The Loan Program at the Department of Energy is designed to provide financing for the acceleration off new energy technologies. For a long time, it was a fairly small office. However, thanks to the Inflation Reduction Act, it now has a massive war chest of over $300 billion, making it a critical part of the energy transition. So what will it do with that money? And what areas of investment are the most promising? On this episode, we speak with Jigar Shah, who runs the office, about his new mission. This transcript has been lightly edited for clarity.
Points of interest from the pod:
The history of the Loan Programs Office — 2:37
How the IRA changes the game — 6:03
What risks does the office take? — 12:10
Lessons from Solyndra — 16:23
Why nuclear is back — 24:01
How to make nuclear cheaper — 29:40
Fragility in the grid — 38:40
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Joe Weisenthal: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:15)
And I'm Tracy Alloway.
Joe: (00:17)
Tracy, you know, we have guests come back on the show from time to time. We have guests come on multiple times, but it's not every day, or it's not common, that we have a guest and then not long thereafter, something major happens to them and they're in the center of the news and we immediately have to get them back.
Tracy: (00:35)
No, that's true. So you make it sound like a bad thing, but this is a good thing. This is a good thing for the guest. So one of the things that happened earlier this year, we had the Inflation Reduction Act that got passed and tucked inside that very big act is $350 billion that our previous Odd Lots guest gets to play around with and invest.
Joe: (00:58)
Yeah. So earlier in the year we spoke with Jigar Shah. He is the head of the Loan Programs Office at the Department of Energy. And I think that he had a loan budget somewhere around $30 billion, essentially a way for the public sector to provide backstop or provide accelerated financing for new energy technologies. Kind of an interesting conversation, but I don't think, you know, in the grand scheme of the energy transition, you necessarily expect $30 billion to really move the needle.
Tracy: (01:29)
Right. But $350 billion might do.
Joe: (01:32)
Right! So as part of the Inflation Reduction Act in August — there's a lot in there. It's a huge bill. Much of it related to climate, energy transition, energy security — tucked into that bill basically is money that will turn the Loan Program at the Department of Energy into a major player. It now has, as you said, over $300 billion to lend out to accelerate clean energy finance. And so rather than just being sort of this small office, Jigar, our guest, is a crucial player in the energy transition.
Tracy: (02:07)
Yeah. A major player. So we should definitely talk to him about what's interesting him right now and how he might actually deploy some of that money.
Joe: (02:14)
Jigar, thank you so much for coming back on Odd Lots.
Jigar Shah: (02:17)
Thanks for having me back.
Joe: (02:19)
So this is very exciting. Let's go really big picture to start. Talk to us about what you had to deploy or sort of the size of the DOE loan office when we talked to you in June, when it didn't look like there were going to be be some major changes and now what the law means for your role?
Jigar: (02:37)
Yeah, look, I think that the Loan Programs Office has always played a critical role in figuring out how to get debt into infrastructure, right? Infrastructure projects don't get built to make 20% unlevered returns. They generally need an equity-debt split. And debt really doesn't want to get involved early in technologies that it perceives as risky, right?
And so you have this fundamental disconnect where you've got a bunch of awesome R&D happening at the Department of Energy and a lot of technologies that gather dust waiting to get deployed at scale because first of a kind deployments are really difficult. So our office has put about $35 billion out the door, mostly in 2009 and 2011, and then has roughly $39 billion left to deploy into what's called 1703 Title 17, which is where a lot of the solar and wind projects got funded.
We had the ATVM, the Advanced Technology Vehicle Manufacturing Program, which is where Tesla and Ford got their loans. And then we have the Tribal Energy Loan Guarantee Program. So that's what we had when we last talked, was roughly around $39 billion of remaining authority. And then we got more out of the Inflation Reduction Act
Tracy: (03:54)
Almost 10 times more. So I have a conceptual question about the program, and I know it's been going on for a while. You mentioned the loans to Tesla and Ford, but why did the government or the department settle on loans versus grants? Like what was the thinking there?
Jigar: (04:13)
Well, we do both, right? So I mean, when you’re the Federal government, you can do both. So we have the Office of Clean Energy Demonstration, which has over $20 billion worth of grants that it can put out the door. And I think it got an additional $8 billion in the Inflation Reduction Act for industrial decarbonization.
But ultimately, grants don't actually help you cross the bridge to bankability, right? So when you think about where we are in the commercialization spectrum, we have a whole bunch of technologies that work, right? It physically works in the lab and the national laboratories, etc. And then you need demonstration projects. And those demonstration projects are generally at a quarter scale, half scale, something like that. And you end up getting grants for that, right? And then those grants are really useful in improving that technology, not just that the underlying technology works, but also that the operations and some of those pieces, which are softer skills, that those actually work as well.
But then you're still left with the technology that commercial banks don't want to fund. And in that case, you really do want loans. And when you talk to Wall Street banks and other banks in the United States and elsewhere, they really do look to us to go first. And when we go first, they are watching us very carefully and saying, ‘Wow, that was a great way that you underwritten wrote that loan. We are now gonna do the next 10 loans.’ And if we didn't do that first loan, they wouldn't have done the next 10.
