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Chris Creed, the chief investment officer at the US Department of Energy’s Loan Programs Office (LPO), joins the show to discuss how the LPO is deploying public funds and attracting private capital to energy, transportation and manufacturing projects that are advancing technologies and delivering jobs across America. Creed shares his insider perspective on how the LPO’s various financial programs are helping established companies expand their operations and newer companies build what the LPO calls a ‘bridge to bankability.’
Key highlights
Overall mission of the LPO – (3:42)
Projects the LPO has recently helped finance – (4:26)
Diversity of projects that apply for LPO financing – (6:50)
The differing maturity levels of companies within the LPO’s portfolio – (10:13)
The philosphy behind the ‘bridge to bankability’ – (18:27)
The ‘patient capital’ of the LPO – (20:08)
How the LPO works with private investors – (22:25)
The process for LPO applicants – (24:44)
More resources from the LPO
Monthly Application Activity Report
More resources from KPMG
Turning the Tide in Scaling Renewables
Energy Institute 2024 Statistical Review of World Energy
More resources from Vinson & Elkins
Energy Transition & Clean Technology
In-Depth Insight on the Energy Transition
V&E+ Conversations About Our Values, Views and Ventures
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Transcript
(Note: This transcript was created using artificial intelligence. It has not been edited verbatim.)
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This episode of the Renewable Energy SmartPod is brought to you in part by KPMG. There’s a race for renewables to power 77% of the world by the year 2050. Today, renewables only generate 14% of global energy. Have you ever wondered what’s holding us back? A new report from KPMG titled ‘Turning the Tide in Scaling Renewables’ tackles that question and more. To read the report, visit kpmg.com/us, that’s kpmg.com/us or just click on the link in today’s show notes.
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Today’s episode is also produced with support from Vinson and Elkins – a leading law firm with deep experience advising clients on renewable energy projects. To learn more about Vinson and Elkins, visit VElaw.com or just check out the resources in today’s show notes.
Sean McMahon
What’s up everyone and welcome to the Renewable Energy SmartPod. I’m your host, Sean McMahon, and today we’re going to spend some time talking about the role the US government is playing to support the technologies and companies that aim to power our energy future. The passage of the Inflation Reduction Act and the Bipartisan Infrastructure Law have armed the government with hundreds of billions of dollars that’s being directed at projects in the clean energy and advanced transportation sectors.
And if you work in the renewable sector, you probably already know that Energy Secretary Jennifer Granholm has been a familiar face in the news as she’s been barnstorming the country to promote the investments the government is making in high impact energy and manufacturing projects that are delivering jobs across America. And some of those projects are where today’s guest comes in. You see many of the loans and loan guarantees that make those projects possible have been facilitated by the Department of Energy’s Loan Programs Office, aka the LPO
To learn more about exactly how that office does what it does. I’m going to be joined in a minute by Chris Creed, the Chief Investment Officer at the LPO, Chris, Director Jigar Shah and the rest of the team at the LPO are working hard to help the Biden administration deploy public funds and attract private capital to help establish companies, expand their operations, and newer companies build what the LPO calls a ‘bridge to bankability.’ It’s a fascinating approach to advancing the energy industry, and Chris is certainly passionate about the work that the LPO does, so I’m sure you’ll appreciate hearing more details from him.
Real quick. This is the third of three episodes we’ve done recently that focus on financing the energy transition. I’ve also chatted recently with Alfred Johnson, the co founder and CEO of Crux to hear more about the market for transferable tax credits. And most recently, I was joined by Luis Silva from EDF Renewables to get his perspective as the CFO and a major developer on the current financial landscape for renewables. I hope you get the chance to enjoy all three of these episodes that are all about money and renewables, but right now, let’s get things going with Chris Creed, the Chief Investment Officer for the loan programs office at the US Department of Energy. Chris, how you doing today?
Chris Creed 03:31
I’m doing very well. Sean, thank you very much for having me on the program.
Sean McMahon 03:36
Yeah it’s a pleasure to have you on here. Listeners of the show are probably pretty familiar with what the LPO does, but let’s just spend a quick minute. Why don’t you walk us through details of the work you do and the overall mission of the office?
Chris Creed 03:47
Yeah, absolutely. I mean, our mission is pretty simple. We want to be the premier public financing partner to help accelerate high impact energy and manufacturing investments to advance America’s economic future. It is a tremendous mandate that Congress has given us, and in order to do that, we administer various loan programs authorized by Congress to help American entrepreneurs and American businesses grow in the energy space.
