In the case of wind, Congress even enhanced the incentive, making the industry’s requested language change, so a wind system need only be “in construction” phase, not “fully commissioned” by end of 2013. Since large wind turbine projects take 18-24 months to plan, this will provide some relief, but likely only for project developers who were ready to pull the trigger ordering turbines by Q3 of this year.
In the case of solar, Congress punted the ball down the field for two months on 1603 (cash instead of tax credit) and gave a full year extension for the bonus depreciation (MACRS) tax incentive.
It’s funny to think how just a month ago, with the cliff looming, those of us in the midst of constructing projects were scrambling.
Here in New England, Varian Semiconductor had completed it’s own $8 million turbine in Gloucester, commissioning its system in early December. But down the road a private developer for an $11 million two turbine project was racing to get the systems commissioned by year-end. In the end their installation was hampered by the interconnection process with National Grid. Millions of dollars were on the line as the ball dropped on Times Square. You can bet the fiscal cliff drama had a different meaning for that management team.
At Groom Energy our team was on a rooftop getting our final utility signoff for a solar system on New Year’s Eve, not knowing if the solar incentives would be extended.
Unfortunately we’ve now become trained to expect that government and utility incentive programs will start and stop with no warning.
Just this week Arizona, the sunniest state in the country, suddenly killed it’s developing solar industry. With one quick decision they slashed all the incentives that had existing for some time. Businesses had for years been hiring based on the availability of this program, so the effect of a complete cut will be severe to say the least.
As the soon-to-be unemployed Arizona solar workers start the trek to California in search of new jobs, there is a much bigger lesson for any politician defining an industry focused support program.
Incentive programs need time to ramp up AND ramp down.
While there will be contentious debate anytime a government funded incentive is considered – once the decision is made, policy makers must design them for the long term. This means they should recognize that companies don’t hire in a day, and customers don’t make purchasing decisions the next. Programs take time to change behavior.
But when a program ends abruptly the reverse is true – customers do stop buying immediately – and businesses shut down faster than you can say shovel-ready stimulus.
So instead of basing a program’s end on the whims of future policy makers, the original authors should define price ratchets which step down over time. The ratchets should be based on real economic metrics – i.e. the number of MWs installed, the payback of a base system or the market price of a commodity. With this signaling businesses and customers can make rational decisions during the life of the program. And policy makers can show constituents that the funding will not be required in perpetuity.
Perhaps most importantly – employees can feel better that the day after the next election a newly elected politician won’t decide whether or not they have a job.
As we watch Europe’s financial system teeter on the brink, many are preparing for the US’s own unwelcomed, but necessary austerity effort. Yet with yesterday’s deadlock by the Super Committee, we’re all left wondering if our elected leaders have been watching too much ESPN, detailing the NBA’s own failure to come to an agreement, after over two years of negotiations.
With this latest partisan gridlock in the face of a financial storm, its a fait accompli that we will see a December 31st expiration of the Section 1603 cleantech cash grant incentives. Solyndra alone has put cleantech supporting Democrats on their heels and become a “reckless government spending” lapel button on Republican sport coats. Rightly or not, large bookable losses from the DOE’s attempt to stimulate jobs make it harder for politicians to put Section 1603 in a cleantech jobs creation wrapper.
Which means the cleantech markets will need to rely only on tax credits, as opposed to grants, in order to weather the looming US austerity period, whenever our politicians decide its important enough to address.
In late 2008 George Bush’s $700 billion TARP investment put the US Federal Government into the private equity business.
With only one Limited Partner (i.e. the US Federal Government) the fund raising process was fast, accelerated by the fact that we thought the US financial system was about to collapse. Applying a unique investment approach, Bank and Automotive company CEOs were called, told how much money they would be receiving (whether they liked it or not) and to draw up the investment docs. Not surprisingly, within a few months the fund was fully invested and it’s portfolio complete.
Now in 2011, with a forecast of only $652 billion likely to be recovered, LPs (taxpayers) are left debating was actually the investing goal?
