Financing the Future Electric System

Panelists:

Michel Di Capua, Bloomberg New Energy Finance, Head of US Analysis

Stuart Bernstein, Goldman Sachs Head of Cleantech and Renewables

Bob Hemphill, AES Solar, JV between AES Corp and Riverstone Holdings

Jacob Susman, OwnEnergy

The one word you hear from investors is “consistency.” But there isn’t consistency in US policy for energy. Vinod Khosla wrote, “Policies do matter because they can encourage or discourage experimentation.” Take out risk or reduce cost so innovators can afford to take risk.

The overall uncertainty in cleantech raises the cost of capital. (Unlike most, Goldman Sachs funds cleantech companies from the GS balance sheet.)

The panel believes that the potential for renewable energy project finance is in pension funds, institutional investors, and large corporations serving as tax equity providers (such as 90% tax equity). But are temporary tax breaks enough to help cleantech companies get over the bump towards scalability? Michel di Capua, Head of US Analysis at Bloomberg New Energy Finance, believes the economics of tax equity works, but limits the people that can participate. If there isn’t more than $25m in the deal, it’s not worth it.

The problem is not that there is no debt financing, rather, there’s not enough high-quality projects. Besides the Goldman Proprietary Fund, there is financing in growth equity, private equity and commercial banks as well, and the market is $250 billion. More unregulated subsidiaries of utilities have joined top of league tables in wind and solar investments, renewable procurement.  Private equity firms are putting capital into independent transmission companies.

Bernstein believes VC winners now will be counter-cyclical – now is the time to invest when others aren’t so optimistic. If you take out the bad press, rates of return have gone up in solar and wind, so it is an attractive time to invest.

Financing obstacles:

  • policy uncertainty
  • technology risk
  • tax equity works, but limits people that can participate

Bill Gates and Steve Chu chat about energy

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When asked why he’s doing here at the ARPA-E Summit, Bill Gates replied, “If you want to improve livelihoods of poorest 1 billion people, can they afford transportation, lighting, etc?…Cheaper energy is certainly on the list of 3 or 4 things you most want for the poorest in the world.”

“It’s crazy how little we’re funding this energy stuff,” said Gates, referring to ARPA-E and other energy funding. He’s bullish on a wide variety of clean technologies, including nuclear, and says that it is up to public sector funding to drive energy innovation. “Venture capitalists will follow what they think is profitable.”

“If you need humans to do something, that’s not a good design.” Gates said nuclear isn’t dead. Next-gen nuclear plants will no doubt have safety procedures that don’t need people figuring out which switch to flip to stop a meltdown.

On batteries and energy storage, “You need thousands of companies trying these things that will increase the chance of the magic solution for batteries.” Sounds like there’s a common theme: see pg 37 of Vinod Khosla‘s paper.

Why isn’t cleantech as booming as the Internet and high-tech sector? For one, energy is highly regulated. (In a speaker panel later today, Stefan Heck, McKinsey’s Global Cleantech Head, gave an anecdote on how escalators in Europe slow down when there isn’t anyone on it. Those escalators don’t exist in the US because companies would risk getting sued if someone got hurt on a slowing escalator.)

Just as difficult, the IT revolution has “warped people’s minds” so they underestimate the difficulty of breakthroughs and how long they take. You can’t create a clean fuel for your car overnight, but you can create a tech startup in six months and sell it to Google for a handsome sum.

Cool: Bill Gates’ favorite energy writer seems to be Vaclav Smil. In this brief fireside chat, Gates mentioned him four times.

Live Twitter “Idea Wall” discussion

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Current question is, “What is the role for companies like FedEx, Microsoft, Walmart, Xerox in advancing energy technology?”

Some answers:

  • Manufacturing efficiency innovation
  • Large corporations like Walmart have the square footage to make a meaningful impact by reducing their energy consumption
  • DoD and FedEx have large vehicle fleets, so they can lead innovation in electrification.

Perspectives on Transportation Fuel Innovation from FedEx CEO and former Walmart CEO

John Podesta in conversation with Walmart Former CEO Lee Scott & FedEx CEO Fred Smith

It’s encouraging that transportation fuels have become a trending topic in presidential debates. Last week, Obama announced the DOE / ARPA-E will fund $14M to support R&D in biofuels from algae and $30M towards a research competition that will investigate efficiently harvesting domestic natural gas for vehicles.

FedEx CEO Fred Smith agrees, “If there will be a breakthrough in aviation fuel, I think it’s likely going to be with micro- or macro-algae.” Smith calls for incentives for capital investment in natural gas and electric vehicles. “In about 5 years, you will have a vehicle with a positive ROI to convert internal combustion engines to electric.”

Smith believes there is a huge opportunity for American manufacturing in transportation – 8 million trucks, 3 million are heavy-duty on the road.

Lee Scott is less bullish on American manufacturing. “It’s not in the cards that we’ll bring men’s underwear back to the US [domestic manufacturing]. However, [in aviation fuels], what we want is perfection…Don’t let government get ahead of where we can go.”

FedEx CEO Fred Smith – Highlights from his Keynote

  • “Operating light duty electric trucks costs 75% – 80% less than comparable gas models”
  • “There is a real chance for America to significantly reduce energy intensity, balance of payments, and transfer of wealth to foreign nations through the electrification of light duty trucks.”
  • “We spend $65-80 billion to protect oil trades every year.”
  • “There is light at the end of the tunnel, and that’s the first I’ve said in my business career about this.”