A Sustainable Future
Jigar Shah, the US Department of Energy’s $215 billion Man

 

How is the Loan Programs Office providing unprecedented amounts of capital for clean energy innovations? Listen to Jason Mitchell discuss with Jigar Shah, US Department of Energy Loan Programs Office Director, his $215 billion mandate in commercialising clean energy innovations, how these technologies align with US energy security goals and climate commitments, and what the multiplier effect of LPO financing could mean for private sector investment.

Recording date: 14 June 2024

Jigar Shah

Jigar Shah is the Director for the Loan Programs Office (LPO) at the US Department of Energy where he leads and directs the organisation's considerable loan authority within manufacturing, innovative project finance, and tribal energy. With more than 25 years of experience in clean energy, he is an expert in project finance, clean technology, and entrepreneurship, as well as a visionary leader and innovator in the field of sustainable infrastructure. Prior to joining the DOE, Jigar co-founded and served as the President of Generate Capital, the leading investment and operating platform for distributed energy storage, microgrids, fuel cells, electric vehicles, and organic waste management. He also founded SunEdison, the inventor of the modern solar-as-a-service industry, and served as the founding CEO of the Carbon War Room, a global non-profit founded by Sir Richard Branson to help entrepreneurs address climate change. Jigar is the author of Creating Climate Wealth: Unlocking the Impact Economy, a book that outlines his mission to scale the transition to a global clean energy economy.

 

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

I'm Jason Mitchell, head of Responsible Investment Research at Man Group. You're listening to A Sustainable Future, a podcast about what we're doing today to build a more sustainable world tomorrow.

Hi, everyone. Welcome back to the podcast, and I hope everyone is staying well. So, it's fair to say that the Inflation Reduction Act or IRA will be remembered not just as one of the most consequential pieces of US legislation, but also one of the single largest investments in climate and energy. And in doing so, the IRA gives the obscure but vitally important Loan Programs Office in the Department of Energy basically a $215 billion-dollar chequebook to shift the US away from fossil fuels. Combined with the DoE’s scientific resources, the LPO is, and I think many would recognise this, an unparalleled resource for clean energy start-ups to scale their technologies, provide jobs and deliver on the administration’s domestic manufacturing goals, which is why it is great to have Jigar Shah, Director of the US Department of Energy’s Loan Programs Office on the podcast, dubbed by the Wall Street Journal as President Biden’s $400 billion man. Jigar discusses his mandate in commercialising clean energy innovations, how the technologies the LPO supports align with US energy security goals and climate commitments and why we need to find ways to overcome the social costs of big, ambitious infrastructure projects.

So, this is a pretty frank discussion about the progress that the LPO has made over the last several years, the foundation still being laid over the next six months and the multiplier effect that LPO financing could potentially have on private sector investment.

Before joining the Loan Programmes Office, Jigar Shah was most recently co-founder and president at Generate Capital, where he focused on helping entrepreneurs accelerate decarbonization solutions through the use of low-cost infrastructure as a service financing. Prior to Generate Capital, Jigar founded SunEdison, a company that pioneered "pay as you save solar" financing. After SunEdison, Jigar served as the founding CEO of the Carbon War Room, a global nonprofit founded by Sir Richard Branson and Virgin Unite to help entrepreneurs address climate change.

Welcome to the podcast, Jigar Shah. It's great to have you here, and thank you for taking the time.

Jigar Shah:

Thanks for having me.

Jason Mitchell:

I'm super excited about this. Jigar, I want to start off with some scene setting. So, first, what is the Department of Energy's Loan Programmes Office and why is it important, I guess, in the context of providing a bridge to bankability for innovations in the Clean Energy technology space? And for context, maybe can you talk about how big the current loan authority is and also what has changed or evolved about the LPO's mandate since it was created in 2005?