Joe: (05:40)
Can you talk a little bit more about post-Inflation Reduction Act in your office? I mean, Tracy mentioned that now your allocation is maybe around 10X larger than it was, but it can't just be about there's more dollar amount. Talk to us a little bit more about how you're thinking about this new opportunity with this level of cash to work with.
Jigar: (06:03)
Yeah it's a good question. Look, I think that we have already been very active in the last 18 months that I've been in office. And so that means that we have, I think we just announced today over 84 active applications now into the office seeking over $86 billion of loans from our office, right? So that's the outreach and business development group.
And what I would say here is that there was a serious breakdown in trust between entrepreneurs and growth companies and our office, right? Because you could imagine after Solyndra occurred and you had all the hearings on the Hill etc., people are like, ‘I don't know if I want to work with this office.’ And so getting people to look at this office and to believe that we were going to be a reliable source of loan financing for them was a huge accomplishment, I think, over the last 18 months.
And we've been able to get loans applied for across 13 sectors. So this includes folks who use natural gasses of feed stock to make carbon black and, hydrogen like Monolith Materials. It includes a hydrogen storage facility that we talked about on the last podcast at Delta, Utah. So now you have all these people who've applied and you now see it the next 200 potential applicants looking at our office saying, ‘Wait a second, maybe I'm missing out on something here. I should be looking at this office more carefully.’
And so we've now, you know, we're going to hire another 20 people in the outreach business development group. And these folks are generally folks who've sold a company, right? Their senior executives that are sort of looking for ways to give back. And so they're joining our office helping to be an ombudsman for their fellow entrepreneurs and saying, ‘Look, you know, the water's warm. You should jump in.’ Because remember, these applicants have to spend two to 300 hours filling out an application, right? It's no joke. It's not unlike what it would be to get a billion dollar loan out of a commercial bank. It's a full data room, the whole nine yards.
Tracy: (08:01)
You mentioned Solyndra and we should definitely talk about that, but before we do, I just have one more basic question, which is, you know, $350 billion, is there some sort of timeframe that you have to spend that in?
Jigar: (08:15)
Yeah, so for the Title 17 program, which is 1703, that's where the project finance occurs. And then we have a new program called 1706, which is repurposing energy infrastructure so that it can play a continued role in the energy transition, right? So converting a coal plant to a nuclear plant, things like that, that is 1706. Those two programs expire at the end of 2026. So we have to put that money out the door over the next four years. And then the advanced Technology Vehicle Manufacturing program got an additional $40 billion of loan authority, and the Tribal Energy Loan Guarantee program got an additional $20 billion of loan authority. And those two go through 2028.
Joe: (08:55)
So when you're thinking about making these loans and something you talk about, and I want to talk about the theory a little bit, or the theory of how this changes, and as we talked about last time on the show, and as you've been tweeting about, you know, this really is important in energy tech in particular for the government to de-risk a sector or to establish some credibility or to make that first loan.
When you're thinking about these loans, how much are you thinking about, ,Okay, this is an interesting company, maybe it'll be the next Tesla, or something’ as opposed to ‘This is an interesting company that we have an opportunity to really accelerate versus this is an interesting sector,’ and how much are you thinking about making loans, not with the express purpose of maybe supporting a company, but trying to really foster an entire industry? And how do you maximize this crowding-in effect, so that you create a cascade of investments across players in any given promising space?
Jigar: (09:53)
Yeah, I've got multiple answers probably to your question. I'd say that from a strictly the way that we run our office answer, If you fill out the paperwork and you qualify for the Loan Programs Office, then we'll give you money. Full stop.
So I don't really care if you're gonna be the next Elon Musk or you're gonna be the next whatever, right? If you project meets what we call the reasonable prospect of repayment, we really do operate like a commercial bank. So if I feel like the ingredients of your project means that we're likely to get paid back, then you'll get a loan. Okay.
That's separate from where we do our outreach and business development. So in our outreach and business development, you could imagine we are looking for areas where there is a crowding-in already of an ecosystem, right? Because if a company is really amazing but everyone leaves the space then we're stuck with a loan that everyone is basically just, you know, trying to make good on for 20 years. But there's no excitement there.
I'll give you an example, like solar-thermal electric, right? So these big mirrors in the middle of the desert. We funded a bunch of those projects right in the first generation. Nobody wants to do that anymore. They're all moved on to solar PV panels and other things, right? So I'm stuck with a bunch of loans with a bunch of projects that work and there's cell power. But you can imagine that there's no enthusiasm in that sector for innovation or anything else. But I still have those loans for 20 years.
Joe: (11:19)
Tracy, if you've never driven past the Ivanpah Solar Mirror Farm outside of Las Vegas, it's really incredible. It's just a bunch of mirrors all pointing light at a big pot of water to get it to boil, to spin a turbine. But I don't know, maybe it's not the most perhaps tech exciting thing, but it is visually very cool to see when you drive by
Tracy: (11:38)
Next time I go, definitely. I'll have to take a look. Actually, this kind of leads into one thing I wanted to ask, which is you mentioned choosing commercially viable projects or things that you think we'll be able to repay the loan. How do you go about evaluating unproven tech in that category? Because it seems, you know, if someone comes to you and says, ‘We want to build a a big solar farm here, or we want to do geothermal there,’ that seems like an understood risk or a more understood risk. But when people come to you with something completely new, how do you evaluate that?
