ClimateIntel.com

So-called first and second generation biofuels share a common challenge—how to show that biofuels represent life-cycle greenhouse gas emissions savings as compared to traditional fossil fuels. The issue also causes breaches in the biofuels industry because the greenhouse gas emissions savings of different biofuels can vary substantially.  A universally accepted regulatory tool for answering the question is “life cycle analysis.” Life-cycle analyses for renewable fuels seek to quantify the greenhouse gas emissions created by the manufacture of the fuel, including its inputs, through transportation to the consumer, use and disposal.  Under the 2007 Energy Independence and Security Act, biofuels qualify for the new renewable fuels standard (RFS) only if all carbon emissions associated with their production and use result in emissions savings of at least 20 percent.  California Assembly Bill AB 32 and the Governor’s Executive Order S-01-07 call for a reduction of at least 10 percent in the carbon intensity of California’s transportation fuels by 2020.  These projected emissions savings thresholds face technical challenges in measuring life cycle emissions savings and political battles as the various stakeholders jockey for position.  The resulting uncertainty contributes to limitations on investment flows in biofuels.

Under the 2007 Energy Independence and Security Act, renewable fuels must meet life-cycle emissions reduction targets for renewable fuels to qualify for the Renewable Fuel Standard (RFS).  Any renewable fuel produced in a facility under construction as of December 2007 must meet a threshold 20 percent reduction from a 2005 baseline, which is generated by measuring the 2005 life-cycle greenhouse gas emissions of traditional fuels.  Beginning in 2009, the subcategories of renewable fuel created by the act (cellulosic biofuel, advanced biofuel and biodiesel) must meet life-cycle greenhouse gas emissions reductions of between 50 percent and 60 percent from the 2005 baseline before consideration for the RFS.

In California, the California Environmental Protection Agency is required to coordinate activities between the University of California, the California Energy Commission and other state agencies to develop and propose a draft compliance schedule to meet the 2020 target.  Furthermore, the California Air Resources Board (CARB) identified the establishment and implementation of the Low Carbon Fuel Standard (LCFS) as an early action item with a regulation to be adopted and implemented by 2010.

As we reported on ClimateIntel, on March 5, 2009, (CARB) released its proposed regulation for establishing an LCFS. The proposed “cradle to the grave” regulation takes into account emissions associated with the full life-cycle of transportation fuels, including (1) direct emissions associated with producing, transporting and using the fuels, and (2) indirect emissions associated with other effects, such as those caused by land use changes.   The U.S. Environmental Protection Agency (EPA) is in the process of developing a similar rule as part of the development of a federal RFS

Compliance with these thresholds requires resolution of just how to measure life-cycle greenhouse gas emissions.  The sheer complexity of the analysis, including disagreements as to the appropriate methodology for measuring greenhouse gas emissions, has made LCFS rulemakings a difficult endeavor.  In 2007, as part of its rulemaking establishing the 2005 RFS, EPA determined that “the current state of scientific inquiry surrounding life-cycle analyses is not sufficiently robust to warrant its use.”  The science has not developed sufficiently since to allow for consensus on this issue, and rulemaking establishing a uniform methodology is likely to be controversial.

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Broadly speaking, biofuel refers to any solid, liquid or gas fuel that has been derived from biomass. It can be produced from any carbon source that is easy to replenish—such as plants.  One of the main challenges when producing biofuel is to develop energy that can be used specifically in liquid fuels for transportation. The most common strategies used to achieve this are to grow plants that naturally produce oils, grow sugar crops or starch that can be fermented into ethanol, or converting “wood” products. 

Over the past year, significant controversies have developed over biofuels related to the extent to which biofuels actually result in reduced carbon emissions, which led to efforts to make “life cycle analyses” to determine the net carbon footprint of biofuels.  Spot food shortages in 2008 led to calls for analyzing whether increased biofuels production leads to food shortages.  In a multi-installment series, ClimateIntel will analyze several issues related to biofuels and the legal and regulatory challenges biofuels face.

