Defenders and attackers of loan guarantees briefly switch sides

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Washington, D.C.-, February 16, 2017 | comments

Some rhetorical judo led to a Democrat calling to close the Department of Energy's loan guarantee program while a Republican praised the initiative yesterday.

At the hearing, titled "Risky Business: The DOE Loan Guarantee Program," before the House Science, Space and Technology Subcommittee on Energy, lawmakers challenged the program's record and debated the future of DOE's role in spurring clean energy deployment.

The main philosophical debate was whether a government agency should be in the business of helping new companies secure financing for nuclear power plants, carbon capture facilities and concentrating solar power farms.

"The department can't prioritize the basic research it does best when it plays venture capitalist," said subcommittee Chairman Randy Weber (R-Texas) in his opening statement.

A loan guarantee, as opposed to a loan, offers a backstop for private lenders to invest in risky, first-of-a-kind projects. The cash doesn't come from the government, but the Energy Department is on the hook if the development flames out.

DOE's loan guarantee program was first authorized under President George W. Bush. Under Section 1703 of the Title XVII of the Energy Policy Act of 2005, DOE received authority to disburse loan guarantees for energy deployments that "employ new or significantly improved technologies as compared to commercial technologies."

The American Recovery and Reinvestment Act of 2009 added another component to the loan guarantee program, Section 1705, which paid the credit subsidy cost for the borrower, making the loan guarantees a much more attractive instrument. The credit subsidy cost is the expected long-term liability to the government.

Loan guarantees disbursed under Section 1705 were aimed at "shovel ready" projects that were meant to put Americans to work during the depths of the Great Recession. The program's authority expired in 2011.

As of December, DOE had issued $31.98 billion in loans and loan guarantees. Sections 1703 and 1705 account for $28 billion distributed across 30 energy companies. About $10 billion was appropriated to cover losses, but DOE reported losses of $810 million, yielding a portfolio that is more than 97 percent solvent.

DOE also reported $1.79 billion in interest payments received, giving the program a positive cash flow of more than $900 million.

The high-profile program suffered a major setback in 2011 when solar photovoltaic manufacturer Solyndra, which received a $535 million loan guarantee in 2009, declared bankruptcy. "Solyndra" soon became shorthand among congressional Republicans for government mismanagement.

Rep. Clay Higgins (R-La.) found an upside to the program.

"The loan guarantee program has had serious problems regarding some of the loans in its portfolio, including controversial failed projects such as Solyndra," he said. "Although there is room for improvement in the program, it's important that we give reasonable consideration to Department of Energy loans designed to commercialize innovative technology in the oil and gas industry versus the green industry."

He cited the conditional $2 billion loan guarantee awarded to the Lake Charles carbon capture and storage plant in Louisiana at the tail end of the Obama administration (Greenwire, Dec. 21, 2016).

"That's an example, to me, of a wise investment," Higgins said.

Three of the four witnesses before the committee expressed skepticism about the program, arguing that federal loan guarantees expose taxpayers to too much risk, create distortions within energy markets, remain vulnerable to cronyism, and overlap with state policies and incentives for clean energy.

"Federal subsidies are overkill," said witness Chris Edwards, director of tax policy at the right-leaning Cato Institute.

Rep. Ed Perlmutter (D-Colo.) said that he wondered whether such authority would be used wisely under the Trump administration.

"Some of you brought up some points that I am really concerned about," he said to the witness panel.

"Even though the Republican Congress passed this back in 2005, signed by George Bush, used by that administration, used by the Obama administration, if this Congress wants to take this tool away from the Trump administration because they're worried about potential cronyism, I may applaud that," Perlmutter added.

"I don't think it's just DOE, either; it's all programs of these nature," said Diane Katz, a senior research fellow at the Heritage Foundation, a conservative think tank.

"So you think all these programs should be taken away from the Trump administration?" Perlmutter asked.

"Absolutely," Katz responded.

Content originally published by E&E News on February 16, 2017.
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