Jigar: (12:10)
Yeah, so to be clear, we never take technology risk at the Loan Programs Office. We take perceived technology risk. There are a lot of technologies that you probably look at and go, ‘that looks risky,’ but I've got 10,000 engineer scientists and experts that sit on the DOE platform that have been working on that exact technology for 25 years, and that technology is not risky to them. And they can show me demonstration project after demonstration project where the underlying concepts around that technology has worked.
Now, it may not actually work operationally and that risk we do take. So for instance, on the Monolith Materials deal that we provided a conditional commitment to back last December, that technology is 25 years old. It basically uses methane pyrolysis to split natural gas into carbon black and hydrogen, right? And the carbon black goes to make your tires and the hydrogen is actually quote-unquote ‘free.’
And they're using that to make fertilizer in Nebraska where they need it. Now, if that technology works but they're only able to maintain a 50% uptime in the plant, then they're going to barely be able to pay back our loan. But if they operate that plant at 80% uptime, which is what they expect to do, they're going to be hugely profitable. So we're taking that risk, but we're not taking the risk that methane pyrolysis actually works.
Joe: (13:32)
How do you evaluate where you see the potential for crowding-in this, because as you mentioned, you know, you could theoretically have a project that pays back like the solar mirrors, but it's not that exciting. There's not a lot of enthusiasm. It's not going to generate some new industry that massively changes the game. A) how do you sort of identify where there's a high likelihood of a sort of more fruitful acceleration? And are there any specific areas right now, any subsectors of energy right now, that you're looking to, that you're thinking, okay, yes, this is something that clearly you can, you can add some fuel to the fire.
Jigar: (14:11)
There's definitely a lot of sectors where we're very excited, but it might be more instructive to tell you where I'm less excited. Not unlike venture capitalists, you look at the TAM of the market, right? The total addressable market. And you know, when you look at like, for instance, small hydro, right? We have report after report after report showing that that's probably a $60 billion sector, but when you actually go from the TAM to the SAM to like the smaller addressable market, it might be $5 billion, right?
And then the question becomes, if we put in $500 million, how do you crowd-in a bunch of capital when the total market size might be $5 billion that they're chasing, right? It's really hard. But I love hydro, right? And geothermal I would say is similar. We have next generation technology, which will greatly expand the ability to do geothermal, but if you look Ormat’s version of geothermal, for instance, which we funded in the 2009, 2011 timeframe, that market size is very small.
It might be $10 or $20 billion total in the United States of that kind of hot rock that we know you can put a well down into and find. And so unless you get enhanced geothermal, which uses advanced fracking technology and other things, working, you don't get to trillion dollar scale. And ultimately trillion dollar scale is what saves gigatons of carbon, right? $8 billion doesn't solve gigatons of carbon.
Tracy: (15:54)
So you mentioned Solyndra, and I think we should talk about it because whenever anyone talks about these loan programs, this is the one that tends to come up or that tends to be brought up by critics. So this was a solar company that borrowed, I think it was like half a billion from the energy department. And then it basically defaulted on that. What was that experience like? Or what did you learn from that particular example?
Jigar: (16:23)
Well, I was on the other side at the time, and you know, I and many of my colleagues were telling people, don't do that deal. And look, I think the reason that they did the deal was there was probably 12 people working in the office at the time. I think the Bush administration had started the underwriting of that loan. And then, remember we had a financial crisis and we were looking for shovel ready projects, and that project was shovel ready, right?
So mistakes were made, lots of hearings were held, lots of reports were written, and we were given a checklist of 14 or so things that we should improve in the office. Those have all been improved today to the point where the Office of Management and Budget now believes that we manage risk better than probably every other lending institution in government.
So I'm not going to say that it can never happen again, but I would say that that deal would definitely not make it through today's Loan Programs Office. And when we do have failures in our office, which we've had many, right? Whether it's Fisker or Bound Solar or others, we now average 55 cents on the dollar of recovery. And, you know, our total losses for the whole program, including Solyndra, has been roughly 3%, which is the same as a commercial bank portfolio.
Tracy: (17:37)
You mentioned that something like the Solyndra loan wouldn't have gotten through the approval process nowadays. What is it about the process that's changed? What are you doing differently now?
Jigar: (17:48)
Well, for manufacturing projects, which is what solar is like, so I'm evaluating the next generation of solar projects, right? And in the Inflation Reduction Act, we had a new policy called SEMA that passed, which provides an additional incentive to solar manufacturing in the United States.
So we've got 20 gigawatts of new solar manufacturing applying or having already applied to the Loan Programs Office that we're evaluating. And we're very conservative. We're saying, you know, ‘what are your offtake agreements? How solid are those offtake agreements? Are you a proven operator of these kinds of plants? Do you know that these solar panels are gonna work? How long will it take to ramp up?’ Like, I mean, we're really, really hard on these applicants. Like Solyndra was a pure startup company. They had never operated a plant like this before. Their product in the field, I think had maybe, had in that particular version two to three years of total time in the field. And so it had a lot of risks that we would never allow through the program today.