Sean McMahon 04:21
That sounds good? Simple enough. Well, a simple enough mission. Maybe not as easy to achieve, but you all are working hard. What are some of the the highlight, or, you know, kind of big name projects, the LPO is financed recently,
Chris Creed 04:32
Yeah. I mean, you know, there’s been a lot of a lot of transactions that have been in the news. Maybe one grouping of projects that that I want to start with is the investments that we have made in the electric vehicle EV battery and EV battery supply chain markets. So when you think about this growing and important contribution to the clean energy future that we think is coming. So. We have been helping companies finance projects across the spectrum. So we lent money to cyra Vidalia, the first active anode material assembler in the United States, taking graphite from Mozambique and making anodes in Louisiana. So that’s your anode. There are many cathode projects that we have been involved with. We have conditional commitments to lithium Americas. We have been working on battery recycling facilities in Redwood materials and life cycle. There are a number of projects that are behind the public wall that we’re working on right now, and you need somebody to put those together. So we’ve been working with GM and their technology partner LG. We’ve been working with Ford and their technology partner SK, and that helps build the packs that’ll eventually go into the automaker’s cars and help bring about the EV sales that we are all predicting will continue to increase over the next decade.
Sean McMahon 06:13
Yeah, we’ve heard a lot about kind of revitalizing manufacturing, and you know, the battery belt, if you will. So it sounds like you and your team are got your fingerprints all over that.
Chris Creed 06:21
It’s, it’s interesting, because, you know, the the number of projects is, is quite large, and some of them are interrelated, right? You know. So, you know, you if you have a sort of downstream project, it is possible that an upstream project might be a customer of the of the project that we’re funding. And so the ultimate goal, though, is a EV market that allows for us to be a global or the global leader in that industry.
Sean McMahon 06:50
Well, it definitely sounds like exciting times in the EV sector, both, you know, the battery and the whole supply chain. What about some of the other stuff? You know, listeners to this podcast are big into wind, solar, other forms of battery storage. You know, what do you see in the most activity? Or, I don’t know if you can disclose the most applications or most kind of interest, what’s the LPO seeing on that?
Chris Creed 07:10
Absolutely every month. Actually, we do disclose to the public our monthly application activity report. So if you go to our website, we, in a high level way, give information about what our applications look like, and we break them up into a technology taxonomy and show the public where our applications are, and they range from renewables, nuclear, offshore wind, Ev and battery supply chain, virtual power plants manufacturing. They run the gamut some other projects that I think your listeners are probably familiar with. We did a loan guarantee for Sonova. That was our first distributed energy project. It was distributed generation with virtual power plant technology, and it helped for both distributed generation and distributed storage of power in residential homes across the United States, with a particular focus on low and moderate income Americans, and a particular focus in Puerto Rico. And so that project helped American homeowners gain access to financing that would allow them to lower their energy bills and participate in distributed generation themselves. Looking at a couple of the other projects that your listeners might appreciate, one of our first projects that we did was aces delta. This was a project that took excess renewable generation in California, used transmission to bring that power to Utah. That power was then used to power electrolyzers, which made hydrogen. The hydrogen was then stored in salt caverns and then pumped back out for use in combined cycle gas turbines to generate electricity, again, sent back to California over that those same transmission lines and used by LADWP for power, effectively seasonally load shifting renewable energy and a cool project where there were private sector partners, public sector partners, and us as the financing partner, we also were very proud to announce the first tribal loan deal in the history of the office. A few months back, this was a micro grid project for a tribe out in California to help build solar and battery storage for a location just outside of San Diego, we have been very active in some of the other hydrogen projects. You know, the very first conditional commitment that this administration put out was for monolith materials, and they make carbon black and hydrogen through a pyrolysis mechanism taking ch four and then decomposing it. So you. Really cool projects that help bring about in a lot of different technology sectors, companies that will help be leaders in these technologies globally.
Sean McMahon 10:13
Yeah, I appreciate you kind of painting the picture across the whole spectrum of projects. You’ve talked about how you kind of spread across the technology, solar, battery, you know, hydrogen. But as someone who’s kind of in charge of all the investments, you know, I come from a finance background, portfolio managers kind of want to be well diversified in many ways. So what’s the LPOS ideal cross section of their portfolio in terms of the maturity of companies? I mean, we hear a lot about startups getting funding. There’s also some well established companies that are expanding. What’s your goal there?
