Read also: How to Power the Energy Innovation Lifecycle: Better Policies Can Carry New Energy Sources to Market
The U.S. Senate is finally preparing to take action on clean energy and climate legislation. And whatever form the final legislation takes, it must provide tools to drive renewable energy growth—this year and over the coming decades.
A price on carbon is a central element of Sens. John Kerry (D-MA) and Joe Lieberman’s (I-CT) American Power Act. This provision is critical to the long-term success of comprehensive clean energy legislation because it will place a cost on burning fossil fuels, which will ultimately provide the economic incentive to move toward a cleaner, more sustainable, and more efficient energy economy.
Yet we must not neglect the need to grow our renewable energy industry today as we wait for the positive effects of a price on carbon to take hold. Recent data from renewable energy industries such as wind, solar, biofuels, and geothermal shows that they are in dire need of immediate help. The first quarter of 2010 saw the fewest completions of wind projects since 2007.
Our research at the Center for American Progress indicates that the renewable industry needs three things in the short term: stable demand for its products, help securing financing for projects at every stage from invention through commercialization, production, and deployment, and the infrastructure to support bringing clean and renewable power to market. It’s vitally important that the Senate include policies to deliver these needs.
The American Power Act should deliver the first of these goals—to create stable demand for the clean energy industry—since putting a price on carbon should immediately increase the demand for low- or no-carbon alternatives.
Incentives for clean energy investment included in APA can also help with the second and third goals of financing and infrastructure, as can measures in Sen.Jeff Bingaman’s (D-NM) American Clean Energy Leadership Act (ACELA, S. 1462), such as a renewable energy standard and tax credits. But one piece of the financing puzzle that has been somewhat overlooked in the public debate is the critical need to help clean energy inventions move into the commercial marketplace.
The Center for American Progress has been a leading advocate of a federally owned, not for profit Green Bank—sometimes referred to as a Clean Energy Deployment Administration, or CEDA—that would provide financing to get technologies over this critical development hump.
A newly established public CEDA—a financial entity with sufficient initial capitalization to invest in and accelerate the deployment of clean energy technologies across the United States in partnership with the private sector—will lead to the steady and reliable creation of clean-energy jobs and will be a crucial element in the U.S. transition to an energy efficient, clean energy economy.
The United States’ competitors and trading partners are not standing still. China is now the largest manufacturer of wind turbines and solar panels in the world. The state-sponsored Chinese Renewable Energy Industries Association reports that renewable energy jobs in China are increasing by 100,000 per year and reached 1.12 million in 2008. And the China Development Bank invested $50 billion in China’s electricity sector overall in 2007.
Germany’s KfW state-owned bank is a leading low-cost financing entity for renewable energy and a major contributor to capital markets in Europe. The Sustainable Development Technology Canada fund has been a leading catalyst and partner with the private sector in promoting clean-energy infrastructure development in Canada.
The United States can ill-afford to cede any further ground to our competitors in the clean energy sector. CEDA is needed now.
There is broad support for a mechanism like CEDA, but there are multiple proposals that differ on certain important details. The American Clean Energy Security Act (ACES, HR 2454)—the climate bill that passed the U.S. House of Representatives last summer—also contains a CEDA proposal. If the Senate passes a climate bill that includes a CEDA, the two proposals will be merged and then sent to the president for his signature.
Here, we provide more detail about our proposed CEDA structure, including a specific proposal for the core principles that must be part of the final version included in any congressional legislation.
CEDA will orchestrate a coordinated clean energy investment strategy
CEDA will establish a coordinated, strategic approach to energy technology innovation in the United States. It will also provide several financial tools to increase the capital available to enable promising emerging technologies to deliver clean energy to American homes in as short a timeframe as possible.
The federal government’s approach to energy innovation in the recent past has lacked an overarching strategic vision. The development and deployment of energy technology has been implemented inefficiently as a wide variety of projects have been scattered across numerous federal agencies with multiple tasks and responsibilities.
CEDA’s independent administrative authority will allow it to create an advisory council with the clean technology subject matter and technical financial expertise to advise the agency on overall energy innovation strategy and project funding decisions. A CEDA advisory council would establish broad, overarching technology goals in a set of areas such as clean electricity, clean vehicles, clean energy manufacturing, smart grid, and high efficiency buildings. The goals would be interwoven into expedited funding decisions as projects were evaluated for viability and creditworthiness.
CEDA will also need to leverage private capital and should have at its disposal a wide range of direct and indirect support tools and incentives to encourage loans to facilitate the deployment of clean energy technology. These direct and indirect incentives tend to reduce the risk to lenders so that they can offer better loan rates to potential clean energy projects.
CEDA can vastly expand the tools available to lenders by providing them with direct support through direct loans, letters of credit, and loan guarantees, as well as indirect support such as the authority to issue bonds, convertible bonds and warrants, and purchase debt securities and other financial products. These services will jumpstart business investment, increase capital at reduced loan rates, lower energy prices, and spur the construction and operation of clean technology projects throughout the country.
Getting companies through the valley of death between a successful pilot phase and commercial deployment
CEDA would allow the nation to confront our energy challenges with the urgency and scale they demand. CEDA is necessary because many new technologies face several unique obstacles along the journey from the laboratory to the commercial plant to our homes.
The development of significant clean energy resources will require financing of the entire innovation life cycle. The five stages of the innovation life cycle—discovery, development, demonstration, commercialization, and maturity—each have different financing needs. Government grants are appropriate for discovery, for example, while privately held debt is appropriate for mature technologies.
