The Department of Energy’s (DOE) Loan Programs Office (LPO) provides access to debt capital for high-impact energy and manufacturing projects. Over more than a decade, LPO has developed a strong understanding of what makes a project more likely to advance through LPO’s processes, as well as the areas that commonly slow down or stop projects in the process. The following tips suggest best practices for considering whether LPO financing could be the right choice and what to include or what to avoid when applying to work with LPO.
For additional details about these areas and many others, please refer to the Getting to Know LPO blog series. You may also want to learn more about the types of projects in LPO’s portfolio, as well as the types of projects that are in LPO’s pipeline. If you believe your project could be the right fit for a DOE loan or loan guarantee, submit an online request for a pre-application consultation.
FINANCIAL
Is our project big enough, and how much debt financing is typical for a project?
LPO was created to provide debt capital for high-impact projects that are unable to access adequate amounts of capital from private debt markets, if they are even able to access debt capital at all. Due to the way that LPO programs are funded, there are expenses associated with obtaining an LPO loan that average several million per application. While there is no statutory lower limit on the size of a loan that LPO can provide, they become less attractive for borrowers under ~$100 million.
For reference, the average loan requests at LPO are nearly $1 billion, and the smallest loan requests are around $100 million.
Do we have a reasonable strategy for selling what we will be producing?
While LPO can underwrite some level of merchant risk, the nature of project financing is that certainty of project cash flows is optimal. Every LPO loan must have a reasonable prospect of repayment, which is largely determined by the certainty and quality of payments from customers and generally need to be obtained prior to a loan being issued. Ideally, LPO looks for signed offtake contracts or committed letters of intent for a significant portion of each project. Sometimes, loan tenors can be longer than the length of offtake contracts.Given the unique nature of manufacturing in the transportation sector, LPO has provided specific guidance for the Advanced Technology Vehicles Manufacturing (ATVM) Loan Program. LPO will evaluate whether the applicant will be able to achieve sufficient sales of its products to sustain long-term existence. Based on past experience, certain measures observed by DOE provide a higher level of confidence in future sales to be achieved in the absence of a demonstrated sales history. For example, long-term purchase contracts from creditworthy offtakers (contracted offtake) can significantly reduce market risk. Commitment from an established “anchor tenant” to purchase the project output can signal a higher likelihood of project viability to LPO. Similarly, if the market for a product is an established “commodity market,” characterized by standardized performance requirements and widespread demand, evidence that the applicant will be able to sell into that market profitably may serve to mitigate market risk.
Have we raised development capital, and do we have committed project equity?
The various elements of developing a commercial-scale energy infrastructure or manufacturing project—such as pre-FEED (front-end engineering and design) studies, Front-end Loading (FEL)-2’s, permitting, analyses, financial advisors, and legal counsel—all require significant capital. Successful applicants have this capital in place when they begin the application process, and they almost always have several of these pieces in place. Further, FEED studies help to ensure that major design decisions are viable before construction begins. LPO’s Outreach and…
This article was originally published by a www.solarpaces.org . Read the Original article here. .