The Obama Administration has been debating an option to kill the Section 1705 DOE Loan Guarantee program and transfer remaining funds to a pool for Section 1603 investment tax credits. The move could be good for wind and solar, but bad news for biofuels companies.

Solar, Wind Win, Biofuels Lose

The big potential winner is wind energy (and possibly solar), as wind energy projects are helped by the Section 1603 program and in 2009 nearly 10,000 megawatts of wind energy were built in the US. Researchers at Lawrence Berkeley National Laboratory estimated that up to 25 percent of the capacity would not have been built if the tax credits had not been available.

The proposal was included in a package of options placed before President Obama by White House energy policy coordinator Carol Browner, former chief economic policy advisor Lawrence Summers, and Vice President Biden’s chief of staff Ron Klain. Among other options: improving the efficiency of the loan guarantee process, or limiting the oversight role of OMB and the US Treasury.

Lame-duck Session Is Key Target

The proposals, which require legislative approval, have been targeted for the lame-duck session where Democrats still control strong majorities in the House and Senate. They indicated that the new policy could be appended to the upcoming tax extenders package.

The advisors, however, warn that the option to defund the Section 1705 loan guarantee would risk incurring the wrath of Senate Energy chairman Jeff Bingaman, noting that the program is “his program.” Vice-President Biden is reported to favor streamlining the loan guarantee program rather than transferring funds to the investment tax credit program.

Admission of “Failure of Key Recovery Act program” Feared

The advisors also note that de-funding the Section 1705 program “could signal the failure of a Recovery Act program” that has been featured prominently by the Administration,” and runs the risk that Congress will agree to take the funds away from the loan guarantee program but fail to apply them towards the investment tax credits.

The goal is to get dollars out of the door before the Recovery Act funding sunsets on September 30, 2011, or before Congress re-appropriates the funds towards other purposes. Already, Congress has redirected $3.5 billion of the funds towards cash for clunkers and other urgent funding priorities.

The advisors note that conditional commitments would need to be finalized by March to close before the overall program sunsets. They further note that OMB review is taking an average of 28 days on top of the extensive due diligence and negotiated changes in the financing structure required by DOE, plus policy review by the White House and Treasury has “occasionally extended the amount of time a project is under review.”

With Republicans intent on enforcing strict, pay-as-you-go financing restrictions, Democrats fear that the untapped loan guarantee funds will prove too tempting a target for Congressional initiatives that will require offsetting budget cuts in order to progress towards passage.

The loan guarantees were developed to assist in proving out the feasibility of transformational projects in order to unlock the availability of traditional project finance, which traditionally avoids first-of-kind technologies. Instead, the DOE has been able to deploy only 2.5 percent of the $2.5 billion in funds, and have given conditional commitments to nine other programs which would obligate another $500-$900 million, according to the brief.

100-200 Staff Closing 4 Loans

The policy background penned by Browner, Summers and Klain paints a picture of organizational gridlock in the execution of the loan guarantee process. The 1603 tax credit program involved a 4-6 week review period, closed 3851 projects and required a staff of 20 full-time employees at Treasury and DOE.

By contrast, the 1705 Loan Guarantee program involves a 6+ month review period, has closed four loans, and requires a staff of “100-200 FTE DOE staff and contractors,” according to the White House memo.

Former Obama Administration official, DOE Director of Minority Impact Joe Garcia, described the loan guarantee process as “A disaster. Nothing could get through. I would get them on the phone and beg people to move these projects along. You have my OK – just get going. We need the jobs.”

The Digest’s Take

The Browner memo is a classic study of a government project that choked on a lethal combination of high ambition and inexperience. Among the factors they cite are an overly consultative process of review, an aversion to risk, and a bloated bureaucracy.

We agree that the Section 1705 program has gone off the tracks, but Vice-President Biden is right: the program requires streamlining, not abandonment. Going back to the legislature, in this uncertain environment, could have disastrous implications.

As far as the option to combine restructuring of clean energy policy with the tax extenders package, we have seen all year defeat after defeat of the tax extenders when it is combined with anything. How many defeats will convince the White House that the tax extenders should not be used as a sweetener for other, more controversial actions?

The President does not need an Act of Congress to bail out the loan guarantee program; an act of leadership will do. By engaging broadly, quickly, decisively with industry and other stakeholders, and streamlining the Administration’s review process, clean energy can accelerate.

A copy of the memo is downloadable, here.