Six months after TARP, President Obama funded his own, smaller but sexier $13 billion DOE Fund I (let’s call it DOEF ) through a $100 million Cleantech carve-out within the intergalactic $825 billion Federal economic stimulus program. The remaining $87 million was delivered through job creating DOE contracts implementing everything from utility smart grid rollouts to nuclear waste cleanup to low income home weatherization.
DOEF made it’s goal to drive “US Cleantech leadership” by investing capital in the most promising organizations. The presumption was that, like venture capital, grants could help spur R&D in strong market areas and, like private equity, loans could help later-stage companies to ramp their commercialization efforts.
But unlike TARP’s “call the CEO” approach, DOEF had to first issue broad RFPs, then consider a diverse set of responses, each with their own business, technical and investment merits. And the applicant pool included for-profit venture capital backed start-ups and even large publicly traded companies, in addition to the DOE’s more typical grantee targets (DOE’s own labs and research universities.)
Like a newly announced business plan competition, DOEF’s launch spurred any company with “cleantech” in it’s vocabulary to stop in it’s tracks, study the RFPs, and begin completing the numbingly exhaustive grant and loan applications. And if an applicant had existing capital or a VC on it’s board it immediately hired a DC-based lobbyist to increase it’s DOEF lottery ticket selection odds.
While the RFPs were intended to flush out the most promising technical ideas, their practical effect was to overwhelm the DOEF investment team (i.e. DOE technical staff) with sheer response volume. I can remember being at the DOE’s offices in late 2009 and having a conversation with a senior official who commented that Steven Chu was pushing his organization to “figure out where it should all go, but $10 billion must be out the door by year-end.” (It turns out today that the money didn’t get out as fast as they had hoped.)
Once they figured it out, DOEF handed out awards with much fanfare, marketing each of the hottest Cleantech categories where they wrote the biggest checks, including $250 million for A123 battery jobs in Michigan, Wind farms in Texas and the now infamous $500 million loan guarantee to venture-backed Silicon Valley based solar PV poster child, Solyndra. DOEF historical funding amounts and their locations can be tracked here.
And while the selections were purely merit based, its remarkable how evenly the recipient’s were located across the US, allowing politicians to confirm for LPs (voters) that their regions each got their fair share. How convenient that the best Cleantech researchers, companies and entrepreneurial ideas were perfectly distributed around the country.
As a first-time fund DOEF was funded on the promise. Now two years later the strategy has moved to execution and the initial portfolio provides an early measuring stick. There are obviously some big question marks.
Some of the biggest DOEF private equity type checks were written to fund building battery and solar manufacturing plants, with Solyndra already having gone bankrupt. If a private equity firm had lost its $500 million investment within a year of funding the entire investment team would already be looking for their next job. But the big miss highlights that the DOE is not in the best to position to identify and fund the winners, which mean more losses like this are likely.
For DOEF venture capital investments, you have to ask why companies like General Electric and Dow Chemical need additional R&D funding to accelerate their investment in cleantech? And do VC backed cleantech start-ups really need DOEFs money to do what they’re doing already? And if DOEF is the “first money in” is it likely they’ll pick the best team and technology ahead of the cleantech venture capitalists?
Last week’s SunShot program awards, a program intended to “reduce the cost of solar by 75%“, made grants to both large multinational and VC backed companies, in addition to a bunch of DOE labs and research universities. But should the DOE really be trying to directly bring down the cost of solar by backing new solar R&D? Last I checked there were a fair number of VCs who have a business investing in this sort of technology.
If it’s ”cleantech leadership” the DOE seeks, let’s start with customer adoption, which drives R&D value, and therefore spurs R&D investment by all companies. Instead of DOEF trying to quickly pick the technical winners now, why not instead implement a 10-year $100 billion Federal incentive program which supports customer investments and drives revenue for the winning companies.
