Tony Parham's Blog

There is, however, a piece of good news for the U.S. in the study: the country is still the heart of cleantech innovation. The U.S. led other G-20 members in VC and private equity investments fueling cleantech innovation.

The Pew Environment Group has published a recent report (March, 2010) entitled “WHO’S WINNING THE CLEAN ENERGY RACE? Growth, Competition and Opportunity in the World’s Largest Economies.”

The report indicates that $162B was invested globally in clean energy, a growth of 230% since 2005.  For the first time, China took the top spot within the G-20 and globally for overall clean energy investment in 2009.  In fact, China’s investment in clean energy was more than double that of the US in 2009: China invested $34.6B, vs. $18.6B for the U.S.

In addition, 10 of the  G-20 members devoted a greater percentage of gross domestic product to clean energy than the United States did in 2009.

While the US has unquestioned strengths in innovation, its policies and national goals have not kept up with those of other countries — a trend which could make the US become more of a laggard in the near future.

Comments about the report from The CleanTech Group are here, and the complete Pew report is here.

Additional contact info:
Web:  www.TKGweb.com,  Twitter: @tonyparham

Recently I had the opportunity to attend several panels which looked at issues pertaining to financing clean energy projects.  The panels were:

• MIT Energy Conference workshop entitled, “Clean Energy Finance: Is Clean Energy the Next Bubble?”
• New England Clean Energy Council event, “The Resurrection of Project Finance“
• HBS Cleantech and Alternative Energy Panel

Although I could never do the three events justice in a summary, here are various bits of information shared at these events.

New England Clean Energy Council / Project Finance

David Richardson gave a generalization of what institutional investors want:

1. A diversified portfolio
2. A stable competitive return (A median rate of return of 8% for non-energy projects.  For energy projects, investors investors may look for a median 10% rate of return after administrative costs.)
3. An offset to risk

Paul Gaynor indicated that the days of developers putting in 10 to 15% equity are gone.  Now funders are requiring developers to put 25% to 35% equity into a project.

Various comments were made about DOE loan guarantees (such as the DOE’s Section 1703 and Section 1705 programs), energy efficiency funds and ESCO’s. Comments were also made about the ARRA Section 1603 Cash Grant Program:

• Website: http://www.ustreas.gov/recovery/1603.shtml
• All applications must be received before the statutory deadline of October 1, 2011.
• Comments from panelists indicated disagreement with the design of the program, in which the trigger dates are set for when the project is brought online / placed in service.  Panelists suggested that a better structure would have been for trigger dates set at the closing date of the financial transaction.
• Mark Riedy indicated that the US Treasury has paid out $2.8B in cash grants from August 1, 2009 through mid-March, 2010.

David Richardson pointed out that, ideally it’s best to avoid complicated financial structures for your project entity, since it can add significant, unnecessary due diligence costs.  (In one example project, the complex financial structure added $1M in due diligence cost.)  However another panelist pointed out that, since projects come in all shapes and sizes, simplicity / standardization is easier said than done.

Marlene Motyka talked about a few of the financial structures currently in use, including the Partnership Flip, Sale Leaseback, and Inverted Lease.  (A few of these structures are mentioned in this Renewable Project Finance blog entry.)

There was a reference to comments made (in other venues) by Ray Lane (and others) that the U.S. is losing out to other countries (especially China) in emerging energy technologies due to inadequate US financial investment; and outdated, cumbersome US regulatory policies.  Panelists commented that firms today sometimes decide to deploy first in China, and then plan to deploy later in the US.  (But, when the “later” comes, they may decide to reinvest again into their China operations if China still appears more attractive than the US for the next set of investments.)

Mark Riedy agreed that there is a huge renewables focus in a number of international countries, including India, China, Africa and others.  Mark pointed out that some international banks will even take carbon credits as collateral on certain loans.

MIT Energy Conference

Steve Isakowitz commented on three key trends driving clean energy  growth:

1. Economic demand (Global energy needs continue to increase.  Alternative power sources will be needed to cost-effectively sate the demand.)
2. Environmental/climate change issues
3. Security issues (The world continues to be a dangerous place, and there are countries who control oil who do not share our own national interests.)

Steve commented on the billions which DOE spent in investments and loan guarantees.  (They received 3,700 proposals, of which 300 were excellent.  But they could only fund 37.)  He  also remarked on  the important skunkworks  role which will be played by DOE ARPA-e.  A recent ARPA-e Summit highlighted high profile energy firms which were winners (or highly considered) in ARPA-e’s funding initiatives.

Steve also pointed out that a “Valley of Death” funding gap exists for firms who have passed the early venture stage, but now need sufficient funds to grow to reach commercial scale.   (See additional comments at the end of this article about filling this gap.)

Another interesting factoid from Steve: The Department of Defense consumes 14% of America’s energy.

Ignacio Pérez-Arriaga indicated that government energy policies must be:

• Loud (significant enough to make a difference)
• Long (sustained for a period of time which is as long in duration as the financial characteristics of the investments)
• Legal (supported by regulations)

(MIT Sloan classmate) Ray Wood spoke about project bonds, infrastructure funds, rating agencies, innovation, coal states / gas states, U.S. versus China, Demand Side Management; and the need for smart meters to provide consumers with price signals.

Phil Deutch (among many other things) made a few comments about risk:

1. Understand it
2. Mitigate it
3. Get compensated for it

Marianne Wu pointed out that she likes to focus on firms which are not reliant on governmental regulations.  (Although it is fine for otherwise-solid business models to use regulations as a good tailwind.)

CEDA (the Clean Energy Deployment and Administration) was also mentioned as a notable initiative.  (Here is a summary and a commentary re: CEDA.)

HBS Clean Tech Panel

This was a broad panel which (in the interest of brevity) I will not try to summarize.  However, I found it interesting that, when the moderator (Judith Judson) asked the panelists to share thoughts on key funding issues, Marc Poirier indicated that one of the current big issues is “the funding gap which exists when trying to build a commercial scale facility.”

Additional contact info:
Web:  www.TKGweb.com,  Twitter: @tonyparham