How will DOE loan out $250B to make dirty energy systems clean?

Canary Media’s Down to the Wire column tackles the more complicated challenges of decarbonizing our energy systems.

The Inflation Reduction Act contains $369 billion in tax credits, grants and incentives meant to drive investment in new clean energy technology over the next decade, a fact that has been widely reported. But it also gives the Department of Energy’s Loan Programs Office the power to spur not just the building of new clean energy resources, but also the transformation of old or dirty energy infrastructure into new or modernized clean assets, and the revitalization of the communities where that old infrastructure now sits.

In implementing the Energy Infrastructure Reinvestment Program — also known as the Section 1706 program — the Loan Programs Office will be able to make up to $250 billion in low-interest loans. That’s an enormous opportunity: $250 billion is enough money to radically restructure entire swaths of the U.S. energy landscape.

Projects aiming to retire or repurpose dirty infrastructure can be hard to finance through traditional private-sector debt models, and the tax credits and incentives offered under most Inflation Reduction Act programs are aimed more at building new projects than repurposing old ones. So the Section 1706 program could play a critical role.

Renovating or repurposing existing infrastructure can help developers avoid many of the siting, permitting and grid-interconnection challenges they face when building new clean energy projects. Coal plants have massive power lines and transformers that can be used by other kinds of power plants, for example, and existing transmission lines can be upgraded with new power cables much more easily than brand-new transmission corridors can be built. And finding new uses for dirty power plants or petrochemical facilities can provide jobs and tax revenue in communities that would otherwise face hardship when they close down.

The Section 1706 program differs from other programs administered by the Loan Programs Office in key ways, notably:

• It does not require projects to be technologically innovative.
• It expires relatively soon, at the end of 2026.
• It essentially operates on a first-come, first-served basis. 

A lot of questions are swirling around about this novel program, however. Most companies that could benefit from it don’t have a good grasp of what kinds of projects they could get loans for and how the system will work.

In this column and a follow-up coming soon, we’ll explain the basics of the Section 1706 program and explore the opportunities it offers and challenges that could limit its reach.

What kinds of projects can qualify?

The Inflation Reduction Act declares that the Section 1706 program can offer loans for projects that ​“retool, repower, repurpose or replace” closed-down energy infrastructure or enable still-running infrastructure to ​“avoid, reduce, utilize or sequester” carbon emissions or air pollutants. This could encompass a dizzying array of projects.

“The entire energy infrastructure ecosystem qualifies to come into the 1706 program to be repurposed,” Jigar Shah, head of DOE’s Loan Programs Office, told Canary Media in a recent interview. A variety of proposals for the program have been coming into his office since the passage of the Inflation Reduction Act, he said — and the variety could be wider still.

The Section 1706 program could extend loans to energy developers to convert coal and fossil-gas-fired power plants to solar and wind farms backed by battery storage, Shah noted in a recent conversation with Bloomberg. Similar projects have been previously proposed for sites in Illinois, Louisiana, New Mexico and other states.

Small modular nuclear plants could be built at former coal plant sites, as a recent DOE study proposes — if SMRs are ready for commercial-scale deployment. Existing nuclear plants that are struggling to stay open or have already shut down could be upgraded to run for decades longer, he said, citing the example of the recently closed Palisades plant in Michigan.

Existing power plants could be put to uses other than power production, Shah said, such as the former coal power plant in Somerset, Massachusetts that’s being converted to produce transmission cables for offshore wind farms and to link one offshore wind farm to the plant’s preexisting onshore grid connections.

And power plants aren’t the only potential target. A number of oil refineries and fossil-gas pipeline operators have approached the Loan Programs Office with ideas to repurpose their systems to produce or transport clean hydrogen or carbon dioxide captured from energy generation or industrial sites, Shah said on a September podcast.

In a Washington Post op-ed, Dan Reicher — senior research scholar at Stanford’s Doerr School of Sustainability and formerly an assistant secretary at the DOE — laid out his own list of projects that could use Section 1706 funding, from converting fossil-gas power plants to run on hydrogen to building underground transmission lines along highways and railroads.

The Section 1706 program could also be used to retire coal plants early through a process similar to ​“securitization,” which involves raising low-cost debt to close coal plants well ahead of their revenue-generating lifespan for the utilities that own them and reinvesting in cleaner and more cost-effective renewable energy. Another possibility is funding the ​“reconductoring” of swaths of the U.S. transmission grid with advanced cables that can carry more power than standard aluminum-and-steel cables. But even with low-cost federal financing, these two kinds of projects can be challenging to get across the finish line (more on that in the next Down to the Wire column).

In talking with Canary Media, Shah gave several more examples of how Section 1706 lending authority could help projects that might otherwise struggle to gain private-sector backing. In the case of regulated utilities, one example might be ​“to help utilities broker a deal with the regulator for projects to be 80 percent debt-funded instead of 50 percent debt-funded,” which would limit rate hikes on utility customers, he said.

