August 20, 2009 USDA Loans, Loan Guarantees, and Grants for Rural Energy Projects Opportunities for Renewable Energy Companies and Suppliers The U.S. Department of Agriculture ( USDA ) has established a number of programs supporting the construction of electric generation and transmission projects in rural America. Traditionally, USDA, through Rural Utilities Services ( RUS ), has provided loans to rural utilities and cooperatives to finance energy projects. USDA has extended its traditional RUS financing to include loans to other developers of renewable energy projects constructing projects in rural America. Additionally, there are a number of other programs administered by USDA to encourage development of rural communities in the U.S. that could provide grants, loans, or loan guarantees for developers of energy projects in rural communities, as well as companies manufacturing component parts to be used in such projects. In a challenging debt market, these programs could make it easier to access funds that will facilitate the construction and development of these projects. RUS Loans for Renewable Energy Projects The Food, Conservation, and Energy Act of 2008 (the 2008 Farm Act ) amended the Rural Electrification Act of 1936, as amended (the REAct ) by permitting USDA, through RUS, to make loans for renewable energy projects, including electric generation from renewable energy resources for resale to rural and non-rural residents. Renewable energy sources are solar, wind, hydropower, biomass, or geothermal. To date, no separate regulations have been issued governing such loans, so RUS is using its standard underwriting process under existing regulations. In order for an applicant that is not an existing USDA borrower to apply for a loan for a renewable energy project, such applicant must have entered into a power purchase or tolling agreement with an existing USDA borrower. The project must meet the USDA rural eligibility requirements. This program does not offer loans for construction projects, but RUS will issue a commitment at the time of the closing of the bridge financing, with long-term loans to be funded by RUS upon
completion of a successful six-month operational period. The term of the loan is limited to 30 years for real estate, 20 years for the useful life of the equipment, and 7 years for working capital loans. The interest rate on the loan is the average tax-exempt rate of similar modifiers published by USDA from time to time. An environmental report under the National Environmental Policy Act ( NEPA ) will need to be prepared. Business and Industry Guaranteed Loan Program The Business and Industry Guaranteed Loan Program is administered by USDA s regional offices. Under this program, loans are made to public or private companies for the purposes of developing business in rural communities, including reducing the reliance on nonrenewable energy resources by encouraging the development of renewable energy resources (including solar and wind). The general purpose of the loan is to improve, develop, or finance business, and industry in rural communities, and the loan may be used to develop land or facilities as well as keep businesses from closing. Under the Business and Industry Guaranteed Loan Program, a borrower applies for a loan from an eligible lending institution (federal or state chartered banks, Farm Credit Bank, or other Farm Credit institutions with direct lending authority, Bank for Cooperatives, Savings and Loan Associations, Credit Unions, insurance companies, National Rural Utilities Cooperative Finance Corporations, and mortgage companies that are part of a bank holding company). The lending institution then applies to USDA for a guarantee of such loan. The maximum amount of the loan is $10 million, although the Secretary of Agriculture can grant an exception for loans of up to $25 million for high priority projects. The amount of the guarantee depends upon the loan size, as follows: 80% guarantee on loans up to and including $5 million; 70% guarantee on loans greater than $5 million up to and including $10 million; and 60% guarantee on loans greater than $10 million. Rural Energy for America Program Overview The 2008 Farm Act revised and expanded the Renewable Energy/Energy Efficiency Program, which was known as Section 9006 of the 2002 Farm Act. The program is now called the Rural Energy for America Program or REAP. REAP is administered by USDA s regional offices. It provides loan guarantees and grants, or a combination of the two, to agricultural producers and rural small businesses to help: purchase renewable energy systems (for example, small and large wind turbines, active or passive solar energy systems, geothermal heating and cooling, anaerobic digesters using food or livestock waste, systems using or producing biomass fuels, facilities 2
producing ethanol or biodiesel, or tidal, wave, ocean thermal and certain hydroelectric technologies); and make energy efficiency improvements (for example, efficient cooling systems, weatherization of poultry houses, efficient lighting and ventilation, irrigation equipment, industrial motors and supermarket refrigeration systems or any other projects that save electricity, propane or natural gas, or diesel fuel). Projects that save fuel used in mobile sources, such as tractors or trucks, are not eligible. REAP also offers grants for energy audits, renewable energy development assistance, and renewable energy feasibility studies. Important legislative changes in REAP from the former Section 9006 program include: Expanding the eligible use to the purchase of renewable energy systems, including systems that may be used to produce and sell electricity; Increasing loan guarantee limits from $10 million to $25 million and the maximum combined award amount from 50% to 75% of the cost of the program; and Funding feasibility studies for REAP clean energy projects for up to $50,000. In determining the amount of a REAP loan guarantee or grant, USDA will consider the