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Feb 11 2012

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The Right Way to Do Clean Energy Loans

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A Small Change - A Big Difference

Solyndra was a spectacular failure.

Other companies that were beneficiaries of support from the Department of Energy’s loan guarantee program have met a similar fate with the taxpayer on the hook, and public ire rising.

In response to the uproar, the White House appointed an independent consultant to review the DoE program and provide recommendations.

The report was released yesterday.

As will come as no surprise for a White House initiative, the report states that the DoE program is performing, but that additional oversight and protocols would improve efficiency and accountability.

 This is no knock on Herb Allison, as the author of the report, whose diverse and consequential business career screams credibility.  It is just a fact that the constraints on Allison’s mission prevented a more thorough review of DoE’s methods and protocols, and thoughtful consideration of whether a more fundamental change was in order.

For many, government loan guarantees – indeed business with the government – is “inside baseball,” with its own language, culture, process and protocols.  For many trying to break into the market, government assistance is a miasma of forms, certifications and representations of mind-numbing detail, fed into a bureaucracy whose internal workings and decisions often appear to defy the detached precision of the application documentation that is required.

This is true at Energy as in any number of other government departments.

But in the case of the Energy Department Loan Guarantee program, the challenge began at conception, in 2005 when Congress authorized creation of the program during the Bush administration.

The program was ultimately structured to support projects through a ponderous solicitation process.

Thus, it was the Energy department itself that decided on what emerging technology to focus, with private sector companies or contractors attempting to meet the requirement in a blizzard of paperwork that invariably shut out small businesses, shutting out private sector creativity in favor of the Energy department diktat.

It was a top-down, government-knows-best process that sacrificed potential, discrete innovation, for the sake of high profile project solicitations, solicitations that seemingly guaranteed equal access and impartial evaluation, but which in many instances, could not see above the process to appropriately assess risks and meet the programmatic goals, let alone tap into the pool of innovation that was necessarily closed off in the solicitation process.

Consider that DoE staff created the solicitations as well as the project benchmarks and goals.  DoE also assessed credit risk, but complicating this, DoE was not alone.

The Office of Management and Budget (OMB) has overall responsibility for the soundess of all government loan guarantee programs under a little known, but enormously important law – The Federal Credit Reform Act (FCRA), which allows OMB to apply common standards to all loan programs to establish a “net present value” of loans, and to reserve an appropriate amount of funds against the risk of a loan default.

Thus, in addition to creating and managing the solitiations, Energy had to wage an inter-agency guerrilla war with OMB on risk profile assessments where bias and insular agency political agendas seeped into credit policy decisions on individual projects. The in-fighting significantly slowed down an approval process that was already creaking.

You might think that these multiple levels of cross agency supervision and oversight would create an airtight process, but no.  Despite all these layers of bureaucracy and review, we still had the failure of Solyndra and her sister companies.

What could be done better?

Outsource.

We are in an economic environment where fear remains the primary motivating fact. The Fed has a near zero interest rate policy, but banks won’t lend to companies or consumers.

Why?  Risk.

Here is a nexus where opportunity meets necessity.

The Energy Loan Guarantee program should be given authority to more pro-actively engage private sector financial institutions in financing and managing projects. To use the Energy guarantee authority as a back-stop that will catalyze private capital mobilization for quick deployment in a manner that is transparent, efficient and effective.

The new authority would permit the Energy Department to create “framework agreements” with private sector financial institutions. These highly detailed agreements would set forth the credit risk and policy requirements of any and all loans to be eligible for the Energy guarantee. Once the the agreements are established and approved, baseline eligibility would be sub-contracted to the banks, with the DoE serving as a double check on the bank’s work, and with a final say in approval.

These frameworks would have immediate, positive impacts.

The process would be sped up with pre-approved conditions. Private capital from te financial sector would be drawn on as the primary source of funding, with Energy providing a risk guarantee.

Perhaps most importantly, such an arrangement would allow for Energy to harness the reach of banks into the private sector and mobilize clean energy and energy efficiency concepts that had not made their way off Energy Department drawing boards.

Consider this one example.

Long haul trucks – Class 8s – use 25 million barrels of diesel fuel per year,  idling overnight simply to power sleeper cabs. To put that figure in perspective, that idled fuel is equal to more than five times the amount of oil that leaked into the Gulf during the BP oil spill.

But there is a solution. There are a number of American companies that manufacture idle reduction technology; equipment which provides an alternate energy source for Class 8s to power their cabs that either greatly reduces or eliminates altogether any idling emissions.

Idle reduction technology not only has a positive environmental impact, but also an immediate financial impact for truckers and trucking firms.

The devices can save up to 3,000 gallons of diesel per truck per year, or over $10,000 per truck each year, with diesel prices at $3.50 a gallon. In most cases, the fuel savings annually more than pays for the one-time cost of the idle reduction device.

The challenge is access to credit.

Profit margins for trucking firms and owner operators – already very tight –  are highly dependent on the fluctuating price of fuel, making additional investment dollars scarce for outright purchases. In addition, on paper, many companies  are bad credit risks due to to loan to value ratios their vehicles, which make loans to buy the equipment prohibitively expensive. So, despite the advantages of the technology, its rapid introduction has been stymied by financial hurdles.

This is the problem that the loan guarantee program was literally made to solve.

If the Department of Energy had authority outlined above, the agency could easily create an “Idle Reduction Initiative,” setting credit and policy standards for idle reduction equipment loans, and then delegating that authority to private sector banks that have the reach and depth to work with businesses across the country. With Energy’s guarantee behind them, interest rates on the loans would become affordable.

The program would mobilize private capital, reduce national fuel consumption and pollutants, support the efficiency and growth of the transportation sector, and act as a shot in the arm for small business. 82% of the 500,000 trucking companies in the US operate 6 trucks or less.

A little bit goes a long way here.

If the money lost in the Solyndra debacle had been targeted at idle reduction under the proposed framework, nearly 60,000 truck owners would be reaping the benefits of lower fuel costs on a dollar for dollar basis alone.  Provide for the leveraging of the Energy guarantee and the number of truckers serviced would multiply exponentially.

While this is documented, imagine the possibilities if other energy efficiency program financings were safely and appropriately delegated to financial institutions with Energy’s guarantee authority behind them. Instead of spending weeks filling out Energy paperwork to bid on a certain, specific technology, entrepreneurs could access commercial financing for new ideas at marginal cost.

That is the true benefit of a government loan guarantee program. It is where Energy is deficient, and it is where possibilities remain for the DOE program moving forward.

 

 

 

 

 

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