The American Recovery and Reinvestment Act of 2009, the Stimulus Bill, includes significant funding and related incentives for development of second generation biofuels.  Earlier this year, the U.S. Departments of Energy and Agriculture  announced a joint funding opportunity pursuant to which $25 million would be awarded to fund biomass research and development.  The funding is directed to researching second generation biofuels, specifically the three technical areas specified in the Food, Conservation, and Energy Act of 2008:

1. “feedstocks development;”
2. “biofuels and biobased products development;” and
3. “biofuels development analysis.” 

Secretary of Energy Steven Chu noted that the biofuels industry should “focus[] on the next generation of biofuels.”  Despite the attention paid to second generation biofuels, however, first generation biofuels still figure prominently and are the only commercially available form of biofuels. 

Recently, the International Energy Agency produced a report comparing first and second generation biofuels.  First generation biofuels are mainly produced from agricultural crops used for food and animal feed, with the two most common sources being sugar cane and maize (corn).  The first generation biofuels market is relatively mature, particularly in the United States, Brazil, and Europe.  Of the three major forms of fuels currently produced, bioethanol, biodiesel, and biomethane, the market is largest for the liquid fuels bioethanol and biodiesel. 

Currently 80% of the world’s ethanol production is derived from sugar cane and corn, based on well-established conversion technologies.  Starch, the raw material from corn and other feedstocks, must first be converted to glucose through a hydrolysis process before ethanol may be produced.  Once the glucose is formed, it goes through a fermentation process during which it is metabolized by yeast cells.  Ethanol is then produced by distilling the product of the fermentation processes.  Sucrose is the raw material from sugar cane, and undergoes the same fermentation and distillation processes as glucose to form ethanol.  The difference is that pressed sugar cane yields sucrose, so it does not have to undergo the hydrolysis step required of starch. 

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This post initiates a series that will examine emerging problems in the European Union’s carbon market—by far the world’s largest—and the broader policy implications of those problems.  We turn first to the recent collapse in the value of European Union Allowances (EUAs), each of which represents the right to emit one ton of greenhouse gases within the EU’s annual emissions caps.  Since the second half of 2008, the price of EUAs has dropped precipitously—from over €30 ($38) per ton to below €8 ($10) per ton. While in recent weeks the price has increased again slightly, and currently stands near €12 ($15) per ton, the overall pattern is of a decline in price.  What is behind the drop, and what does it mean for the health and sustainability of the EU’s Emissions Trading Scheme (ETS)?

For some market observers, the decline evinces a market working properly, with supply and demand finding a new balance.  Some point to sharply declining industrial output in the EU, which has left many emitting facilities long on EUAs, driving prices down.  As noted by Hernkir Hasselknippe of Point Carbon, an energy consultancy, the rational response for companies in this position is to sell credits.  “If they are emitting less then they do not need the credits so much and the price of carbon will fall.”  Other observers see the declining value of EUAs as a manifestation of the credit crisis, with holders of EUAs eager to sell them to raise cash.  Notwithstanding decreased demand for EUAs, current trends suggest that the total volume of EUAs traded within the EU ETS will continue to grow significantly this year.  According to Point Carbon’s projections, the volume traded in the ETS in 2009 could reach 3.8 gigatons of CO₂ equivalent this year, up from 3.1 gigatons in 2008.

Other market observers, however, attribute the decline in the value of EUAs at least in part to ETS design flaws.  A recent Deutsche Bank analysis identifies two problematic features of the ETS:  first, that the EU has fixed the supply of EUAs through 2020 (the end of the third commitment period in the EU ETS, for which legislation was just enacted); and second, that many EUAs to date have been provided to emitting facilities free of charge, leading to a glut.  Due to these factors, the Deutsche Bank analysts contend that the real prospect of future EUA shortages, as the EU emissions caps decline, are inadequately reflected in today’s EUA prices.  These analysts are also concerned that sustained price weakness for EUAs in the months leading up to the U.N. Copenhagen Conference in December 2009 could call into question the viability of the EU ETS as the foundation for a post-Kyoto Protocol global emissions trading system.

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Today marks the start of another busy week on Capitol Hill, with three hearings in the Senate and eleven in the House. All of this activity sets the stage for a possible energy bill, which Senator Jeff Bingaman, Chair of the Energy and Natural Resources (ENR) Committee, has indicated that he will try to introduce before the Easter recess in early April.