Independent developers looking to redevelop coal plants can also face barriers in getting financing that meets private lenders’ environmental, social and governance (ESG) standards, even if they’re acquiring that plant to close it down and do something cleaner with it, he noted. ​“A lot of ESG funds won’t fund a coal plant, even if they’re only going to own it for a week” before it’s shut down and redevelopment work begins, Shah said. ​“We can help bridge that gap.”

Another major opportunity lies in remediating contaminated former energy sites where ​“traditional debt players don’t normally want to get involved,” he said. ​“Where the state is expecting to clean it up over 30 years, our funds could allow them to clean it up over the next five years…and they pay us back over the next 30 years,” he said. Many such locations are ​“perfect for manufacturing or other uses because they have railroad infrastructure; they’re close to highways,” he added.

How will the Section 1706 program work? 

While the specifics of the Section 1706 program are still being developed as it goes through the rulemaking phase, Shah said it’s likely to work much like the Loan Programs Office’s Section 1703 program, so named for the part of the Energy Policy Act of 2005 that grants DOE authority to provide and guarantee loans.

Section 1706 loans will be backed by the federal government, which enables them to be offered at very low interest rates, as 1703 loans are. Section 1703 loans and loan guarantees in the early days of the Obama administration backed some of the first utility-scale wind and solar projects in the U.S. (While the office’s loan portfolio has included a few well-publicized losses — most notably the $500 million loan to failed solar startup Solyndra — the lending program overall earns more every year in interest payments on its $31 billion in outstanding loans than it has lost over its entire lifespan to date.) After a hiatus during the Trump administration, the 1703 program was reinvigorated under President Biden, who put Shah at the helm. Since then, it has offered loans to support battery materials processing, electric-vehicle battery-cell manufacturing, and low-carbon hydrogen production.

While the specific interest rates for each loan aren’t public, the formula for determining them is. For the 1703 program, it’s the current rate for U.S. Treasury Bonds plus a small adder of three-eighths to one-half of a percentage point, along with a small ​“risk-based charge” set through an assessment of the risk of borrower default.

For the Section 1706 program, the Inflation Reduction Act provides $5 billion for credit subsidy appropriations meant to cover the risk and potential cost to the government if the borrower is unable to repay the loan. That will allow LPO to offer low interest rates for each Section 1706 loan for up to 30 years.

The mix of assessed risk across the portfolio of projects will determine how much in total loans up to its $250 billion cap the Section 1706 program will be able to finance, Shah said. Loans deemed to be investment-grade, such as for projects brought forward by investor-owned utilities with approval from state utility regulators to recover their costs through long-term charges on customers’ bills, will require a lower credit subsidy. Projects with higher risk profiles, such as those proposed by independent energy project developers that lack the backstop of a guaranteed rate of return, will likely require higher credit subsidies.

Shah emphasized that DOE’s role in making these kinds of loans is to build a track record to spur private-sector lending, not to supplant it. Because Section 1706 lending will not require projects to be technologically innovative — unlike 1703 lending — ​“there is some concern that there is competition with the private sector,” Shah said. The Loan Programs Office (LPO) will ​“try to avoid that.” He believes there are plenty of projects the Section 1706 program can fund that other lenders wouldn’t.

What are the next steps? 

As it develops the rules for implementing the Section 1706 program, LPO is holding listening sessions where ​“people are pitching us potential uses,” Shah said. Ten sessions have been held so far, and at least 10 more are scheduled over the next few months.

“We want any and all ideas that meet the statutory requirements of the program. I’m not here to say this use case is preferred over that use case,” Shah said. He stressed that LPO isn’t playing favorites with what kinds of proposals it will fund, nor is it trying to set industrial policy through these loans.

There’s also a public-comment process underway to collect views on what kinds of projects should be eligible for Section 1706 funding.

Ultimately, of course, LPO can only fund specific projects, not general concepts. ​“Everyone is like, ​‘Jigar, I have this great idea; I wrote this policy paper.’ That’s great. But unless the private sector embraces that policy paper and turns it into a loan application, there’s nothing I can do.”

While the Section 1706 program will help private companies execute projects, it is also intended to help the communities where those projects are located. The Inflation Reduction Act requires that projects receiving Section 1706 loans come with plans for how they will benefit those communities as well as the broader class of customers that may face cost or service impacts.

Ideally, community members will be part of the process of designing and pitching proposals, Shah said.

As Shah told Bloomberg recently, ​“A lot of those projects are really about a community coming together and saying, ​‘Hey, we actually have all this expertise in our community around energy and around infrastructure, and we’d like to continue to make money and get tax revenue…from that expertise. Let’s figure out [how] we want to repurpose our old energy assets so that it’s relevant in this decarbonized world.’”

Given the enormous amounts of money needed to transition the U.S. energy sector to reduce its carbon emissions impact, one might imagine the demand for this funding quickly outstripping supply. But ​“it’s a mistaken notion that there will be more projects to come in than we will be able to fund,” Shah said. Given the tight timeline for developing, reviewing and approving complex projects, ​“I’d say it is highly unlikely that we run out of funding capacity before 2026.”

In fact, the greater challenge may lie in pulling together the multiple parties that will need to find common ground to make complex energy infrastructure reinvestment projects work. We’ll cover that challenge in the next installment of this column.