U.S. Department of Energy 

Office of Inspector General 

Office of Audit Services 

Audit Report 

The Department of Energy's Loan 

Guarantee Program for Innovative 

Energy Technologies 

DOE/IG-0812 February 2009 




AUDIT REPORT ON THE DEPARTMENT OF ENERGY'S LOAN 

GUARANTEE PROGRAM FOR INNOVATIVE ENERGY

TECHNOLOGIES 

TABLE OF 

CONTENTS 

Loan Guarantee Program Structure

Details of Finding ..............................................................................1 

Recommendations ..............................................................................6 

Management Reaction..........................................................................7 

Appendices

1. Objective, Scope, and Methodology.....................................................9 

2. Prior Reports.............................................................................. 11 

3. Management Comments............................................................... 13 
LOAN GUARANTEE PROGRAM STRUCTURE 

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Page 1 Details of Finding

Introduction The Energy Policy Act of 2005 (Energy Policy Act) 

authorized the Department of Energy (Department) to 

guarantee loans for new or significantly improved energy 

production technologies that avoid, reduce, or sequester air 

pollutants and other greenhouse gases. In August 2006, the 

Department issued its first solicitation for loan guarantees, 

and invited 16 respondents to the solicitation to submit full 

applications for loan guarantees in October 2007. The 

Department also announced three solicitations for nuclear 

power facilities, front end nuclear facilities for the 

production of nuclear fuel, and energy efficiency, 

renewable energy, and advance electricity transmission and 

distribution technologies in June 2008. The Department 

issued a solicitation for advanced fossil energy projects in 

September 2008. Collectively, the Department's 

solicitations make $42.5 billion available in loan guarantees 

to support innovative energy projects. 

As of November 2008, the Department had received 11 

substantially complete applications for projects requesting 

approximately $8.2 billion in debt financing in response to 

the 2006 solicitation. The Department also received 19 

applications (part one of a two part process) for the 

construction of nuclear power plants and two applications 

for front end nuclear fuel cycle facilities. The Department 

planned to rank proposed projects based upon information 

provided by applicants in the first part of the application. 

The Department also planned to provide the ranking 

information to the applicants so that they could decide 

whether to continue seeking a guarantee by completing the 

second part of the application. Applicant responses to the 

2008 advanced fossil energy technologies solicitation were 

due on December 22, 2008, and the applications for the 

energy efficiency, renewable energy and advanced 

electricity transmission and distribution technologies are 

due to the Department in February 2009. 

The Energy Policy Act required the Secretary of Energy to 

make a determination that there is a "reasonable prospect" 

of repayment of the guaranteed debt. As part of its "due 

diligence" to support such a determination, the Department 

had begun reviewing technical information, business and 

financial plans, and proposed project organization and 

staffing information provided by applicants for projects 

resulting from the 2006 solicitation. The Department 

expects to approve and issue the first loan guarantees in 
 

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Page 2 Details of Finding

response to the 2006 solicitation during the spring of 2009. 

In response to the 2008 solicitations, the Department has 

reviewed the first part of the 19 applications for nuclear 

power plants and has provided an initial ranking of the 

projects to the applicants. The Department is also 

reviewing the two applications for the front end nuclear 

fuel cycle facilities. 

Program Structure As of December 2008, the Department had not fully 

established controls necessary to award loan guarantees and 

to monitor guaranteed projects. Specifically, the 

Department had yet to: 

• Finalize policies and procedures for evaluating loan 

applications, approving loan guarantees, monitoring 

project and loan guarantee performance; qualifying 

potential lenders and monitoring participating 

lenders; 

• Formally document portions of its applicant 

reviews, including information about potential 

changes to an applicant's business environment; 

and, 

• Formalize procedures for disbursing loan proceeds 

to successful applicants. 

