Jigar Shah on Using Federal Funds to Advance Clean Energy Technologies

It's so good to see you. How have you been? You know, it's great. I have to say, you know, like being part of this really exciting time with all these new resources and, you know, an extraordinary year last year, right, of I think 60 billion plus dollars of venture capital going into companies. And so now all those companies are, you know, coming to us at the Loan Programs Office to help deploy their first-of-a-kind project and, you know, business plan. And so it's been an extraordinarily busy but also just invigorating time.

Yeah, look, I mean, I think that, you know, the president's comments there and the excitement there was palpable, right? I think we're in a situation right now where, you know, we're not transitioning our energy system based on regulation, right? We're transitioning our energy system based on superior technology, right? People really like low-cost electricity from renewable energy. They really like battery storage in their garage so they can actually ride out, you know, small issues on the grid. They really love electric vehicles. They really love, you know, all these technologies. And so, I mean, even heat pumps, I find it's fascinating everyone's, you know, commenting on gas bans and these kinds of things, but ultimately, you know, over 35% of all new homes come installed with heat pumps, right? And so people are already buying heat pumps because they're a superior way of doing things, right? I mean, a lot of what the president's doing through the IRA is making sure that we onshore and reshore a lot of the manufacturing capacity that we lost over the last 40 years, making sure that we train workers so that we can actually get all the stuff installed, right? Figuring out how we create advanced financing mechanisms, which you and I have been working on for 20-plus years, to be able to make sure that it's affordable for people to reduce their energy burden. So I feel like I think sometimes the messaging is lost here where, you know, people think that, you know, things are being imposed on them, and it's like, no, you still have consumer choice. It's just that these technologies are better.

Yeah, I think, look, when I started SunEdison back in 2003, we had signed a contract with Whole Foods and Staples and IKEA and all those things, right? And, you know, when we went to normal commercial banks on a 20-year power purchase agreement with corporations that were investment grade, they were like, "What's this solar stuff? That's just weird. I don't know that we're going to do this." Right? And so that's happening again for the next set of entrepreneurs, right? People have technologies that are proven. They've gone through the national laboratories. They've licensed technologies. They've done all these things. And they go to commercial banks and the commercial banks are saying, "That's weird. You know, I don't know. I don't have five other friends who've done that before, and it's, you know, going to take 12 papers I have to write to convince the investment community to do this deal." And so a lot of those great projects don't get commercial debt. And I think, as you know, 100% equity financing infrastructure projects is really almost impossible, right? You really need debt in an infrastructure project. And so for all of these projects across 20-plus sectors, the Loan Programs Office is a place where they can get a fair hearing, right? That we're not competing with commercial debt because commercial debt doesn't want to do these deals. We're going to do the first, second, third, fourth projects, and then the commercial debt folks will come in on project number five, right? So we're sort of that bridge that they need to be able to get to, you know, the commercial debt, and we're happy to play that role. And our money isn't cheap, right? I mean, it's not super expensive, but it's not cheap. It's meant to be a fair price for the cost of, you know, doing this kind of work. But we've got also 10,000 engineers, scientists, and experts behind us that can actually determine whether we're taking real technology risk or we're taking perceived technology risk. And we try to stay in the perceived technology risk camp. We have demonstration programs within the Office of Clean Demonstrations and others that do the real technology risk work. But, you know, we're excited. We've got over a hundred billion dollars of new loan authority in our existing three programs and then this new 1706 program. And so we're excited to see what this next generation of entrepreneurs need to be able to bring their extraordinary technology into the marketplace.

Yeah, that's right. So we started in 2005, and then we were funded pretty heavily in the ARRA stimulus bill. So we put out about a little over 30 billion dollars worth of capital out the door, and as you suggested, we've already been repaid a lot of that money. And, you know, we've made money, but we also, the thing people don't know is we put aside $5 billion in first-loss capital. So we put aside $5 billion into what amounts to a loan loss reserve at the US Treasury, right? We've lost roughly $1.1 billion throughout our history, which is about 3.3%, and basically the same as what a commercial bank loses. So, you know, right in line with the private sector. And, you know, so we've made $4 billion. We make about $530 million a year in interest for the taxpayers. We set aside $5 billion for first loss, and we've lost a total of 1.1 billion, right? I think if you talk to a lot of our stakeholders, what they'll say is, "Look, we're just not taking enough risk here at the Loan Programs Office."