Jigar Shah:

Yeah, no, that's great. Look, I think that there has been several decades where I think we as a society have really focused on innovation and breakthroughs as the main way for us to really get to where we want to get to solve climate change. I think increasingly, there is a recognition, and this was something Senator Domenici recognised back in 2005 when creating the Loan Programmes Office that while innovation and breakthroughs were great, getting that last step of building a first of a kind plant at commercial scale was really hard that before the Loan Programmes Office existed, the only way to do that was with 100% equity, just going and raising a whole lot of money and putting it to work.

And when you raised a whole lot of money, most of that money wanted 20%, 30% returns on that money. So, when you think about just how large that hill was that folks had to climb, it really was almost impossible in height. And so, when you think about the Loan Programmes Office, when we put in up to 80% debt for these first of a kind projects, first for nuclear, but then later for fossil projects, for renewable energy projects, for the Advanced Technology Vehicle Manufacturing Programme projects, and now the Tribal programme projects, we're now in a place where people have a fighting chance of really getting that first debt that they need to bring their weighted average cost of capital maybe to 10%, 11%, 12% returns, which are far lower than 20% or 30% returns. And then, we can keep helping folks cross that bridge, so not just first of a kind, but also their second through fourth projects, which is really that engineering excellence step.

And then, the next project, which is the infamous learning curve, which I think a lot of folks have figured out through solar, wind and lithium battery storage. And then, there's a final step, which I think a lot of people skip, which is the Wall Street acceptance test, right? Because when you think about getting to trillion dollar scale, you still need full Wall Street acceptance, and we play a big role there as well. And so, that I think is the core of the thesis around the Loan Programmes Office.

In terms of our resources, when the president came into office, we had about $40 billion of unused loan authority, and so we went to work, getting people interested in using that loan authority. After the passing of the Bipartisan Infrastructure Law and the Inflation Reduction Act, we're now up to over $215 billion of loan authority depending on how you calculate the numbers. And we have about $287 billion of loan requests that we've fielded.

Not all of those projects are going to make it to the finish line, but it shows you just how large the need is from the marketplace.

Jason Mitchell:

Yeah. I'm wondering, just in terms of that last question around how this has evolved. If you look from your own experience back around the time that you took out SunEdison, did you approach the LPO? How would that have changed things? How does that thinking feed into what you're architecting now?

Jigar Shah:

Yeah, it's a really interesting story arc I think for the Department of Energy. When you think about our founding in the 1970s, there was a real mandate for commercialisation and implementation back then because we were in the middle of the Arab oil crisis. Over time, we lost our way. And I'd say that in general, we focused almost exclusively on innovation. And so, for people like myself who started SunEdison in 2003, there was really no invitation for the private sector to engage on commercialisation activities with the Department of Energy.

In fact, most of the Department of Energy's programme explicitly said that unless you are at a technology readiness level that was pre-commercialisation, you really weren't invited to participate. And so, the Loan Programmes Office was there but not active until the global financial crisis where there was a huge dislocation in debt markets. And that's where we funded the first large solar projects, wind projects, geothermal projects, et cetera.

But I would say that the bigger role that the Loan Programmes Office played there was yes, to help commercialise those large technologies that frankly were not yet accepted by Wall Street, but also to play this liquidity role during the global financial crisis.

I'd say today, the Department of Energy has been given an explicit mandate by Congress to be in the commercialisation business, which was part of our original mandate, the 1970s, but something that we lost along the way, but we've regained that mandate and are using it really at scale, not just the Loan Programmes office, but the Office of Clean Energy Demonstrations, which did the hydrogen hubs or the Manufacturing Electricity Supply Chain office, which is doing a lot of the battery supply chain and other supply chains in the heat pump space.

And so, I think that today, we are really viewed as a mainstream way for investors to see their companies deploy their first of a kind deployments, which certainly wasn't true I think in the 2009 timeframe.

Jason Mitchell:

Got it. Super interesting. I guess to what degree are LPO-funded technologies intended to, I guess, explicitly align with US energy security goals and climate commitments? Or are they intended to provide in a way, a maximum form of optionality for the US? I guess what I'm saying is, is there a coordinated, and that doesn't necessarily mean top-down, but is there a coordinated understanding of how to build and finance the optimal energy portfolio across the DOE and how does the LPO's funding support that?

