Alert May 27, 2009

Congress Considers Establishing Clean Energy Investment Agency

Congressional leaders have introduced legislation that establishes a new government agency dedicated to providing project-development funding assistance to innovative clean technologies, particularly what are referred to as high-risk, high-reward “breakthrough technologies.”

The 21st Century Energy Technology Deployment Act (S. 949, the “Senate Bill”), sponsored by Senators Jeff Bingaman (D-NM) and Lisa Murkowski (R-AK), respectively Chairman and ranking Republican of the Senate Committee on Energy and Natural Resources, would establish an independent agency within the Department of Energy to partner with the private capital markets to create an attractive investment environment for clean energy projects.

The Senate Bill appears to have broad support in the Committee, and therefore has elicited companion legislation in the House of Representatives. While several proposed bills were circulated, Representatives Jay Inslee (D-WA) and Steve Israel (D-NY) initially sponsored a substantially similar bill in the House (H.R. 2212). On May 19, 2009, a later variation on the Inslee-sponsored bill, now sponsored by Representatives Inslee, John Dingell (D-MI) and Bart Gordon (D-TN), was approved by the House Committee on Energy and Commerce as an amendment (the “House Amendment”) to incorporate virtually all of the key provisions of the Senate and House bills into the American Clean Energy and Security Act of 2009. The vote (51-6 with only Republicans voting against it) underscored the broad support for this financial support system.

The paragraphs below outline the substance of consensus aspects of the Senate and House bills, outlining key distinctions between the Senate and House versions in the final paragraphs. Overall, the bills are substantially similar, and reconciliation appears reasonably achievable.

It is worth acknowledging the importance of this and comparable legislation to the clean tech and clean energy community, particularly given the substantial slowdown in available credit markets for the very sort of innovative technologies that large-scale energy projects represent. For this reason, support from ventures and investors is expected.

21st Century Energy Technology Deployment Act

The Senate Bill and House Amendment alter the existing loan guarantee program at the Department of Energy (“DOE”), both by transferring that program to a new specialized entity and also by augmenting the loan guarantee program with a $10 billion revolving “Clean Energy Investment Fund” designed to supplement the loan guarantee program with flexible and comprehensive funding options. In short, the new program effectively eclipses the former loan guarantee program, in apparent recognition that, however valuable, the value of loan guarantees depends in substantial measure on the existence of what has been scare underlying roles.

The new specialized entity, an independent financially focused agency within DOE, is titled the Clean Energy Deployment Administration (“CEDA”). CEDA would assume responsibility for the loan guarantee program and – perhaps more importantly – develop and implement multiple investment mechanisms to advance the development and deployment of clean energy technologies, particularly breakthrough technologies.  

Structural Framework for CEDA

In an apparent nod to the novelty of government financial support of this magnitude, CEDA would be governed by a board of directors and a new administrator, all of whom would be appointed by the President, subject to Senate confirmation and functioning wholly independently within DOE. In addition, to offer appropriate guidance, an independent Technology Advisory Council, comprised of academic experts, technologists and representatives from national research laboratories, would advise the board of directors.

It stands to reason that the existing DOE loan guarantee program personnel would be transferred to CEDA, at least on a transitional basis, to ensure against gaps in implementation of the loan guarantee program. This is especially important since a recently closed solicitation is in the works. However, no such details are provided in the Senate Bill or House Amendment.

CEDA’s Functions

CEDA would provide unlimited credit support to clean energy technologies, including loans, loan guarantees and other credit enhancements, in an effort to redress perceived hurdles to project finance, particularly the hurdles that exist for novel technologies without a history of project finance terms and conditions. To advance its funding mission, CEDA is further empowered to advance a secondary market structure, including with the ability to:

  • Develop financial products, such as clean energy-backed bonds
  • Aggregate or otherwise bundle debt instruments for multiple clean energy projects on a residential or small commercial scale 
  • Purchase, or make commitments to purchase, “any debt instrument associated with the deployment of clean energy technologies for the purposes of enhancing the availability of private financing for clean energy technology deployment.”