Policies and Procedures

The Department had not finalized key policies and 

procedures needed for loan application review and 

approval, project and portfolio management, qualifying 

potential lenders and monitoring participating lenders. To 

protect the Government's interest, Title XVII of the Energy 

Policy Act of 2005, required that "no guarantee shall be 

made unless the Secretary determines that there is a 

reasonable prospect of repayment of the principal and 

interest on the obligation by the borrower." The 

Department had drafted, but not finalized those policies and 

procedures necessary to make a "due diligence" 

determination, including those related to project screening, 

underwriting, recovery analysis, estimating credit subsidies, 

credit monitoring and management, credit approval, and 

environmental requirements reviews. Further, accounting 

procedures for loan guarantees and procedures for 

qualifying potential lenders and monitoring participating 
 

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Page 3 Details of Finding

lenders had not been finalized. Management told us that 

they plan to have these policies and procedures approved 

by the Credit Review Board by January 2009. 

In one area particularly important to the financial viability 

of the program, the Department had not finalized 

procedures necessary to estimate potential losses in the 

event of loan default. After 15 months of negotiations, the 

Department received approval from the Office of 

Management and Budget regarding the design and 

implementation of a Credit Subsidy Model that is intended 

to estimate potential losses to the Government in the event 

of project failure and/or applicant default. The estimated 

losses will be used to determine the amount an applicant 

must pay in advance of receiving a loan guarantee – a fee 

designed to mitigate, to some extent, the financial risk to 

the taxpayer. The amount is important to both the 

Department and the applicants because it is designed to 

defray potential losses to the government and represents a 

cost to the borrower. 

However, the Department had not finalized procedures for, 

among other things, evaluating project financing and cash 

flow, and estimating potential recoveries in the event of 

default. The data produced by these procedures are 

important inputs to the Credit Subsidy Model and are 

therefore critical to determining applicant fees. According 

to management, these procedures have been drafted, but 

could not be finalized until final approval of the Credit 

Subsidy Model was obtained from the Office of 

Management and Budget. Management also indicated that 

it expects to have the Credit Review Board approve the 

procedures in January 2009, prior to presentation of the 

first loan guarantee to the Credit Review Board. 

Ensuring that the Department has established policies and 

procedures for applying the Credit Subsidy Model are 

important since delays in determining the amount of cost to 

be paid by applicants could adversely affect projects to be 

financed through guaranteed loans. For example, one 

applicant to the 2006 solicitation informed the Department 

in September 2008 that it needed a rough estimate and 

range of the credit subsidy cost since a high credit subsidy 

cost could negatively affect the applicant's ability to move 

forward. Specifically, the applicant noted that delays in 

obtaining an estimate of the credit subsidy cost could 

jeopardize its ability to move forward with the project and
 

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Page 4 Details of Finding

would adversely affect key decisions such as purchasing 

land on which the facility would be built and 

commissioning architects to prepare engineering plans and 

design. According to management, it provided an estimate 

of the credit subsidy cost for this particular project to the 

applicant in December 2008. 

Finally, the Department had not issued guidance for when 

project reviewers should use independent outside advisory 

consultants to assist in the review of loan applications. The 

Department plans to use consultants to analyze market, 

legal, financial and engineering aspects of the projects. 

Loan Guarantee Program Office managers told us that in 

general, independent advisory consultants for legal and 

engineering services would always be used; however, 

consultants for market and financial services would be used 

on a case-by-case basis, depending on the complexity of the 

project. Formal guidance on the use of independent 

advisory consultants would help ensure consistent 

underwriting and project monitoring for each of the 

applicants. 

Subsequent to the completion of our fieldwork, 

management informed us that it had finalized the "Title 

XVII of the Energy Policy Act of 2005 Loan Guarantee 

Program Credit Policies and Procedures" manual. The 

Credit Review Board approved the manual on January 15, 

2009. 

Application Review Documentation

The Department had not fully documented or recorded the 

results of reviews of loan guarantee applicants. Documents 

and analyses relevant to the Department's review of 

applications were not always included in the Loan 

Guarantee Program Office's official electronic data 

repository. In one instance, for example, a site visit was 

conducted by Department personnel, but was not 

documented in the data repository. Further, notable events 

relative to applicants' operations including changes in 

senior management, company reorganization, and pending 

litigation were not documented in the system. The 

Department's recent solicitations note that application 

reviews will include a detailed analysis of, among other 

things, the applicant's organization and staffing, and 

changes in the project since the application information was 

submitted. As a result of our audit, the Loan Guarantee 
 

________________________________________________________________________ 

Page 5 Details of Finding

Program Office prepared a guidance document to be used 

when documenting its due diligence reviews in the project 

management system. Also, project managers updated 

selected files to reflect the results of due diligence efforts. 