following six factors: (i) the type of renewable energy system to be purchased; (ii) the estimated quantity of energy to be generated by the renewable energy system; (iii) the expected environmental benefits of the renewable energy system; (iv) the quantity of energy savings expected to be derived from the activity, as demonstrated by an energy audit; (v) the expected energy efficiency of the renewable energy system; and (vi) the estimated period of time for the energy savings generated by the activity to equal the cost of the activity. Eligible project costs for REAP loan guarantees and grants (or combinations thereof) include: post-application purchase and installation of equipment (new, refurbished, or remanufactured), except agricultural tillage equipment, used equipment, and vehicles; post-application construction or improvements (except residential); energy audits or assessments; permit or license fees; professional service fees, except for application preparation, packager fees, and broker fees; feasibility studies and technical reports; business plans; retrofitting; 3
construction of a new energy efficient facility only when the facility is used for the same purpose, is approximately the same size, and based on an energy audit will provide more energy savings than improving an existing facility; working capital; and land acquisition. Congress increased funding for REAP in the 2008 Farm Act. Mandatory funding for REAP starts at $55 million in 2009 and increases to $70 million in 2012. In addition, the 2008 Farm Act provides for discretionary funding up to $25 million per year. In 2009, Congress provided $5 million in discretionary REAP funding, bringing the total available funding for this year to $60 million. The application deadline for 2009 was July 31, 2009. The REAP application instructions and ranking criteria explained in the Notice of Solicitation of Applications (NOSA) for the 2009 program that USDA issued on May 26, 2009, could nonetheless be of interest to future applicants considering to apply for REAP for 2010, as USDA may apply similar application requirements and ranking criteria. REAP Loan Guarantees A REAP loan guarantee protects the lender against a portion of the value of a loan in the event of a borrower default. The amount of a REAP loan guarantee is limited to 75% of the total eligible project cost. The maximum loan guarantee amount is $25 million for any one borrower. The amount of the REAP loan guarantee depends on the loan size: 85% if the guaranteed loan amount is up to and including $600,000; 80% if the guaranteed loan amount is greater than $600,000 up to and including $5 million; 70% if the guaranteed loan amount is greater than $5 million and less than or equal to $10 million; and 60% if the guaranteed loan amount is greater than $10 million. USDA charges fees to provide a REAP loan guarantee. In 2009, the USDA guarantee fee is 1% of the guaranteed portion of the REAP loan and the annual renewal fee is 0.25% of the guaranteed portion of the loan. REAP Grants In addition to loan guarantees, REAP also provides grants. Grants for feasibility studies are a new feature this year. The maximum amount of a REAP grant is: $500,000 or 25% of eligible project costs, whichever is less, for renewable energy system grants; 4
$250,000 or 25% of eligible project costs, whichever is less, for energy efficiency grants; and $50,000 or 25% of eligible study costs, whichever is less, for feasibility studies. In 2009, 20% of REAP funding is set aside for grants of $20,000 or less. USDA will add 10 points to the application score for these projects. USDA anticipates setting 10% of REAP funding aside for feasibility study grants. Biorefinery Assistance Program The 2002 Farm Act included a program to provide grants for the construction of new biorefineries. The 2008 Farm Act authorized a broader biorefinery development program, the Biorefinery Assistance Program, with mandatory funding for both loan guarantees and grants available through 2012. The Biorefinery Assistance Program provides loan guarantees to fund the development, construction, and retrofitting of commercial-scale biorefineries. Loan guarantees of up to 90% of principal and interest may not exceed $250 million and are limited to 80% of project costs. This program also provides competitive grants to assist with the development and construction of demonstration-scale biorefineries that convert renewable biomass to advanced biofuels. Grants may not exceed 30% of project cost. Biorefinery assistance loan guarantees and grants under the Biorefinery Assistance Program are subject to feasibility studies and a scoring system. An example of a project that was financed through the new Biorefinery Assistance Program includes a commercial-scale cellulosic (woodchip) ethanol plant for which USDA guaranteed an $80 million loan. When fully operational in 2010, the plant is expected to produce approximately 20 million gallons of cellulosic ethanol per year. Repowering Assistance Program for Biorefineries Under the Repowering Assistance Program, USDA provides payments to rural biorefineries, in existence before July 18, 2009, that replace fossil fuels used in their heat and/or power process with renewable biomass. An eligible biorefinery is defined as a production facility for bio-based, liquid transportation biofuels. Facilities can receive payments for up to 3 years. The maximum award under the Repowering Assistance Program is $5 million or 50% of project costs, whichever is less. Bioenergy Program for Advanced Biofuels The 2008 Farm Act extends the existing Bioenergy Program established by Executive Order in 1999 as the Bioenergy Program for Advanced Biofuels. Payments will be made to eligible advanced biofuel producers for the production of fuel derived from renewable biomass, other than corn kernel starch, to include: biofuel derived from cellulose, hemicellulose, or lignin; 5
