Loan Guarantees Under the American Recovery and Reinvestment Act of 2009

By John Eustermann
In Feb. 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA), a $787 billion economic stimulus package that contains $60 billion of loan guarantees by the U.S. DOE for certain renewable energy projects and transmission projects. The ARRA creates a new Section 1705 to the DOE's Innovative
Technology Loan Guarantee Program, a program originally authorized by Title XVII of the Energy Policy Act of 2005 (EPAct 2005).

Section 406 of the ARRA amends Title XVII of EPAct 2005 to add this new Section 1705 which temporarily directs the Secretary of Energy to use the $6 billion in appropriated funds to make guarantees under the loan guarantee program established under Title XVII of EPAct 2005 for only the following categories of projects, which must commence construction not later than Sept. 30, 2011:

›Renewable energy systems, including incremental hydropower, that generate electricity or thermal energy and facilities that manufacture related components

›Electric power transmission systems, including upgrading and reconductoring projects

›Leading-edge biofuel projects that will use technologies performing at the pilot or demonstration scale that the secretary determines are likely to become commercial technologies and will produce transportation fuels that substantially reduce lifecycle greenhouse gas emissions compared to other transportation fuels (up to a limit of $500 million).

Section 1705 effectively prevents the $6 billion under temporary authority from being used to make loan guarantees for the innovative technology projects described in Section 1702 of EPAct 2005. Currently, the DOE has a pool of 16 potential innovative technology projects. This number, however, is expected to be whittled down to 11 in a matter of weeks.

It is worth noting, however, that to date, the DOE has not approved and disbursed a single loan guarantee under the innovative technology program of EPAct 2005.

Shortly after the signing of the ARRA, Secretary of Energy Steven Chu stated that he was ready to put some of the stimulus package to work within months. This desire and the sense of urgency created by the fact that the loan guarantees are limited to projects that commence construction by Sept. 30, 2011, suggests that the DOE will be limited as to how much time, effort and consideration can be given to time-consuming rulemaking. As such, it is expected that, although some streamlining of the application process will take place, the loan guarantee regulations of Section 1702 will likely prove to be, for the most part, the model adopted for purposes of how the DOE solicits, evaluates, approves and monitors the new loan guarantee program. One exception, however, has been established: under the 1705 program, applications shall be evaluated on a rolling basis. This is a departure from the prior program in which submission deadlines were established and applications were evaluated side-by-side against each other. In light of these facts and circumstances, the project developer interested in submitting an application should consider compiling the necessary project submission materials in the manner established under Section 1702 so that upon the issuance of final rules governing the new ARRA loan guarantee provisions, an advantage to being an early applicant may be garnered as financially viable projects may be subject to a first-come, first-served evaluation process.

The application process, for the most part, is expected to be as follows:

›Pre-application: Requires general information about the project, its sponsor(s), and the financing plan.

›Application: Some of the pre-applicants will be invited to submit applications. The applications require far greater detail as to the project and the financing plan.

›Term sheet: The successful applicant will receive a DOE-issued term sheet setting forth the material terms and conditions of a definitive loan guarantee agreement.

›Execution of a conditional commitment: Once the applicant, DOE and qualified lender agree on the material terms of the term sheet, the term sheet becomes a conditional commitment.

›Execution of the loan guarantee agreement: Once the conditions of the conditional commitment are met, the parties will execute an agreement incorporating the terms.

Although a considerable number of issues still need to be ironed out with regard to ARRA and the expanded loan guarantee program, the prospective borrower is wise to share in the DOE's sense of urgency and commence pulling together key project specific data.

John Eustermann is a partner with Stoel Rives LLP. Reach him at or (208) 387-4218.

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