Solar Projects: DOE Section 1705 Loan Guarantees

Solar Projects: DOE Section 1705 Loan

Guarantees

name redacted

Analyst in Energy Policy

October 25, 2011

Congressional Research Service

7-....

www.crs.gov

R42059

CRS Report for Congress

Prepared for Members and Committees of Congress

Solar Projects: DOE Section 1705 Loan Guarantees

S

ince Solyndra, a solar system manufacturing company that received a $535 million loan

guarantee from the Department of Energy (DOE), filed for bankruptcy in September of

2011 there has been much congressional interest in better understanding the characteristics

of renewable energy projects, specifically solar projects, that have received DOE loan guarantees.

The objective of this report is to provide Congress with insight regarding solar projects supported

by DOE’s loan guarantee program, the risk characteristics of these projects, and how other DOE

loan guarantee projects are either similar to or different from the Solyndra solar manufacturing

project.

Key Points

•

DOE’s Loan Programs Office (LPO) administers three separate loan programs:

(1) Section 17031 loan guarantees, (2) Section 17052 loan guarantees, and (3)

Advanced Technology Vehicle Manufacturing (ATVM) loans.

•

To date, all loan guarantees for solar projects have been provided under LPO’s

Section 1705 program.

•

LPO’s Section 1705 program has closed transactions that guarantee

approximately $16.15 billion of loans for renewable energy projects. Roughly

82% ($13.27 billion) of Section 1705 loan guarantees have been for solar

projects.

•

Solar projects supported by Section 1705 loan guarantees generally fall into one

of two categories: (1) solar manufacturing, or (2) solar generation. Each category

has different financial, operational, and technology risk characteristics.

•

Four solar manufacturing projects, including Solyndra, have received loan

guarantees totaling $1.28 billion, which is approximately 8% of the total dollar

value of loans guaranteed under the Section 1705 program.

•

Twelve solar generation projects have received loan guarantees totaling $11.99

billion, which is approximately 74% of the total dollar value of loans guaranteed

under the Section 1705 program.

•

Solar manufacturing projects might generally be considered more risky than solar

generation projects because solar generation projects have contractual

mechanisms (power purchase agreements, performance guarantees, service

agreements, etc.) that allow these projects to manage many project financial

risks.

•

One solar manufacturing project might be considered somewhat similar to

Solyndra, only because the project aims to manufacture solar panels that use the

same materials as those used by Solyndra (copper indium gallium selenide—

CIGS). However, the company’s manufacturing approach, products, and markets

are distinctly different from those of Solyndra.

1

Section 1703 of the Energy Policy Act of 2005 (P.L. 109-58).

Section 1705 of the Energy Policy Act of 2005 (P.L. 109-58). Section 1705 was created by amending the Energy

Policy Act of 2005 through the American Recovery and Reinvestment Act of 2009 (P.L. 111-5).

2

Congressional Research Service

1

Solar Projects: DOE Section 1705 Loan Guarantees

•

All LPO solar manufacturing projects will have to address and manage the same

market risks that may have contributed to Solyndra’s bankruptcy. These risks

include (1) declining solar module prices; (2) competition from new and

established solar manufacturing competitors; and (3) subsidy/incentive

reductions in international (mostly European) markets.

Background—DOE Loans Program

The Department of Energy Loan Programs Office (LPO) administers three loan programs:

1. Section 1703: loan guarantees for innovative clean energy technologies with

high degrees of technology risk.

2. Section 1705: loan guarantees for certain renewable energy systems, electric

power transmission, and innovative biofuel projects that may have varying

degrees (high or low) of technology risk.

3. Advanced Technology Vehicle Manufacturing (ATVM): loans to support

advanced technology vehicles and associated components.

According to LPO’s website, all renewable energy manufacturing and electricity generation

projects supported by loan guarantees have used the Section 1705 program.3 DOE’s loan

guarantee authority originated from Title XVII of the Energy Policy Act of 2005 (P.L. 109-58).

The American Recovery and Reinvestment Act of 2009 (P.L. 111-5) amended the Energy Policy

Act of 2005 by adding Section 1705. Section 1705 was created as a temporary program, and 1705

loan guarantee authority ended on September 30, 2011. DOE received appropriated funds to pay

for credit subsidy costs4 associated with Section 1705 loan guarantees, which, after rescissions

and transfers, was $2.435 billion.5 From an industry perspective, Section 1705 loan guarantees

were very attractive as they provided an opportunity to obtain low-cost capital with the required

credit subsidy costs paid for by appropriated government funds.6

LPO has guaranteed approximately $16.15 billion of loans for renewable energy projects.

