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Clean Energy Supply Chain Troubles? LPO is Here to Help

Two years in, the ongoing shocks of the pandemic continue to highlight the fragility of many vital supply chains. A global semiconductor shortage impacting a wide swath of industries is expected to drag on through 2022. Now, with Russia’s recent invasion of Ukraine, and the resulting sanctions placed on the country, global energy supply chains are experiencing a stress test like never before. While European reliance on Russian natural gas is making headlines, Russia is also a leading producer of various critical minerals, accounting for 11% of global nickel production and 4% of global cobalt production. Removing Russia as a source could hobble the manufacturing of clean energy technologies like wind turbines and batteries, making it more apparent than ever that a clean energy transition will require durable supply chains insulated from geopolitical instability. 

For decades, supply chains for clean energy products, including mineral extraction, processing, and subcomponent manufacturing and assembly have increasingly spread across the globe with dozens, if not hundreds, of stops. From the perspective of driving down costs, this has been extremely helpful. Countries with the expertise and infrastructure to produce individual components or raw materials do so efficiently, making the production of end-use technologies a collaborative, international process. However, a geographically diverse and often obfuscated web of connections is risky when national security and public health emergencies arise. 

For example, the map below shows that the electric vehicle (EV) battery supply chain spans six continents, creating numerous points where production can fail. While this approach helps customers benefit from lower costs through more efficient production, supply chains are at greater risk of price shocks and product shortages if there’s an issue with a link in the chain. Creating domestic backstops for clean energy supply chains can help insulate the United States from energy instability while also providing global trade networks with another reliable source.  

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Credit: Bloomberg

It is critical to minimize the risk to our nation’s clean energy supply chain. Congress agrees, and that’s why the bipartisan Infrastructure Investment and Jobs Act (IIJA) provided the DOE Loan Program Office (LPO) with new authorities to invest in projects that increase the domestic supply of critical minerals and to expand programs that invest in manufacturing zero-carbon technologies for vehicles. This includes over $17 billion in direct loans through the Advanced Technology Vehicles Manufacturing (ATVM) to support production of materials critical to the EV supply chain, such as batteries and charging infrastructure components, and over $3 billion in loan guarantees in the Title 17 Renewable Energy and Efficient Energy Projects program to support projects such as mining, extraction, processing, recovery, and recycling of critical materials. Using proven federal financing policies, this injection of capital could put the U.S. on the path to building durable domestic clean energy supply chains for a range of technologies. 

By providing debt financing for the commercial deployment of clean energy supply chain projects that struggle to find private investment, LPO can help stand up firms that are crucial for producing decarbonized solutions. From lithium in batteries, gallium in solar cells, and uranium for nuclear, there’s a lot of stuff needed for countries to meet the Paris Agreement’s mid-century goals. Currently, demand for lithium is projected to outpace production by the end of the decade, and further efforts to accelerate the adoption of clean technologies like EVs will only put more pressure on strained supply chains. Already, Hell’s Kitchen, a first-of-a-kind project to extract lithium from geothermal brine that began drilling late last year, is showing promise of economic growth — project developers estimate it will create more than 1,400 jobs. With LPO’s help, this could represent just a fraction of the potentially hundreds of thousands of American jobs supported by a domestic clean energy supply chain industry. By de-risking domestic clean energy supply chain production methods and technologies, LPO can drive substantially more capital to relevant firms than the $20 billion in loan authority would indicate. The due diligence LPO performs before issuing a loan or loan guarantee communicates to potential investors that an innovative energy or manufacturing project carries a low level of risk and high level of legitimacy. For example, when LPO invested in utility-scale solar power during the industry’s infancy, it signaled to private lenders that the office’s rigorous evaluation showed the projects were likely to succeed and meet repayment, spurring private investment. Ultimately, utility-scale solar power has reduced emissions by trillions of tons, employs more than 231,000 workers domestically, and is now largely funded by private investment. This success shows what’s possible if LPO can help close the finance gap for the clean energy supply chains. 

With a flood of new applications since the revitalization of LPO under the Biden administration, LPO’s remaining loan authority may run dry in the coming years, leaving many companies that would otherwise qualify for a loan with no domestic financing options as they seek to commercialize. The Energy Act of 2020 expanded LPO project eligibility, made the structure of fees more amenable for applicants, and authorized funding to cover LPO’s administrative expenses through fiscal year 2025, but failed to provide new loan authority. The current draft of the Build Back Better Act includes provisions that would dramatically increase LPO’s loan authority, providing $3 billion in credit subsidy for the ATVM program, $3.6 billion in credit subsidy for the Title 17 program, and $40 billion in loan guarantee authority across a range of technology areas. The $40 billion in new loan guarantee authority would substantially boost the Title 17 program, which currently only has $4.5 billion in remaining loan guarantees available to support the wide breadth of critical material projects needed. The increased funding for credit subsidies would also help lower the costs associated with applying for an LPO loan for applicants. With the upcoming FY 2023 appropriations bills, the House and Senate Energy and Water appropriation committees also have an opportunity to bolster LPO’s current funding levels by expanding loan authority and providing funding to cover the credit subsidy cost for applicants. With LPO’s expanded mission and the rapid scale needed for launching new clean energy supply chains, it’s essential that the office’s loan authority is capable of following in the footsteps of utility-scale solar and successfully catalyzing private sector investment. 

In conclusion, investing in domestic supply chains is essential for ensuring energy reliability and affordability for American households and LPO is key to achieving this goal. By helping new supply chain focused firms overcome scaleup challenges via LPO’s financial tools, the U.S. can create hundreds of thousands of new jobs while also protecting our national security, economic security, and public health and safety through a resilient energy system. LPO’s new authorities will help catalyze investment into domestic clean energy supply chains and put American manufacturing prowess back in the limelight. 

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