HOW NEW ENERGY GROWS

Five Emerging U.S. Public Finance Models: Powering Clean-Tech Economic Growth and Job Creation
October 2009 (Clean Edge)

SUMMARY
The question has never been whether or not people want New Energy. The question has always been whether people want New Energy enough to pay a high upfront price for it.

Five Emerging U.S. Public Finance Models: Powering Clean-Tech Economic Growth and Job Creation, by Ron Pernick and Clint Wilder of Clean Edge, Inc. and Green America, looks at 5 possible and promising new ways New Energy can be publicly financed: (1) Clean Energy Deployment Administration (CEDA, aka The Green Bank), (2) Clean-Energy Victory Bonds, (3) Tax-Credit Bonds, (4) Federal Loan Guarantees, and (5) Clean-Tech City Funds.

History, state of present activity, and potential impact on growth and job creation is presented for each cutting-edge idea, though the paper is not an economic study but a consumer’s overview.

Public financing will fuel the engine that drives New Energy growth and turns the U.S. into a dominant force in the international New Energy economy. Without effective financing, however, the U.S. will likely be a follower as Asia and the EU take control of the most important energies of this century.

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COMMENTARY
Over 90% of the public, in a very recent and reliable study, want solar energy. Less than half are planning to put a system on their roofs.

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At the consumer and power producer levels, the conundrum is similar: New Energy appeals but its cost or the complications of financing it are discouraging, especially in this last, economically troubled year. The crashing economy has made even the best-positioned consumers jittery and tight credit has left power producers with little more than good ideas.

But that’s all about to change.

The $100 billion of the $787 billion American Recovery and Reinvestment Act (ARRA) of 2009 stimulus package that was directed at New Energy and the rules by which it must be put to work are finally ready for the marketplace.

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New Energy technologies like wind, geothermal, Smart Grid hardware and software and energy efficiency tools are reaching full, cost-competitive maturity. Others, like solar and biomass, are nearing it. And cutting edge technologies like the hydrokinetic and offshore energies are ready for pilot projects.

And New Energy advocates have won big policy breakthroughs, like long-term investment tax credits and Treasury Department grants, and are pushing for even more important ones, like long-term production tax credits, a national Renewable Electricity Standard (RES), a national Energy Efficiency Resource Standard (EERS), utility decoupling practices and a federal Feed-In Tariff (FiT).

The EU has big plans for New Energy. (click to enlarge)

Yet Asian and EU economies are leading the world in the development of these policies and the policies are having 2 effects. First, they are attracting capital. Second, they are driving technological breakthroughs. If the U.S. is to be competitive in what will be the dominant energies of the 21st century instead of remaining dependent on the Old Energies of the 20th century, it must be at the cutting edge of policy, technology and financial innovations that drive New Energy development.

China has even bigger plans than the EU for New Energy. (click to enlarge)

Any of the public finance plans described in the Clean Edge report, or all of them together, could be the way to do what needs to be done to drive innovation, grow jobs and fuel the future.

Model 1: The Clean Energy Deployment Administration (CEDA, or The Green Bank). The idea of an independent finance institution dedicated to using federal loan guarantees, debt instruments and equity to drive New Energy projects is working its way through Congress with bipartisan support.

The basic idea is to use the power of federal support to bring big players into New Energy, Energy Efficiency and transmission projects, multiplying useable monies 10 or 20 times over.

Regulation would be necessary to control leverage and make sure the Green Bank wasn’t limiting its focus or picking winners. The federal government has financed big undertakings in the past, from the transcontinental railroad to the national highway system to the Internet. Several other big activities get similar federal financial backing, including international trade and the Central Intelligence Agency.

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Model 2: Clean Energy Victory Bonds. Bonds democratize investment, allowing citizens to buy into whatever effort is being sponsored. The U.S. and other governments used bonds to finance the World Wars. Europe has raised big funds for New Energy with World Bank Green Bonds and Climate Awareness Bonds. Canada is considering a bond measure to support New Energy. The U.S. raised $2 billion with Green Bonds in 2004 for cleanup of urban brownfields and other restoration projects.

With "green" Victory Bonds, people could make whatever size investment they can afford. Over an extended period of time their investments would mature and earn a moderate, guaranteed interest just like U.S. Savings Bonds. The money, meanhwhile, would go to the development of highly secure New Energy and Energy Efficiency infrastructure. Such projects are already being sponsored by utility ratepayers and contributors to popular voluntary “green” campaigns. Bonds would allow people to actually invest in such projects instead of merely donating to them.

An opportunity to buy in and earn would likely generate big citizen investment pools and create equally big pressure from bondholders on power producers and utilities to obtain power from New Energy sources and institute the kind of Smart Grid and Energy Efficiency measures their bond investments represent. Bonds would give citizens real participation. Voting with their dollars, their backing of New Energy would drive growth and their commitment could change the face of the energy world despite Big Coal and Big Oil.

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Model 3: Tax Credit Bonds. Clean Renewable Energy Bonds (CREBs), Qualified Energy Conservation Bonds (QECBs) and Build America Bonds (BABs) already provide investors earnings on bond purchases in the form of tax credits.

CREBs pre-existed the 2008 economic meltdown and brought in a lot of investment from successful financial institutions looking to offset their tax burdens with the credits earned on the bond purchases. Since the crash, financial institutions are not earning a lot of profits and therefore are not in need of tax credits. Nevertheless, it is a great idea to institute such bonds now, in anticipation of economic recovery, returning profits and a revitalized interest in tax offsets.