Roughly 82% ($13.27 billion) of the value of Section 1705 loan guarantees support solar projects

(see Figure 1). The remaining 18% of Section 1705 loan guarantees support a variety of projects

for biofuel production, energy storage, wind generation, transmission, and geothermal electricity.

The focus of this report is on solar projects supported by Section 1705.

3

Department of Energy Loans Program Office website, https://lpo.energy.gov/?page_id=45.

DOE’s LPO provides the following definition of credit subsidy cost: “Credit Subsidy Cost has the same meaning as

‘cost of a loan guarantee’ in section 502(5)(C) of the Federal Credit Reform Act of 1990 (2 U.S.C. 661a(5)(C)), which

is the net present value, at the time the Loan Guarantee Agreement is executed, of the following estimated cash flows,

discounted to the point of disbursement: (1) Payments by the Government to cover defaults and delinquencies, interest

subsidies, or other payments; less (2) Payments to the Government including origination and other fees, penalties, and

recoveries including the effects of changes in loan or debt terms resulting from the exercise by the Borrower, Lead

Lender or other Holder of an option included in the Loan Guarantee Agreement.” See https://lpo.energy.gov/?page_id=

64.

5

Department of Energy 2012 budget appendix, available at http://www.whitehouse.gov/sites/default/files/omb/budget/

fy2012/assets/doe.pdf.

6

Section 1703 loan guarantees required the loan guarantee recipient to pay the credit subsidy cost.

4

Congressional Research Service

2

Solar Projects: DOE Section 1705 Loan Guarantees

Figure 1. DOE Section 1705 Loan Guarantees

Source: Department of Energy Loan Programs Office website, https://lpo.energy.gov/?page_id=45.

Notes: “Other” projects include biofuel production, energy storage, wind generation, transmission, and

geothermal electricity.

Solar projects supported by Section 1705 loan guarantees generally fall into one of two

categories: (1) solar manufacturing, or (2) solar generation. Each project category typically has

different market, customer, financial, and technology risk characteristics. Solyndra is categorized

as a solar manufacturing project. The following sections discuss the different characteristics and

risk profiles for the two project categories.

Solar Manufacturing Projects

The Department of Energy has committed to guarantee four loans totaling $1.28 billion for solar

manufacturing projects, approximately 8% of the value of all loans guaranteed under Section

1705 (see Table 1). Solar manufacturing projects supported by 1705 are generally for scaling up

manufacturing capacity for new solar technologies that may offer cost, performance, or other

discriminators in the solar marketplace. Solyndra falls into this category.

Congressional Research Service

3

Solar Projects: DOE Section 1705 Loan Guarantees

Table 1. Solar Manufacturing Projects Supported By DOE’s 1705 Loan Guarantee

Program

Project

Loan Guarantee Amount

Technology

1366 Technologies

$150 million

Silicon solar wafer manufacturing process that may reduce

silicon waste by as much as 50% compared with current

processes.

Abound Solar

$400 million

Proprietary manufacturing process for thin-film cadmium

telluride (CdTe) photovoltaic modules.

SoloPower

$197 million

Copper indium gallium selenide (CIGS) photovoltaic cell and

module manufacturing using a proprietary electrochemical

fabrication process.

Solyndra Inc.

$535 million

Cylindrical CIGS photovoltaic cell and module manufacturing

for commercial rooftop applications.

Total

$1,282 million

Source: DOE loan guarantee program website, https://lpo.energy.gov/?page_id=45. Company web sites.

Solar manufacturing projects typically have to manage several market risks in order to succeed.

Each project must successfully scale-up its manufacturing capacity; produce technologies and

products that are differentiated based on cost, performance, and/or other parameters; compete

with companies that offer commercially proven products; and navigate a dynamic marketplace

that has experienced dramatic cost reductions and new market entrants over the last several years.

One solar manufacturing project (SoloPower) might possibly be considered somewhat similar to

Solyndra, only because the project aims to manufacture solar panels that use the same materials

as those used by Solyndra (copper indium gallium selenide—CIGS). However, SoloPower’s

manufacturing approach (electrochemical), products (thin-film PV on a flexible substrate), and

markets (residential and commercial rooftops) are distinctly different from those of Solyndra.

Nevertheless, each LPO-supported solar manufacturing project will have to address and manage

the same market risks that may have contributed to Solyndra’s bankruptcy. These risks include (1)

declining solar module prices; (2) competition from new and established solar panel

manufacturers; and (3) subsidy/incentive reductions in international (mostly European) markets.

The success or failure of each respective project will likely be determined by the ability of each

solar manufacturing project to differentiate its product in the solar marketplace, deliver expected

cost and performance objectives, and convince buyers to accept some degree of new technology

risk.