On Tuesday, Sen. Bingaman’s committee hosts an oversight hearing on energy development, both in onshore public lands and the Outer Continental Shelf. Interior Secretary Ken Salazar will testify, as will a range of state and federal government officials, representatives from industry and others. View the full witness list here. 10:00am in 366 Dirksen Senate Office Building.

In the House, Tuesday features four hearings relating to alternative energy and climate change. First, the House Energy and Natural Resources Committee’s Subcommittee On Energy And Mineral Resources holds a hearing on “Leasing And Development Of Oil And Gas Resources On The Outer Continental Shelf” at 10:00am in 1334 Longworth House Office Building. See a witness list here. Also, the Budget Committee meets at 10:00am in 210 Cannon House Office Building to discuss financing the nation’s transit and highway infrastructure-possibly examining issues like increasing the gas tax, or implementing congestion pricing. In the third hearing, energy Secretary Stephen Chu testifies before the House Committee on Science and Technology on “New Directions for Energy Research and Development at the U.S. Department of Energy.” Chu will testify on plans to boost R&D at the department, as well as launching the Advanced Research Projects Agency-Energy project. This hearing follows up on one from last week on the future of FutureGen and other advanced coal projects. Read more about that hearing here. The hearing begins at 10:00am in 2138 Rayburn House Office Building. Finally, the Appropriations Committee’s Subcommittee on Commerce, Justice, Science, and Related Agencies (Commerce) holds a hearing on the status of climate change science at 10:00am in the Capitol building, room H-309. Dr. Susan Solomon of the National Oceanic and Atmospheric Administration testifies.

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Akin Gump Strauss Hauer & Feld: Renewable Energy Alert

President Obama‘s first budget provides an early demonstration  of his spending priorities dedicated to advancing renewable energy and climate change goals. While the president’s budget is not binding, it outlines policy priorities through the remainder of his term. The president’s energy priorities reflect a shift away from fossil fuels to lower-carbon and renewable sources. The budget seeks to double renewable energy capacity, support expansive energy efficiency investments and create millions of “green” jobs. The budget would impose additional costs upon fossil fuels beginning in 2011, after anticipated economic recovery. Specifically, the proposed budget establishes new leasing costs and fees on mineral development on federal lands and anticipates revenues from an economy-wide greenhouse gas cap-and-trade program beginning in 2012.

President’s Budget Seeks Spending to Strengthen the Renewable Energy Industry

The president’s budget characterizes investments in the renewable energy sector as providing three main benefits.

• First, as technology, it will allow the United States to shift away from foreign oil and other fossil fuels, providing a benefit to national security.
• Second, the budget looks to the sector as a catalyst for domestic innovation, international competitiveness and job growth.
• Third, it looks to renewable energy as a resource to limit greenhouse gas emissions.

The budget proposes to fund investments in clean and renewable energy primarily through Department of Energy (DOE) programs. The proposed DOE budget builds upon the approximately $39 billion in appropriations made through the American Recovery and Reinvestment Act of 2009 (stimulus bill) and seeks to position the United States as a world leader in clean energy and climate change technology. Within the DOE, the budget’s spending priorities mirror those established in the stimulus bill. Specifically, the budget provides support for loan guarantees for innovative energy technologies that will reduce greenhouse gas emissions. The budget would make funding available to modernize U.S. transmission and distribution infrastructure. The budget supports extensive research and development, demonstration, deployment and commercialization of clean energy technologies, including biofuels, renewable energy and energy efficiency projects.

The budget allocates additional funding to support the renewable energy industry to Departments other than DOE. The Department of Interior receives $50 million to conduct environmental impact assessments and other technical studies to allow for increased renewable energy development on federal lands. Funding is also made available to the Department of Labor to provide renewable energy job training programs. To support rural renewable energy programs, the Department of Agriculture receives $250 million for loans and grants for renewable energy projects, including wind energy and biofuel development.

