The federal government is eager to help renewable energy companies borrow money for their manufacturing or power plant projects. But is it a good deal?

Assessments of the loan guarantee program run by the U.S. Department of Energy have been mixed. On one hand project developers say they need the government support to convince banks to loan them money. On the other hand, some of these companies' advisors aren't sure the savings are there to warrant the lengthy and costly process of securing loan guarantees.

"The loan guarantees are paradoxically an impairment," said Nathaniel Bullard, asolarassociate with New Energy Finance, at the Solar Energy Investment and Finance Summit in San Francisco last week. "They will be the most risky tranche of debt. But without loan guarantees, no one is lending."

The Energy Policy Act of 2005 created the greentech loan guarantee program to help secure low-interest loans for renewable energy, alternative-fuel vehicles and other emissions reduction projects. But the DOE didn't start awarding them until this year.

Three companies have received loan guarantees so far, and they are all equipment manufacturers (see Beacon Power, Nordic Windpower Get $59M DOE Loan Guarantees). Solyndra, for one, was able to borrow $535 million to build a thin-film solar panel factory in Fremont, Calif. (see Solyndra: Fab 2 Construction Begins).

Congress authorized the DOE to create a new clean energy loan guarantee program when it passed the American Recovery and Reinvestment Act in February this year. The DOE has since folded the older program into the newer one.

Many developers of renewable electricity generating plants are counting on the loan guarantees to help fund their projects, which tend to be large and drawn to serve utilities.

BrightSource Energy might be the first power plant developer to get a loan guarantee. The company is finalizing its negotiations with the DOE, and hopes to get the final approval by the end of the year, said Charles Ricker, senior vice president of business development at the Oakland, Calif.-based company, during an interview at the conference.

Ricker declined to disclose the loan guarantee amount, but the debt and another federal program the company is eligible for could make up 80 percent of the project's cost. The other federal program is a cash grant for offsetting 30 percent of the project's cost, though the developer won't get it until after its power plant is put into service.

Rules of the loan guarantee program would prevent BrightSource from securing other long-term debt (it requires 100 percent collateral), Ricker said. That means the company would have to come up with cash for the remaining 20 percent of the project's cost. It also may need a short-term loan to tie it over until it could get that cash grant.

BrightSource, which aims to start construction of its first, 440-megawatt project in California's Mojave Desert next April, is talking to investors to raise the equity, Ricker said. Bechtel already has committed to invest in the project, called Ivanpah Solar Electricity Generating System, though both companies declined to say how much (see BrightSource Gets Big Brother in Bechtel).

BrightSource would like to own 15 percent to 25 percent of the project at the end of all these fundraising efforts, however, he added.

For BrightSource, a startup with a new technology, the loan guarantee program would play a critical role if it wants to succeed.

The amount of time and cost that a company spends to apply for a loan guarantee isn't much different than the process it would have to go through if it were to obtain a loan directly from a private lender without the loan guarantee, said Ed Feo, a partner at law firm Milbank, Tweed, Hadley & McCloy, at the conference.

"Even though it's a difficult gate to get through, [the loan guarantee] is a fairly cheap option," he said.

But the overall cost of the project could grow bigger because projects receiving loan guarantees would have to carry out an environmental analysis under the National Environmental Policy Act (NEPA). That could add a year or more development time to a project, which would have to start construction by Sept. 30, 2011 under the loan guarantee program rules.

Developers that apply to build solar farms on federal land would have to do the NEPA review anyway. Those who want to build on private or other types of public properties wouldn't have to meet the NEPA requirement if they aren't getting the loan guarantees.

Some banks are lukewarm about the loan guarantee program, Feo said. Borrowers expect lower interest rates because the government is backing the loans. Lower rates means lower earnings for the banks.

If the banks aren't willing to lower the rates much, then some project developers might not see substantial savings. Daniel Gross, a partner at Hudson Clean Energy, said a quick cost-benefit analysis by his firm for a wind energy project showed that the savings "are marginal."

Matthew Ptak, vice president of BayernLB, said the German bank is more interested in loaning money for the portion of project financing that isn't guaranteed by the U.S. government.

"We have an appetite for the unguaranteed tranche," Ptak said. "We work actively to team up and share the risks in the guaranteed piece."

The government program also would likely benefit more large, established players in the energy business than the startups that are seeking loans to finance their first projects using projects using newly developed technologies.

"It will not benefit the likes of Googles and Amazons [in the energy market], but the GEs and Siemens.  And it will benefit the Pacific Gas and Electric Co. and the Florida Power & Light," said Feo, noting that BrightSource is now relying on engineering giant Bechtel not only for project financing and construction, but also to provide assurance to other potential investors.  

Photo via BrightSource Energy.