Jigar Shah on Financing the Energy Transition

Jigar Shah:

I really am bullish around this entire strategy and where we're headed. I know that things always look darkest before dawn, but I think the dawn is coming.

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, chief sustainability officer at BMO. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices, and our world.

Speaker 3:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.

Rahim Bapoo:

I'm Rahim Bapoo. I'm a managing director at BMO Capital Markets, and I'm here joined today by Jigar Shah, director at the Loan Programs Office at the US Department of Energy, at our 33rd annual Global Metals and Mining Conference. Now renamed the Global Metals Mining and Critical Minerals Conference. 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 Ioneered pay as you save solar financing. After SunEdison, Jigar served as the founding CEO of the Carbon War Room, a global nonprofit found by Sir Richard Branson and Virgin Unite to help entrepreneurs address climate change. Originally from Illinois, Shah holds a bachelor's from the University of Illinois and an MBA from the University of Maryland. With that said, it's an absolute pleasure to sit down with you here today and I look forward to our conversation.

Jigar Shah:

Thanks for having me. This place is buzzing.

Rahim Bapoo:

Can you start by telling our audience a little bit more about the Loan Programs Office? We're used to gathering here in this forum with a lot of private investors, but this year it feels like there's a lot more government involvement.

Jigar Shah:

Yeah, look, I think that after the passage of the bipartisan infrastructure law and the Inflation Reduction Act, the Loan Programs Office has clearly been given a mandate to help with onshoring and reshoring these critical sectors here in the United States. I think when you think about what the form of capitalism looks like here in the United States, we've had extraordinary technologists for decades, and those folks got grants from the Department of Energy to take their technologies to the next level and to commercialize them.

But what you found was when they got to the big dance and they had to really build a commercial scale facility, you largely had to 100% equity finance that, and that's really expensive, particularly right now. And so making sure that there was debt available, not just well priced debt, but also longer tenor debt to be able to help folks have the runway to see themselves through commodity cycles or other things is really where the loan programs office I think really shines. So we can't fix a project that is broken, but we can take a project that really ought to be given a chance to succeed and give it that chance.

Rahim Bapoo:

And you talk about being able to write big checks. How big is the Loan Programs Office?

Jigar Shah:

Well, we have several programs. So the Advanced Technology Vehicle Manufacturing Program probably has about $50 billion worth of loan authority there. And then the Title 17 Innovative Clean Energy Program has about $70 billion worth of loan authority there. And so those are the two loan authorities that I think are focused most on Critical Minerals. We certainly have a much bigger program called the Energy Infrastructure Reinvestment Program, and that's largely being used by electric utilities and others to replace 50 and 60-year-old infrastructure with new stuff. But we're excited. The Loan Programs Office has certainly grown tremendously under the president's leadership and we're now getting a ton of loan applications in. So I think today we're at 205 active loan applications and we actually throw out loan applications regularly. So when I say active, I actually mean active and they're seeking roughly $263 billion worth of loan proceeds.

Rahim Bapoo:

And how many of those would be in the critical mineral space roughly?

Jigar Shah:

I'd say today we're probably in the 10 to 15 billion range in terms of critical minerals, and so battery manufacturing would be separate. And so just the critical mineral side of it's probably 10 to $15 billion.

Rahim Bapoo:

Wow. And you've been now at the Loan Programs office for three years?

Jigar Shah:

Yeah.

Rahim Bapoo:

Have you written some big checks?

Jigar Shah:

Well, we've certainly written some big checks, right? I mean the GML TM and Blue Oval deals were both multi-billion dollar deals, but we've also made some big conditional commitments in this space, whether it's Redwood Materials or Lifecycle or Syrah Resources down in Louisiana or Rhyolite Ridge Ioneer in Nevada. So I think we've seen a lot of critical mineral projects announced out of our office, but also a lot more that are coming.

I think honestly the biggest challenge that we've had is that because the office was dormant for some time, the ecosystem isn't very robust. And so what you find is that folks just don't know how to fill out the paperwork. And I don't have a lot of sympathy for people because our average loan request is $1 billion. So I feel like when you're requesting $1 billion, hire the right advisors and figure out how to fill out the paperwork, but we continue to have people come to us with 90% complete applications and with a really hard time completing the last 10%. And so that's a lot of what we're working on now is figuring out why is that last 10% so hard and what can we do to help folks really get through our office efficiently?