Chris Creed 10:43
So I think it’s important to talk about one of the objectives of the loan programs office. It is to be the debt financer to help catalyze through debt these important projects, but we are emphatically private sector led and government enabled. And so whilst we are cognizant of portfolio impacts, we look at from a portfolio perspective, concentration limits, whether they be counterparty concentrations or technology concentrations or program concentrations. We don’t select companies based on that, we are active through our outreach and business development team, talking to companies stakeholders, whether they be community stakeholders, labor stakeholders, environmental stakeholders, the broad array of stakeholders, making sure that Everyone understands our program and then those companies, those entrepreneurs and businesses that want to take advantage of our program to help gain debt leverage, to cross that bridge to bankability, that metaphor that we use the the idea that we are there to help companies that have not just a really good idea, a really good idea that they have demonstrated, get across that bridge of bankability to full capital markets acceptance. People often ask us, sort of, What risks do you take? And we don’t really take will it work? Risk for your listeners, I’m using air quotes, it works. It works in the lab. It works at the demonstration facility. What we’re there to do is help scale that up. We’re there to help take cost curve reduction risks, scale up risks in terms of, you know, can I build 10x what I was building at the risk of giving away too much of the secret sauce of finance. Finance isn’t that hard. We have, you know, if we’re building a widget factory, I have the cost to build the widget factory, and I have risks that my costs are higher than I estimated. I have O and M costs to run the widget factory, and risks around that. I have risks around what am I selling my widgets for? And Will my counterparties pay me for those widgets and risks around that? And I have feedstock and raw material price risk, and what we’re here to do is provide debt to these projects, make sure we’ve decomposed all those risks and looked at them, and then help those companies, especially in Title 17, in the 1703 program, those that either can’t get private financing or who have trouble getting private financing at the scale that would be required to be successful, give that financing to allow them to be the next great entrepreneur. And that’s the really cool part about this job. If you look back at the history of the LPO, whether it be Tesla or utility scale, solar, generation or wind, there have been a number of very strong success stories coming out of this office. It’s our hope that with the mandate and the imprimatur that Congress gave us through both the bipartisan infrastructure legislation and the IRA, we can duplicate that success across many more industries.
Sean McMahon 14:16
We’ll be right back.
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Just a quick reminder everyone I want to again thank Vinson and Elkins for their support with today’s episode, please be sure to visit ve law.com or you can check out the resources in today’s show notes to see how Vinson and Elkins helps guide clients through every step of their renewable energy projects, from development and finance to regulation, tax, patents and more.
This episode is also sponsored in part by KPMG. There’s a race for renewables to power 77% of the world by the year 2050. Today, renewables only generate 14% of global energy. Have you ever wondered what’s holding us back? A new report from KPMG titled ‘Turning the Tide in Scaling Renewables’ tackles that question and more. To read the report, visit kpmg.com/us, that’s kpmg.com/us or just click on the link in today’s show notes.
Sean McMahon
And now back to my conversation with Chris Creed, the Chief Investment Officer at the US Department of Energy’s Loan Programs Office.
So you mentioned 1703? What is that for our listeners?
Chris Creed 15:39
Yeah, absolutely. So we administer, as I mentioned earlier, a number of different loan programs. The largest of our loan programs is the title 17 Clean Energy Finance program, and it has two components right now, the 1703 program for innovative clean energy and the 1706 program for energy infrastructure reinvestment, the 1703 program is the one that has the innovation requirement. It has to be projects that have novel or second of a kind style risks. And this is really where the bridge to bankability metaphor really fits. We’re trying to help these projects and companies that have a really interesting idea, again, that has been tested works in a lab, has a demonstration facility, generally speaking, we know that it works. We’re helping them get to commercial scale. The 1706 program, the energy infrastructure Reinvestment Act is the large scale program. Congress in the IRA gave us $250 billion of loan authority and $5 billion of credit subsidy. If your listeners wanted to think of that as loss reserve, that wouldn’t be too far off the mark to lend to rehabilitate, replace, uprate existing energy infrastructure, and in particular, utilities are mentioned in the legislation by name, but utilities are likely to be one of the big users of the 1706 program as they look to take their aged energy infrastructure and green if I reduce greenhouse gasses through these infrastructure investments away from title 17, we have the ATVM, the advanced transportation vehicle manufacturing program, and that’s where a lot of Our EV battery and battery supply chain transactions fall under so the large conditional commitment that we made to Ford, the loan that we closed with General Motors, the transactions that I mentioned earlier, with CIRA and others, those all fall under the ATVM program. We also administer the tribal program, and like I said, we’re very proud that we had our first tribal transaction reach conditional commitment earlier this summer, and depending on when this podcast airs, maybe we’ll have closed and and then finally, last but certainly not least, we have a carbon dioxide transportation infrastructure program, Scythia. And while we have not made any conditional commitments on that program, yet, it’s another program that was formed under the Bil and one of the loan programs that we administer here.
