Senate Testimony of Jerome P. Peters Jr.

Senior Vice President, TD Banknorth N.A.

Before the Senate Committee on

Energy and Natural Resources

March 7, 2007

I would like to thank the Chairman and the members of the Committee for
inviting me here today to address the Committee on matters which are
vital to the development of policy that can provide this nation with
sustainable energy alternatives. In order to properly address the issues
surrounding the impediments to the deployment of advanced energy
technologies, we must first identify the goals that we, as a nation,
expect to realize from these technologies. The commercial promise of any
advanced energy technology must be its ability to deliver cost effective
benefits to the consumer without putting a significant burden on the
nation's taxpayers while lessening our dependence on foreign sources of
energy.

Historically governments have played a significant role in supporting
the development of new energy technologies through the critical period
between the demonstration stage and the scale up to commercialization
stage. Over the last 25 years, U.S. policy intended to support and
promote the development of new energy technologies has largely involved
the availability of various tax subsidies to the owners of assets
employing these technologies. While this strategy has contributed to the
deployment of a significant number of mature technologies by subsidizing
energy production costs, tax subsidies alone have done little to promote
the early deployment of emerging energy technologies.

Since the passage of the PURPA in 1978, Federal energy policy has
supported the notion that renewable and efficient energy production must
be cost competitive with conventional sources. Since this nation
generates the vast majority of its energy from fossil fuel sources,
continued cost competitiveness, and thus sustainability, of advanced
energy projects, has been directly correlated to the volatility of
fossil fuel prices.

History has demonstrated that energy projects which utilize advanced
energy technology cost more than conventional energy projects, in many
cases 10x as much. While efficiency gains and lowered or eliminated fuel
costs may offset a significant portion of the capital cost disadvantage
inherent to these projects, the available Federal tax subsidies often do
not permit such projects to be economically viable in certain low fossil
fuel price environments.

The capital cost disadvantage combined with fuel price volatility,
present a risk environment that only a limited number of sophisticated
investors are willing to enter. Project equity investors are generally
bigger risk takers and have yield requirements to match. Because of
this, advanced energy projects funded with 100% equity will not be
economic. Risk adverse debt lenders, with significantly lower yield
requirements, can provide significant leverage. Debt lenders, however,
have little appetite for either energy price volatility or technology
risk. While fuel price volatility can be mitigated through the execution
of price hedging strategies, technology risk cannot.

EPACT 2005 goes a long way in establishing a framework for the
mitigation of technology risk for debt investors in advanced energy
technologies, however, the subsequent issuance of DOE's August 2006 Loan
Guarantee Guidelines has dampened most, if not all, lender interest in
participating in this program. Title XVII provides for loan guarantees
up to 80% of total Project Cost. The DOE Guidelines undercut that
protection in two significant ways. First, they limit the guarantee to
80% of the loan amount shifting 20% of the technology risk to the lender
and seem to prohibit the substitution of additional equity to make up
for the un-guaranteed portion of the debt. The addition of this
technology risk component will significantly reduce the pool of lenders
willing to participate in the program and will result in higher rates to
the project developers. Even more damaging to lender interests, is the
fact that the DOE Guidelines require that any commercial debt brought
into a project must be subordinate to the government guaranteed debt.

The "superior rights" provisions of Section 107(g) seem to prohibit the
recovery of any un-guaranteed portion of any commercial loan until the
DOE's claim is paid in full. Without "collateral protection", a loan
default and guarantee call would most certainly result in a loan loss
equal to 20% of the loan amount. While many lenders are willing to
assume some level of loan loss risk, none, that I am aware of, are
willing to take a first loss position in assets in which the collateral
is pledged to the guarantor.

To summarize, I do believe that properly structured Federal Loan
Guarantees can greatly assist in the accelerated deployment of advanced
energy technologies. The USDA Business and Industry Guaranteed Loan
Program comes to mind as properly structured Federal guarantee program
that has contributed to the successful deployment of a large amount of
current ethanol production.

There also may be other mechanisms, in addition to loan guarantees, that
the Federal government can facilitate in cooperation with technology
providers and the investment community that can overcome the current
impediments to advanced energy technology deployment. Many of these
mechanisms may well be technology specific. For example, high capital
costs may need to be overcome in certain technologies such as cellulosic
ethanol production and integrated coal gasification electric production,
while uncertainty over long term component life may be the impeding
factor to the deployment of technologies such as fuel cells or
concentrated photo-voltaics. I believe that a focused dialogue among the
various stake holders, designed to create technology specific federally
backed enhancement programs, would result in an accelerated deployment
of advanced energy technologies. Properly structured, these enhancement
programs need not put an undue burden on federal taxpayers or on the
nation's energy consumers. I would be happy to participate in these
discussions. Thank you.