Loan Disbursement Mechanism

The Department is required to use the Federal Financing 

Bank as the provider of funds in cases where the loan is 

fully financed through the Loan Guarantee Program. 

Specifically, Office of Management and Budget Circular 

A-129 requires that agency guarantees of 100 percent of the 

loan amount must be financed through the Department of 

the Treasury's Federal Financing Bank. Department 

regulations for the loan guarantee program permit 

guarantees of up to 100 percent of the loan amount. In fact, 

the 11 substantially complete applications received by the 

Department are for 100 percent guarantees. As of 

December 2008, Loan Guarantee Program officials had not 

reached an agreement with the Federal Financing Bank 

establishing the details on how loans will be disbursed. 

The Loan Guarantee Program Office had the standard 

forms used by the Federal Financing Bank to establish a 

loan disbursement mechanism. However, the Loan 

Guarantee Program Office had not completed the forms and 

formalized its working relationship with the Federal 

Financing Bank – both of which were required prior to 

disbursing funds to loan guarantee recipients. 

Program Staffing and The Department had not fully established controls because 

Competing Priorities it had not fully staffed the Loan Guarantee Program Office 

and experienced competing demands for its limited staff 

and resources. As of January 2009, the Loan Guarantee 

Program had16 full-time federal employees that were 

augmented by 7 full-time and 4 part-time contractor staff. 

According to the Loan Guarantee Program, the number of 

onboard staff is not adequate to, among other things, 

monitor disbursed loans and to complete the due diligence 

and credit underwriting for applicants to the 2008 

solicitation. Accordingly, the Loan Guarantee Program 

identified the need for an additional 21 employees in fiscal 

year (FY) 2009. Management stated that it has sufficient 

funding under the FY 2009 Continuing Resolution to hire 

14 additional staff by the end of March 2009. Management 

also stated that it will be unable to hire additional staff after 

that date without the enactment of its proposed FY 2009 

budget request.
 

________________________________________________________________________ 

Page 6 Recommendations

The Department focused its efforts on issuing new 

solicitations for renewable energy, nuclear and nuclear fuel 

facilities and clean coal projects. In February 2007, the 

Government Accountability Office reported that the 

Department focused on initiating the Loan Guarantee 

Program by soliciting pre-applications for proposed 

projects rather than taking and completing key steps to 

ensure that the Loan Guarantee Program would be well 

managed and accomplish its objectives. We noted that in 

2008, the Department continued its focus on issuing 

solicitations for projects. Specifically, in 2008, the 

Department issued four solicitations totaling $38.5 billion 

in loan guarantee authority. Three of these solicitations 

were issued on June 30, 2008, and the final solicitation was 

issued September 22, 2008. Loan Guarantee Program 

officials told us that the emphasis on issuing solicitations 

was driven by the September 30, 2009, expiration date of 

the 2008 loan authority of $38.5 billion, and concerns 

expressed by Congress, industry and the public about rising 

energy costs and the availability of capital to finance 

innovative energy projects. 

In recognition of the realities of the environment in which it 

was operating, management chose to focus resources on 

issuing new solicitations – a path that absorbed staffing 

resources that could have been otherwise directed towards 

finalizing important internal controls. 

RECOMMENDATIONS The Department had not completed the development and

implementation of controls necessary to manage the 

Government's significant financial risk exposure and to 

ensure the success of the Loan Guarantee Program in 

meeting its overall objective of promoting the use of 

innovative energy technologies. To help ensure the 

ultimate success of the Loan Guarantee Program, we 

recommend that the Director, Loan Guarantee Program: 

1. Finalize policies and procedures needed to complete 

the evaluation of loan applications, approval of loan 

guarantees, monitoring project and loan guarantee 

performance, qualifying potential lenders and 

monitoring participating lenders; 
 

________________________________________________________________________ 

Page 7 Comments

2. Prepare a policy or guidance document establishing 

the conditions requiring the use of independent 

advisory consultants; 

3. Document material aspects of loan application 

reviews, such as site visits, in the official electronic 

project files; 

4. Formalize procedures for disbursing loan proceeds 

with the Federal Financing Bank; and, 

5. Take action necessary to ensure that the Loan 

Guarantee Program is fully staffed and capable of 

meeting all requirements. 

