[Senate Hearing 112-52]
[From the U.S. Government Publishing Office]
S. Hrg. 112-52
GLOBAL INVESTMENT TRENDS IN CLEAN ENERGY
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
TO
EXAMINE CURRENT GLOBAL INVESTMENT TRENDS IN CLEAN ENERGY TECHNOLOGIES
AND THE IMPACT OF DOMESTIC POLICIES ON THAT INVESTMENT
__________
MARCH 17, 2011
Printed for the use of the
Committee on Energy and Natural Resources
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20402-0001
COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana JOHN BARRASSO, Wyoming
MARIA CANTWELL, Washington JAMES E. RISCH, Idaho
BERNARD SANDERS, Vermont MIKE LEE, Utah
DEBBIE STABENOW, Michigan RAND PAUL, Kentucky
MARK UDALL, Colorado DANIEL COATS, Indiana
JEANNE SHAHEEN, New Hampshire ROB PORTMAN, Ohio
AL FRANKEN, Minnesota JOHN HOEVEN, North Dakota
JOE MANCHIN, III, West Virginia BOB CORKER, Tennessee
CHRISTOPHER A. COONS, Delaware
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
McKie Campbell, Republican Staff Director
Karen K. Billups, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Auerbach, Neil Z., Managing Partner, Hudson Clean Energy
Partners, Teaneck, NJ.......................................... 23
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Coleman, Will, Partner, Mohr Davidow Ventures, Menlo Park, CA.... 16
Gallagher, Kelly Sims, Associate Professor of Energy and
Environmental Policy, Director, Energy, Climate, and Innovation
Program, The Fletcher School, Tufts University, Medford, MA.... 11
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 2
Zindler, Ethan, Head of Policy Analysis, Bloomberg New Energy
Finance........................................................ 4
APPENDIX
Responses to additional questions................................ 59
GLOBAL INVESTMENT TRENDS IN CLEAN ENERGY
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THURSDAY, MARCH 17, 2011
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:32 a.m. in room
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman,
chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
The Chairman. OK. Why don't we get started?
Thank you all for being here. The purpose of this hearing
is to gain insights into the investment environment that exists
here in the United States as well as abroad for manufacturing
and deployment of clean energy technology. Our competitors are
moving quickly to secure an advantage in this growing market.
We want to thank our witnesses for providing valuable testimony
about this issue and making recommendations to us about policy
in this area.
I've remarked before on the significant challenges that we
face in energy in the coming decades. Our current energy
sources not only endanger our long term prosperity. But also
leave us reliant on unstable regions to which we are currently
transferring billions of 's of our wealth every year.
Obviously this is not a sustainable situation. We have an
obligation to try to address it. Passing on the ability to deal
with the consequences of climate change is not something we
should contemplate for future generations. Clearly we need to
strengthen our own economy in these years by dealing with these
issues in a forthright way.
The testimony today bolsters the case for action. It's
clear that countries such as Germany and South Korea and China
are devoting substantial resources to securing their place in
what promises to be a multi-trillion dollar market as the
developing world increases its appetite for energy in coming
decades. In my view the losers in this clean energy technology
race will be those who do not participate aggressively.
Competition between countries will largely take place in
bringing increasingly affordable innovations to market. Setting
off a cycle where clean energy sources become more and more
affordable compared to incumbent technologies. The market grows
to more developing countries.
Unfortunately although the United States remains a great
source of innovation in the world, it is not clear that we are
going to reap the benefits of that innovation or even that we
will retain our advantage in innovation. Our competitors are
making a compelling case to investors and entrepreneurs that
it's good business to develop there rather than to develop in
the United States. As the best minds follow those investments
the likely result is that the next waves of innovation may take
place there as well. The next generations of innovative energy
technologies that will determine who will lead the world in
this competitive race.
So in that sense investment choices we make now will shape
the world in which our children and grandchildren live. The
longer we wait to address our clean energy challenges the
higher the hill will be for them to climb. I look forward to
hearing what we can learn today about our current situation and
what we can be doing to ensure our future leadership in this
very competitive environment.
Senator Murkowski.
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR FROM ALASKA
Senator Murkowski. Thank you, Mr. Chairman and good
morning.