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The American Recovery and Reinvestment Act of 2009 (the stimulus bill), the Obama Administration’s $787 billion emergency legislation, contains substantial tax and spending provisions for the renewable energy industry. The stimulus bill’s renewable energy spending provisions include loan guarantees and grants for renewable energy projects and infrastructure. The stimulus bill substantially revises the tax code, extending the production tax credit deadline, offering flexibility to renewable projects to choose between a tax credit on production or investment, and establishing a program by which a renewable project developer may receive a grant in lieu of tax credits. The bill also makes tax credits available to manufacturers of clean technology equipment. In this post, ClimateIntel provides an overview of the renewable energy spending and tax provisions.

Stimulus Bill Expands DOE Renewable Energy Grant Programs

The stimulus bill allocates $16.8 billion in additional funding to the Department of Energy’s (DOE) Energy Efficiency and Renewable Energy grant programs. These provisions allocate $2.5 billion to fund research and demonstrations of renewable energy technologies. The majority of remaining $14 billion in funding is allocated to investment into state- and local-level energy efficiency and building retrofits, low-income weatherization, state energy program funds and grants for advanced battery technologies to support the manufacture of advanced vehicle batteries and components.

Stimulus Bill Expands DOE Loan Guarantee Program

The stimulus bill includes $6 billion in additional funding for loan guarantees for the rapid deployment of new or significantly improved renewable energy and electric power transmission systems. The increased loan guarantee program provides capital for renewable construction and transmission projects postponed due to the current contraction in the credit market. The stimulus bill requires that renewable energy systems, electric transmission systems and pilot biofuel projects funded through the $6 billion in additional funding commence construction by September 30, 2011.

Bill Authorizes Spending for Smart Grid and Electrical Infrastructure Investments

The stimulus bill authorizes $11 billion in spending to upgrade U.S. electrical transmission and distribution systems. In particular, $4.5 billion is allocated toward investments, including research and demonstration projects, in a Smart Grid System. This program will deploy digital technologies in the transmission grid to save energy and costs, facilitate demand response and improve power quality. The stimulus bill provides 50 percent matching grants for Smart Grid demonstration projects to utilities, and the solicitation process will begin within 60 days of enactment of the stimulus bill.

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As part of its commitment to implement its Carbon Pollution Reduction Scheme (CPRS) by next July, the Australian Government yesterday released its eagerly awaited draft emissions trading legislation in a package of six bills.  The exposure draft remains largely unchanged from the details provided in the Government’s controversial White Paper released last December.  Importantly, much of the detail is yet to be covered in regulations. 

At the heart of the scheme is the Government’s commitment to reduce greenhouse gas emissions by at least 5% from 2000 levels by 2020, with the potential for a 15% cut if a global agreement is reached.  Problematically, however, the center-left Labor Government does not have a majority in the Senate and faces increasing resistance to the scheme from both the Greens and the conservative opposition, the Liberal Party.  The Opposition wants delays and more compensation for big business given the current economic environment; while the Greens want deeper cuts of around 25% by 2020.  The Opposition and the Greens have collaborated to establish a two-month Senate inquiry, saying they will not support the scheme without significant changes.  The position advanced by the Opposition is seemingly supported by Lawrence Summers, head of President Obama’s National Economic Council, who has been reported as suggesting that a recession is no time to introduce emissions trading by arguing that “expenditures for climate change will be far easier to make in economies where per-capita income is growing.”

Key Features of the Scheme

• The Carbon Pollution Reduction Scheme Bill 2008 (the Bill) will establish a national cap and trade scheme under which the quantity of GHG’s for which liable entities are responsible will be monitored, reported and audited and at the end of each year, each liable entity must surrender an Australian Emissions Unit (AEU) for every ton of GHG’s that they are responsible for in that year.
• The penalty for failure to surrender sufficient AEU’s will be specified in regulations, but may not exceed 110% of the benchmark average auction price, with penalties for late payment and a make good provision.
• The scheme cap will be set by regulation and thus may be adjusted by the government.
• Entities subject to the cap include operators of facilities with annual direct GHG emissions greater than 25Kt of CO2-e.
• AEU’s may be issued: at auction; by free allocation to eligible emissions intensive, trade-exposed entities and coal-fired electricity generators; for a fixed charge of $40 for the first five years, which will rise in real terms by 5% a year (the so called “safety valve”); or for abatement in non-covered sectors such as reforestation or destruction of synthetic GHG’s.
• The Bill allows for the import of an unlimited number of CER’s (but not other types of Kyoto units) and provides for the possibility of linkages with other systems or countries.
• Importantly, the Bill classifies AEUs as personal property that are fully transferable and does not prevent the creation of equitable interests or taking of security over AEUs. Understanding and classifying the specific rights attaching to emissions allowances is becoming of increasing significance as the world grapples to streamline the interlocking and expanding web of global carbon schemes.
• A National Registry of Emissions Units will be established to record and track the creation, transfer and surrender or cancellation of AEU’s and Kyoto units.
• Executive officers of corporations will be subject to civil penalties if they are aware that the corporation will contravene the law, are in a position to influence the corporation’s conduct, and fail to take reasonable steps to prevent it.
• Of particular importance to the energy, resources and infrastructure sectors is the absence of any discussion on contractual cost pass through. The Government has left this issue to determination by the private sector in respect of existing contracts or contracts straddling the commencement of the scheme which is a major legal and commercial issue for companies where the price review or change-in-law clauses are not explicit.