biofuel derived from sugar and starch (other than ethanol derived from corn kernel starch); biofuel derived from waste material, including crop residue, other vegetative waste material, animal waste, food waste, and yard waste; diesel-equivalent fuel derived from renewable biomass, including vegetable oil and animal fat; biogas (including landfill gas and sewage waste treatment gas) produced through the conversion of organic matter from renewable biomass; butanol or other alcohols produced through the conversion of organic matter from renewable biomass; and other fuel derived from cellulosic biomass. Eligible producers entering into a contract with USDA under the Bioenergy Program for Advanced Biofuels are paid based on quantity and duration of advanced biofuel production and on net nonrenewable energy content of the advanced biofuel. No more than 5% of funds made available annually under the Bioenergy Program for Advanced Biofuels may go to facilities with a total refining capacity of more than 150 million gallons of advanced biofuel per year. Biomass Crop Assistance Program Th e Biomass Crop Assistance Program ( BCAP ) provides financial assistance to producers or entities in selected areas that deliver eligible biomass material to designated biomass conversion facilities for use as heat, power, biobased products, or biofuels. As sistance under BCAP may include (i) payments for up to 75% of cost of establishing an eligible crop; (ii) annual payments to support production; and (iii) matching payments of up to $45/ton for 2 years for collection, harvest, storage, and transportation to a biomass conversion facility. Contract terms under BCAP are up to 5 years for annual and perennial crops and up to 15 years for woody biomass. Eligible crops and other biomass do not include those eligible for commodity payments under Title I, invasive or noxious plants, animal waste and byproducts, food and yard waste, or algae. Specified conservation practices must be adhered to. The 2008 Farm Act provides funding for the collection, harvest, storage, and transport of certain biomass for delivery to biomass conversion facilities separate from BCAP. The USDA Secretary is required to use the Commodity Credit Corporation ( CCC ) funds that are necessary to carry out BCAP each year through 2012. Biomass Research and Development The 2008 Farm Act extends the existing Biomass Research and Development Program created under the Biomass Research and Development Act of 2000 to coordinate policies promoting biobased industrial products. The Biomass Research and Development Program provides grants, contracts, and financial assistance to eligible recipients to carry out research on (i) the development and demonstration of biofuels and biobased products; and (ii) the methods, practices, and technologies for the production of biofuels and biobased products. Eligible recipients are private sector entities, institutions of higher education, national laboratories, federal and state research 6
agency, nonprofit organizations, or consortiums of two or more entities described above. The federal-cost share for any grant is limited to 50% of project cost. The 2008 Farm Act provides mandatory CCC funding for the Biomass Research and Development Program of $118 million for 2009 through 2012 and authorizes an additional $35 million annually through 2012. Rural Business Enterprise Grants Rural Business Enterprise Grants ( RBEG ) were originally authorized under the Rural Development Act of 1972. Grants are made to rural public entities (towns, communities, state agencies, and authorities), Indian tribes and rural private non-profit corporations for measures that benefit small and emerging private businesses in rural areas. Small and emerging private businesses are those that will employ 50 or fewer new employees and have less than $1 million in projected gross revenues. RBEG may be used for the acquisition or development of land, easements, or rights of way; the construction, conversion, or renovation of buildings, plants, machinery, equipment, access streets and roads, parking areas, or utilities; pollution control and abatement; the capitalization of revolving loan funds, including funds that will make loans for start ups and working capital; training and technical assistance; distance adult learning for job training and advancement; rural transportation improvement; and project planning. Funding under RBEG is not subject to maximum grant amounts. However, smaller projects are given higher priority. Rural Business Opportunity Grants Rural Business Opportunity Grants ( RBOG ) are authorized under the Consolidated Farm and Rural Development Act. Grants may be made to public bodies and private nonprofit community development corporations or entities. Although not directly energy-related, RBOG funds made be used to identify and analyze business opportunities that will use local rural economic and human resources; to identify, train, and provide technical assistance to rural entrepreneurs and managers; to establish business support centers; to conduct economic development planning and coordination, and leadership development; and to establish centers for training, technology, and trade that will provide training to rural businesses in the utilization of interactive communications technologies. If you require further information with respect to any of these or future USDA loans, loan guarantees or grants for rural energy projects, please contact Deborah DeMasi at 202-585-8194 or ddemasi@nixonpeabody.com Alexandra López-Casero at 202-585-8372 or alopezcasero@nixonpeabody.com Please be aware that any communications with us through our website will not establish a lawyerclient relationship with us. Do not send us any information that you or anyone else considers to be confidential or secret unless we have first agreed in writing to be your lawyers in that matter. Any information you send us before we agree to be your lawyers cannot be protected from disclosure. Click on the following to access our energy, renewable energy and tax credit client alerts. 7