Archive for November 2009
Attention policy makers – Cleantech Grants and Utility Rebates need to be predictable and continuous
In my former life as a early stage venture capitalist I learned a traditional VC bias against investing in start ups where government subsidies were necessary to make the technology’s economic case work. Year’s later I’m scratching my head at how the VC market has thrown out this bias in cleantech investing, an example being their heavy investment in solar PV technology.
While one can’t dispute that the worldwide PV markets are getting larger, anyone who has run PVwatt knows that without significant subsidies the technology doesn’t work as an alternative to kWh from the grid. An incremental improvement in PV’s performance will not change this situation. In the US, the math says that without a relatively high kWh cost AND a belief that kWh cost will inflate at 5-10%/year AND a large State renewable grant AND a 30% Federal grant or ITC, PV just doesn’t pass a reasonable economic test.
Which means that when Federal or State policy makers contemplate any potential change to renewable grant levels, the market gets really bumpy. We experienced this at the end of 2008 when the Federal ITC extension was in question. We’re currently experiencing this again in Massachusetts where the PV incentive program is temporarily suspended as the State transitions to a REC model “sometime in 2010.“ Kind of makes it difficult on a small local solar installer while it’s customer prospects wait for new incentives….here, an absense of policy has slowed one of the fastest developing PV markets in the US.
Like State renewable grants, utility energy efficiency rebates are watched closely for the signaling effect of change. Earlier this year we saw one utility’s energy efficiency program introduce “accelerated” rebates, only to abruptly cancel the program four months later due to over-subscription. Customers who didn’t participate are left to wonder whether they should wait on the sidelines until another accelerated program comes back to the market. Here, the utility’s haphazard policy has stunted market growth.
As the US moves towards more incentives for both broader renewable and energy efficiency upgrades, Federal, State and utility policy makers need to better coordinate the management, introduction and changes to these programs. They should recognize the dual edged sword they hold – whenever they change the incentives, or worse, suggest they might change the incentives, the market adoption rate is slowed.
Just as the stock market rewards companies which produce predictable financial results with higher multiple stock prices, policy makers need to signal the market as they grow incentive programs, making them predictable and long term. The incentive programs need to reward action today, including grandfather clauses for those who would otherwise sit on the sidelines while new policies are being developed. Without this approach, human nature “wait and see” will rule the day.
I’m here in Los Angeles at the Beverly Hilton for the 26th annual NAESCO conference called Energy Efficiency, Kicks it up a Notch. Many of the attendees have been involved in the ESCO industry for a long time and yesterday’s discussions were a lot about “our time has finally come.”
With pending climate legislation, challenging economic times, a higher motivation for becoming energy efficient and a recognition that energy efficiency is lower cost than renewable energy, all the stars seem to be aligned. The consensus here is that over the next few years this industry could experience tremendous growth, heading from $5 billion to $15-30 billion depending on who you’re talking to….or maybe not.
In general, the ESCO industry provides turn-key energy efficiency upgrades for tax exempt customers such as states, cities, municipals, schools and hospitals. The ESCO identifies the savings through an investment grade energy audit, installs the energy efficiency upgrades, provides a financial guarantee that the energy savings will be achieved, and the customer pays the ESCO with proceeds from their issuance of tax exempt bonds.
With the introduction of the American Recovery and Reinvestment Act (ARRA), these same customer prospects are now the potential recipients of lots of grant $$$$$$. This additional “free” money means they should be doing even a greater number of projects, right?
Today there remains a lot of confusion about how exactly they can spend these grants if they receive them. Maybe they should use the ARRA money just to buy these upgrades instead of borrowing to pay for them? Can they co-mingle the ARRA grants with State grants through the EECBG program? Can they buy down part of the project cost and issue less debt? And, by the way, the reporting and administration hooks that come with any of these grants are even more confusing. All of which has contributed to the slowing of decision making….
Which leaves the ESCO’s thinking maybe this wasn’t such a good thing after all.