The Government plans to enact the legislation by June this year, to allow one year for implementation, and is seeking written submissions to the Bill, due April 14, 2009.  The CPRS promises to be the most broad ranging scheme worldwide to date, covering approximately 75% of total national GHG’s and involving 1,000 firms and auctioning the bulk of its permits.  In contrast, the EU ETS covers 40% of industrial emissions and has, at least in the past, given out most of its allowances for free.  Whether the Government is able to stick to its original timetable and implement the scheme will depend largely on the cooperation of the Opposition and the Greens which to date has not been forthcoming.

The Department of Energy’s (DOE) Office of Energy Efficiency and Renewable Energy is soliciting applications for the development or construction of renewable energy projects or the implementation of energy efficiency improvements in Indian Country. This effort is being undertaken under the provisions of Title V of the Energy Policy Act of 2005. Under this announcement, DOE is soliciting applications from Indian tribes, tribal energy resource development organizations or tribal consortia for one or more of the following—

1. Installation of efficiency improvements to existing tribally owned buildings, including—

• energy efficiency improvements and/or
• renewable energy system installations for building heating or cooling.

Successful applications under building efficiency must demonstrate the potential for at least a 30 percent reduction in energy usage for energy efficiency improvements and, for heating and cooling applications, the generation of at least 30 percent of the building heating and cooling load.

2. Pre-construction activities for renewable energy projects.

Successful applications must demonstrate the potential for at least 1 MW at the point of interconnection using renewable energy resources.

3. Construction of renewable energy projects for power production.

Successful applications proposing the production of power must demonstrate the potential generation of at least 1 MW.

DOE anticipates making four to 12 awards under this announcement, depending on the size of the awards. In anticipation of possible increased FY 2009 funding appropriated under potential congressional actions such as The American Recovery and Reinvestment Act of 2009, the total expected number of awards may increase. DOE also anticipates that awards will be in the $500,000 to $1,000,000 range for the total project period, which may range from one to three years. The minimum award size will be $200,000 and at least 50 percent of the project’s funding must come from non-federal sources, unless otherwise allowed by law.

In order to apply for a grant, the applicant must complete the http://www.grants.gov/ registration process. Registration can take between three and five business days or as long as two weeks if all steps are not completed on a timely basis. Click here to register. Multiple applications may be submitted from a single applicant, as long as each is specific to only one of the three topic areas above.

Applications are due by midnight, April 1, 2009.

Click here to obtain the Financial Assistance Funding Opportunity Announcement.

Capitol hill remains a busy place in the climate space, with six committee hearings on issues varying from the affect of climate legislation on trade policy to consumer protections in climate policy. At the same time, the Senate continues its debate of the 2009 Omnibus Appropriations bill.

