Augmenting the “SEFI Carveout”: How Special Purpose Vehicles Can Facilitate Large Project Pipelines
Executive Summary
Many state governments and their financing authorities are putting together plans to support decarbonization project development through the creative application of federal funding pools such as the Greenhouse Gas Reduction Fund and the Loan Programs Office’s (LPO) Title 17 financing authority. LPO co-lending provides a massive volume of capital for decarbonization projects that state governments and project developers alike may not want or be able to raise from private lenders. In other words, it represents more capital available at cheaper rates and lent via a public sector institution enthusiastic about supporting states’ decarbonization goals.
While both project developers and governments are expressing substantial interest in securing public-sector financial support, many of their projects are likely smaller than the $100 million minimum transaction size required by the LPO. In this issue brief, CPE presents a set of recommendations for how state policymakers can circumvent this transaction size minimum by capitalizing a special purpose vehicle (SPV) to aggregate a sufficiently large project pipeline. In summary, these recommendations include:
- Having a State Energy Financing Institution (SEFI) capitalize an SPV with a project pipeline larger than $100 million to prepare to draw financing from the LPO.
- Providing “meaningful support” to the SPV through equity capitalization and other financing such that total SEFI participation in the SPV is at least 20% of the total project pipeline size.
- Seeking meaningful support commitments from other state financing institutions.
- Applying to the LPO such that the LPO approves the SPV’s request for debt financing for its project pipeline.
- Enabling project developers to draw debt from the LPO via the SPV
- Ensuring that project developers can repay the SPV such that the SPV can repay the LPO.
Where states want to support energy generation projects that are eligible for elective pay, their SEFIs could also:
- Capitalize wholly owned project LLCs (limited liability corporations) that commit their renewable energy development projects to the SEFI SPV’s project pipeline.
- Ensure that these LLCs can access elective payments from the IRS to support their projects and to help guarantee repayment of debt to the SPV.
This approach, combining SPVs and LLCs, allows the SEFI to avoid using its own balance sheet capacity for project development, beyond capitalizing LLCs and providing meaningful support as required by the Title 17 statute.
In this brief we (1) explain how SPVs and LLCs work to allow policymakers to engage in off-balance sheet and non-recourse project financing; (2) describe the structure of a potential SEFI-backed SPV; (3) flesh out these topline recommendations for SPV structures; (4) outline some risk management guidelines; (5) consider potential regulatory barriers to uptake; and (6) highlight potential immediate state and cross-state applications for this SPV structure.