Joe: (18:44)
So you tweeted recently an interesting thread, you said there's been a central premise that if the technology was ready, then the commercialization would happen. And that kind of gives me two thoughts.
It's like one, do people who come from, say, the tech world and they look at energy or they look at climate, do they have misunderstandings about how energy technology becomes commercialized? Are there biases that they bring from say, consumer tech or business tech where they assume that it's like, ‘well, this works, it works on my phone, it's better than the last app, so I can do the same thing.’ And in energy, like, are there other lessons that don't apply?
And then just more broadly, you know, you talked about these technologies gathering dust, can you talk a little bit more about the theory and like how it comes together in energy, specifically, what has to happen for the right technology to meet the moment?
Jigar: (19:39)
I mean, there's certainly billionaires who I won't name, who have no energy experience that have said lots of things that I disagree with around how energy tech gets commercialized. I think in general, what I would say is, let me give you an example, and this is true across every sector, but let me give you an example.
So if you look at fracking, the DoE invented fracking. It was all of our R&D,. That's been well written about by reporters. I was involved in fracking projects when I worked at BP in 1999, 2000. But at the time, oil prices were, I don't know, like 30 bucks a barrel maybe. Or 20 bucks a barrel. And so it didn't make any sense. I mean, at that time it was about $80 a barrel to profitably frack.
But you had these people who were just like, ‘I don't care. This is definitely going to change the world.” Harold Hamm and some of these other players, and they just kept doing it. I mean, why the hell would you frack in The Bakken back in like 2003? It made no sense at all. But he did, he just kept doing it and he kept raising money and he kept promising the world to people. This is gonna definitely change the world. And then in 2007, oil prices went to $132 a barrel and Harold Hamm was suddenly rich.
Joe: (21:00)
Yeah. According to Google, he's worth $21 billion.
Jigar: (21:03)
Right. But I mean, in what world did what Harold Hamm did make any sense to anybody, right? But the same thing's true with Elon Musk when he started, you know, when he took over Tesla and then grew it. But the same thing's true with Andy Marsh. I don't know if you guys have talked to Andy Marsh over at Plug Power when I helped invest in his company while I was a debt provider, when I was at Generate in 2016, I think his market cap was $300 million. Amazon and Walmart had already agreed that they were going to change all of their forklifts at all of their distribution centers to hydrogen-based forklifts because you could have much higher run time and the payback for Amazon and Walmart was 31 days to switch. But it still took forever. And, you know, they had to raise money and it was hard. And today, Andy, I don't know what their market cap is now, but it it it topped out at like $30 billion.
Joe: (22:00)
Yeah. $15.5 billion right now.
Jigar: (22:03)
Yeah. And they are single handedly forcing the world to do green hydrogen. They have I think a $14 billion order book of backlog of electrolyzers that they're selling into Europe. And so there is no rational reason. I think Andy's been CEO of that company for 13 years maybe. But that is how this works in this country. You have somebody who just feels in their gut that this is going to happen. And in what's different in the energy space versus the tech space is there's no upside, right? So let's say you succeed, let's say you succeed beyond your wildest dreams, right? You're still capped by the cost of natural gas or the cost of oil, the cost of the substitute. The only place where that's different is potentially in Tesla where people are willing to pay $140,000 for a car.
Joe: (22:53)
That's interesting. So you could have this breakthrough, you could have some sort of like tech hydrogen breakthrough, fuel cell breakthrough, green hydrogen, etc. But if you go through a long period, I guess, where natural gas is cheap or oil is really cheap, it just doesn't matter. You just sort of, I guess what? You wait around for your turn until there's a moment when it becomes economical.
Jigar: (23:14)
Yeah. Look at the Vogtle nuclear plant, right? How many people have written negative stories about the resurgence of nuclear in this country? The Votgle nuclear plant has now gotten NRC approval, right? To load fuel into Vogtle 3, right? And that facility, Lord Almighty, that timing was perfect. Look at where natural gas prices are today. Southern Company is thanking they're lucky stars that they have new nuclear in their territory right now.
Tracy: (23:45)
Actually, this leads into something else that we wanted to ask you about, which is nuclear and how you're thinking about it and what the opportunity is there. And I guess, does it feel like attitudes towards nuclear are starting to shift given some of the energy shortages that we've seen this summer?
Jigar: (24:01)
Well, I'll give you two anecdotes. One is that like Diablo Canyon just reversed their decision and will will extend their life there. This is in the state that invented anti-nuclearism, right? Germany just decided to extend two of their nuclear plants, you know, that they were planning to shut down in December. Like the Green Party, the only reason the Green Party is even in the government is to shut down the nuclear plants, right? I mean, yes, things have shifted.
I mean, we're in a situation right now where you, look, I love solar and wind, I don't think there's a single person on the planet that you could find who loves it more than I do. But I read models, I look at data, I look at how California runs its grid, how Texas runs its grid. You can't run a well functioning grid without a diversity of resources. And nuclear is the only resource that can scale to the same level that coal, natural gas is at today at that base load.
