5 Comments

Summary:

The Department of Energy has treated some companies unfairly in their bids to win loan guarantees for innovative energy tech, and risked “excluding some potential applicants unnecessarily,” according to a new report from the the watchdog arm of Congress.

The Department of Energy has treated some companies unfairly in their bids for loan guarantees and risked “excluding some potential applicants unnecessarily,” according to a new report from the Government Accountability Office, or GAO, the watchdog arm of Congress.

The loan guarantee program was delayed for years after its creation under the Energy Policy Act of 2005. Having kicked into high gear with the new administration, the program now illustrates some of the risks that come with trying to get billions of dollars-worth of awards out the door ASAP to support innovative energy technologies facing what’s often called the “valley of death” — a funding gap between demonstration and commercial deployment.

Assessing the goals, evaluation process and other factors of the program, which has issued a $535 million loan guarantee to solar startup Solyndra and made conditional commitments for a dozen additional guarantees, the GAO found that the DOE “has made substantial progress in building a functional program for issuing loan guarantees.” Some of those solid steps include identifying broad policy goals, developing a manual of credit policies and procedures, and gaining approval for a model to estimate credit subsidy costs, among other things.

But the GAO found that the DOE’s loan guarantee program fell short in a couple key aspects of how the program has been implemented and how the agency has dealt with more than 170 applications seeking more than $175 billion in loan guarantees.

Competitive Edge

Scoring a loan guarantee can offer a crucial competitive edge for a company like Solyndra and Abound Solar, although it’s not money in the bank. As the DOE explained about its loan guarantee program last year, recipients still have to “secure their own share of financing — similar to earnest money in a home mortgage.”

Typically, a loan guarantee will enable a company to finance projects with a better interest rate and at a lower cost than would otherwise be available to them. It serves essentially as promise by the government to back a loan if the company can’t make good on it, which lowers financial risk for lenders and represents a vote of confidence from Uncle Sam that can help a company attract equity investors. So the nitty gritty of how the loan guarantee program functions can reverberate across the competitive landscape in greentech.

Inconsistent Treatment?

One of the main criticisms the GAO notes in its report is that the DOE gave the green light for conditional awards to at least half of the first 10 winning companies before all of the (supposedly required) reviews of the projects had been finalized by third parties. In at least one case, the DOE did not obtain even a single report from external reviewers, which are meant to help fill any gaps in engineering, legal and marketing expertise in the DOE’s due diligence process.

Energy Department officials explained that the particular project went on the fast track because they were convinced they had enough info and the project had “strong business fundamentals.” The GAO was not convinced, however, and wrote in the report that, “It is unclear how DOE could have sufficient information to negotiate commitment without such reviews.”

Feedback Loop

In addition to inconsistent treatment of applicants, the GAO found that the loan guarantee program, “lacks mechanisms to identify and address” applicants concerns. Rather than having a systematic process for appeals and feedback, the agency picks up rejected applications for a second review “on an ad hoc basis and gathers feedback through public forums and other outreach efforts that do not ensure the views obtained are representative,” writes the GAO.

That ad-hoc process for reviewing previously rejected applications means some companies opting to take another stab at the program have to pay all the associated fees a second time, according to the GAO, while those whose applications the DOE decides to review again “as a courtesy” do not. The Energy Department views this as a perception problem, and told the GAO that it sees a need for greater transparency about what specific circumstances would allow an application to hit the fast track “to avoid the perception of inconsistent treatment.”

The Big Idea

Also lacking from the loan guarantee program, according to the GAO, are performance goals covering the breadth of the program’s activities. For example, the program has awarded two loan guarantees (on a conditional basis) for energy efficiency projects, when the only performance goals on the books have to do with generating renewable energy and supporting nuclear power facilities.

Energy efficiency doesn’t fit squarely into those goals, which might seem like a minor detail, but in the world of government, it means that the “DOE lacks the foundation to assess the program’s progress, and more specifically, to determine whether the projects it supports with loan guarantees contribute to achieving the desired results,” as GAO explains.

In its response to the GAO’s findings, the DOE said it is revisiting the performance goals for the loan guarantee program to bring them more in synch with the agency’s larger goals of spurring growth in the “green economy” and reducing greenhouse gas emissions from power generation.

No Silver Bullet

In an exclusive interview in May, Jonathan Silver, a former venture capitalist who now heads up the loan and loan guarantee program, told us that the program had standardized its “due diligence to the extent you can in what are very unique projects.” And in its official response (included in this week’s report), the DOE flat out disagrees with the GAO finding that applicants have been treated inconsistently, emphasizing that “there is no one-size-fits-all approach across the various energy sectors, and processes may legitimately vary.”

Indeed, that’s one of the biggest challenges for this type of program, as in the private sector when it comes to financing green energy technologies: Green energy technologies cover a wide and varied territory that’s rife with uncertainty, and few firms, organizations, agencies or individuals have expertise spanning the whole field.

The DOE isn’t pretending to have a crystal ball showing which technologies will succeed in the marketplace. As Silver explained to us earlier this year, the DOE plans to offer loan guarantees to competitors in various industries. So even if the award to Solyndra, for example, ends up supporting one of the least economical thin film solar manufacturing business models around, the project could further larger ambitions. According to Silver, “our goal is to create a marketplace of projects and ideas which the private sector will then be in a position to pick and choose from.”

Related content on GigaOM Pro (subscription required):

Cleantech Financing Trends: 2010 and Beyond

How EV Battery Startups Can Cross the Valley of Death

  1. [...] How the DOE's Loan Guarantee Program Falls Short Comments [...]

    Share
  2. The goal to create a marketplace of projects and ideas which the private sector will then be in a position to pick and choose from sounds like hocus pocus to me. And who wants to answer why Kanjorski’s incompetent nephew all of a sudden is being thrown $400 his way?

    Share
  3. FYI

    Share
  4. [...] Brown Unveils Plan for 500,000 Green Jobs, Czar See All Articles » How the DOE’s Loan Guarantee Program [...]

    Share
  5. [...] How the DOE’s Loan Guarantee Program Falls Short [...]

    Share

Comments have been disabled for this post