Companies that are in the demonstration and commercialization stages have unique financing needs that are not currently being met. These companies are typically riskier than mature companies, so traditional private debt will not meet their needs, and they also need large amounts of money, so venture capital financing is insufficient. The government can create instruments that fill this gap by enabling large investments in these companies, either by providing direct support such as direct loans or loan guarantees, or by giving indirect support such as securitizing debt. It is at this vital stage that CEDA plays an important role in financing innovation.
The inherent new and innovative nature of many emerging clean energy technologies means that many technologies are still being tested as they produce energy in a startup pilot phase. They have yet to realize cost savings from experience and economies of scale. Banks and commercial lenders are reluctant to loan to many of these projects with unproven technologies and limited track records in the marketplace.
Private investors, such as venture capital firms, have enthusiastically supported clean energy technology in the pilot phase, but do not provide the resources to fund multi-million or multi-billion dollar construction projects to take these technologies to the commercial level. The clean technology company is stranded between having enough capital to get started, but not enough capital to begin commercial production.
These clean technology companies’ inability to secure loans and capital to make the leap from pilot phase to commercial deployment—the so-called “valley of death”—is a major contributor to the success or failure of clean energy technology, and the overall competitiveness of the United States in the clean energy sector. Only five of the top 30 companies producing solar energy components, wind turbines, and advanced batteries were U.S.-based companies in 2009.
Leveraging private dollars
It is particularly important in this era of large deficits and scarce public resources that taxpayer dollars invested in the clean energy economy be used strategically to leverage private dollars and spur business investment. Working in coordination with the business community, a well-constructed, independent, public, and nonprofit CEDA will reopen credit markets and motivate investors to invest again in U.S.-based industries, providing a critical financial boost as we emerge from the global economic downturn.
By helping companies across the valley of death and into the commercial market, CEDA will enable clean energy technologies to be deployed on a large scale and become commercially viable at current electricity costs. And CEDA should ultimately become self-financing through the use of fees and interest.
The private sector is the appropriate and most efficient means of delivering clean energy solutions to the market at scale, but the federal government can play a critical role in accelerating deployment and the boosting market share of clean energy technologies.
The production, construction, and actual deployment of emerging clean energy technology projects is vital to a clean energy future. CEDA, in combination with a national renewable electricity standard that requires a certain amount of energy to be generated form clean energy sources, will drive critical demand for clean energy and lower prices for ratepayers as emerging and existing clean energy is commercially brought to scale.
CEDA will enable the federal government to enlist the private sector to increase the amount of capital available to ensure construction begins on clean energy projects. And more and more clean energy will be delivered to American homes at lower prices in every region of the country as emerging and existing technologies are deployed.
Core principles for CEDA
The version of CEDA that emerges from Congress and is sent to the president should, at minimum, include these core principles:
Overarching goals and support for clean energy technologies
CEDA’s mission should be to marshal a variety of well-established financial tools to work flexibly with the private sector. The purpose: To rapidly and affordably develop and deploy emerging and existing clean energy and energy-efficiency technologies.
- A significant portion of financial assistance should be targeted to move technologies from pilot stage to commercialization, to get over the valley of death, which would also provide long-term market transformation benefits by supporting emerging technology categories.
- CEDA should prioritize projects that provide for a reduction in greenhouse gas emissions and oil use—projects that today face market barriers in accessing debt financing or credit enhancement. Projects should be selected on a competitive basis according to the amount of carbon emissions reductions or avoidance achieved.
Accountability
CEDA should operate in an open and transparent manner and be held publicly accountable for its lending activities. All projects should meet strong underwriting standards and appropriate risk management metrics. CEDA should take a portfolio approach to investing in projects, targeting projects that are riskier than the portfolio average, as well as projects that are less risky, for an overall return that is positive, but less than that required by the private sector.
- CEDA should cover its own operating costs through fees charged for its services and require that all parties in a transaction share some risk on every single deal.
- The Federal Credit Reform Act and Budget Enforcement Act should apply to ensure CEDA’s accountability to Congress and provide assurance that CEDA will not be taking on excessive credit risk since potential losses could be borne by American taxpayers. But CEDA should at the same time have the autonomy and the authority to provide loan guarantees without further legislative action or limitations.
CEDA should support a diverse set of technologies and safeguard taxpayer funds. Concerns that capital-intensive investments in nuclear power could come to dominate the portfolio should be addressed by limiting CEDA’s investment in any single technology. No single technology must be allowed to absorb a disproportionate share of the funding. CEDA’s maximum leverage for an individual project, as well as total government exposure and total loan guarantee volume should also be limited, or capped.
Governance
CEDA should ideally be structured with an appropriate level of independence and governed by a board of directors. The board of directors should be made up of relevant Cabinet members and additional leaders with relevant industry and finance experience appointed by the president to staggered terms. This will give it both the flexibility and accountability it needs.
CEDA should also facilitate private-sector investments, not crowd out private investors. CEDA should work closely with private banks to provide loan guarantees, credit enhancement, and other financing tools to stimulate private-sector lending and investment in projects that cannot access commercial financing on economically feasible rates and terms. CEDA can vastly expand the tools available to lenders by providing direct support through direct loans, letters of credit, and loan guarantees, as well as indirect support such as authority to issue bonds, convertible bonds and warrants, and the ability to purchase debt securities and other financial products.
Funding for CEDA should be on the order of an initial $10 billion, with additional capital provided of up to $50 billion over five years. This capital could be leveraged at a conservative 10-to-1 ratio to provide loans, guarantees, and credit enhancement to support up to $500 billion in private-sector investment in clean energy and energy-efficiency projects.
Read also: How to Power the Energy Innovation Lifecycle: Better Policies Can Carry New Energy Sources to Market
Jake Caldwell is the Director of Policy for Agriculture, Trade & Energy and Richard W. Caperton is a Policy Analyst with the Energy Opportunity team at American Progress.