And when you look at all the models coming out of the NL Clean Futures reports, or Princeton, or you know, Vibrant Clean Energy or some of the other best in class modelers, they're showing that probably something in the order of 40% of all of the grid’s electricity has to come from what we call clean firm technologies. By the way, for solar and wind, to get to 60% of the grid, we would have to take the current volume, which is around 35 gigawatts a year, increase it to 80 gigawatts a year, and then increase it again to 160 gigawatts a year. So no one is taking any, like, food out of the mouth of babes here.
Tracy: (25:47)
Do you think about grid mix and resiliency when you're approving loans? Would you think, like, ‘oh this, you know, this could add a backup power source to this particular location, or this is interesting for that.’ Is that something that you try to build in a little bit when you're approving these?
Jigar: (26:06)
No. So I mean, again, in terms of who gets loans, it's people who qualify for money from the Loan Programs Office. If you fill out the paperwork and you qualify, yes, you get money. Now, some of those projects pencil because of the grid mix, right? So like TVA is building two nuclear plants that they announced at Clinch River because they believe it's important for their grid mix.
And if TVA then, well TVA can’t because they're a federal entity, but like if Dominion or Duke or somebody else comes in and says, ‘we want a loan,’ the reason that they rate-based that project is because they convinced their regulators that they needed that nuclear for their grid mix. And so that part's true. And separately, we get so much data, like we've evaluated at a cursory level a trillion dollars of projects since I've come into office. And so we have better intel on what's happening in the country than any investment bank in the country, right? And so that intel can be used to create insights for the government and for planning purposes and all that stuff.
But the other thing I would say, Tracy, is I feel like one of the things that people get hung up on is that they really feel like, just because a spreadsheet model said that it was the best, most optimal structure that that would have any chance of becoming reality, right? Like these are all hard fought wins. And people take it for granted, if you want to build a solar farm somewhere, you have to get approval from the landowner, approval from the county, approval from this thing. That person believes that your inverter's gonna cause them cancer. You're gonna have to figure out how to talk about white papers. You're gonna do all these things. Every single piece of infrastructure is a struggle.
You gotta figure out community benefit agreements. You gotta figure out how to like work with the labor forces in the area, etc. And so the modeling helps you to figure out like what should be pursued. But then what actually happens is based on just blood, sweat and tears from these developers in local communities, duking it out every day trying to get permission to build something.
Joe: (28:35)
Going back real quickly to the nuclear question, and you mentioned the Vogtle plant in Georgia, but more broadly, if nuclear is inevitably going to be part of the low carbon mix and provide low carbon energy at scale, it seems like plants, they always seem to be running behind in terms of schedule, over budget, and sort of infamous. There are technologies that people seem to be excited about within nuclear small reactors, but I don't know that any are actually getting built or are actually scaling. How are you thinking, like A) how are you thinking about the opportunities in nuclear specifically and how you can accelerate it? I don't know. It feels like there's all these exciting opportunities and it just seems extraordinarily difficult. How can you make it easier?
Jigar: (29:22)
It's a good question. Look, I think the first thing is to recognize that we have a problem, right? I mean, even China who is trying to force their way through nuclear is behind schedule and over budget.
Joe: (29:34)
Why is that? Why can't they just add 20% so that everyone is on budget?
Jigar: (29:40)
No, it's over the 20% that they added already. I think in general, it's about building airplanes, not airports. So right now a nuclear plant is built like an airport where you have a custom design for every single site. And then you’re like ‘oh, the contours of this land is a little bit different,’ or whatever. When you look at how a natural gas plant is sited, a natural gas plant, Bechtel like invented a lot of this, but others have done the same. They won't actually build a natural gas plant for you unless you meet all of their specs. They're like, this site has to be perfect. It has to have this level, it has to have this much land, has to have this, this, this and this. And unless it's all perfect, we're not going to build it for you.
That's what we're doing with SMRs, right? So we're building airplanes. Airplanes are remarkably complex. Many suppliers, lots of assembly. All this, you know, management. But what you do differently is when they started the Vogtle nuclear plant, they had only had a 15% completed design. When you have an SMR, you have a hundred percent completed design because you have to hundred percent complete design before you start construction and get all the suppliers locked up and all those things, right? And then you build them in a controlled environment where the amount of civil works at the site is 80% less than it is for traditional nuclear because most of it's built in a factory and then brought in pieces to the site to be final assembled.
And so, so you know, the one that's farthest along in North America is GE Hitachi has 10 reactor orders, right? Four from Ontario Power Group, four from Saskatchewan Power, and then two from TVA, and then the TVA site could be doubled to four sites. Then you've got places like Duke Energy and others who've put three nuclear plans in their IRP plan, their integrated resource plan, but they don't know which technology they're going to pick. Separately, NuScale just made it through the Nuclear Regulatory Commission with a full approval. And so they are working with UAMPS, which this group of municipal utilities in Utah to buy power from their first facility. And you have an announcement between Holtec International, which is the world's largest producers of casks to store nuclear waste and Entergy to build nuclear plants between those two firms.
