Ivanpah and the DOE Loan Guarantee Program

Ivanpah and the DOE Loan Guarantee Program

by Joe Desmond

A recent story in the Wall Street Journal discusses BrightSource Energy’s push to finalize a loan guarantee for the Ivanpah project.

To be perfectly clear, we did urge the government to make a decision on our loan guarantee application.  We spoke to anybody who would listen about this great project – the largest and most technologically advanced of its kind in the world.  The project was completely consistent with Congress’ intention when it established the loan guarantee program – to support the commercialization of technically innovative projects. 

The DOE spent over four years thoroughly reviewing the project. In early 2011, we increased our efforts to get DOE to make its decision. 

The DOE’s decision to provide a loan guarantee for the project was based on the project’s merits. The DOE was extremely thorough and diligent in its review, as were the other agencies involved in the process.  The level of scrutiny on the project was comparable to that which would have been applied in a commercial bank financing.  Confirming the DOE’s judgment, NRG and Google independently decided to invest a total of $468 million to purchase a majority ownership interest in the project, also based on the same merits. 

Based on the project’s current status, the DOE’s decision to extend the loan guarantee was a smart one. Below we have included key points highlighting the project’s strengths and successes. 

Ivanpah Project Overview
In 2007 we commenced the permitting and financing of our Ivanpah Solar Electric Generating System, located in California’s Mojave Desert. The purpose of the Ivanpah project is to generate power to sell to PG&E and SCE under three of the power purchase agreements that we signed with those two utilities. In total, the Ivanpah project will cost about $2.2 billion to build and, at 392 megawatts, will produce enough power for 140,000 homes. The Ivanpah project is already providing substantial economic benefits not just to California and the region, but to the nation, as our plants depend on the traditional supplies needed for conventional power plants as well as commercial mirrors and equipment needed to provide its solar “fuel”. In fact, we procure from a supply chain that stretches across 17 states. The majority of the materials are procured domestically and we estimate that approximately 70 percent of the project’s value will be captured in the United States.

Ivanpah Project Benefits
The Ivanpah project is one of the largest infrastructure projects in the nation and the largest solar thermal plant under construction in the world. When completed it will increase the amount of solar thermal energy produced in the US today by 70 percent. The project is being built over a three year period and is creating 1,400 construction jobs alone at peak. The project will generate $250 million in earnings for these construction workers and over its 30 year life will produce $650 million in earnings for workers on the site, including the 90 permanent jobs required to operate the plant. In addition to the supply chain investment and labor wages created, the project will also generate $300 million in state and local tax revenues over its life.

Ivanpah Project Update
Today, the Ivanpah project is nearly one-third complete and is currently on schedule. Each day, we are meeting critical milestones and are moving ever closer to project completion. In fact, we will start to deliver power to the grid by early 2013. Construction continues to advance at a strong pace, with Bechtel, one of the most experienced and successful engineering, procurement and construction contractors, helping to assure its continued progress on schedule and on budget.

We are working closely with federal and state agencies to provide the appropriate care of the desert plants and animal species found on the Ivanpah project site. As part of our mitigation requirements, we estimate that we will invest nearly $56 million in caring for desert tortoises. This includes $22 million in protection, care and translocation of the tortoises, as well as $34 million in land acquisition costs for the three-to-one mitigation required by the California Energy Commission (which incorporates the one-to-one mitigation required by the U.S. BLM).

The Project Finance Model, Common to Large Energy Generator Projects of All Kinds, Reduces Risk
BrightSource employed the project financing model for the Ivanpah project. Consistent with that model, BrightSource was the project sponsor of Ivanpah, but is not the loan recipient. The borrower under the DOE-guaranteed loan is the special purpose project company itself, which is owned by NRG, Google, and BrightSource. The project company holds the long-term, fixed price power purchase agreement. For a 20 or 25 year period, so long as the project continues to produce energy, it has purchasers for all of the energy it produces at a price that has already been agreed. The project company also owns the infrastructure that will be producing that energy. The underlying loan is fully secured by all of the project company’s physical assets and contracts, and the borrower pays interest that will earn a return for the lender. In the case of Ivanpah, the project companies own the three power sales contracts, each with a major credit-worthy utility and for a minimum of 20 years, and also own the assets that will produce clean power under those contracts. This is analogous to building a new hotel and having its mortgage backed not only by the property, but by the income that will result from guaranteed, 100% occupancy for 20+ years.

Under the project financing model, equity owners provide the portion of the project costs that is not served by the loan—again, much like the down payment for property that goes along with a mortgage. An escrow account is established to hold all of the equity funds not used in construction to date, as well as detailed engineering and operational information required to successfully implement and operate the technology, so that the project can continue successfully even if one or more of the equity partners becomes financially insolvent. For Ivanpah, equity investors have committed $598 million to the project, consisting of $300 million from NRG, $168 million from a Google Inc. affiliate, and $130 million from BrightSource Energy. BrightSource maintains an equity share of the project, and as the technology provider, the company is also committed to supporting the project and technology. We will remain an integral partner in ensuring project success and performance.

In April 2011, the Federal Financing Bank extended the Ivanpah project companies a $1.6 billion loan, which was guaranteed by the DOE. Each month, NRG as managing member of the project companies submits a draw request to the DOE, which itemizes the payments to be made for that month. The draw requests are reviewed and approved by an independent engineering firm that was selected by DOE. The funds drawn under the loan are paid directly by the Federal Financing Bank to the intended recipients, which include Bechtel and other suppliers and subcontractors to the project, rather than going first to the project companies. This helps ensure that suppliers are paid in a timely manner, and protects the value of the assets that secure the loan.

Ivanpah and the DOE Loan Guarantee Program
BrightSource first applied for a loan guarantee in 2006 and achieved financial close of the loan in April 2011. Following is a high level timeline of the company’s loan guarantee process:

December 2006: BrightSource applies for pre-qualification to the DOE 1703 Loan Guarantee Program, which was established by the 2005 Energy Policy Act under President Bush, for the Ivanpah project.

October 2007: After 9 months of review, DOE names the BrightSource Ivanpah project as one of the sixteen projects invited to submit a formal application for a 1703 Loan Guarantee.

November 2008: BrightSource submits the formal application for the Ivanpah project.

January 2010: After an additional fifteen months of technical, commercial, and legal review and negotiation, DOE issues a conditional loan guarantee commitment of $1.37B for the Ivanpah project.

October 2010: Groundbreaking at Ivanpah; NRG commits to $300M equity stake in the project, conditioned, in part, on the successful close of the DOE loan guarantee. BrightSource continues to spend money in anticipation of successful close of financing.

April 2011: Fourteen months after the term sheet was signed, following extensive additional technical, commercial, and legal review and negotiation, close of $1.6B DOE loan and Ivanpah financing. NRG and Google acquire an aggregate 86% ownership interest in the Ivanpah project companies, committing up to $468 million in equity.

Throughout the review period, BrightSource funded well over two million dollars of review work by world-class, independent consultants selected by and operating on behalf of the DOE, who closely examined the technical, commercial, and contractual aspects of the proposed projects.

In total, the DOE review process lasted more than four years. In our experience, the DOE’s review process was extremely thorough and marked by thoughtful analysis.