Rahim Bapoo:

One of the things that we hear about sometimes is it takes a while to get through loan programs, office application. How much of that do you think is just that last 10% versus the first 90?

Jigar Shah:

It's almost always the last 10%. I just think when you think about what you expect from a government program, you don't expect a government program to cut corners or to look the other way when something's missing. You expect us to make sure that everyone is treated equally, and that means everyone's got to fill out the paperwork properly. And if you have a problem with the paperwork, well then we can adjust the paperwork and make it more simplified, et cetera. And we've done that, but you have to do that equally for everybody. I can't say to one applicant, "Sorry, I'll let this last 10% go and then figure it out for you," and for some other applicant hold the line. So I think you want everyone to be treated fairly and equitably, and that process sometimes leads to folks feeling frustrated because look, you can imagine by the time someone gets a loan programs office and they're asking for a multi hundred million dollar check, they're very accomplished people.

There are folks that are keynoting this conference. There are folks that have raised equity successfully in the marketplace, they've differentiated themselves from their peers, so they have a tremendous amount of self-confidence and feeling of accomplishment. And I think it frustrates them that they can't fill out some government paperwork. But my sense is that if you want to play at the big boys table or big girls table and you want to get these kinds of resources, you got to follow the rules. And so part of what we're doing here is helping the investors that are at this conference, but also the investment banks at this conference, really learn how to help their clients get through that process because I think it's essential, frankly, for their own success, for their clients to be able to do this well.

Rahim Bapoo:

Do you think, Jigar, as you talk about that, and you're right, we've got some super accomplished people here both on the corporate side, but also investors who have had a lot of success in this space. Does it feel a little bit like this loan programs office that's new has been tasked with choosing winners and losers in this space?

Jigar Shah:

Well, we certainly don't advertise ourselves that way. In general, the goal of the loan programs office is to treat everyone equally. And so we really don't want to be saying, "Well, this is the best technology out of the clay space or the DLE space in lithium," or whatever else. If all three competitors can get through the paperwork process and show a reasonable prospect of repayment, we want to fund all three. And so the goal of the Loan Programs Office is not to pick one over the other, but to fund everyone who meets our criteria. And I think that that is lost on people. It's funny because every time I announce a big deal, the first thing a reporter asks me is, "Why'd you pick this company?" And I was like, "I didn't pick this company. They picked themselves through their competence, they were able to get through my office." The 205 active applications we have, the reason that they're active is because we believe that all of them actually meet the criteria of the office, but they're not getting all the way to the finish line because they haven't completed all the steps.

Rahim Bapoo:

The advice actually to corporates is really clear, hire the right advisors. But what would you say to investors? What should they know when you write a loan... Part of our job is to go out and raise the balance capital behind a big DOE loan. How should they think about that DOE money?

Jigar Shah:

Yeah, it's a great question and one that frankly I think has been asked and answered a few times now. I think when you think about our history, we've done over $35 billion worth of loans now, and we're heading towards $100 billion. Our losses are roughly 3.1% across the entire portfolio. So very reasonable compared to the risks that we're being asked to take. Some people could accuse us of not being forward enough in terms of risk taking. But when you look at the results on the infrastructure side of our loan book, the equity returns have averaged roughly 10%, which is sort of at market or above market in terms of the infrastructure space. On the corporate equity side of our loan book, the equity investors have had a 7.5X Return, which is compared to roughly a 2.5X return on the S&P 500 since 2009.

So our companies on a portfolio basis have over performed. Now you can obviously pick some deals that we've had that have not been successful like Fisker Automotive or Unbound Solar or some of these other deals, but as an aggregate, we've been extraordinarily good at forcing companies to be disciplined, which is really what you want from your debt supplier, right? Is once someone gets a conditional commitment from us, that means they've actually answered the hard questions around, does your technology really work? Are we really taking, will it work one at work risk, or are we just taking scale up risk? Do you really have your feedstock risk matrix worked out? Some of it can be merchant, all of it should not be merchant, right? Do you really have your offtake strategy worked out? Are you actually relevant to the big buyers of critical minerals in this space?

If you're not relevant to them, then why are you not relevant to them? Why are they unwilling to sign a contract with you? Do you have trained people on the construction side of things and the operation side of things? Do they actually know how to operate these plans? We spend almost three to $4 million per deal to hire outside advisors and answer all those questions. So once someone has a conditional commitment, they have absolutely separated themselves from the rest of the field by being able to answer all those questions in a tight fashion.