So we'll see who wins, right? It's not my job to pick who wins and loses. It's the job to pick which design they want to go for. But I do think that they have a brand new approach here. And the other thing I would say is, from a political standpoint, back to what I was saying to you before, Tracy, part of the reason these projects happen is not just because of cost, part of it happens because of politics. So we have 265 coal plants that have been announced for closure, right? Each of those communities generally are populations of less than 5,000 people. And so half of their budget for their city comes from that coal plant.
So if that coal plant shuts down, they're going to lose all the money they have to pay for schools. And so they want to replace it with something that's going to pay those property taxes. Separately, you have 200 union workers in those coal plants and they want to continue to be employed into the future, right? So you could imagine that community preferring a nuclear plant there over a solar field with battery storage that doesn’t pay as much property tax or have any ongoing operating jobs.
Joe: (33:04)
I want to go back to sort of where we started and, you know, you have all this money. You say you're hiring 20 new people? In like four years, getting it out of the door by 2026, that kind of doesn't feel like that much time. I mean, maybe I don't have a great feel, but this seems like a lot of cash that you could potentially deploy and, you know, you don't have an infinite amount of time. Can you talk a little bit more about your sort of plans, like right now, to scale up your office and how you're thinking about getting the money out the door in a timely manner while also keeping your standards high so that the money, you know, ultimately delivers on the promise of accelerating what the loan office is for?
Jigar: (33:46)
Yeah, so we're definitely hiring more than 20 people. Those 20 are just the folks in the outreach and business development. But in terms of maybe breaking this down for you a little bit. So we got a hundred billion of new money into our three existing programs, right? So it's 1703, ATVM, and Tribal. Those programs, given the amount of like pipeline we have and all that stuff, those programs should put that money out the door within the timeframes allotted. I have no doubt that we have the right mix of entrepreneurs and growth companies who need the money and the right mix of, you know, employees here to process the loans. And so we can get that done.
The new program, which is 1706, the charge there is to repurpose energy infrastructure, right? So that program does not have an innovation requirement like 1703 does. So in that program, the requirement is we have to find existing energy infrastructure, right? Whether it's been ceased in operations or whether it's operating today, and somebody has to suggest a conversion of that infrastructure into something within the energy transition, right? So they could convert a coal plant to solar plus storage. They could convert it to, you know, nuclear plant.
They could take a refinery and co-locate a Monolith Materials carbon methane pyrolysis unit, and then have the excess hydrogen from that unit go into the refinery. They could take an old pipeline, like we have a couple of people who have approached us with old pipelines, where the natural gas volume is actually low because there's a competing pipeline in the area and they want to shut down that pipeline and convert it to a CO2 pipeline, right? So a lot of those projects are really about a community coming together and saying, ‘Hey, we actually have all this expertise in our community around energy and around infrastructure, and we'd like to continue to make money and get tax revenue and all that stuff from that expertise. Let's figure out what we want to repurpose our old energy assets so that it's relevant in this decarbonized world.”
Tracy: (35:49)
So this announcement went out as part of the Inflation Reduction Act. What's been the response so far? Have you seen an uptick in loan applications?
Jigar: (36:00)
Yeah, we definitely have. And I think that the bigger thing honestly is that we have a really weak ecosystem around the Loan Programs Office. And you know, admittedly, because the Programs Office was largely dormant since 2011, so what we really need, and we've been doing a great job of doing this, but we need a whole bunch of like investment banks, commercial banks, financial advisory firms, etc., to be sending their clients our way, right? Because a lot of them are getting hired by these entrepreneurs to raise debt for them. And they need to be saying, ‘Well actually, you know, I think it would be easier for you to go to the Loan Programs Office because your technology has some of these misunderstood components, which I think will make it hard for us to raise debt in the commercial markets.’
Joe: (36:45)
Do you have those relationships or are they forming such that you're in communication with some of the energy bankers or tech bankers?
Jigar: (36:53)
Yeah, you can imagine given my, my background, I know pretty much all of them. And so we've talked to almost all of them in the last 18 months. I'd say, look, you know, they're bankers, right? They care about earning fees. And so with the IRA passing, they're like, ‘Oh, the volumes are much higher. I think I could earn a lot more fees.’ So you could imagine that a lot of the seeds that we planted 12 months ago or like, they're all coming back going, ‘Hey, Jigar, You know, that conversation we had we're very interested now.’
Joe: (37:20)
This actually is not a Loan Programs Office question specifically, but you know, we're recording this on September 7th, and over the last two days, and I think over the next couple of days, there's a lot of anxiety right now about the grid in California specifically. And they came close last night, I think, to maxing out, but they just managed to avoid wide scale blackouts. But it does raise this concern, it's like, okay, everyone is gonna be putting their cars on the grid with electrification and their stoves and their hot water etc., is the sort of vision. And yet right now the headlines, the stories are about the grid having trouble keeping up. So we're going to like put all our eggs in this one basket. And I kind of feel like people have a reason to be intuitively nervous about that electrification. All these industries and appliances seem exciting, except if the grid is itself vulnerable. Why shouldn't people be worried about this direction that we're going in?
