Proximo Weekly: Flesh on the bones of the US LPO’s new authority
The US DoE’s revitalised Loan Program Office (LPO) has issued new guidance that could have significant impact on greening or replacing dirty assets.
The two blockbuster energy-related bills that passed in 2021 and 2022 – the Infrastructure Investment and Jobs Act and the Inflation Reduction Act – were designed to funnel large amounts of cash into the United States’ energy and infrastructure sectors. Some of that was designed to happen through grants, government spending and tax credits, the implementation of which still needs to be worked through.
But they also gave a further boost to the US Department of Energy’s resurgent Loan Program Office. The two acts increase funding for existing programmes, and introduce a new category that essentially supports the re-use of old energy infrastructure for cleaner purposes.
The office already had a spring in its step thanks to some inspired appointments under the Biden administration. The two acts give it much more funding – enough to support as much as $300 billion in financing.
The LPO released guidance for the Title 17 programmes that it administers on 19 May. A large part of the new guidance involves consolidating the raft of solicitations that the LPO manages into four distinct categories.
The first, for Innovative Energy, essentially covers technologies that are not quite fully commercial yet. These technologies need to be new or significantly improved and not really bankable by a commercial project finance lender.
The second, for Innovative Supply Chain, covers manufacturing projects. This is likely to be useful for generating equipment manufacturers and particularly for electric vehicle supply chain participants.
The third, for State Energy Financing Institution projects, is designed to layer on funding for projects that have attracted strong state-level support. This will be designed to improve state participation in clean energy procurement.
The fourth – Energy Infrastructure Reinvestment – is perhaps the most interesting category and allows for developers of proven technology to raise low cost financing to upgrade existing dirty energy infrastructure to make it cleaner or to build new capacity at closed or stranded energy assets.
This would potentially be a big opportunity for the recent buyers of ailing coal or gas plants, many of them already sitting on promising interconnection capacity. It is one way for the programmes and the bills to win support from communities that have been historically dependent on coal mining.
The new guidance suggests that developers do more to engage with local opinion by developing community benefits plans. But there is probably more to be wary of in Congress. The Republican Party, newly in control of the House of Representatives, may look to re-enact its successes in investigating an earlier loan guarantee recipient, Solyndra, by keeping a close eye on the DoE.
Questions about manufacturing operations in China recently sank a grant that the department was considering making to Microvast, a NASDAQ-listed battery manufacturer. Microvast’s shareholders are angry, Republicans are jubilant at claiming a scalp, but the DoE has so far stayed silent.
The other main features of the new guidance, and those of most interest to developers, will be those governing how the office allocates advisory costs and premiums. The DoE says that it cannot pay its financial advisors directly, but that those costs can be financed as eligible project costs. Developers would need to meet their own third party advisory costs.
The main financing cost would be the interest rate on the loan, calculated as the Treasury curve at draw, plus a liquidity spread of 37.5bp, plus a risk based charge, which is ratings-based, and varies from 3.5bp for a AA- transaction (any higher and the charge is zero) to 162.5bp for a project at B-. The LPO says that it can buy down that charge for certain unspecified projects, but is unlikely to be as generous in waiving premiums as it was in the early teens.
In addition the LPO charges a facility fee (0.6% on amounts up to $2 billion and 0.1% above that) and a maintenance fee that varies according to complexity. It says it is looking for transaction sizes of at least $100 million.
The Proximo perspective
LPO is now carrying itself with much more confidence. There has been limited progress taking all of its approvals to financial close, but some of that slowness was the result of applications waiting for the LPO to receive a renewed appropriation. Rather than seeing some of its noughties solar loans as a source of embarrassment, the office credits its work in the aftermath of the 2008 crisis in kickstarting a solar finance market.
Certainly its approvals cover a good spread of geographies and technologies. It has received a solid number of applications and says it has the capacity to screen and process these. The next 18 months will be crucial to the success of the office and the programmes that it manages.
Selected news articles from Proximo last week
Gigapower FTTH financing syndication due to launch
There will be a retail syndication for the financing of the Gigapower fibre network that is likely to proceed over the course of summer 2023, according to sources with knowledge of the deal.
TenneT secures €8bn credit facility
Transmission system operator TenneT has secured an €8 billion ($8.6 billion) credit facility with a tenor of 2.5 years to support its increasing Capex programme.
NHPC seeks $600m from Japanese banks for solar expansion
NHPC, India’s largest hydropower company, is in talks with three Japanese banks to help fund its expansion into solar power. NHPC wants to borrow as much as INR50 billion ($609 million) in yen-denominated loans and is in talks with MUFG, Sumitomo Mitsui Financial Group and JBIC.
Financial close nears for Globeleq’s Kenyan geothermal project
Globeleq and partner Geothermal Development Company (GDC) have begun construction of the 35MW Menengai geothermal project in Nakuru County, Kenya.
Further details on Solek Chilean solar portfolio financing
Further information has emerged regarding the $379 million financing of Solek's 284MW portfolio of solar assets in Chile.
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