On Tuesday, March 10th, the Senate Energy and Natural Resources Committee meets to discuss the conduct of a study examining the effects energy development will have on the waters of the U.S. The hearing will take place in room 366 of the Dirksen Senate Office Building and will be webcast live here. Witnesses include Carl Bauer, Director of the National Energy Technology Laboratory, US Department of Energy, Stephen Bolze from GE Power & Water, Dr. Michael Webber of The University of Texas at Austin, Dr. Peter Gleick from the Pacific Institute and Dr. Lon House of Water and Energy Consulting. Also in the Senate, the Commission on Security and Cooperation in Europe will hold a hearing on the “impact[s] of potential climate remediation policies on carbon-intensive United States industries and creating climate-friendly economic and trade polices, focusing on how the financial crisis impacts the implementation of climate-friendly policies within the United States and among trading partners.” The hearing will take place at 10:00am in room 428-A of the Russell Senate Office Building. Three witnesses are scheduled to testify: Robert Bradley, Director of International Climate Policy at the World Resources Institute, Trevor Houser a Visiting Fellow at Peterson Institute for International Economics and Richard D. Morgenstern, a Senior Fellow at Resources for the Future.

In the House of Representatives, the Energy and Environment Subcommittee of the House Committee on Energy and Commerce will hold a hearing entitled “The Future of Coal Under Climate Legislation.” That hearing will take place at 9:30am in room 2322 of the Rayburn House Office Building. Read a briefing memo on that hearing here.

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Rick Gittleman has been exploring the idea of developing a Renewable Energy Private Investment Corporation (”REPIC”) as a quasi-governmental renewable energy infrastructure bank.  Previous posts have assessed the need for a REPIC, programmatic areas that REPIC could offer and the administrative advantages of REPIC.  Rick requested Mark Garfinkel, Vice-President and General Counsel of the Overseas Private Investment Corporation from 2001 to 2009 to author this post which explores options and issues for Congress to consider as a renewable energy investment bank bill is drafted. Mark has kindly agreed and his post is below.  

It is widely anticipated that the 111^th Congress will pass a new bill establishing a clean energy bank or private investment corporation in 2009.  In creating REPIC, the question is not whether our legislators can reach a compromise bill that will be hard to vote against, but rather, whether they can pass a bill that creates a nimble commercial bank-like entity equipped to deploy capital within an ambitious time frame.  The goal must be to establish a new U.S. government (USG) financial institution with a mission to provide finance and insurance support for clean and renewable energy projects as well as for energy efficiency and “innovative technology” projects in the United States.  This post counsels on legislative drafting issues that are essential to ensure a functional and efficient REPIC.

Efforts underway to draft REPIC appear to merge language from previous bills in the 110^th Congress, along with legislative language used in the Energy Policy Act of 2005, which authorized the ailing Department of Energy (DOE) Loan Guarantee Program.  Proponents of a merger are likely to end up with a hybrid alternative financing mechanism, rather than an independent bank or financial institution. We strongly caution against this approach.  Those of us who have served in the legal departments of U.S. governmental agencies, commissions and corporations know first hand the frustration and program delivery paralysis that can be caused by an overly restrictive and contradictory authorizing statute that leaves an agency with little flexibility.  

Thankfully, a good working model for REPIC exists in the form of OPIC, a small self-sustaining financial institution established in 1969 that has broad bi-partisan support.  The Office of Management and Budget has praised OPIC for its responsible delivery of credit authority.  Congress should look closely at the OPIC model and at some of the other successful USG credit programs, such as those of the U.S. Department of Agriculture, for lessons learned.  In addition, the trials and tribulations of establishing the Millennium Challenge Corporation should not be overlooked.

Which Projects Should Be Eligible For REPIC Funding?

As discussed, the first Senate draft of REPIC will likely combine aspects of two bills introduced in the previous Congress: S. 3233 (Senator Bingaman) and S. 2730 (former Senator Domenici and others).  Both of these bills have strong and weak points; however, they are fundamentally at odds with each other in defining eligible projects.  

Under S. 3233, projects eligible for funding utilize a “breakthrough technology,” “novel technology” and “clean energy technology.”  S. 2730 has a confusing and unworkable definition of “eligible project” and fails to define often used terms such as “clean energy” and “energy efficiency technologies.”   The DOE Loan Guarantee Program eligibility language, authorized by Title XVII of the Energy Policy Act of 2005 (EPAct), is likewise problematic.  The Title XVII language specifies eligible categories of projects but limits guarantees to projects that employ “new or significantly improved technology,” that either avoid, reduce or sequester air pollutants or greenhouse gas (GHG) emissions. 

