Loan guarantees are a no-brainer

In one of our previous posts

, we discussed the House Continuing Resolution sections that called for a stop on loan guarantee programs for large scale renewable energy projects. Today, 34 CEOs of renewable energy companies wrote to House and Senate leaders to protest against this proposal. They say the loan guarantee program will help create tens of thousands of jobs and generate billions of dollars in investment from the private sector. Of course it will. Moreover, without a loan guarantee program it simply cannot happen.

I’ve had various arguments in the last weeks with people about this. “Unfair treatment of renewable energy over traditional (fossil fuel) energy” is the most heard argument against such loan guarantees. Of course, this is a crazy statement to make. All industries receive government support in forms of loan guarantees, tax subsidies, hidden tax subsidies, accelerated depreciation programs, stimulus programs, you name it. The oil, gas and coal industry certainly receive their fair share. In fact, I’d argue that at this point in time, the renewable energy industry is not at all yet at a level playing field with the established fossil fuel industry. The price tag for large scale renewable energy projects over the duration of their lifetime is nearly fully determined by capital costs: fuel is free. If a company cannot get a decent loan, with a decent interest rate, the price of the renewable energy resource will go up and its competitiveness will go down. Is it fair that large scale solar plants cannot get the same interest rates as a nuclear power plants, or coal-fired power plants? Typically rates are determined by perceived risk. Here’s a catch 22. The current perceived risk is high because we have little experience with large scale renewable power plants. But, if as a result, the capital costs remain unfairly high, we will never get this experience.

A governmental loan guarantee eases the discomfort that financial institutions may have with lending money to “risky” businesses. The guarantee means that the government agrees to pay part of the money owed to lenders if a company defaults. The government itself estimates a risk associated with the loan guarantee. Suppose that a plant will cost 2 billion dollars to construct. The government could, say, provide a loan guarantee for 80% of this capital investment, and decide that it needs to actually put aside 10% of this 80% for each project as insurance against the loan guarantee, so 160 million dollars. The higher this insurance set-aside is, the harder it is to convince congress to put the loan guarantee up. But, ultimately all it is is a perception. There is little base in numbers, because there are so few numbers.

In short, without a loan guarantee program, we will in the current economic climate not get anywhere with large scale renewables. Besides, the chief executives also say, the cuts would “defeat America’s effort to compete with China, Germany and others in the clean technology marketplace.”

Together, the companies these 34 CEOs represent have already invested $13.3 billion dollars in projects that are being considered for the loan guarantee program and should break ground before the end of September. The projects are in 28 states, and will create an estimated 25,000 construction and operating jobs. Companies include solar panel maker First Solar Inc (FSLR.O: Quote), solar thermal company BrightSource Energy, solar panel maker SunPower Corp (SPWRA.O: Quote), geothermal power company U.S. Geothermal Inc (HTM.A: Quote) and biofuels maker POET, among others.

I’m hoping this CEO plea will help. Particularly now that nuclear energy is being seen by many as a no-no, and we will (tomorrow) be commemorating the anniversary of the Deepwater Horizon disaster, it seems like such a crazy idea to halt large scale renewable projects and kill this industry before it even has a chance.

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