DOE Loan Program Office to Implement New CO2 Transport Infrastructure Finance and Innovation Program

The Department of Energy (DOE) is rolling out a brand new loan program to fund infrastructure to transport carbon dioxide. A component of the historic Infrastructure Investment and Jobs Act (see our alert on the Act here), this new Carbon Dioxide Transportation Infrastructure Finance and Innovation Act (CIFIA) program will provide flexible low-interest loans for CO2 transport infrastructure projects, much like the Transportation Infrastructure Finance and Innovation Act (TIFIA) has done for bridges, roads and tunnels.

The DOE will provide loans, loan guarantees and challenge grants (challenge grants will first require raising some private funding) for entities to build projects estimated to cost more than $100 million that are for common carrier carbon transportation infrastructure or associated equipment, including pipeline, shipping, rail or other transportation infrastructure and associated equipment, that will transport or handle carbon dioxide captured from anthropogenic sources or ambient air.¹

Who is Eligible?

Public entities must apply for the program, but the obligor can be a private entity through a public private partnership.² Applicants for a grant or loan must first submit a letter of intent before they can submit a formal application as prescribed by the Secretary of the DOE (the “Secretary”). The loans will go to selected entities for completion of their project.

The Secretary is required to give priority for credit assistance to projects that:

1. Are large-capacity, common carrier infrastructure.
2. Have a demonstrated demand for capacity from associated carbon capture storage (CCS) projects.
3. Will enable geographical diversity of CCS projects.
4. Are sited within or adjacent to existing pipelines or other linear infrastructure corridors to minimize environmental impacts.³

What are the Terms?

Eligible entities that are selected may then enter into a secured loan with the DOE. The interest rate on a secured loan will be no lower than the U.S. Treasury yield for a security of similar maturity as the secured loan. The maturity date will be the earlier of 35 years from the date of the substantial completion of the project or the useful life of the asset.⁴ Repayment can be deferred until up to five years after substantial completion of the project.⁵ Loans do not have a prepayment penalty.⁶ The Secretary can provide a loan guarantee instead of a loan if she determines that the budgetary cost of a loan guarantee is substantially the same or less than a secured loan. All the other terms will be the same except that the interest rate may be different since the lender and borrower will negotiate the rate with the consent of the Secretary.

Secured loans can be for up to 80 percent of project costs.⁷ Loan proceeds may be used to finance:

• Eligible project costs.
• Refinance interim construction financing.
• Refinance long-term project obligations or federal credit instruments, if the refinancing provides additional funding capacity for the completion, enhancement or expansion of a project.⁸

Loan proceeds can fund 100 percent of development-phase activities, including (1) planning, (2) feasibility analysis, (3) revenue forecasting, (4) environmental review, (5) permitting, (6) preliminary engineering and design work, and (7) other preconstruction activities; as well as (8) construction, reconstruction, rehabilitation, replacement and acquisition of real property (including land relating to the project and improvements to land), (9) environmental mitigation, construction contingencies and acquisition and installation of equipment (including labor), (10) capitalized interest necessary to meet market requirements, (11) reasonably required reserve funds, (12) capital issuance expenses, and (13) other carrying costs during construction; and (14) transaction costs associated with financing the project (including legal fees and the cost of technical consultants).⁹

Future Growth Grants

Future growth grants are a new device CIFIA introduces to encourage projects to expand. The Secretary may award future growth grants to incentivize a project to increase the scale or add additional capacity beyond what demand initially calls for.¹⁰ The grant can cover up to 80 percent of the cost differential between the cost of constructing the project as contemplated and the cost to construct the project based on a higher future flow rate.¹¹ The higher flow rate is determined based upon a project’s demonstration that in the 20-year period following substantial completion of the project, it can reasonably be expected to have such increased capacity demand. To be eligible for a future growth grant, a project must meet the CIFIA eligibility requirements for credit instruments and have a probable future increase in demand.¹² It appears that a project can receive a grant without receiving a loan although this is not entirely clear.

Repayment Prospects

To receive a loan or grant, a CIFIA applicant must demonstrate that the federal credit instrument it is applying for is repayable, in whole or in part, from user fees, payments owing to the obligor under a public-private partnership or other revenue sources that also secure or fund the project obligations.¹³ The Secretary also must find that the financial assistance will attract public or private investment for the project or enable the project to proceed at an earlier date than the project would otherwise be able to proceed or reduce the lifecycle costs (including debt service costs) of the project.¹⁴ The DOE also will determine that there is a reasonable prospect of repayment of the credit assistance. Eligible applicants must also be in a position to begin the contracting process for construction within 90 days of the date the credit instrument or grant is obligated.¹⁵

Credit Agreement

The Secretary may enter into a master credit agreement for a project if the following requirement are met:

• The Secretary determines the project will likely be eligible for credit assistance upon obtaining additional commitments from associated carbon capture projects to use the project or all necessary permits and approvals.
• It is a project of high priority.¹⁶

A project sponsor also may request that the Secretary enter into a master credit agreement where there is not sufficient federal funding available to fund a credit instrument or where there are not sufficient funds to cover the subsidy costs available.¹⁷

What is the Approval Process?

The applicant shall be notified by the Secretary within 30 days after receipt of an application, whether the application is complete or whether additional information is needed, and within 60 days of providing notice that an application is complete whether the Secretary has approved or disapproved the application.¹⁸

Before making a loan, the Secretary must consult with the Director of the Office of Management and Budget to determine the appropriate credit subsidy amount, taking into account “all relevant factors.”¹⁹

Fees and Repayment Schedule

The Secretary will be able to collect a fee upon financial close of up to $3 million to cover the costs to the federal government of providing the credit instrument.²⁰The obligor and the Secretary may amend the terms of the loan to add to the principal of the secured loan an amount equal to the amount of the fee collected by the Secretary.²¹

For each secured loan, the repayment schedule will be based on the projected cash flow from project revenues and other repayment sources and the useful life of the project.²²

Payments Deferred

If a project is unable to generate sufficient revenues in excess of reasonable and necessary operating expenses to pay the scheduled loan repayments of principal and interest on the secured loan, the Secretary may under certain circumstances allow the obligor to add unpaid principal and interest to the outstanding balance of the secured loan.²³Any payment deferred will continue to accrue interest until fully repaid.

As far as transaction costs, if funding to cover the cost of technical consultants and loan servicing is not provided in an appropriations law, the Secretary, during that fiscal year, may collect fees from the obligor to cover those costs.²⁴

Applicants should note that these grants and loans are subject to federal requirements, including the National Environmental Policy Act (NEPA) and Buy America requirements.

¹ 42 U.S.C. § 16372(b)-(c).

² Id. § 16372(b)(6).

³Id. § 16372(c)(2).

⁴ Id. § 16373(b)(5).

⁵ Id. § 16373(c).

⁶ Id.

⁷Id. § 16373(b)(2).

⁸ Id. § 16373(a)(1).

⁹ Id. § 16371(4).

¹⁰ Id. § 16374(a).

¹¹ Id. § 16374(d).

¹²Id. § 16374(b).

¹³Id. § 16373(b).

¹⁴Id. § 16372(b).

¹⁵Id.

¹⁶ Id. § 16372(c)(3).

¹⁷Id.

¹⁸ Id. § 16372(f).

¹⁹ Id. § 16373(a).

²⁰Id. § 16373(b)(7).

²¹Id.

²² Id. § 16373(c).

²³ Id.

²⁴Id. § 16371(4).