Considering Poison Pills in Future OTs
Regaining Credibility After the Age of Terminations
During the summer of 2024, I spent significant time assuring the organizations DOE was negotiating with that Financial Assistance terminations were rare and that we had no interest in unilaterally terminated cooperative agreements. Last month, the Administration started termination proceedings on over 300 Financial Assistance agreements. In my defense, the scale of the terminations we’ve seen is unprecedented, and even the most cynical observer would not have predicted them.
A former colleague of mine recently wrote about how important trust is in Federal energy programs. He’s right, without trust and partnership with the private section, nothing gets done. The broad political support necessary to sustain energy projects, especially clean energy, does not exist in contemporary America. So, if you happen to work in the next administration, how are you ever going to get a counter-party to trust that a future administration won’t immediately terminate your agreement?
Consider the poison pill: “In the case of unilateral termination by the Government, the Government must pay to the counter-party an amount equal to 90%1 of the total value of the agreement less any payments previously made.”
I think this is a sub-optimal, maybe even terrible, idea. It will create a lot of misaligned incentives. For example, would a project failing for technical reasons behave so poorly that it forces the Government to terminate? (Thus triggering an unearned payout.) Would it turn Government overseers into compliance cops? (Your quarterly report is an hour late; the Government is terminating for non-compliance.) Would it even prevent termination? (What amount would the current administration pay for the projects to stop forever?)
But I also don’t see how we are going to get private investment for projects that extend beyond the current administration. My former office recently released a solicitation for coal plant recommissioning and modernization. If you are a company planning to submit an application, how could you be sure that your project won’t be cancelled on January 21, 2029? Can you finish within the balance of this presidential term? DOE just fired several top political appointees responsible for infrastructure—is this organization stable enough to be a reliable partner?
I’m a big fan of preparation and I hope that the next administration has a “day one” plan to invest in clean energy technologies. But many current and future technologies need more than four years to demonstrate and deploy and we have to start thinking about how to make sure, appropriately, that those projects can come to term.
You can change the number to 100% , 50%, or XX%. The point is to discourage termination so significantly that it would never happen.