Jigar Shah:

Yeah, no, it's a great question and one that I think we struggle with a lot, at the core of our mandate is to help the private sector achieve its goals. And so, ultimately, at the end of all of our efforts, someone has to spend thousands of hours to work with us to get through the Loan Programmes Office to be able to get to on average a billion dollar loan. Now, on the front end of the process, planning can play a big role.

So, you can imagine on a top-down basis, someone saying, "Well, we really need more support in the nuclear space or more support in the hydrogen space or in virtual power plants," or in some of that stuff. You can imagine on the outreach and business development side, we could go to certain conferences, work with certain trade associations, put in that extra effort to get entrepreneurs in a certain sector of interest to apply for our money.

But what comes out the other end really are entrepreneurs and innovators who are willing to be somebody who invests in our process, who trust us enough to do that, but also competent enough to make it through the process and meet our reasonable prospective repayment.

So, in some ways, we can do planning on a top-down basis, but what actually comes out the other end is really governed more around which innovators and entrepreneurs are ready for the resources that we have to put in.

Jason Mitchell:

Yeah, it's a really interesting aspect. I guess I'm wondering because it's not just funding, and I'm wondering in what ways does the LPO play, I guess a mentorship role to these entrepreneurs who have, for the most part focused on the technological innovation aspects of their business, instead of really focusing on scaling up the legal and physical infrastructure of their companies. Maybe it's a naive assumption on my part, but I guess there's this assumption that great climate innovation somehow find their own way to scale given all the focus from investors and policymakers on climate transition.

Jigar Shah:

If you think of all of the great entrepreneurs that are currently in a growth round of capital, let's call it C round or D round in terms of raising their corporate capital, I would say that less than 10% of them have ever raised debt before in their entire life. So, they have only raised equity and they're masters at it. The average loan that comes into Loan Programmes Office, I mean these companies have raised $200, $400, $600 million of corporate equity capital before they come to the Loan Programmes Office. So, these are folks who are quite famous in their own sectors. They keynote conferences on a regular basis. They are well-known in the investor circles. That's how they've been able to raise this much money.

But when you ask them, have you ever in your entire history raised debt capital, the answer is never. And even the CFOs that they've hired are generally the people who know how to raise equity capital, not folks who know how to raise debt capital. So, when they come into the Loan Programmes Office, it is not surprising. In fact, it is the norm for someone to come in and say, "I have no idea how to do this." Now, they don't come out and say that outright because they've got too much of an ego for that.

But through their actions, it's very obvious that they're asking very basic questions. And so, mentorship is a critical way for us to help what represents really the nation's best innovators and entrepreneurs get to the other side. Because us judging them for not knowing how to fill out government paperwork or even standard commercial debt paperwork isn't going to help us commercialise their technology. So, instead of judging, we mentor and we come in and aggressively help people really learn what the checklists are, what the skills are.

And for many of our applicants, we say, "Look, you're not going to be able to do this with the staff you have. You're going to have to hire this outside advisor, pick from a list of 15 different advisors, but you got to pick one because you're not going to be able to get there with the people that you have now." They're just too equity-focused. And so, they don't know how to represent what a baseline looks like, what downside cases look like. What does a properly structured feedstock contract or off-take agreement look like?

That is not their expertise. Their expertise is something on the technology side.

Jason Mitchell:

That's really interesting. Part of the LPO budget as I read is meant to extend first-known industries. Another part is to lay the foundations for the next Clean Energy building blocks in terms of technology and value chains. How do you think about the progress first that you've made across each of these pillars? I think second, if you consider that... To be frank, you're essentially on a shock clock, especially over the next seven months under the current administration. What more foundation can you lay for these building blocks, whether it's small scale, nuclear hydrogen, long duration battery storage, et cetera, with this clock running.

