment of a qualifying clean energy technology and receive meaningful financial support or credit enhancements from an entity within a State agency or financing authority. SEFI projects are not required to employ innovative technology. Funds appropriated under the IRA to support credit subsidy cost are permitted to be used to support SEFI projects.
5See IFR Section 609.12.
7See Article III – Permitting Reform of BILLS-118hr3746eh.pdf (congress.gov).
8“Transaction Costs” are now defined under 609.2 as “out-of-pocket costs of financial, legal, and other professional services associated with the financing of an Eligible Project, including services necessary to obtain required licenses and permits, prepare environmental reports and data, conduct legal and technical due diligence, develop and audit a financial model, negotiate the terms and provisions of project contracts and financing documents, including those costs associated with the advisors to DOE and any other Eligible Lender; and costs of issuing Eligible Project debt, such as commitment fees, upfront fees, and other applicable financing fees, costs and expenses imposed by Eligible Lenders.
9See 609.02 definition of “New or Significantly Improved Technology”
10See Internal Revenue Code Sections 45U, 45Y and 48U.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.