While there are limits to CEDA’s authority, the bills envision a flexible and responsive process, designed to accommodate and combat adverse market conditions.

Breakthrough Technologies

In what is likely to be much-debated language, CEDA’s financing support is limited to technologies where “insufficient commercial lending is available to allow for widespread deployment.”  This language, construed narrowly, might create an acid test for projects that effectively limits the scope and breadth of U.S. financial support. However, a more moderate perspective would suggest that this language is only meant to signal the sector-wide hurdles facing clean energy companies and technologies, and therefore should not act as a barrier to fairly widespread financial support.

In addition, in recognition of the difficulty of obtaining funding for transformational technologies, CEDA has a mandate to provide the maximum practicable percentage of support to promote “breakthrough technologies.”  Breakthrough technologies are generally defined by the Senate Bill and House Amendment as having “not been considered a commercially ready technology as a result of high perceived technology risk or other similar factors.”  To qualify as a breakthrough technology, the technology must also establish a significant opportunity to advance the Act’s goals, which include:

  • Reducing U.S. reliance on foreign sources of energy
  • Establishing the United States as a world leader in the commercialization of clean energy technologies
  • Transforming the building stock of the United States to zero net energy consumption
  • Manufacturing clean energy technologies on a scale sufficient to achieve price parity with conventional energy sources
  • Domestically producing commodities and materials (such as steel and cement) using clean energy technologies so that the United States will become a world leader in environmentally sustainable production of the commodities and materials
  • Incorporating clean energy technologies, distributed generation and demand-response in the U.S. electric grid

Finally, CEDA must use a portfolio investment approach to mitigate risk and ensure that its Clean Energy Investment Fund is self-sustaining.  

Oversight

Consistent with the Obama Administration’s commitment to transparency, the Senate Bill and House Amendment provide for various safeguards to the new CEDA program, including audits by the Comptroller General and oversight by the Government Accountability Office. CEDA is generally required to deliver biannual reports to Congress on the technologies it supports and its progress in facilitating the deployment of clean energy technologies, and CEDA will also be subject to an annual audit by an independent public accountant.

Amendment to American Clean Energy and Security Act of 2009

As noted earlier, the House Committee on Energy and Commerce approved the House Amendment to incorporate virtually all of the key provisions of the Senate and House bills into the American Clean Energy and Security Act of 2009 (H.R. 2454, “ACES”).

The House Amendment, offered by Representatives Inslee, Dingell and Gordon, differs from the Senate and House bills in the following substantive areas:

  • Federal Cost Share. The House Amendment requires that a loan guarantee shall not exceed 80% of the project cost of the facility subject to the guarantee.  The Senate Bill does not contain a similar cost share provision.
  • Portfolio Investment Approach.  The House Amendment requires that no particular technology be provided more than 30% of the financial support available. The Senate and House bills require that no particular technology be provided more than 20% of the financial support available.
  • Indirect Support.  The Senate and House bills would grant CEDA a broad mandate to develop financial products and arrangements to promote the widespread deployment of clean energy technologies through securitization and indirect credit support.  The House Amendment does not include a provision for indirect financial support.
  • Initial Investment. The Senate and House bills would require the U.S. Treasury to transfer $10 billion to the Clean Energy Investment Fund. The House Amendment does not include a provision requiring the U.S. Treasury to transfer specific funds to the Clean Energy Investment Fund, likely because the dominant funding mechanism in ACES is through carbon auction revenues and comparable carbon charges/fees.

Markup on ACES has begun, and it appears that the Senate Bill and House Amendment have solid and mostly bi-partisan support. Nonetheless, issues remain to be resolved, including with respect to the proposed language differences between the Senate Bill and House Amendment. Likewise, practical implementation questions, such as whether CEDA’s authority will be delegated, as is the case with the Export-Import Bank, remain unanswered.