I think you may know him, this is Mike Chen from Equilibrium Capital, but he talks about this analogy of laying pylons within a pier, which is what you're doing around technological innovation. How much more can you lay in the time you've got?

Jigar Shah:

Yeah, no, it's a great question. And I'd say that it's a bit misplaced. In general, when you think about what the Secretary of Energy said during her confirmation hearing, she called the Loan Programmes Office dormant. And so, today I would say that we are no longer dormant. And so, that was a huge accomplishment in and of itself. I think the other thing is because of just the extraordinary amount of private sector engagement with the Loan Programmes Office, we probably have over 2000 companies that we've talked to in a material way, of which about 213 of them have submitted loan applications into our office.

We now have by far the best dataset in the world for what people are doing on the deployment of these technologies and defining these pylons. And so, what we've done is use that data to publish these liftoff reports along with our colleagues and the rest of the Department of Energy. And so, we've now put together these liftoff reports which don't represent DOE strategy or policy, but they do represent what the private sector believes they need to get across the bridge to bankability to the other side.

And so, those roadmaps I think are really in place and we have a lot of these applicants in place. And so, I guess what I would say is that part of my job has been to make sure that the LPO really resumes its status that it lost a long time ago of really being an essential institution to these entrepreneurs and innovators who need to get to the other side. And when you think about where we are today, so close to the election, we're still getting in 1.6 applications a week, representing $5 to $7 billion a month of new loan applications.

I think while the election is an important milestone, I don't think we're on a shock clock. I think in general, people view this place as an institution that plays things straight and that should be able to survive and thrive regardless who the president is because innovators and entrepreneurs so desperately need this office to operate to be able to commercialise their technologies.

Jason Mitchell:

Can you talk more about the arc of the LPO and the sense that it was to some degree dormant and how vulnerable it is to electoral cycles?

Jigar Shah:

Well, look, I think the reality of the situation is the Loan Programmes Office has had an extraordinary track record. So, when you think about the track record of the Loan Programmes Office, we've had losses of roughly 3%, which is frankly too low. That's in line with a commercial bank. And so, I think we're probably expected to take more risks than that. More importantly, I think if an investor had blindly invested alongside of us into all of the equity tranches for all of our infrastructure projects, as well as our corporate equity projects, they would've beat the S&P 500 by 3x, by 3x instead of 25% returns, about 75% returns.

And then, I think when you think about the infra side, we're probably in the top quartile, top third performance around 10% return on equity, which is pretty impressive when you think about the fact that we're on the cutting edge of things. So, the Loan Programmes Office has been hugely successful. That being said, we clearly had a high profile loss, which created a lot of political kerfuffles.

And I think that as a result, I think that many entrepreneurs and innovators thought, one, that we were closed for business, that we weren't really active, which I think that the office thought it was active, but certainly they were not sending out the same vibes and the secretaries were not sending out the same vibes. And I think the second piece of it is there were clearly a lot of oversight that occurred from Congress, et cetera, and many innovators and entrepreneurs didn't want to subject themselves to that level of oversight.

I think today, we've completed a full reset, and I think that we have regained the trust of not only all the entrepreneurs and innovators, but also all of the folks who provide oversight over the Loan Programmes Office to the point where there are many in the federal government now who believe that we are one of the best-run loan programmes in all of government. I think today it's a much more confident place to do business, and I think that's important to be able to fulfil our mission.

Jason Mitchell:

If a 3% loss is too low, where is the right place? Where do you think about moving out on the risk curve?

Jigar Shah:

We set aside about 15% for future losses and only realised 3%. So, we set aside 15% for a loan loss reserve and only lost 3%. Part of that is because our portfolio management group is so extraordinary that as a bank would've just said, "Well, if they succeed, they succeed. If they fail, they fail." Our portfolio management team is very aggressively working with our applicants to help them succeed. Part of that could be just we have such a great portfolio management group, that's why it's been successful.

