The U.S. Department of Energy’s Loan Programs Office (LPO) would seem to have more than enough work on its hands. It has 135 active loan applications totaling over $124 billion for pre-commercial clean energy technology and infrastructure currently under review and nearly two new applications coming in weekly for the rest of the $412 billion in loans and guarantees, most of which it must make by 2026. But to LPO Director Jigar Shah, the work of fulfilling LPO’s mission of filling in private sector funding gaps to advance climate technology innovations toward market uptake has just begun.
“The Inflation Reduction Act (IRA) provides us with a mandate to allocate nearly $400 billion in loans and guarantees to speed promising clean energy innovations to commercial deployment that can help us decarbonize the economy. As of the end of FY22, LPO had disbursed just $31.6 billion of our loan authority,” says Shah, a prominent climate tech entrepreneur and investor who was named director of the LPO in early 2021, just as the Biden administration brought the office back to life after several quiet years under the previous administration.
Now it is playing a major role in achieving U.S. net zero goals. In the 2022 fiscal year, the LPO made four new conditional commitments for over $4 billion to advance its mission to empower the private sector in the clean energy transition, including a clean hydrogen production and storage facility, a virtual power plant to support grid reliability and clean energy access, and an expansion of a facility that produces critical materials for lithium-ion batteries.
Here, Shah discusses the challenges to reaching ambitious U.S. greenhouse gas reduction targets, and how he’s positioning the LPO to help break the “chicken-and-egg” logjam slowing private sector financing needed to scale breakthrough climate technologies, with Alfie Zarate, a principal in the Energy & Infrastructure practice at Deloitte Transactions and Business Analytics LLP.
Zarate: What’s your view on challenges to achieving these U.S. climate goals, and what is LPO’s role?
Shah: When it comes to achieving major industrial goals, whether that’s reestablishing the domestic semiconductor industry or decarbonizing the U.S. economy, America is fiercely private, sector-led, and government-enabled. With the passage of the IRA, CHIPS, and infrastructure laws, the government-enabled part of achieving U.S. net zero goals is locked and loaded, but I think the private sector is still trying to figure out how to lead to make decarbonization goals a reality.
I see a lot of significant commitments from major corporations to reduce greenhouse gas emissions from their operations and their value chain, and from major banks to deploy the trillions of dollars it will take to finance decarbonization. But I also see a big gap between those climate action commitments and actual steel being put in the ground, and I haven’t seen much evidence that we’re closing the gap, even with all the financial incentives the IRA has made available to companies. I think that a major reason for that gap is the “chicken-and-egg” challenge still facing the private sector—the reluctance on both the supply and demand sides to incur the financial risks or competitive disadvantage of being a first mover in a commercially unproven technology, whether that’s green hydrogen, direct air capture, or geothermal. That has produced a lot of “wait and see” on the part of financiers, manufacturers, and end users of the clean energy innovations that we need to rapidly scale if we’re going to have a chance to reach net zero targets.
LPO’s mission is to help break that chicken-and-egg logjam by providing low-interest financing for climate innovation projects that venture capital equity and the commercial debt market aren’t ready to fund, thereby giving them the confidence to step in and finance ensuing projects that move the technology from innovation toward full market acceptance.
How are you fulfilling that mission?
We do it by working with both major financiers and with the companies developing climate innovation projects. In my conversations with many major banks, which have collectively made public commitments of as much as $10 trillion in financing to advance the clean energy transition, they’ll typically say, “We’re ahead of schedule on solar, wind, battery, and storage, but we have yet to do our first hydrogen project or our first geothermal power project.” When I ask what it will take to start funding projects in those and other emerging technologies, the typical answer is, “We’re very interested in financing the seventh green hydrogen project, so we would love to see you finance the first six of them.”
Having LPO do the first six projects for a given emerging climate technology allows commercial lenders to look over our shoulder to learn how LPO underwrote the deals, what worked, and what didn’t. That helps them be ready to finance that seventh deal and beyond. Our founding statute explicitly allows us to do those first six deals, two per region of the country. In the case of clean hydrogen, for example, last June, we issued a $504.4 million loan guarantee to finance Advanced Clean Energy Storage, a first-of-its-kind clean hydrogen and energy storage facility.
And what about on the project developer side?
LPO’s focus is on project or deployment finance, which is all about scaling a climate technology rather than growing a business, which is what venture capital and corporate finance focuses on. Most of our loans are in the range of $700 million to $1 billion, because that’s what it takes to achieve the commercial scale needed to bring down product cost and build a market.
We see a diversity of deals coming in, some from Fortune 500 companies that use our debt to accelerate their strategic initiatives on climate action and energy transition. For example, the largest loan we’ve made was to Ford Motor Company for $4.9 billion, to help in the company’s efforts to dramatically reduce the carbon footprint of its fleet, including the electrified F-150 truck. We saved millions of gallons of fuel based on that loan, which is why it qualified for an LPO loan.
The majority of our applicants are late-stage startups that typically have raised about $100 million in equity over several rounds of investment and are looking to scale their innovative technology. When you go down the line with these pre-commercial climate technologies, every one of these companies has a growth and scaling pathway that includes project finance. But getting that level of project finance for unproven technology is often difficult.
As an example, consider a company that is looking to replace heavy- and medium-duty diesel trucks with electric versions. They’ve made five and are ready to scale that to 1,000 vehicles. Producing 1,000 vehicles at their level of production maturity would cost $1 million per vehicle, so $1 billion in total. That company will need a buyer to make advance purchases so the startup can convince lenders they can sell these vehicles. But say they find a large company willing to make that advance commitment because it wants to electrify its distribution fleet. When that company turns to its established credit partners who for instance helped it finance its diesel fleet, to finance the purchase of those EV trucks, the lenders are likely to turn it down because of the risks involved with a new technology. Now, where does the company turn to for that billion dollars? The LPO.
If a company executive reading thissays, “if the financing were available, I would buy long-lead items in advance to help tip that market move by procuring it on a five-year basis,” is that something the LPO could potentially step in and finance?
Yes, LPO could finance it. Anything in the clean energy space that’s manufactured in the United States can come to us for financing. In the offshore wind space, there’s been a lot of this chicken-and-egg situation that we’ve been able to resolve, and in the hydrogen space, too. It’s not our job to negotiate the deal. But we can—and do—facilitate the conversation between climate tech or infrastructure makers and their end users to help bring their needs together for the project.
—by Andy Marks, editor, Executive Perspectives in The Wall Street Journal, Deloitte Services LP
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