Today's hearing is on a pretty broad topic, one where the
conversation often leads to comparison as to how the United
States stacks up against other countries. How our policies
compare. These comparisons I think we recognize can be very
useful.
But in making them I think we have to be very clear about
some very important factors including what our own constitution
permits. How much taxpayer money we can afford to spend? What
the American people will support.
Perhaps the best example of the need for honesty is our
ongoing conversation about China, a country that has only
partially opened its markets. The United States on the other
hand operates as a capitalist democracy. In so many ways the
conversation about our status verses China's rely upon perhaps
an apples to oranges comparison.
Our basic approach is to governance are vastly different.
So are the ways our Nations choose to make investments. So I
hope that as a committee we, from the outset, recognize those
pretty fundamental differences.
It's become popular, particularly when focused on energy
policy to say that we're falling behind China in sort of a
clean energy race. I guess I would challenge that. We can and
we should work with China wherever possible to make progress on
our energy challenges. But we should not merely copy what they
do or how they do it whether they're in terms of total
investment dollars or individual technologies.
Even China's more progressive energy policies have been
imposed with less than ideal results. China has a national goal
of producing 15 percent of its energy from non-fossil fuel
sources by the year 2020. The Three Gorges Dam, a source of
renewable energy is now producing enough electricity to replace
31 million tons of coal, reduce China's carbon emissions by 100
million tons annually. But I think we know the story. The dam
caused the displacement of several million people from their
homes, from their communities.
Another Chinese project meant to help meet greenhouse gas
emission reduction targets involves the construction of 13 dams
in a world heritage site that is home to more than 80
endangered species. Probably go out on a limb here, but would
guess that the EPA would probably block such a project if it
was proposed here in the United States. Of course here in this
country our policies are not perfect either.
Where we have laws like the Clean Air Act and the Clean
Water Act, that have been in place for decades.
We have biofuels that have played a role in rising global
food prices.
Nuclear power has left us with spent fuel that must be
safely stored and the siting of transmission lines to connect
renewable assets to the grid has resulted in controversy,
certainly some controversy there.
I raise these issues not in an attempt to throw cold water
on the enthusiasm for deploying clean energy technologies. But
perhaps to provide some needed context. Remind my colleagues
that the scope of the energy and the environmental challenges
that we face.
I understand that many believe that we should be just as
enthusiastic as China when it comes to clean energy. Others
look at prices at the pump and say that we should be just as
enthusiastic as China when it comes to the development of oil,
of natural gas, coal and other minerals. So this is not just
about lowering the cost of financing projects that we all
support or finding money in the budget for subsidies.
I think it's about looking honestly at the whole picture.
Devoting as much attention to identifying those areas where the
government can play a constructive role as we do identifying
the areas where the government is perhaps getting in the way.
It's about reaching agreement on viable energy policy that
addresses both of our immediate and our long term needs.
I look forward, Mr. Chairman, to the conversation this
morning as we, as a committee, focus on these issues that
command so much attention here on a national scene and on the
international scene. Thank you.
The Chairman. Thank you very much.
Let me introduce all 4 of our witnesses. Then we'll hear
from them.
Mr. Ethan Zindler is the Head of Policy Analysis with
Bloomberg New Energy Finance here in Washington, DC.
Ms. Kelly Sims Gallagher is an Associate Professor of
Energy and Environmental Policy and Director of the Energy,
Climate, and Innovation Program at The Fletcher School at Tufts
University.
Mr. Will Coleman is a partner with Mohr Davidow Ventures in
Menlo Park, California.
Mr. Neil Auerbach is the Managing Partner with Hudson Clean
Energy Partners in Teaneck, New Jersey.
Thank you all very much for being here. If each of you
could take 4, 5 or 6 minutes and sort of give us the main
points that you think we need to try to understand. We will
include your entire statement in the record. But we will then
have some chance for questions.
Mr. Zindler, why don't you start out?
STATEMENT OF ETHAN ZINDLER, HEAD OF POLICY ANALYSIS, BLOOMBERG
NEW ENERGY FINANCE
Mr. Zindler. There we go. Thank you very much, Senator and
Mr. Chairman. I first just want to say thank you to you and to
the staff for inviting me here today. It's a real honor.