Yeah. So first of all, I think our portfolio is performing as well or better than a commercial bank, which many people accuse us of being too conservative there because, you know, they're saying, well, given that you're working on innovation, you guys should be losing more money. But second of all, look, I think, and that includes high-profile, you know, failures that we've had, and we will continue to lose money on new deals. I mean, this is the thing that I think people just need to recognize: when a commercial bank puts money out the door, or a public policy bank in our case, you have to take swings at bat, and some of them won't work out, right? But it was worth doing. Like, does anyone argue that like we should have not done Tesla or Fisker, right? Like it's one of those things where if you're going to do Tesla, which obviously was a huge success, then you're going to do Fisker. That's how it works. You do three or four of these deals, right? And in general, when you think about the places where we've lost money, we've recovered 55 cents on the dollar. So our recovery rate has actually been quite strong, which means our underwriting is actually really robust, right? So in general, like when you think about these new sectors we have to go into, whether it's hydrogen or nuclear or long-duration energy storage or, you know, critical minerals or other things, there will clearly be losses that come from some of those loans. But I mean, as long as our loss rate on the overall portfolio is 3.3%, and we're making $500 million a year in interest payments for the US taxpayer, you know, we really are paying for ourselves and then some.

Well, for Tesla, if you remember, they had already created the Roadster, so a very successful car. One of my co-founders at SunEdison had bought one of those, and it was great. But now they needed to make a mass-market car, right? And this was the Model S, and they had an old factory that was available to them in California that was shut down. And they needed money to retool that entire factory to make it, you know, like ready to make electric vehicles, right? And so that was what the loan was for. And, you know, Tesla has been very clear about the fact that like without that loan, they couldn't have made it through that period of time. That being said, they also had to raise over $4 billion of equity in the marketplace to get to 2018, 2019. So one of the things that I am very concerned about is, you know, that we balance the narratives. I mean, Tesla is an extraordinary success story, and they did it on their own, right? The government enabled them through, you know, a loan and, you know, through other programs, but, you know, it really is an American entrepreneurial success story, right? And I think that as we help the next set of companies using our office, it doesn't take away from their entrepreneurial passion and risk-taking and success.

Well, so one of the challenges you have with cities, as you know, is that the vast majority of cities really think about financing in the form of municipal bond financing and their credit rating, right? To some degree, based on your success and many others, they've now learned what a power purchase agreement is for solar, which is great, right? I don't think they actually know that it's project finance, but they understand that it's off-balance sheet, right? But when you think about the next set of assets, right, the school buses that we now are providing grants for out of EPA, those grants don't pay for 100% of the bus. So there's some money that has to come from the school district. But then also there needs to be EV chargers put in. There needs to be, you know, vehicle-to-grid software put in, as well as some of the software to run those schools as emergency shelters right off the buses in the future, right? That all costs money, and we can finance it all, right? And the question becomes, do they want to use municipal bond financing? Usually, it's no. Well, there's service agreements that they can sign. And there's lots of new companies that have come out that actually have replicated the SunEdison model with, you know, school bus electric fleets, right? Or with, you know, switching out all the police cars in their fleet to electric, because police cars, you know, often have to idle all day, right? Because they have to run the electronics in the car. And so they get like 3 miles a gallon. And so the payback is two and a half years to go to electric cars. And think about all the pollution on the street that you're taking off by doing that, right? And so I think that the cities know where the top 10 list is of things that they should do, right? I think it's pretty obvious they should replace. I mean, we only have like 60% of all street lights that have gone LED. Where's the other 40% of street lights? They should all move over, right? And so when you think about the top 10 list, they know what that is, but most of them think, hey, I need to pay for this out of the annual budget, right? I need to use municipal bond financing to pay for it. And in fact, what we've figured out in the solar industry can be replicated into all these other areas, including wastewater treatment plants, right, who often have anaerobic digesters at the plant. Those digesters are running at 30% utilization because that's all the sludge that's left in the wastewater treatment plant to digest. They could bring in waste from food waste and other, you know, animal manure, etc., and put it into that digester. But, you know, like that requires a different way of operating that asset, right? And so I think that cities have to recognize that there are just hundreds of extraordinary companies that are there to help them with solutions, but if they don't really feel comfortable with all of these, you know, advanced financing concepts, the DOE can help them with technical assistance.

They already are. Some of them are coming to us directly, and some of them are signing a contract with a private company, right? And then the private company is coming to us directly because the private company is pitching them more than school buses. The private company is pitching them school buses plus the EV charging plus the integration into emergency centers plus the capability of doing vehicle-to-grid with those buses when they're not transporting children. And so like, so they're giving them a full suite of services. And so they have to decide what's right for them. They can absolutely come to us directly, and then they can also go through a private sector manager who helps to manage their fleet.