Sean McMahon 18:27
One of the things I see a lot on the LPO site is a phrase called the bridge to bankability. I love that phrase for starters, but tell us more about that.
Chris Creed 18:35
It’s a, I think, really good metaphor to help explain, especially in our 1703 program. What we’re trying to do we have applicants, companies that come to us that have a really interesting product, they’ve developed it, they’ve demonstrated it, but they need to get it to commercial scale. They haven’t yet gotten the size or de risked enough of the other components of the project to get private capital financing. And so we’re there to help them cross that metaphorical Valley. And so we help provide financing to first second of a kind projects that when they cross that bridge, not only are they able to then turn around to the broad private capital markets and say, Hey, we just built our widget factory. It was super successful. Here are our numbers. We want to build a second factory. And the private capital says, Yes, but potentially other companies will say, Oh, this is really interesting, and they’re able to get private capital as well because we’ve shown the path, and broad private capital acceptance is sort of the end part of that bridge. And so when we look at that metaphor, it sort of helps people understand, what are we. Year for especially in in understanding how we are complementary to private financing and not supplementary and crowding out private financing.
Sean McMahon 20:08
There’s also something, you know, when you dig into the LPO and kind of what you guys do, there’s another phrase, patient capital. Explain that to our listeners.
Chris Creed 20:15
We want to be there as a lender. I think today’s EV Zeitgeist is probably a good example. We sold more EVs in 23 than we sold in 22 we’re gonna sell more EVs in 24 than we sold in 23 to butcher a Mark Twain quote, The Death of EVs is greatly exaggerated, but there are certainly investors who had growth forecasts that were higher than we are realizing, and capital is constrained, and we’re continuing to underwrite our transactions. We’re continuing to see new applicants conditionally commit to our older applicants and close on deals that we’ve completed due diligence on, and we’re going to continue doing that. It’s important. It’s important for the country. It’s important for our economy, and the communities that these projects and companies are located in. They depend on it. Once we close on a deal. We also are strong partners with our portfolio companies to help them get through tough times. Our realized default rate is a little bit under 7% and our realized loss rate is just a little bit above 3% which is substantially below our at time of origination estimates. That is, I think, in part, because of our strong technical underwriting, our strong financial underwriting, and our strong, active portfolio management of projects, post close and working with applicants, understanding working with our borrowers after they’ve they’ve graduated from applicant to borrower, understanding their business and working with them, that is, I think, part of the key to the success that this office has had.
Sean McMahon 22:25
Okay, I want to get back to how the LPO works with applicants in just a second. But one of the misconceptions, I think, is out there is that LPO kind of provides all the funding. When they hear about these loans, that it’s just coming from DOE and LPO, people don’t always understand that you’re bringing in institutional investors and Equity Partners and things like that. So how does LPO work to de risk investments from those kinds of entities?
Chris Creed 22:50
We are strictly debt lenders. We provide the debt. I know your audience is sophisticated, but for other audiences, I usually make the metaphor, we’re the bank that provides the mortgage on the home. Somebody’s got to provide the down payment. That down payment is mostly sponsor equity. Many of these sponsors need to go out and raise equity capital in the marketplace, and so statutorily, we can’t lend more than 80% of the project’s cost, so 20% needs to come from somebody else. In reality, we don’t usually get to that level of leverage. Think 55 to 70% on average. And obviously it depends on the risk of the project and the individual project specifics, but that’s a good range for people to have in your head. Now, I think that the LPO de risks projects in a number of ways. The obvious way is we provide relatively long term, relatively attractive debt financing, and so just from a math perspective, that increases the equity return through high quality leverage. However, I don’t think that’s the only place where the LPO helps de risk. I think that we did our underwriting, that we went through the two year process parenthesis, we’re trying to get that down a little bit to underwrite the loan, understand the business, understand the technology, understand the risk, and then stress test that in a way that gets us comfortable. I also like to think that helps send a signal to the equity markets. The private equity markets usually that, hey, this project went through the LPO process and came out with a loan offer.