But the other piece of it is that it's not great for us to assume 15% losses and only realise 3%. Because that means, we set aside a lot of taxpayer dollar for potential losses and we're not accurate around what was going to happen in the future. And so, I think today, the work that we've done has made us far more accurate in terms of what we think potential losses will be in the future.

And so, my sense is we're probably setting aside roughly 6% for losses going forward, and my sense is that our losses will be approaching that number.

Jason Mitchell:

Maybe it's too early to ask this question, but when you think about the multiplier effect on what the LPO is doing, it's generally assumed or thought that public spending can trigger private sector investment of 1.1 to 1.6 times in terms of this multiplier effect. How do you think about that multiplier effect on the LPO's portion of the IRA? Some out there, Goldman, Brookings are talking about much bigger numbers as high 3x plus, and where in the portfolio do you see the potential for the greatest multiplier effect?

Jigar Shah:

Yeah, I think that in general, when you think about the multiplier effect conversations, some of that is direct, right? We provide debt and our applicants raise equity, so there's a direct multiplier there. But I think when you think about the companies that we are working in, working with, these are companies that have extraordinary ambition. These are companies who've raised on average $200, $500, $600 million of corporate equity. And so, for them, once we build that first of a kind facility, they may never use the Loan Programmes Office again.

So, when you think about what happened in the solar and wind space, we put in money in that 2009 to 2011 timeframe. Most of those projects were completed by 2012. It was not until probably about 2018, maybe 2019 when those technologies reached full Wall Street acceptance and we're able to raise roughly a trillion dollars of private sector capital against was probably something in the order of $10 to $15 billion worth of debt that we provided to those sectors.

And so, when you think about how big of a multiplier effect we had there, it really was critical. And there are some sectors where we didn't achieve our goal to be clear. In the solar, wind and lithium ion battery space, we did achieve our goal, but in the concentrating solar PV space, that sector did not take off after our involvement or even the traditional geothermal space. We funded several projects there and we didn't take off there.

Some of what we've learned is what didn't work and why those sets of projects didn't work. And I think that the level of trust and respect that the private sector has around what we do in our due diligence process is coming through. And so, as a result, all of the projects that we've provided conditional commitments to today have been able to raise equity capital because I think people see that we do play this catalytic role to be able to actually, not only 1.6x but 10x, 20x, 50x the amount of money that gets into these sectors.

So, I do think that the complexity by which we talk with traditional investors gains real respect and trust from them. So, it's not just talking points, but we're going into real detail by sector around what's working, what's not working, what their thoughts are, how we might best support the direction that they want to invest in. And that is really crowding in a huge amount of capital.

Jason Mitchell:

What are the social costs to big ambitious energy infrastructure? We're basically talking about NIMBYism, right? Why are they so high? I've heard you talk about the fact that government did a big disservice in the forties, the fifties and the sixties with actions like eminent domain on big infra projects, which seems to have only hardened resistance within communities. But what's the answer? How do you solve for that and bring in community on these big infra projects?

Jigar Shah:

Yeah, no, it's a good question and one I think the president and the secretary have shown a lot of leadership on. I think that in the 1940s and 1950s, I think the US government knew best and we just started building stuff without really regard for what the local community wanted. I think today, we are absolutely going through a process by which we are garnering community feedback, but also making sure that the wages that we're paying for construction and operations jobs are family-sustaining wages. And that I think is leading to a far more sustainable partnership between our projects and the community that they operate in or serve.

I think some people misunderstand what we're doing though and saying, "Well, actually, we're giving everybody a veto." And that's not true. And so, the communities have a standard process. There's permits that are in place from local jurisdictions. If those permits are provided, the fact that some community members are against the project isn't something that is holding up the project.

And so, these projects are confidently moving forward on timelines that they themselves had set. And so, the process that we're adding here is not slowing anybody down, but it is making sure that we're bringing everybody along. And during the process, and we're a part of each one of these, and in some cases, we force these meetings because a lot of these entrepreneurs, frankly are scientists and have never done a community engagement meeting or don't know how to engage with project labour agreements. And so, we're teaching them how to do that, and we're going into the community and working with them.