The US Federal Government has changed position on the incentive model enough that investors and companies discount the chances that the latest incentives are really around for the long term. As we’ve commented previously, Federal incentives for both renewable and energy efficiency investments must be continuous, predictable and bankable for the market to really invest. Unlike DOEF, which needed to push money out as fast as possible, companies and managers take a little longer to make strategic investment decisions.
So before fund-raising for DOEF II begins, let’s change direction and shift the DOE out of venture capital and private equity and into defining long term strategic incentives which drive adoption and put the US in a more competitive position in the next decade. The free market will respond, cleantech growth will follow and it will cost the LPs a lot less money.
Today I attended the Clean Economy Network‘s first conference in Washington, DC, fittingly on the eve of President Obama’s State of the Union address.
The conference covered the latest cleantech policy and legislative debates, as presented by and to venture investors, entrepreneurs, policy makers, NGO and utility executives. The topics were broad ranging, from the EPA’s role in defining GHG rules, to the challenges with upgrading our electrical grid, to alternative fuel sources for the next generation of power plants and transportation systems. The speakers were candid about their views.
My favorite nuggets:
From panel speculating on the EPA:
- Don’t expect an attempt at carbon tax/cap-n-trade legislation from the EPA anytime soon. Even if the EPA thinks they have the authority, the fastest it has ever implemented anything is 18 months – and it is always followed by years of litigation.
- However, the EPA is getting dangerously close on attacking carbon, and if it comes to litigation, history tells us Congress will back off immediately as there is no win for politicians once this happens. The better hope is that the EPA’s direction catalyzes the House and Senate to finally pass climate legislation, BEFORE the EPA reaches this point of no return.
- The US’s current implied price of carbon (based on government and utility incentives) is $90/ton for wind, $400/ton for solar PV, $200/ton for ethanol fuel and $4,000 per ton for “cash for clunkers.”
- Consider history lesson where deregulation in railroads, wireline, wireless and cable TV all led to more competitive markets, where innovation ultimately drove greater efficiency. Energy markets are ready to have the same opportunity.
From Ray Mabus, the US Secretary of the Navy’s presentation:
- Secretary Mabus reminded the audience how controversial each fuel source change to the Navy’s fleet has been – going from wind to coal to oil to nuclear. In each shift there was significant tension about whether the new fuel source was reliable enough. Now as the Navy plans to introduce a clean fuel fleet with demonstrations next year he confirms that skepticism is increasing….
From John Woolard, CEO, BrightSource Energy’s presentation:
- John described the how the renewable energy legislation vacuum beyond 2016 is already impacting any new utility scale solar thermal power plant projects. Without long term legislation investors can’t make their decisions. While we’ve commented before on the need for predictable utility incentives for energy efficiency year to year, John’s observation really puts the long term need in perspective. The cleantech market requires long term visibility and predictability.
On this last nugget, and as I sit here listening to the State of the Union address, I’m left crossing my fingers that President Obama’s outward determination to address our “Sputnik moment” will lead him to drive US cleantech legislation which outlives his presidency and has a lifetime impact on the industry.
With last night’s tax bill passage by the House, the renewable energy industry has been given a wonderful holiday gift. But this toy’s battery only lasts one year and you might not be able to replace it.
By extending the Section 1603 provision for just another 12 months Congress has extended life for renewable grants, but kicked off another year of scrambling by project developers and customers. During 2011 activity will be harried as everyone wonders if this extension will disappear in 2012, be extended yet again for another year, or be part of a broader cleantech/energy package with different economics, better or worse, starting January 1st 2012.
As we outlined a year ago the key for any energy related incentive, (Federal, State grant or utility rebate) is to have consistency and visibility. Customers, developers and investors need this in order to make long term decisions and not be encouraged to try to game the system – or worse be gamed by missing a holiday special.
While this 1603 extension was bundled into Washington’s more politically important consumer tax cut deal, we have to hope that in early 2011 our legislators can figure out how to give the cleantech market these more permanent signals about economic support, regardless of whether they’re higher or lower. Only then can they catalyze more rational, long term cleantech investment decisions.
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.