It is important that a REPIC bill clarify eligible technologies in plain language to encompass what are essentially three broad categories of projects:  1) clean and renewable energy projects; 2) energy efficiency projects employing technologies that can provide the same level of energy in a more efficient manner and 3) innovative or novel technologies that can improve the use of existing commercial technologies and reduce, avoid or sequester pollutants and GHGs (e.g. gasification).

How Should REPIC Interact with the DOE Loan Guarantee Program?

A REPIC bill must phase-out or sunset the current DOE loan guarantee program authority and transfer the project pipeline and project management over to the new entity.  REPIC should have broader powers and more flexibility than the DOE Loan Guarantee Program. 

While the DOE Loan Guarantee Program was ambitious, it has failed to evaluate projects efficiently and has yet to issue funding.  It is clear that the structure of Title XVII of EPAct did not give the program the tools needed for success.   A particular concern with borrowing elements from S. 3223 is replicating aspects of the DOE Loan Guarantee Program that may lead to funding delays.  S. 3223 would create a program under DOE oversight that would spend its early years developing goals, performance targets, and a rating system to establish funding priorities, but not issuing financial support.  Lessons learned from the existing Loan Guarantee Program caution against such mandates.

In replacing the Loan Guarantee Program, it is critical not to incorporate the restrictive and confusing language that authorized the Loan Guarantee Program.  However, drafters should borrow from those concepts that work. 

How Should Congress Structure REPIC?

Looking to OPIC as the primary model, the entity does not need to be complicated.  The intent of REPIC must be to create a financial institution with broad programmatic authority and the highest level of flexibility.  Congress should staff the Corporation with people who understand underwriting, servicing loans and portfolio management.  Ideally, REPIC should employ seasoned financiers, bankers, clean energy entrepreneurs, private equity managers, structured finance attorneys and insurance professionals with private sector experience, recruited using a pay parity model. 

To move quickly, Congress must give REPIC  broad debt, equity and insurance authorities, and direct it to work with the private sector and encourage private investment.  Since REPIC will support projects based on fairly new and evolving technologies, it is prudent to add a chief technology officer and a technology advisory council.  Congress should establish maximum contingent liability caps for program authorities and provide for the appropriation of subsidy costs to control overall portfolio risk. 

REPIC should have discretion to charge commercial banking fees, which it can use for working capital and administrative costs without the need for OMB apportionment.  REPIC should issue securities and loan guarantees backed by the full faith and credit of the United States, and set up a revolving fund outside of credit reform to cover insurance risk and equity investment.

What Policy Tools Does REPIC Need to Operate Efficiently and Effectively?

In creating REPIC, Congress must examine carefully and handle correctly a host of fundamental policy issues.  For example, REPIC should be allocated sufficient credit subsidy and not be given an option to charge sponsors an upfront fee to cover the cost of the loan.  The DOE Loan Guarantee Program shows that charging an upfront fee to cover modeled loan risk is not a commercial reality.   

Another critical policy area is the environment.  It is important for projects funded by REPIC to comply with stringent environmental standards.  However, for REPIC to function like a commercial financial institution, it should be given its own streamlined environmental protection scheme that specifically exempts it from the National Environmental Policy Act (NEPA).  Certain aspects of NEPA, such as the ability of project critics to seek judicial review of loan commitments and other final agency actions, will create untenable and commercially unreasonable uncertainty that the private sector will not embrace.  

REPIC legislation should also resolve the question of whether the new entity should be allowed to provide support for research and development.  It is reasonable to allow DOE and the National Renewable Energy Laboratory to continue with their success in this area, and have REPIC focus solely on commercialization.  However, there is little harm in giving the new entity limited authority to provide funding for feasibility studies and technical support, with such funding repayable on certain conditions.

Even with best designed statute, we need to remain realistic.  OPIC, which emerged as a highly successful vehicle for mobilizing U.S. investment overseas, took over three years to begin getting money out the door.  Given the right tools, a REPIC could be established and begin operations within two years.

This posting was written by Mark Garfinkel, who was VP and GC of OPIC from 2001 to 2009, and a former Chief of Staff for the USITC. He is currently an international mediator and founder of Diligence International, LLC, a consulting firm in the Washington, DC metro area.  He can be reached at mgarfin@mindspring.com.