“Too much money and not enough projects” is how the head of the DOE Loan Programs Office characterizes the current pace of deployment for climate-related projects in the United States.
“The pace at which we are deploying climate solutions is wholly unacceptable,” says Jigar Shah, director of the U.S. Department of Energy’s Loan Programs Office that has more than $40 billion in loans and loan guarantees available to help deploy large-scale energy infrastructure projects in the United States. “The United States is at maybe $200 billion a year of climate change solution deployment annually. That number has to probably be a trillion dollars a year to be able to be on track to [achieve] the goals that the president will be announcing [at the United Nations Climate Change Conference] in Glasgow.”
The comments are part of the latest episode in the CERAWeek+Conversationsseries. In a conversation with Atul Arya, IHS Markit Senior Vice President and Chief Energy Strategist, Shah discusses the role of being a “catalyst” for Wall Street; advancing climate solutions to the trillion-dollar-scale needed to meet carbon goals; and how oil and gas companies can transition to leverage their expertise in subsurface, geology, risk management and safety in other sectors.
Noting that previous DOE loans to Tesla and others created a trillion dollars of equity value in nearly every sector since those loans were made in 2010-2011, Shah says “now we have to find the next set of technologies to do the same thing.”
“A lot of what we’re doing at the Loan Programs Office is really explaining to people the supply chain of how it works within the government, but then also within industry. There are many industry participants who really don’t understand [project finance],” he says.
The complete video is available at: https%3A%2F%2Fondemand.ceraweek.com%2Fcwc
Interview Recorded Friday, July 9, 2021
(Edited slightly for brevity only)
- On the bridge role that the Loan Programs Office plays between venture technologies and commercial capital:
“We all recognize that project finance is something that is not well understood. Ultimately what you find is that the commercial debt market generally does not want to do new things. Sometimes it’s because they generally believe there’s technology risk that they don’t understand. But a lot of times it’s just because they can hit their numbers without doing new stuff. What ends up happening is there’s a lot of technologies that we care about at the Department of Energy and also as a nation that don’t get a good start. We have about $46 billion in existing authority within clean energy and the automotive supply chain to be able to provide these loans and to really be a bridge for the commercial debt market so that they see us do the first three of four deals, then they get comfortable doing the next set of deals.”
“Today we’re already averaging about $7 billion of applications every month. More are coming every day. We have about 40 applications that are actively being put together. Everything from the fossil [fuel] sector to advanced nuclear to renewable energy and energy efficiency to EV manufacturing, battery manufacturing and critical minerals.”
“Ultimately the way the Loan Programs Office thinks is the same way that S&P [Global] and Moody’s thinks. It’s the same way the commercial debt market thinks. We are a liquidity instrument. The goal for us is to fund a project, but more importantly, fund it in a way where we think that we can just pass all of our notes on to Wall Street so that they can do the next set. I have $46 billion of authority here at the DOE Loan Programs Office. We can do whatever portion of that that we can do. But at some point, we’ve done our job. We’re a catalyst and we can hand it off to Wall Street to do the next hundred billion.”
“Every one of these solutions has to get to a trillion-dollar scale. That’s the only way you meet the carbon targets that we’ve set for ourselves for 2035 for electricity and then 2050 for the whole economy. LPO is never going to have a trillion dollars. That means that we have to bridge to private sector capital, otherwise the goal doesn’t get reached.”
- On LPO’s portfolio of investments and its early stage financing arrangement with Tesla:
“Utility scale solar and wind—many people forget that those were unbankable projects. They received PPAs in 2007-08; by 2010 they still had not gotten bank debt. The Department of Energy provided the bank debt and even after we provided a guarantee, most of those projects were forced to be sold to Berkshire Hathaway. It was not until 2014 that Wall Street banks really got fully comfortable with solar and wind financing at scale. We did three geothermal projects; we did electric vehicles with Tesla and Fisker. We did battery manufacturing with Nissan; we did nuclear plants—the Vogtle nuclear plant continues to be almost close to being turned on. The existing portfolio is about $32 billion. It’s a pretty diverse group.
“In almost every sector, a trillion [dollars] of equity value has been created since we made those loans in 2010-2011. Now we have to find the next set of technologies to do the same thing.”
“[Tesla] was out of cash and no one wanted to fund them because you had the financial crisis. LPO put in $465 million for them to retool an existing auto manufacturing plant into their plant and that allowed them to launch the Model S which allowed them to raise more money and do the Gigafactory. All of those things came from that. We’re proud of the fact that they were able to pay us off early. It was a fantastic success story. Even more importantly, we made the loan to Fisker as well which we lost money on.
“We have to take several swings at-bat. The question becomes, if we fund four EV manufacturers and one of them becomes Tesla and the other three are not as financially successful, that still promotes the interest of the United States of America and making sure that all of that innovation that we’ve paid for at the DOE stays here, and grows here, and creates jobs here.”
- On LPO’s approach to financing carbon capture and sequestration and geothermal projects, and the supply chains that support their industries:
“It’s very clear that we have been testing carbon sequestration and storage techniques for decades. As the United States government, we’ve been talking about it and funding it at high levels since 2009. Now the question becomes: What does scale-up look like? What does it take to create hundred billion-dollar deployments?