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Model 4: Federal Loan Guarantees. Loan guarantees are a tried and true device for federal support. They were used to bail out Lockheed and Chrysler and, more recently, to get the biorefineries built that will be needed to meet the requirements in the 2005 and 2007 federal energy bills for ethanol and biofuel. Those bills also allocate loan guarantee funds for nuclear power plants.

The problem with loan guarantees has been federal red tape. Loan monies don’t go out and go to work because the Department of Energy (DOE) paperwork required for the guarantees is too onerous to be completed.

ARRA allows for big guarantees to federal New Energy, Energy Efficiency and transmission projects. In response to the Obama administration’s push to get ARRA projects of all kinds into gear, DOE has streamlined the paperwork and funds are now being allocated. Guarantees are expected to play a progressively important role in project financing going forward.

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Model 5: Clean Tech City Funds. This is the most innovative of the Clean Edge financing models. It began in Berkeley, CA, and was advanced in Portland, OR, Cambridge, MA, and Boulder, CO. Recently, more sensible places like Palm Desert, CA, and Babylon, NY, have initiated municipal financing for New Energy. Each city that has applied the idea has developed interesting elaborations.

The idea is ingenious. Municipalities can exercise big borrowing leverage and have the collateral to get the best interest rates. They borrow the money and lend homeowners the upfront capital needed to pay for New Energy systems and Energy Efficiency retrofits. Homeowners redirect the savings they get from their New Energy systems and efficiency-reduced utility bills to pay the cities back through add-ons in their property tax assessments.

The loans to the homeowners are as secure as property taxes and collateralized by the home itself. With property tax collecting departments in place, the cities require little added bureacracy or expense to manage the loans or the financing.

Is the idea popular? Berkeley’s first $1.5 million was reserved in 9 minutes. The demand in Portland is so big that the program is expected to turn a profit.

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The Clean Edge report concludes with 4 key lessons about public financing for New Energy:

1-Involvement at the municipal, state, regional and federal levels is needed to advance New Energy and Energy Efficiency and earn the benefits of a New Energy economy its concomitant emissions-free future.
2-Innovative financing mechanisms are needed in the marketplace, are available and need a federal push toward implementation.
3-Only predictable, long-term, reliable federal policy and regulation will support the urgently needed deployment of New Energy, Energy Efficiency and transmission infrastructure.
4-The full battery of innovative financing possibilities is needed, including those described in the paper and others. There is no single right plan.

Just announced by the wind industry. (click to enlarge)

According to Clean Edge, the federal policy and regulatory framework needed includes:
1-Interoperability standardization of smart grid technologies that allow national deployment and integration of all forms of New Energy.
2-A price on greenhouse gas emissions through a carbon tax or cap&trade system and continued pressure from the Environmental Protection Agency to regulate emissions.
3-A demanding and long-term national Renewable Electricity Standard (RES) requiring regulated utilities to obtain a significant portion of their power from New Energy sources over an extended period of time into the 2020s or further.
4-A shift in energy subsidies away from imported fossil fuels to domestic New Energies.

Footnote: The Power Purchase Agreement (PPA) was, just a couple of years ago, heralded as the breakthrough solution to solar financing - but it is not even on the Clean Edge list. Why?

In a PPA, a solar company, energy services company, or New Energy project developer with financing covers the cost of installation on someone else’s space (usually a rooftop). To get the system, the space owner agrees to buy the electricity generated by the system from the builder at a set (below market) price for 15-to-25 years.

The space owner gets solar at a low price (which becomes an increasingly better deal as time goes by and the price of grid electricity rises) without the burdens of ownership (maintenance is the builder’s responsibility). The builder gets the guaranteed return on power sales from the agreement, the excess power to sell at an ever-better profit over time and the tax credits and other high-finance benefits of owning New Energy.

PPAs have had limited success because they do not work when financing and credit are unavailable and tax credits are unneeded. They also have a slight aura of financial complexity that does not go down well with home and small business owners during insecure times.

Clean Edge says PPAs will have a place in New Energy financing as time heals the economy and consumers’ needs shift. Under the right circumstances, PPAs represent a great way for money players to profit by doing a good thing.

The PPA. (click to enlarge)

QUOTES
- From the Clean Edge report: “The public financing models discussed here could go a long way toward funding a range of clean energy deployments in the U.S., from large-scale wind farms to a major ramp up in solar to a revamped electric grid…[These] five emerging financing models…stand to change the game in Washington, D.C. and be felt from Main Street to Wall Street…[I]f implemented properly, [they] could give the U.S. a significant upper hand in being a clean-tech beacon, along with China and other nations vying for a leadership role. Indeed, for too many years, clean-tech leadership has resided mainly at the state level. If the U.S. wants to have a significant, defensible clean-tech position, the federal government will need to step up to the plate. The federal models noted in this report…could help the federal government be a true leader in moving the nation to a clean-energy economy – a role that President Obama says he embraces…”

Financing New Energy is the way to protect today's kids from the threatening shadow of global climate change. (click to enlarge)

- From the Clean Edge report: “The financing models outlined in this report are not mutually exclusive. We believe we’ll see a combination of the above models coming to fruition – serving city, state, regional, and federal activities. Indeed, as with clean-energy technologies themselves, there is no single “silver bullet” solution among the emerging public finance models. We will need a robust combination of several financing mechanisms to ensure the continued growth of U.S. clean energy and the benefits that come with it.”
- From the Clean Edge report: “By deploying the models outlined in this report, the federal government can support the growth of American technological ingenuity, assist regional, state and local efforts to expand clean energy, and ensure the nation’s economic competitiveness and leadership deep into the 21st century. If not, we risk ceding clean-tech leadership to China, South Korea, Japan, the European Union, and other nations that are making clean-tech development a true cornerstone of their stimulus and economic development efforts.”