Solar Generation Projects

LPO has guaranteed twelve loans totaling $11.99 billion for solar generation projects,

approximately 74% of loans guaranteed under the Section 1705 program (see Table 2). These

projects are generally large solar electricity generation projects that use commercially proven

technologies or technologies that have some operational history from pre-commercial

demonstrations.

Congressional Research Service

4

Solar Projects: DOE Section 1705 Loan Guarantees

Table 2. Solar Generation Projects Supported By DOE’s 1705 Loan Guarantee

Program

Type

Project (Company)

Loan

Guarantee

Amount

Technology

CSP

Mojave Solar (Abengoa)

$1,200 million

Parabolic trough concentrating solar power.

CSP

Solana (Abengoa)

$1,466 million

Parabolic trough concentrating solar power.

CSP

Genesis Solar (NextEra)

$852 million*

Parabolic trough concentrating solar power.

CSP

Crescent Dunes (Solar

Reserve)

$737 million

Power tower concentrating solar power with

thermal storage system.

CSP

Ivanpah (Brightsource)

$1,600 million

Power tower concentrating solar power.

CPV

Cogentrix

$90.6 million

Concentrating photovoltaic electricity generation

technology.

PV

Antelope Valley (Exelon)

$646 million

FirstSolar thin film solar panels along with a new

type of inverter technology.

PV

Mesquite Solar 1 (Sempra)

$337 million

Crystalline silicon photovoltaic solar modules from

Suntech.

PV

Desert Sunlight (NextEra)

$1,460 million*

FirstSolar thin film solar panels.

PV

California Valley Solar Ranch

(NRG Energy)

$1,237 million

Crystalline silicon photovoltaic solar modules from

SunPower.

PV

Agua Caliente (NRG Solar)

$967 million

PV

Project Amp (Prologis)

$1,400 million*

Total

FirstSolar thin film solar panels.

Rooftop photovoltaic panels on 750 warehouse

buildings owned by ProLogis, Inc.

$11,993 million

Source: DOE loan guarantee program website, https://lpo.energy.gov/?page_id=45.

Notes: CSP = concentrating solar power; CPV = concentrating photovoltaic; PV = photovoltaic.

* DOE provided a partial guarantee.

Unlike solar manufacturing projects, solar generation projects generally do not have to deal with

market risks. Rather, these projects typically have to manage operation and execution risks. One

specific risk associated with these solar generation projects is their ability to perform and operate

at large scale. Many of the power generation projects that have received loan guarantees use

technologies that have been demonstrated either commercially or at a pilot scale. However the

size of each project is quite large and in some cases will be the largest project either nationally or

globally to use its respective technology.

Most solar generation projects reduce market risk through the use of power purchase agreement

(PPA) contracts with entities (often electric utility companies) that agree to purchase a project’s

electricity at defined prices for terms usually between 20 and 25 years. As a result, the focus

shifts to risks associated with performance of the selected technology over the contract period

(generating enough electricity to meet revenue objectives) and the operations and maintenance

(O&M) costs of the project during its lifetime (keeping O&M costs low to enable cash flows that

Congressional Research Service

5

Solar Projects: DOE Section 1705 Loan Guarantees

can adequately service debt and other financial obligations). However, performance guarantees

and O&M service agreements are typically used to manage these project-level risks.7

Furthermore, it is important to recognize that three different technology types are represented by

the twelve solar generation projects supported by 1705 loan guarantees. As indicated in Table 2,

the three technology types include (1) photovoltaic (PV); (2) concentrating solar power (CSP);

and (3) concentrating photovoltaic (CPV). PV technology is generally considered to be the most

commercially viable of the three technology types, as the overwhelming majority of global solar

installations use PV. CSP technologies might be considered less commercial when compared to

PV, although parabolic trough CSP systems do have some commercial operating history. CPV

technology might be considered the least commercially viable of the three technologies, and the

Cogentrix project supported by 1705, at 30 megawatts of generating capacity, will be the largest

utility-scale CPV project in the world.8 Generally speaking, projects that use technologies that

may not be fully commercialized (CSP and CPV) will be higher risk than projects that use

commercially proven technology (PV).

Risk Profile: Solar Manufacturing vs. Solar

Generation

For the purpose of this analysis, risk might be defined as dynamic external (market, competition,

cost, etc.) and internal (technology, performance, operation) factors that can impact a project’s

ability to meet its financial obligations. It is important to recognize how risk characteristics of

solar manufacturing and solar generation projects are different. Solar manufacturing projects

typically have to manage several types of risk: market, technology, competitor, and others. Solar

generation projects, on the other hand, generally need to only manage operation and execution

risks. Table 3 provides a side-by-side comparison of risks for solar manufacturing and solar

generation projects. Solar manufacturing projects might generally be considered more risky than

solar generation projects because solar generation projects can use contractual mechanisms to

manage many project financial risks.