MANAGEMENT Management concurred with the recommendations 

REACTION and stated that it was in the process of implementing 

corrective actions. Additionally, management stated that it 

is committed to managing the Loan Guarantee Program 

Office carefully to maintain the integrity of the Loan 

Guarantee Program as well as to promote the objectives of 

the Title XVII program while protecting the American 

taxpayer. Subsequent to our fieldwork, management 

finalized and obtained approval for "Title XVII of the 

Energy Policy Act of 2005 Loan Guarantee Program Credit 

Policies and Procedures" manual (Manual). The Manual 

was approved by the Credit Review Board on January 15, 

2009. According to management, the Manual defines the 

specific procedures for the utilization of independent 

advisory consultants. 

Management stated that as a result of our audit, the Loan 

Guarantee Program Office issued "Guidelines for 

Populating LGPO's E-Docs Filing System" for the purpose 

of providing a central, readily accessible, and current 

source of relevant documents and information generated, or 

received, by the Loan Guarantee Program Office in 

conducting business. Management also stated that the 

E-Docs system is not meant to capture every piece of 

project-related guidance correspondence ever produced or 

all public information generated during the life of a project. 

Management committed to work with the Federal Finance 

Bank and other parties to ensure that procedures for 

disbursing loan proceeds are finalized in accordance with 

applicable rules and regulations. Finally, management 

stated it will continue to recruit and hire 
 

________________________________________________________________________ 

Page 8 Comments

qualified personnel of the highest caliber to complete the 

project origination, monitoring and oversight activities of 

applicants to the 2008 solicitations. 

AUDITOR Management comments are responsive to our 

COMMENTS recommendations. In response to management comments 

on finalizing policies and procedures for the Loan 

Guarantee Program Office, we acknowledge the 

completion of the Credit Policies and Procedures Manual 

on January 15, 2009. As noted in our report, however, the 

Department needs to complete its accounting procedures 

for loan guarantees and its procedures for disbursing loan 

proceeds. 
Appendix 1 

________________________________________________________________________ 

Page 9 Objective, Scope, and Methodology 

OBJECTIVE The objective of our audit was to evaluate the Department's 

progress in establishing internal and operational controls 

over its Loan Guarantee Program. 

SCOPE The audit was performed between September and 

December 2008, at the Loan Guarantee Program Office at 

the Department of Energy's Headquarters in Washington, 

D.C. The scope of the audit included activities performed 

by the Loan Guarantee Program since inception through 

December 2008. 

METHODOLOGY To accomplish the audit objective, we: 

• Reviewed laws and regulations applicable to the 

Loan Guarantee Program; 

• Reviewed key documents such as the Credit 

Policies and Procedures Manual and the Concept of 

Operations Manual; 

• Analyzed the technical and financial review sheets 

for the applicants that responded to the 2006 

solicitation; 

• Reviewed the Credit Review Board Meeting 

Minutes; 

• Evaluated the audit recommendation tracking 

spreadsheet; 

• Reviewed the procurement files for advisory 

services; 

• Reviewed the official project files contained in the 

electronic data repository; 

• Interviewed key personnel in the Loan Guarantee 

Program and the Department's Office of 

Management and Administration; 

• Met with representatives from the Federal 

Financing Bank;
Appendix 1 (continued)______________________________________________

________________________________________________________________________ 

Page 10 Objective, Scope, and Methodology 

• Coordinated with personnel from the United States 

Department of Agriculture and Export-Import Bank 

Office of Inspector General; and, 

• Observed a "mock" application of the Draft Credit 

Subsidy Cost Model. 

We conducted this performance audit in accordance with 

generally accepted Government auditing standards. Those 

standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a 

reasonable basis for our finding and conclusion based on 

our audit objective. We believe that the evidence obtained 

provides a reasonable basis for our finding and conclusion 

based on our audit objective. The audit included test of 

controls and compliance with laws and regulations related 

to the Loan Guarantee Program. Because our review was 

limited, it would not necessarily have disclosed all internal 

control deficiencies that may have existed at the time of our 

audit. Also, we examined the establishment of 

performance measures in accordance with the Government 

Performance and Results Act of 1993, as it related to the 

audit objective. The Loan Guarantee Program had not 

established performance measures regarding the 

establishment of controls. We did not rely on computer 

processed data to satisfy our audit objective. 

