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Revived programme leverages outside finance

Improved loan plan from Bush era gives better deals for lenders.

A federal loan guarantee programme for renewables that has languished since it was created in 2005 is set to make an impact for wind and other renewables, following changes made in July. The programme could eventually generate between $60-120 billion in loans for qualifying renewable energy projects from outside lending institutions, says Kenneth Hansen of law firm Chadbourne & Parke. "There's basically a huge amount of financing that the federal government, one way or another, is putting into renewable energy and innovative technology projects."

Outside lenders, who provide the bulk of the funding, were wary of the original programme, which gave first-priority liens to the US Department of Energy (DOE). This meant that the government had the right to its money back or collateral before other lenders. And companies seeking loans had to provide around 10% of the loan's value in cash up front - a so-called credit subsidy, like a down payment, to cover the cost of the risk.

"People are used to a 1%, maybe even a 2% upfront fee," Hansen says. "But a 5%, 10%, even a 15% upfront fee? A lot of folks said that's ridiculous - those are mafia terms." The precise amount also remained unknown until shortly before the loan was closed, making it difficult to comply.

The benefits for lenders

Under the new rules, announced in June, liens are shared proportionally between the DOE and outside lenders, based on the amount each party financed in the event of a default.While loans are largely provided by outside institutions, the DOE will now help to cover the cost of the upfront credit subsidy.

The programme was first authorised by the Energy Policy Act of 2005 but had been largely dormant because it was opposed both by the George W. Bush administration and the DOE, says Hansen. "Congress enacted it anyway and told them to go do it," he says. "Frankly, they were not in a rush."

No loans were made during the Bush administration but the DOE's stance shifted rapidly under President Barack Obama, Hansen says. "There wasn't a swing of the pendulum - it was a complete jump. From extreme recalcitrance to do these deals to 'why haven't you done them?'"

From June, the DOE has made $8.5 billion available to back loans related to renewable energy and transmission projects started by September 2011, and another $2 billion for credit subsidy costs. For riskier innovative projects there is no expiry date, but there is only $750 million available and it does not include subsidy assistance, which must be paid up front by loan recipients.

However, the programme's revival this year has not been without its glitches. In August, Congress pulled $2 billion from the DOE loan programme to pay for an emergency funding increase to the popular Cash-for-Clunkers automobile stimulus plan. "If the Clunkers money gets restored, then there's no issue and we're back to where we were," Hansen says. "But if it's not, it dramatically changes the nature of the programme." Industry experts predict the money would be replenished somehow.

Meantime, Nordic Windpower of Berkeley, California, was one of a few companies this year to receive a conditional loan guarantee under the old rules. Nordic will use its $16 million to support expansion of an Idaho assembly plant, where it is manufacturing two-bladed 1 MW turbines. A few more loan guarantees are expected from requests made under the old rules, according to DOE spokeswoman Ebony Meeks.

"They've been feeling pressure to announce more of these things," says Hansen. "But the theory is if they announce things prematurely, it's bad karma. The companies don't want it to be known that they had a failed negotiation, so DOE decided that they should not make announcements until they finalise term sheets. And that's a bit of a process."

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