When they hear the ideas that the communities have, they realise that communities are not against the project, but they do want to know how they expect, for instance, to make sure that their workforce can get to the plant, right? Because of the traffic issues, et cetera. They're saying, "Hey, maybe you should look at busing folks in from this place so that you can get folks who don't have access to public transit over there to your workforce." And a lot of the CEOs were really frankly afraid of what feedback they would get, and when they get the feedback, they're like, "Actually, most of this stuff is very doable."

And so, then they're more enthusiastically engaging with the community further after we've left because they realise the community is not out to kill their project. The community is just trying to enhance their project. So, that really better aligns with what the community needs. I think the process has gone really well and it's new muscles that everyone is exercising, but I think the process has not slowed anybody down, but in fact made these projects more durable and more likely to last and frankly pay back our loans.

Jason Mitchell:

We were talking a little bit earlier about Wall Street and markets, but how much of the loan process is about the market talking to the LPO, or is it about the LPO effectively signalling to the market to work to coordinate all these moving pieces to build, for instance, a US battery supply chain? How do you think about the interplay between the LPO and markets?

Jigar Shah:

Well, it certainly started out with us going to them. You can imagine that when you have an office that was dormant, there wasn't a lot of inbound engagement coming from the market. And even after the Bipartisan Infrastructure Law and the Inflation Reduction Act passed, I'd say that the private sector wasn't really ready to lead, even though the president and John Podesta and the Secretary of Energy have said very clearly that we're private sector-led, government-enabled. The private sector didn't actually know what it wanted to do. And so, we had to go to the private sector and say, "Hey, how do you want to lead?" And the private sector would say, "Hey, we really need these things to be able to more confidently invest."

And once they told us those things, it was very clear that they had not coordinated amongst themselves before they told us those things. And so, you could imagine the first few sessions were messy and we weren't getting very clear feedback. But I think now that we're into year three of this feedback loop, and we've gotten these liftoff reports that we've written, which is the fact base that the private sector told us through 60-plus interviews, and we've been able to update those and we've been able to have more structured conversations.

We had three at CERAWeek just this past March. I think that there's just a level of coherence now coming in. And now, we don't actually have to proactively engage with the private sector, although we do. They're now proactively putting their thoughts together and coming to us. And you see that within some of the investment banks have put together fantastic research analyst reports, which have only now been coming out around what they think that their companies need to be able to more confidently succeed and raise capital.

And so, I think the quality of the conversations has gone way up. But I think this whole private sector-led, government-enabled framework is something that people are still trying to figure out exactly how to engage in and what expectations they should have of government in terms of being responsive to their feedback. We have some things where we can be a little nimble, but sometimes it takes us six to nine months to make a pivot when someone gives a recommendation just because of our regulations and statutes. And so, figuring out how we work together has been a critical part of those last three years.

And frankly, I think that that's why the trust level is so high now is because we went to the private sector. They admitted that they were unprepared. They have now worked really hard to become more prepared. They've come to us with recommendations, we've implemented, frankly most of them, and now I think the level of partnership is at a much better place.

Jason Mitchell:

That's really good to hear. Is the financing gap between VCs and banks for climate innovation that wide? What's the risk that the LPO crowds out private capital at some point? I think that's always a worry. Are there safeguards to prevent this, and how does the LPO think about and manage, also these exogenous risks related to the cyclicality of certain sectors, mining, minerals and these commodity super cycles that tend to govern them?

Jigar Shah:

Let me answer in two ways. One is that, remember, in order to solve climate change, we're talking about a trillion dollars a year of investment. The Loan Programmes Office will probably commit $50 billion a year or so of capital, of that $20 billion of that debt is for these growth stage companies that will need to go out and raise $15 to $20 billion of matching equity. I don't think anyone believes that we're crowding out commercial debt. The commercial debt players recognise areas that we're involved in or areas where they frankly just don't feel comfortable.