Sean McMahon 24:44
Okay? And now I want to get back to you mentioned kind of when applicants graduate to be borrowers and Pat I just want to touch on what the interaction with the LPO is like for applicants, you know. So if I’m a company coming in, what am I facing? I know that you and director Shaw have done a great job. Of you know, trying to attract companies like, hey, come to us. We’re here to help you. But you know, when they walk in the door, what does that interaction look like, and what can they have prepared to speed that process? You said it’s two years you’re trying to try to shrink that timeline. What should they bring to the table and be ready for?
Chris Creed 25:15
Yeah, I mean, I will give jigger a ton of credit. Obviously, Secretary granholm’s leadership has been instrumental. We have very much changed the office. Over the past three years, we have added a new division within the LPO, our outreach and business development division, we have staffed that up with industry professionals from a variety of different technologies, and they have gone out to explain the program to different key stakeholders, different industries, different groups, to make sure that they understand how our process works, because we’re the government, and it is different than the private sector is used to seeing. And it is our OBD team’s role to help translate that they will be with our applicant throughout the life of the law. They bring our applicant in and their primary objective their their sort of goal is to help our applicants form a high quality application. And what that means is going to be different for different types of applications, but the overall objective is that you are able to proceed through our office in as optimal a way as you can, and that, I think, has been something that we have spent an awful lot of time on over the past two or three years, and we’re now starting to see some of the dividends from that investment now.
Sean McMahon 27:00
Alrighty, well, dividends and investment kind of leads me to my final question here, and you touched on a little bit earlier about the performance. How you guys are doing in terms of, you know, default rates and loans and things like that. So give me the whole picture. You’re working hard. What’s the performance look like?
Chris Creed 27:16
Very interestingly, our utility function, our objective, right? Our mission is not returns to LPs. So our mission is catalyzing these amazing energy projects, and so our really relatively low loss rate of just very low threes right now relative to our at time of origination, expected ratings of double B minus ish, maybe single B plus double B minus ish is really, I think, very strong. And over that time period, we’ve reduced, sequestered or avoided a significant amount of greenhouse gasses, we’ve allowed for a significant number of Americans to be able to find high quality jobs in the part of the economy that we all think is going to be a primary engine of growth, of GDP growth over The next decade, two or three every year we publish our annual report, which goes through those metrics, but our objective over the year is to see how many of these loans can we close, and how many of those closed loans can Draw and complete their projects and accomplish their own business goals and become the next great American company in their industry, which is, you know, really cool to see.
Sean McMahon 28:50
Yeah, I agree. It sounds like, you know, you and your team, your performance is measured on more than dollars and cents. Really, it’s just success of these companies.
Chris Creed 28:58
I wish I could tell you we had a 9.3 net return to our investors, but that’s just not we’re not trying to make money. We’re not we’re not trying to make money for the federal government. We’re trying to be good stewards of taxpayer dollars. We’re trying to underwrite high quality loans, but the mission is to be a financing partner for American entrepreneurs and businesses to create amazing, high quality jobs in all 50 states, in an industry that is growing and is important and will help be one of the major tools we’re using to combat the crisis of our lifetime. It’s a amazing seat to be in. I haven’t you know, a tremendous amount of thanks for jigger and for Secretary Granholm for giving us this opportunity for Congress and like, if it sounds Frank Capra esque, it is because it is, it is awesome.
Sean McMahon 29:54
Well, I can’t say anything other than I just wish you continued success to you and the team at the Loan Programs Office and the wider DoE. We keep doing what you’re doing.
Chris Creed 30:02
I really appreciate it. Sean, thank you very much for having me on. I look forward to hearing other exciting guests on your program in the future.
Sean McMahon 30:09
Well, that’s our show for today, but before we get out here, I want to say one final thank you to the folks at KPMG and Vinson and Elkins for their support in producing this episode.
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