Well, this is the other reason why people are going through a private sector aggregator, right?

Yeah, it costs us a good two million bucks to process a loan, right? So you're not going to come into our office for a $12 million loan usually, but for a private sector aggregator, they could aggregate up, you know, 20, 22 million projects and come to us for a $240 million loan, right? And so that's one of the reasons why, you know, folks are choosing a private sector partner. But again, they can choose whatever they want. But what we're trying to do with the bill money that has, you know, come through last year and then the IRA money that's come through this year is help support a lot of these decision makers so they don't feel, you know, like that they're ill-prepared to make a decision. Because if they don't make a decision today and then buy a few more diesel school buses or a few more propane school buses, then we've lost that opportunity for that bus for another 12 years, which is sad, right? Like, I mean, particularly with all this money at EPA where they're giving grants to all these buses, etc. This is the moment for people to raise their hand and say, look, I need help. We want to do the right thing right now. We understand the climate is a really big thing and a huge opportunity for economic development, but we need help, and we trust the DOE to provide that help. So we're happy to go to the DOE and ask for it.

Well, it certainly increases it a lot. Let's put it that way, using technical terms. When I came into office, you know, we had roughly $40 billion worth of loan authority across Title 17, ATVM, which is the Advanced Technology Vehicle Manufacturing program, and then the Tribal Energy Loan Guarantee program. The IRA gives us roughly an additional hundred billion worth of loan authority across those three programs, right? And so that's 40 billion for the Title 17 program, which is where we funded solar and wind utility-scale projects, geothermal, transmission lines, that kind of stuff. Then the Advanced Technology Vehicle Manufacturing program, where we're funding new battery manufacturing plants and like critical minerals and things like that. And then you've got the Tribal Energy Loan Guarantee program, where you've got an additional 20 billion in there. And a lot of tribes now are looking at, you know, putting in solar and wind and then pairing our debt money with the direct pay that they got out of the IRA. So they now no longer need tax equity. They can get a direct pay where they can turn in the tax credit and just get cash back from the federal government on that. We separately got this new program, which is the $5 billion credit subsidy for 1706, and that's to convert existing coal plants, natural gas plants, you know, like recently shut down plants, things in the petroleum supply chain, so refineries and pipelines and tank farms, and then convert those into assets that would generate property tax revenue for the local town for the next 40 years, right? And so that basically pays for the points on the loan. So everyone gets US Treasuries plus 38, and so we pay for the points on the loan. And so it's until that 5 billion goes away. So if we have risky projects, then that 5 billion might support 50 billion of loan authority. And if we have low-risk projects, then that 5 billion might support $250 billion worth of loans.

Which we put $54 million into. So, okay. Yeah. So we're already helping the good citizens of LA. I think in general, I'd say that, you know, the DOE has a lot of vision. In this case, this is not our vision. It's entrepreneurs' vision, right? And asset owners' vision, right? So we have a tool, which is what 1706 is, right? And that tool has the ability to provide people with debt, but people have to apply for it. So like it doesn't matter how much vision we have, and what matters is how much vision the local community has. So there's a lot of local communities that have coal plants that have already announced that they're being shut down, right? So we've already identified of the 600-plus coal plants that have announced that they're shutting down, 300 of them are optimal to be converted to nuclear plants. The remaining coal plants are looking at putting in solar plus storage, right? Or technologies like that, wind power, right? Some of them are looking at geothermal if they're in the right locations, right? There's some folks who are looking at transmission lines and saying, "Look, we can reconductor them with next-generation technologies that qualifies for the 1706 program." There's others who are saying, "Hey, there's this old, you know, sort of uranium processing facility that can be repurposed to process critical minerals." Or there are folks who are saying, you know, we've got an old tank farm or an old refinery, right? There's eight refineries that have already been announced that they're going to be shut down in this country over the next few years, right? And so, you know, for all of the consternation that people have had with those assets, right, particularly with pollution and things like that, they also had a lot of really good-paying jobs at those facilities, and many of them, you know, paid 50% of the property taxes in the town for a long time, right? And so while people want to reduce that pollution, and we support that fully, they also want to maintain the jobs and maintain the property tax revenue. And so figuring out how to do that is something that we are happy to enable, and we have a tool by which to help people. But the, you know, enthusiasm and the passion really has to come from the local communities around, you know, reimagining what they can use those assets for.