You should all have before you a nine page document that I
submitted in the record. I'm not going to go through all of it
word by word, but I will walk through the charts that are in
it. So if you would, you know, follow along with me here.
I come here today in my role as Head of Policy Analysis at
Bloomberg New Energy Finance, a market research firm providing
data and insights on the clean energy sector and the carbon
trading markets. New Energy Finance as it was then known was
founded 7 years ago in London with one express purpose. To
track finance technology and policy trends in clean energy.
In December 2009 we were acquired by Bloomberg. Today we
have a staff of 180 in 11 offices around the world. Our major
clients include most of the top investors in this sector who
are doing these investments primarily to earn a healthy return
less for social purposes.
At this point I just want to say that my remarks today
represent my views alone as a clean energy industry analyst.
They do not represent the corporate positions of Bloomberg LP
or Bloomberg New Energy Finance. In addition, they do not
represent specific investment advice and should not be
construed as such.
So I'm going to start today with a quick overview of
investment activity globally. Before I do, just let me offer a
few comments just on what our definition of new energy or clean
energy is. It's renewables. It's biofuels. It's energy
efficiency technologies.
I know that there's been a lot of discussion of nuclear as
a non-carbon emitting source. Other firms do track investment
in that sector. But I don't have numbers for that in these
figures here that you're going to see today.
Overall new investment in clean energy rose 30 percent in
2010 from the year prior to an all time high of $243 billion
which you'll see in figure 1 here. This came after a leveling
off between 2008 and 2009 amid the economic crisis. Despite all
that new capital there's still some lingering and substantial
concerns among public market investors which you can see in
figure 2 which shows the NEX which is an index that we run
tracking 100 publicly traded clean energy companies.
As you can see the NEX which is the purple line or the
purplest line suffered a sharp decline amid the economic
crisis. This is not surprising. A lot of the companies in our
sector are new.
It's relatively immature. There's a high degree of
volatility. The NEX has bounced back. But there's still a
certain discomfort among some investors about the status of the
industry.
Another trend that I point out is that last year we saw a
surge of new investment in so called small scale distributed
generation projects which rose 90 percent to about $60 billion.
This accounted for about $1 in $4 invested in the clean energy
sector overall. This was primarily--sorry, this is entirely due
to installation of residential, small scale, commercial PV or
photovoltaics.
Germany is the world leader and installed about 7,500
megawatts of new PV capacity last year. By comparison the U.S.
was far behind at less than 1,000. Even the Czech Republic
installed more PV last year than the United States did.
Turning specifically to the U.S.----
The Chairman. Is that comparison you just went through in
one of these charts?
Mr. Zindler. Sorry, yes. The actual number of PV
installations is not in the charts.
The Chairman. OK.
Mr. Zindler. The chart No. 3 here just gives you the
overall macro figure.
The Chairman. Right.
Mr. Zindler. In terms of dollar investment.
The Chairman. But not PV.
Mr. Zindler. You can see about $55 billion in new third
party capital was invested in China last year. Germany was a
bit further behind at about $40 billion. The United States came
in at about $35 billion. Most of that money in Germany was for
the deployment of residential rooftop solar projects.
The Chairman. Good.
Mr. Zindler. So let's turn to the United States for a
moment and we look ahead. I would say that the industry here
domestically faces what we would call uncertain prospects.
State renewable energy mandates or renewable portfolio
standards which are on the books in about 30 States in the U.S.
are not driving investment as they did several years ago. Low
natural gas prices are making it difficult for wind developers
in particular to compete. There's clearly ongoing uncertainty
around key Federal policies.
In U.S. wind, if you look at figure number 5, we predict
significant overhang of capacity in terms of manufacturing on
U.S. soil of wind turbines. Last year about 5 gigawatts of new
capacity were added in the United States. This year the number
could be somewhere in the area of 6 to 7 to 8. But the total
capacity online of manufacturing turbines is somewhere up above
10 which inevitably means that a number of these plants are
either going to have to shut down or export or run at lower
capacity in order to meet the market demands here.