“When you think about the state of Louisiana where 60% of their emissions are from the industrial sector, for them to meet the governor’s goals they have to really figure out carbon sequestration and storage. When you look at the geology of Louisiana, they can really store tremendous amounts of CO2. The question really becomes, what does it look like? Is it each individual company coming to LPO for an application? Sure. But it can also be a new utility company—one common trunk line for CO2 and we’re going to allow people to opt into the network and share the risk and costs across all of them so there isn’t discrete risk on one project. When you think about all the complexities of these issues, the Loan Programs Office is staffed not only to evaluate senior debt for a loan, but also to think through all of these issues with governors and the industry participants.”
“It’s very obvious that geothermal technology works. It’s a staple of many economies around the world, including California and the U.S. But when you think about the challenges of geothermal, there are real risks around drilling. For the risk management divisions at Halliburton and Schlumberger, can they actually reduce the risk on drilling?”
“Each one of these technologies has these institutional barriers where everything needs micro-management when it comes to due diligence. Every single project is a snowflake and each project takes extraordinary amount of time—years’ worth of due diligence—before people feel comfortable to put the money in. The supply chain of capital when it comes to development of these projects, to the risk management of the construction, to the operations, mirrors the oil and gas sector. What we found is that the oil and gas sector has not yet figured out how they want to play in the space at scale. There’s a lot of pilot projects here and there. The Loan Programs Office continues to be open for business. We see a lot of projects coming in. We’re going to be doing several billion dollars’ worth of geothermal loan guarantees. But the bridge to bankability is more than just these projects. It’s also figuring out how we rationalize the supply chain around development dollars and EPC risks.”
- On oil and gas companies transitioning skills and human capital to low-carbon industries:
“When you read the technology pathways work from the IEA, what is shows is that there are certain sectors that are on track to reaching gigaton scale, whether it’s solar, wind or lithium ion battery storage. And there are many pathways that are not on track to gigaton scale—geothermal, low impact hydro or small modular and advanced nuclear.
“I’ve been quite surprised at how they have been chasing things that are already successful, like solar and wind, as opposed to leveraging the tens of thousands of extraordinary people who work at their companies and bringing forward their expertise in subsurface, geology, risk management, safety. There are many sectors where these skills are critical, and these skills are generally not available in the existing players in that space. I would love to see them differentiate themselves and, as Warren Buffet talks about, create ‘moats’ around their business which I think will lead to increased interest in their companies from investors.”
- On the pace of clean investments and the surplus of capital to finance low-carbon projects:
“The pace at which we are deploying climate solutions is wholly unacceptable. The United States is at maybe $200 billion a year of climate change solution deployment annually. That number has to probably be a trillion dollars a year to be able to be on track to [achieve] the goals that the president will be announcing in Glasgow. When you think about the transition, we can maintain $200 billion a year or even grow that number substantially and still pursue supply chain efficiency because we eventually have to get to a trillion dollars a year of deployment or else we’re not going to get to the goal. We’re not deploying at a fast-enough pace where any slowdown is necessary because we’re just in such a deficit in terms of deployment.”
“Today we perennially have too much money and not enough projects. If you look at the energy sector alone, five years ago fundraising was probably 50-50 between oil and gas and clean energy. Today it’s like 10% oil and gas, 90% clean energy. On a macro basis, in 2003 about 3% of global money raised—of all types—into private funds was in infrastructure. Today that number is 12%. When you think about just the sheer amount of money that has been raised, it’s enormous. We don’t have enough projects. The reason we don’t have enough projects is because the only people who really know how to develop projects are people who develop solar and wind and those kinds of projects. When you look at the oil and gas space those are almost always PPPs: Someone wins an auction, they get a monopoly license to figure out a site, and they build out their capabilities if there’s oil and gas there. That’s not the same thing as climate solutions.
“When you think about climate solutions, whether it’s nuclear plants or carbon sequestration, these are projects. The vast majority of people are still waiting for the government to tell them what a risk-free approach looks like. That’s not how it works. It’s not risk-free. A lot of what we’re doing at the Loan Programs Office is really explaining to people the supply chain of how it works within the government, but then also within industry. There are many industry participants who really don’t understand [project finance].”
- On DOE and LPO initiatives to facilitate a just energy transition:
“Clearly we have [Native American] tribes who have not been given full access to modern services. That is something that is working through the congress today. Largely, a lot of that work is grant-funded. Separately there are many wealth opportunities. Many of the best wind and solar sites in the country are on tribal lands. There are many transmission corridors which run through tribal lands and making sure that the tribes not only get paid rent for those sites, but also participate in ownership of those assets is something that we’re very focused on. That is where we’re really focused on the Tribal Energy Loan Guarantee Program. We have $2 billion of authority. The tribes have to own at least 51% of the project and then we can provide up to a 90% loan guarantee on the debt. There are many projects where the private sector has figured out that if they invite a tribe in as their partner to be a 51% owner, then they can get access to this much lower cost debt and it supports everyone.”
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