Jigar: (38:19)
So are you saying that natural gas pipelines are not vulnerable?
Joe: (38:27)
My intuition would be that well, there's a diversity of sources so that gas pipelines exist, grids exist, and so forth, but we're putting it all on the grid now, right? Or that's the vision...
Jigar: (38:40)
Look, I think that the bottom line here is that natural gas was a bridge fuel, right? We all talked about it being a bridge fuel and clearly what's happening with Nord 1 and their maintenance issues, what's happening with our LNG community, etc. I mean, the United States is on the second half of that bridge, right? Like the bridge was long, it was well built, it had wonderful, like, bones, but now we're on the other half of the bridge and we're figuring out how we actually moved to something more efficient. Think about how this works today. You burn natural gas to cook, right? It emits all sorts of weird toxins in you home when you do that because natural gas is only 98% pure natural gas and the other two percent's other stuff. So you have indoor air quality issues separately, right?
Separately, natural gas, in the end right, is volatile. And you see that now with natural gas prices spiking going into the winter, right? And so, you know, we all got lulled into sleep, you know, around how natural gas was super cheap. But remember the 2001 California electricity crisis, part of what caused that? Yes, Enron, but also remember natural gas prices spiked to like $15/million BTU. And then remember in 2005 when Lee Raymond said, all cheap gas has been found in this country and we have reached peak gas, you remember this and then natural gas prices went up to like, I think they were like $10 to $12 a million BTU in 2007. Right? And then the fracking revolution occurred, and it's great, don't get me wrong, but even with today's prices of natural gas, you're seeing not a lot of additional drill rigs, right?
And so, well, so when you think about where we are today, look, I'm a huge fan of natural gas and we should be exporting our LNG around the world so that people aren't burning more coal. But it is way better to use a heat pump, which is 3X more efficient than a natural gas, you know, system, right? It is way better to create a heat pump for your water heater than it is something else. On top of that, California's just saying, ‘don't charge your car from four to 9:00 PM,’ not don't charge your car at all. So that means it's like saying don't fill up your gas tank at the gas station from four to 9:00 PM.
Joe: (41:04)
Yeah, but the point is, that's not a thing that's said, right? When you have a car that is filled by gasoline, you never have to think about that. You fill it up 24 hours a day. It's just...
Jigar: (41:14)
I mean, the 1970s you thought about it all the time, right? Like Joe, I appreciate that we have lived in a period of energy abundance and we need to get back to a period of energy abundance, which is, I think what you're saying, and I think it goes to what Tracy's suggesting, which is planning it matters, right? And we need to plan, right?
And that means that some of these coal plants may have to run a little bit longer before they shut down. So we have adequate excess capacity on the grid and it means that we have to rapidly move to solar and wind and nuclear power and geothermal and other things, right? But ultimately when you think about how you actually solve this problem, remember when we talked about it last time? You can solve it a couple ways, right?
When you have an energy supercycle or a commodity supercycle, you drill for more commodity, right? You make more electrons fine, you use the electrons we have more efficiently, right? That's a lot of what heat pumps and those kinds of things are, right? They use far less electricity and energy then what they're replacing, right? And we don't do enough of that. It's amazing to me how everyone always just defaults to making more stuff, drilling more stuff instead of helping people use stuff more efficiently.
And then the third one is you have to invest in the substitutes, which is what my office is doing, right? We're scaling up the substitutes and we have these demonstration and deployment pathways that we're writing across nuclear, across hydrogen, long duration energy storage and carbon management. And the reason we're doing that is we're really writing down what is the 99 step process that we need to follow to scale up these technologies to trillion dollar scale so that Wall Street and everyone else can follow what we're doing. But I don't think that we should say that we should, you know, cut off progress, right? Because there's bumps in the road during the transition.
Tracy: (43:04)
So I have just one more devil's advocate question. And you've spoken very elegantly about crowding-in and scaling up some of these technologies, encouraging Wall Street banks to get interested, that sort of thing. Does the risk of crowding out investment, crowding out private investment, which is a classic criticism of government financing for these types of projects, does the crowding out risk grow once you jump from, you know, a budget of $39 billion to something like $350 billion? Does it change along with that scale?
Jigar: (43:39)
We'll see, right? Like the folks I've talked to have assured me that we're not crowding out the private sector. I would never want to. In general the process of going to the Loan Programs Office is no picnic. I mean, we have made it far more streamlined than it was when I got here, but it's still, you know, a pretty involved exercise. If you could go through a commercial bank, I think you would. So I don't think we're in that territory yet, but it's something we have to watch for.
Joe: (44:06)
I think this is going to be one of the most sort of interesting, I mean obviously there's a lot of money behind it, but I think, it’s going to be one of the most interesting things to watch over the next several years and potentially a model. You know, like people look at the Federal Reserve and they're like, ‘Oh, their tools are very blunt. You raise interest rates and lower them.’ In a way., you know, you are now the head of a sort of very large government policy bank that can direct capital in certain ways far more nimble than many of the other operations that we have. So Jigar Shah, thank you so much for coming back on so soon and I think everybody should be interested in what you do over the next several years.