So the equity investors know that they're not just investing in to if you build that they will come type scenarios. They're investing in folks who could get through that process. I mean, the other thing I would say is that the patience and competence required to get through our process is so high that you can't just be a cowboy to get through our process. And so that also differentiates our folks, because you can imagine that this is not going to be a straight line process. We're going to go through a couple of commodity cycles before these critical minerals companies are fully ramped up and successful, and you want people who are levelheaded who have the ability to see it through all the way to success.

Rahim Bapoo:

Speaking of commodity cycles, we're in a pretty deep trough in particular on the lithium space and on some of the other critical minerals. One of the things that has been interesting to me is watching the loan programs office continue to advance loan applications through this period of time as the cycle continues to turn. But one of the things that private investors will ask a lot of questions to us about is when you're competing with state capital in other countries, you might have a long period of depressed pricing. How do you think about that from the perspective of the loan programs office?

Jigar Shah:

Yeah, look, I think that it always looks like the discipline that we're showing out of the US government's approach of being private sector led and government enabled, always looks like we're competing with other state actors with two arms tied behind our back. But what you find time after time sector after sector is that the healthiness of our companies and their ability to serve customers in a way that they want to be served, always wins out. And so when you think about how this whole thing is going to work, it belies the underlying science to say that we're in a commodity sector. These are not commodities. When you think about extracting lithium from clay or DLE or geothermal brine or out of oil and gas wells, this is all predicated on a technology stack that needs to actually go through a bridge to bankability. You need first of a kind deployment, second through sixth deployments, the learning curve where we inject even more technology and then Wall Street acceptance.

The patience that we go through to get through that curve results in stronger companies on the other side. And I think that in general, you have a tremendous amount of confidence in that process from the entrepreneurs and innovators. Sometimes I find the government folks want to take the shortcut and say, "Well, why can't we just give them 100% of the capital stack and just get them all to come to the United States or whatever else?" And what I would say is that that leads to a suboptimal allocation of capital. And so you really want the private sector to choose the winners and losers, and you want us to actually reduce that cost of capital to make it more palatable for them to succeed so they don't have to 100% equity finance these deployments. And so it's going to look a little bit murky probably for the next few years, but I would suggest that the approach that we're taking will be the most successful approach over the long term, even if in the short term it looks like we might be getting lapped by a few other governments.

Rahim Bapoo:

Can you tell me, as an applicant would work through the DOE and the LPO, often, you're also working with several other government agencies. And that coordination burden can be quite high on private companies, $4 million at your office, but also a lot of money to work through all of the other various government agencies. How do you think about coordinating all of that?

Jigar Shah:

Yeah, so I can't speak for all the government agencies, but I'd say for the applicants in the loan programs office, we do that work for our applicants. So if they need to get permits out of the Department of Interior or they need to get some sort of final guidance out of the US Treasury Department or they need other services, we will do that work with the applicant. Obviously, we can't do it for them, I guess, but we can do it with them because it goes to the reasonable prospect of repayment of our loan.

So we actually need those answers as well. And so if the Department of Interior has a real problem with the project and says, "Look, given the endangered species issues or these issues or those issues, we're unlikely to be able to provide a successful NEPA," we want to know that upfront so that we can tell the applicant, "Hey, we're unlikely to move forward on this loan." And if instead it's really just a delay caused by bureaucracy, then we're happy to interject and try to speed things up. Because as you know, the administration has promised faster permitting timelines, faster processing, less red tape, and so we can try to be the police to make sure that that's actually being followed.

Rahim Bapoo:

I know that is a message that many of people here will be very happy to receive. Jigar, thank you so much for your time today. It was an absolute pleasure talking to you, and hope you and everyone else enjoys all the rest of the conference.

Jigar Shah:

Well, thanks for having me, and really thank you for assembling this extraordinary group of people here. I really am bullish around this entire strategy and where we're headed. I know that things always look darkest before dawn, but I think the dawn is coming.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO. You can find our show on Apple Podcasts, Spotify, or your favorite podcast player. Press the follow button if you want to get notified when new episodes are published. We value your input, so please leave a rating, review, and any feedback that you might have or visit us at bmo.com/sustainability leaders. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, thanks for listening and have a great week.

Speaker 5:

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