And you could imagine, given the difficulty of our process, if a private sector player could easily get commercial debt, they would opt to go do that. They're not doing that because the commercial debt is not yet comfortable. So, I think it's very important for us not to crowd out private sector debt, and I think we are very careful to make sure that we're really supporting additionality. But I do think that we're going to continue to put out $50 billion a year or so with of commitments probably through 2028 or 2029.

And I do think that probably 20 billion of that is going to be in that growth sector where raising equity requires a little bit of work. And so, there's a lot of explaining that we have to do and we're committed to doing that. I think to your other question around cyclicality and commodities, I think when you think about where the Loan Programmes Office is, most of the debt providers in those spaces now really provide very short-term debt, let's call it three to five years with a balloon payment and expected resets.

We are far more willing to go 10, 15 years as long as we think that the facility will operate at least that long because we think the recovery rates are going to be quite good with these assets. But because of that, the payments are much lower. And so, we can ride through business cycles in a much more confident way. And to the extent that there are very good years where folks make a lot of money, we can sweep cash to get paid back faster.

So, I think we're very comfortable with that format and that makes us far more attractive in those sectors than really suboptimal approaches that the private sector are using.

Jason Mitchell:

Yeah, it's interesting. Basically, the LPO's mandate sits between VCs. You don't have the scale and banks who generally don't have the lending risk appetite. What's been interesting to see more recently is some of the biggest asset owners globally have started to commit portions of their portfolio to "climate solutions." As an example, the New York State Common Retirement Fund now targets, I think it's around 15 billion in climate solutions by 2030. And they're asset owners that have much bigger targets. But much of this starts on the private infra side.

How do you see this investment from those institutional investors as a handoff between the LPO's work, investors markets, and do you see investor risk appetite increasing on this front?

Jigar Shah:

We're getting there. It's slow. I would say the vast majority of the pension funds and others who've made those commitments are not yet ready to invest in what we're doing. And so, they're generally looking at well-structured offtakes and feedstock and all that stuff. I think folks are, on a direct basis, not going to be actively involved, but I think you're starting to see very talented managers raise dedicated funds for our companies. And the returns obviously are yet to be fully realised, but you're starting to see many of those folks be able to raise funds. And so, it hasn't been a hard thing to do.

And so, for a lot of these pension funds, they might be LPs in these well-managed funds for $50 or $200 million, but I think a lot of their direct investing is still going into well-structured transactions. But I expect that to change over the next few years. You know how this stuff is. Most of these institutions are really sitting on an enormous amount of cash, and they need higher returns to be able to pay out pensions and other obligations that they have. And so, as soon as this asset class has a little bit more weathering, I think you're going to see a lot more folks come in.

Clearly, in the power sector, I think people are very comfortable, but you can imagine we are operating across biotechnology, hydrogen, critical minerals. And so, for a lot of folks, these sectors just feel very new to them. And so, they're playing them through funds right now, and I think they'll start to see them make many more direct investments probably three or four years from now.

Jason Mitchell:

Does the LPO have a preference in terms of capital structure for companies applying for loans? The LPO bridge to bankability seems to end at the commercial debt market, but is there an expectation companies are raising either private equity or going down the public path in terms of creating more of a Wall Street machine behind these technologies?

Jigar Shah:

Well, we certainly don't have any right to tell them where to raise money from. They can raise money from whoever they want. I think we have certain opinions around what type of investors are likely to weather storms that we can predict. Sometimes these CEOs will ask us and say, "Hey, we're thinking about raising money from this group. What do you think?" And without saying anything about that group, what we might say is, "Hey, your company is likely to lose money for the better part of the next four years." Think about Tesla. When we gave them a loan in 2009, I mean, they'd lost money probably all the way through 2018 before they made money.

And so, we might say to them, "Hey, you're likely to be in growth mode for a long time," which means you have to raise more money every single year, like getting an investor that can help you raise that money every year and is seeing you as a long-term investment is going to be far more in your best interest than getting money from a hedge fund that wants to try to make a quick buck on, the spike in your stock from the announcement from our loan, and they're looking to sell that spike. And so, you should be careful.