Jigar: (44:48)
Well, we really appreciate your interest. And honestly, I think it's really more about the fact that these projects have to come together, right? I can't make them come together. They have to come together. So part of what we've lost the knowledge around is how to bring these projects together, right? And we're now bringing that back, that is super exciting.
Joe: (45:06)
And it does seem like one of those things, like it's an easy thing to say, like years ago we had Bill Janeway, the former VC on the podcast and we were talking about some of this stuff with energy tech and the importance of unlike say, consumer tech of the government providing some of these like backstops and de-risking. But it's one thing to say it, or it's one thing to identify, yes, the government needs to have a role, but to actually operationalize that and to do it well and to do it in a cost effective manner and in a timely manner with only a sort of limited time seems like it's going to be a very interesting challenge.
Jigar: (45:41)
That's for sure.
Tracy: (45:43)
We'll have to have you back on, Jigar, and you can tell us how it's going.
Jigar: (45:47)
I appreciate that.
Tracy: (45:48)
Probably not, you know, in another two months this time.
Joe: (45:52)
Maybe in a year. Let's check back next September.
Jigar: (45:57)
I look forward to it. You know, I went to college with Neel Kashkari, so we'll both have to have our annual Odd Lots.
Joe: (46:04)
I love that. Annual tradition. Thank you so much Jigar, thank you for coming back on.
Jigar: (46:09)
Yep. Thank you.
Joe: (46:10)
Take care.
Joe: (46:24)
Tracy. Obviously I really liked that conversation. I do think to that last point, you know, again, it's one of these things where it's easy to in theory, ‘Okay, we can identify why in energy there is a specific role for the government to play in taking on some of these risks, backstopping this risk.’ But actually how good is the government at it and how much can it scale and make good loans that actually like accelerate this crowding-in effect and have this positive effect on accelerating industries I think is a pretty big open question still.
Tracy: (46:58)
I like the bit where Jigar said everyone should do what I'm suggesting and think of the planning over the grid mix. That was my favorite part. But I do think there is a tension there between like, it feels like a lot of these projects sort of, I don't know, they almost, they happen and they might make sense, you know, on a local basis or on a narrow basis, but then when you look at them sort of holistically, you start to spot more difficulties, right? Or like more issues with the mix. And I wonder who is overseeing the whole thing?
Joe: (47:33)
I mean that kind of seems like the problem, right? And you know, one of the things that also is being debated in DC right now is the question of permitting reform. And a lot of energy projects in general seem to hinge on the permitting process, which Jigar talked about because, you know, you set up a solar farm or something, you know, how many local authorities do you need to get? Like there isn't anyone overseeing it. And so probably in theory, if you had some sort of entity that could say ‘no, just put up the land or just put up the photovoltaics on the land, it might be easier. But we don't have that kind of system and so we just have to sort of keep going at it, it sounds. But it's like hard work. It's real work.
Tracy: (48:13)
Yeah. I mean that said like there are these issues and how do you actually put them into place and how do you overcome some of the permitting issues and things like that. But going from $39 billion to $350 billion, I mean, that is a big step change.
Joe: (48:26)
It's a huge change. And then to his point, which I thought was really interesting, just this idea of like rebuilding that relationship between the office and the Wall Street banks, or the idea that the Wall Street banks would be familiar with the office and now that it has this much money, and obviously, in the last time we spoke with Jigar, we talked a little bit more about his background in the private sector.
Tracy: (48:51)
At SunEdison.
Joe: (48:52)
Yeah. Creating SunEdison. And so he has these connections, but like actually like building up that network and bankers knowing to refer people to the Department of Energy when it looks like there's a project that would likely qualify for a loan. Like these are all sort of interesting things that will determine whether this is successful or not.
Tracy: (49:09)
Yeah. I mean that's also kind of why I asked the crowding out question as well. Because if banks get too comfortable with, ‘Oh, here's an energy project, let's just send it over to the DoE,’ that could be problematic too. Although in general, I do think that the government is the correct financier for a lot of this.
Joe: (49:25)
And I do think that was interesting too about energy being unique and that you might have something special, something promising, but the timing is just not right. And so it's like the late nineties, you know, there was a lot of excitement about clean energy in the late nineties too, but oil and gas were really cheap.
Tracy: (49:45)
I sometimes wonder if the DOE should be taking equity stakes in some of these companies. I mean, Tesla, they gave that loan in 2010. If they’d taken equity in Tesla, we'd have a lot more money for clean energy.
Joe: (49:57)
That's true. If it were set up so that they could recycle those profits.
Tracy: (50:03)
Anyway, it'd be good to get Jigar on once a year in September. That'd be fun.
Joe: (50:07)
Yeah, see how that’s going and we could do a walkthrough of all the loans he's approved over the last year.
Tracy: (50:10)
Yeah. The exciting new projects that he's seeing, hopefully. Alright, shall we leave it there?
Joe: (50:15)
Let's leave it there.
You can follow Jigar Shah on Twitter at @jigarshahdc.