7

A performance guarantee is essentially a contractual agreement between the technology provider and the project

owner whereby the technology provider guarantees, based on certain conditions, a specified amount of electricity

generation for a defined time period. If the technology performs below the levels guaranteed in the agreement, the

project developer can typically seek liquidated damages as compensation for underperformance.

8

DOE loan guarantee program website, https://lpo.energy.gov/?projects=cogentrix-of-alamosa-llc.

Congressional Research Service

6

Solar Projects: DOE Section 1705 Loan Guarantees

Table 3. Risk Comparison: Solar Manufacturing and Solar Generation Projects

Solar Manufacturing

Solar Generation

Market risk

Projects must constantly manage

changing market dynamics such as

demand levels, manufacturing capacity

levels, subsidies/incentives, etc.

Generally not an issue once the

project is operating. Most generation

projects reduce market risk through

the use of power purchase

agreements (PPA) for electricity

generated.

Competition risk

Projects must monitor and respond to

competitors with regard to

technology improvements, cost

reductions, and other factors.

Once a PPA is established with an

electricity customer, competition risk

for the project is reduced.

Cost risk

Solar manufacturing projects must

keep pace with industry cost trends in

order to maintain competitiveness in

the marketplace.

To some degree, generation projects

must manage operation and

maintenance (O&M) costs in order to

achieve financial projections. O&M

cost risks might be managed through

the use of O&M service agreements.

Technology/performance risk

Projects must ensure that the new

and innovative technologies being

manufactured are able to meet or

exceed technology performance

targets.

Many generation projects use

commercially proven technologies

that have minimum technology risk.

Some 1705 projects are using

technologies that are not fully

commercialized, which may present

some degree of technology

performance risk. Technology and

performance risks can be managed

through performance guarantee

agreements.

Customer acceptance risk

Solar manufacturing projects must

actively work to convince potential

customers to accept the new and

innovative technology being

manufactured. To some degree, this

can be managed through sales

agreements. However, in some cases

sales agreements may not be

contractually binding.

For projects that have established

power purchase agreements, the

customer acceptance risk is typically

eliminated. Unlike solar manufacturing

projects, solar generation project

customers are purchasing electricity,

not a particular technology.

Operation/execution risk

Projects must execute their

construction and scale-up plans as

well as their operational plans in

order to achieve revenue and cost

targets.

Generation projects have some

degree of operation and execution

risk as they need to operate in a

manner that achieves revenue and

cost targets. Further, many 1705

projects are the largest in either the

country or the world for their

respective technology types. The

large-scale nature of these projects

creates uncertainties that can result in

operation and execution risk.

Source: CRS.

Congressional Research Service

7

Solar Projects: DOE Section 1705 Loan Guarantees

Conclusion

Each solar project supported by Section 1705 has a unique set of project, technology, and risk

characteristics that require constant management. It is important to recognize, however, that

Section 1705 solar projects fall into one of two categories: (1) solar manufacturing, or (2) solar

generation. Risk characteristics for each category are distinctly different and solar manufacturing

projects are generally considered higher risk than solar generation projects because the latter can

use contractual mechanisms to reduce market, project, and financial risks. Whether or not Section

1705 solar projects will succeed is beyond the scope of this report. However, each Section 1705

solar manufacturing project will have to address the same market dynamics that may have

contributed to Solyndra’s bankruptcy. Ultimately, the success or failure of all Section 1705 solar

projects will likely be determined by the ability of each project’s management team to adapt to

market dynamics and manage project risks.

Author Contact Information

(name redacted)

Analyst in Energy Policy

/redacted/@crs.loc.gov, 7-....

Congressional Research Service

8

EveryCRSReport.com

The Congressional Research Service (CRS) is a federal legislative branch agency, housed inside the

Library of Congress, charged with providing the United States Congress non-partisan advice on

issues that may come before Congress.

EveryCRSReport.com republishes CRS reports that are available to all Congressional staff. The

reports are not classified, and Members of Congress routinely make individual reports available to

the public.

Prior to our republication, we redacted names, phone numbers and email addresses of analysts

who produced the reports. We also added this page to the report. We have not intentionally made

any other changes to any report published on EveryCRSReport.com.

CRS reports, as a work of the United States government, are not subject to copyright protection in

the United States. Any CRS report may be reproduced and distributed in its entirety without

permission from CRS. However, as a CRS report may include copyrighted images or material from a

third party, you may need to obtain permission of the copyright holder if you wish to copy or

otherwise use copyrighted material.

Information in a CRS report should not be relied upon for purposes other than public

understanding of information that has been provided by CRS to members of Congress in

connection with CRS' institutional role.

EveryCRSReport.com is not a government website and is not affiliated with CRS. We do not claim

copyright on any CRS report we have republished.