Jason Mitchell:

Yeah, I guess that falls under the mentorship view. Absolutely. So, final question, the falling cost curve for renewable energy, especially solar represents a pretty powerful precedent. But as I'm sure you well know, the reality of that is a combination of historical European and Chinese policy incentives. I'm talking about these early feed and tariffs and subsidies 10, 15 years ago that played a major role in establishing the market and ultimately driving down prices. And I guess I'm wondering, how does the LPO think about replicating this across dozens of other technologies from DAC to lithium production to thermal power and small nuclear when the same tailwinds won't necessarily be there?

In other words, is the solar cost curve an anomaly because of the European China policy element, or do you see it as something that can be in a way systematically replicated across other technologies?

Jigar Shah:

Yeah, it's a great question. And it's obviously a different answer for every single sector. I'll give you an example of some projects that we're looking at. When you look at the Sustainable Aviation Fuel Market, it is very obvious that lots of people around the world have committed themselves to SAF and decarbonizing aviation. For a long time, the most powerful policies in the world were the Low Carbon Fuel Standard credit programme in California. What's happened recently is state policies that have passed in Illinois and Minnesota mandating staff there. And then, I think there's an every expectation that next year the Europeans are going to put in some regulations around Sustainable Aviation Fuel as well.

When you think about where the supply for Sustainable Aviation Fuel is coming from and where the demand is coming from on mandates, it does feel like the market's going to be undersupplied SAF here for the next five to seven year. And there's domestic policies in Illinois and Minnesota or California, and then there's international policies that we're benefiting from in Europe.

I think similar things are true for hydrogen, where clearly in the Inflation Reduction Act, the US has taken a confident leadership position where we weren't as large outside of the state of California for the solar and battery revolution. And so, I think we are planning to put in the most amount of money to bring hydrogen down the cost curve. And you see this with secretary's earthshots, right? So, she has an earthshot for hydrogen for long duration energy storage, for DAC, for some of these other sectors.

And so, that means that there is an R&D, as well as commercialisation mandate coming from the Department of Energy to back up those earthshots. And so, certain sectors, I think the Inflation Reduction Act provided a lot of leadership from the United States. And so, that's something that we can do due diligence on. And there's other sectors where we're looking to folks in Asia, folks in Europe and others to provide that level of leadership. But either way, I think the first of a kind deployment that we're funding has to work. We have to be able to get paid back.

When you look at some of the projects that we funded in the solar PV space in 2009 and 2011, they had power purchase agreements at $0.17 a kilowatt-hour. Now solar came down in cost, but those power purchase agreements were with creditworthy counterparties, and they've continued to pay those costs for those solar projects.

Jason Mitchell:

Yeah, yeah. Super interesting. You mentioned aviation. We've got an upcoming podcast with... It's the COO of EasyJet, and it's been really interesting in the sense, at least in a European context, of being one of the first low-cost short haul airlines that's trying to decarbonize and effectively go to hydrogen-based flights by 2035, 2040. So, definitely some interesting stories out there. It's been fascinating to discuss what the DOE's Loan Programmes Office provides in terms of a bridge to bankability for Clean Energy innovations, how the technologies it supports aligns with US energy security goals and climate commitments, and why we need to find ways to overcome the social costs of big, ambitious infra projects.

So, I'd really like to thank you for your time and insights today. I'm Jason Mitchell, head of Responsible Investment Research at Man Group. Here today with Jigar Shah, director of the US Department of Energy's Loan Programmes Office. Many thanks for joining us on A Sustainable Future, and I hope you'll join us on our next podcast episode. Jigar, thank you so much for doing this. Really appreciate it.

Jigar Shah:

My pleasure. Thanks for having me on.

Jason Mitchell:

I'm Jason Mitchell. Thanks for joining us. Special thanks to our guests and of course everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast.