Large-Scale U.S. Solar Projects: Critical Financial Incentive Program Set to Expire

published: 2011-05-25 9:51 | editor: | category: Analysis

Large-Scale U.S. Solar Projects:  Critical Financial Incentive Program Set to Expire

As part of the American Recovery and Reinvestment Act of 2009, the U.S. Congress modified the U.S. Department of Energy Loan Guarantee Program by adding Section 1705. Originally intended as a “temporary “program to help jump start the American economy after the financial crisis of 2008, Section 1705 provides loan guarantees to developers of  solar, and other qualified renewable energy (RE) systems.

In addition, the provision made loan guarantees available to companies involved with electric power transmission, and innovative biofuel projects. Developers must break ground on their projects by September 30, 2011. Initially, Congress appropriated $6 billion for credit subsidy fees. Subsequently, Congress reduced the amount by $3.5 billion. Some of the money financed the “Cash for Clunkers” program.

How Section 1705 Works

The DOE loan guarantee provides a loan guarantee for a maximum of 80 percent of a project's costs. This security encourages private investment in risky, utility-scale energy projects. It provides assurances to financial institutions and project developers that the government will cover loans they cannot repay. Developers enhance their return on investment because of the lower costs of financing projects.

Unlike the DOE Section 1703 program, developers that receive Section 1705 loan guarantees do not have to pay “credit subsidy fees.” Credit subsidy fees represent long-term costs of loan guarantees or the net present value of estimated payments made by Uncle Sam. These outlays cover defaults, delinquent payments, and interest subsidies. Origination fees, penalties, recoveries and other charges offset subsidy credit costs.

Qualified lenders must apply on the behalf of renewable energy project developers. Program rules require lenders to retain a significant percentage of the unguaranteed credit exposure on their books. So far, nine of the 19 projects that have closed or received conditional approval are solar-related ventures. 

Section 1705: Solar Project Applications Closed/Conditional Commitment

Company

Project Type

Guarantee Amount

Status

Agua Caliente

Photovoltaic Panels, 290 MW

$967 million

Conditional Commitment

Abound Solar 

Thin Film Manufacturing

$400 million

Closed

Abengoa Solar

Concentrating Solar Power, 250 MW

$1.446 billion

Closed

BrightSource Energy, Inc.

Solar Power Towers, 392 MW

$1.6 billion

Closed

Cogentrix of Alamosa

Concentrating PV, 30 MW

$90.6 million

Conditional Commitment

Solar Trust of America

Parabolic Trough, 1000 MW

$2.105 billion

Conditional Commitment

SoloPower

Thin Film Manufacturing

$197 million

Conditional Commitment

Solyndra Inc.

PV Manufacturing

$535 million

Closed

SunPower  Corp.

Photovoltaic Panels, 250 MW

$1.187 billion

Closed

Source: U.S. Department of Energy

Making the Case for Extending Section 1705

In late March, solar industry CEOs Tom Werner (SunPower), Tim Harris (SoloPower), and Robert Gillette (First Solar), along with 31 other executives from solar, biomass, biofuel, wind, and geothermal companies, sent a letter to House and Senate leaders. The correspondence outlined a strong case for approving additional funding and extending the 1705 loan guarantee program. In the letter, the executives wrote:

“We are deeply concerned that eliminating funding for this critical program will not only destroy thousands of pending jobs and hinder the growth of critically-needed U.S. domestic energy production, but also defeat America's effort to compete with China, Germany and others in the clean technology marketplace.”

Furthermore, the combined private investment of these companies exceeds $13 billion and involves 28 states. Scheduled projects expect to employ 15,600 construction workers and create 10,200 permanent long-term jobs. These figures do not include thousands of additional jobs created by equipment and service vendors.

The RE executives expressed concerns about the U.S. losing more ground to China and Germany in the competition to attract private funds for renewable energy investments. A report by the PEW organization gives credence to this statement. In 2010, China had a 39 percent - $54.4 billion, in clean energy investments. Germany doubles its take to $41.2 billion. The United States dropped to third place, reporting $34 billion dollars in private funds invested in renewable energy projects.

The executives went on to write: “Unless the full year CR protects funding for the program, our economy could sacrifice a generation of our best clean technology opportunities - delivering a devastating blow to the US renewable energy industry. Longer-term, future projects that will seek private sector lending once they are proven commercially with the help of the Loan Guarantee Program would be jeopardized, damaging U.S. competitiveness and domestic manufacturing and a supply chain that is dependent on the large-scale deployment of renewable projects in the U.S.”

Is Anyone Listening?

A market research report,sponsored bySolar Energy Industries Association (SEIA) and GTM Research, revealed the United States installed 240 megawatts of photovoltaic capacity in 2010. This doubled the quantity of 2009 PV installations. Many analysts attribute much of the increase to the DOE loan guarantee programs. The expected capacity gain for 2011 -- 700 megawatts, suffered a setback with the recent DOE announcement.

Uncertainty of the funding for the 1703 and 1705 loan programs makes it more difficult for developers to achieve the projected installation production. Although the Section 1705 program has proven its value helping to move large-scale solar projects from conception to breaking ground, it seems the highly successful program has fallen victim to the recent budget deal struck between Republicans and the White House.

Barring a change of plan, the Section 1705 loan guarantee program will expire on September 30, 2011. Late last week, the DOE official who heads the loan programs posted on the DOE blog that it would contact companies “farthest along in the process that we will be working with them to take the final steps required to complete a loan guarantee.”

Mr. Silver states in his post:” To qualify, projects must have commenced construction and closed their loan guarantees by that date.” The DOE had about $800 million in funds remaining at the time of the announcement. The agency separated the applications into two groups: firms under consideration for the guaranteed loans, and companies whose applications now sit on the back burner.

The letter sent to companies still in the running for the remaining funds stated, “we believe that it remains possible for your project to meet financial close by September 30.” The letter went on to say, “there is no guarantee that your project will meet the entire rigorous financial, technical, legal, and logistical requirement by that date.”

Projects Seeking 1705 Loan Guarantees

Company

Project Name

Project Type & Generation Capacity

First Solar

AV Solar Ranch

PV, 230 megawatt

First Solar

Topaz

PV, 550 megawatt

First Solar

Desert Sunlight

PV, 550 megawatt

Tenaska Solar Ventures

Imperial Solar Energy Center - South

PV, 130 megawatt

Tenaska Solar Ventures

Imperial Solar Energy Center –West 

CPV, 150 megawatt

Sempra Generation

Mesquite Solar I

PV, 150 megawatt

Solar Reserve

Crescent Dunes

CSP, 110 Megawatt

Source: Company Websites

Keep in mind, companies that failed to receive DOE loan guarantees may still have the financial resources to follow through with their proposed projects. However, the absence of loan guarantees increases project costs, which lowers the potential ROI.

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