We met with management and discussed the results of our 

work during the course of the audit. Management waived 

the exit conference. 
Appendix 2 

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Page 11 Prior Reports 

PRIOR REPORTS

   

Office of Inspector General 

• Loan Guarantees for Innovative Energy Technologies (DOE/IG-0777, September 19, 

2007). The Office of Inspector General conducted this special review to identify 

lessons learned from prior Departmental loan guarantee and related programs and 

obtained information from other Federal agencies with experience in such 

agreements. The Department of Energy's Loan Guarantee Program is a multi-year, 

multi-billion dollar program that is complex and contains certain inherent financial 

and programmatic vulnerabilities. Under these circumstances, and based on past 

experience, the Department's Loan Guarantee Program needs to be closely managed. 

While the actions taken by the Department to date were commendable, the report 

concluded that there were a number of additional steps that should have been taken to 

foster the success of the loan guarantee program. These included finalizing a staffing 

plan, developing risk mitigation strategies, implementing and executing a monitoring 

system, and promulgating procedures relating to loan defaults.

Government Accountability Office

• New Loan Guarantee Program Should Complete Activities Necessary for Effective 

and Accountable Program Management, (GAO-08-750, July 7, 2008). The 

Government Accountability Office (GAO) report acknowledged that it would take 

some time to create a new office and hire staff to implement such a program. 

However, instead of working to ensure that controls were in place and mitigate risks, 

the Department of Energy had focused its efforts on accelerating program operations. 

Moreover, because loan guarantee programs generally pose financial risk to the 

federal government, and this program had additional inherent risks, it was critical that 

the Department of Energy complete basic management and accountability activities to 

help ensure that it would use taxpayer resources prudently. These included 

establishing sufficient evaluation criteria and guidance for the selection process, 

resource estimates, and methods to track costs and measure program progress. 

Without completing these activities, the Department was hampered by its ability to 

mitigate risks of excessive or unnecessary losses to the federal government and 

American taxpayers. 

• Observations on Actions to Implement the New Loan Guarantee Program for 

Innovative Technologies, (GAO 07-798T, April 24, 2007). The Government 

Accountability Office found that the Department of Energy had begun 

implementation of the Loan Guarantee Program without a specific appropriation. 

GAO raised serious questions about whether the Program and its financial risks 

would be well managed. At the time of the GAO review, the Department had not 

taken steps to ensure that it had in place the critical policies, procedures, and 

mechanisms necessary to ensure the program's success. Specifically, the Department 

had not issued regulations to include: (1) programmatic, technical, and financial 
Appendix 2 (continued) 

________________________________________________________________________ 

Page 12 Prior Reports 

factors for selecting projects for loan guarantees; (2) policies and procedures for 

selecting and monitoring lenders and loan performance; and, (3) any other policies or 

information necessary to implement the Program. 

• The Department of Energy: Key Steps Needed to Help Ensure the Success of the New 

Loan Guarantee Program for Innovative Technologies by Better Managing Its 

Financial Risk, (GAO-07-339R, February 28, 2007). The GAO report on the 

Department of Energy's current approach to the Loan Guarantee Program raised 

questions about whether the Program and its financial risks would be well managed. 

The Department's efforts to date focused on expediting the Program's 

implementation. For example, the Loan Guarantee Program Office issued guidelines 

and solicited pre-applications for loan guarantees, rather than making certain the 

Department had in place the critical policies, procedures, and mechanisms necessary 

to better ensure the Program's success. GAO stated that the Department could better 

ensure that the Program would be successful and financial risks to the federal 

Government would be well managed by taking key steps before selecting projects and 

issuing guarantees.
Appendix 3 

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Page 13 Management Comments 
Appendix 3 (continued) 

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Page 14 Management Comments 
Appendix 3 (continued) 

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Page 15 Management Comments 
IG Report No. DOE/IG-0812

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