I would like to make one point before I go on about this
question of China in response to your comments, Senator
Murkowski. I think that to some degree it is a little bit over
simplistic to paint the U.S. and China relationship on clean
energy as purely a race. We are seeing the emergence of a truly
integrated supply chain between the 2 countries. A lot of this
equipment that is produced in either country does contain
components made in one country or the other. There's a lot of
global trade that takes place.
In reality there's probably a net deficit of clean energy
deficit between the U.S. and China with China exporting more
than the U.S. is. But in reality it's very heterogeneous. I'm
not going to walk you through figures 7 and 8. But if your
staff wants to take a look one of the things that we point out
is that in a typical solar modular or wind turbine you
inevitably have components from both countries.
I'm almost running out of time. So I'm just going to make
one--a couple, few comments here about the so called Valley of
Death conundrum here. One of the biggest impediments to further
progress in the U.S. in terms of new technologies is a
persistent dearth of capital for potentially lower cost,
breakthrough technologies that have advanced out of the lab but
still require extensive and expensive field testing and trial
installations before being deployed at scale.
Financing has existed in the past for early stage, risky
technologies in the form of venture capital. It is also
available for late stage, lower risk technologies in the form
of project financing from banks, but what about new projects
that fall somewhere in between? The so called commercialization
Valley of Death poses a long standing challenge to the clean
energy sector just as it has to other capital intensive
industries in the past.
I would argue that bridging this gap is critically
important. Existing technologies do have an important role to
play. But costs must come down further for clean energy to
truly be competitive on an unsubsidized basis.
As you all know in response to this conundrum, Congress
established the Loan Guarantee Program in 2005. That program
began offering loan guarantees in 2009. The program has become
a bit of a lightning rod. I would say for those on both sides
of the aisle.
Those in the industry and I'm speaking here really giving
hearsay on behalf of some of my clients have complained that
the process of getting a loan guarantee is slow and onerous.
But then I know that some in Congress have complained that the
DOE has moved too quickly in offering some loan guarantees and
maybe not done enough due diligence. So they are essentially
taking, I would say, from both sides to some degree.
In our view the Loan Guarantee Program puts the Federal
Government in a fundamentally challenging position. On the one
hand it has been charged with helping to finance potentially
game changing technologies. On the other, it must serve as a
careful guardian of taxpayer funds.
As private sector investors know well, investing in new
technologies inevitably involves a high degree of risk. We
believe the Loan Guarantee Program can foster important
breakthroughs but also will inevitably result in some number of
failures. If the Federal Government is going to guarantee
financing for technologies it must also be comfortable with the
inherent potential downsides. As any serious investor in
stocks, bonds or other securities will tell you having a
portfolio of both winners and losers in inevitably part of the
game. Success is determined by the portfolio's overall
performance.
The Loan Guarantee Program aside, the fundamental challenge
of the Valley of Death remains for many new companies seeking
to build their first pilot scale projects. From a larger
strategic perspective we would argue that whichever Nation puts
in place policies or financing schemes to bridge this gap
stands to reap the greatest economic benefit in the long haul.
With that I would say, thank you very much for your time.
[The prepared statement of Mr. Zindler follows:]
Prepared Statement of Ethan Zindler, Head of Policy Analysis, Bloomberg
New Energy Finance
clean energy investment trends and the impact of domestic us policies
Despite major disruptions to the global economy, new investment in
clean energy has continued to surge in recent years. However, the
pattern of that investment has shifted dramatically. China, a virtual
non-player on the international stage as recently as four years ago, is
now the undisputed leader in attracting and disbursing new capital. The
US and all others trail behind by comparison. However, much remains to
be played for as generating from truly clean sources generally is more
costly than from fossil fuels on an unsubsidized basis. The true
eventual 'winners' in any clean energy technology race will be those
that can generate power or produce transport fuel at lower cost. In
this regard, with its outstanding intellectual, entrepreneurial and
other resources, the US is hardly out of the game. Still, with
governments elsewhere recognizing the potential economic opportunity of
clean energy and throwing major support behind the sector, the US runs
the risk of being left further behind.
Clean energy investment has proven surprisingly resilient,
despite the economic downturn. Total new investment in the
sector totalled $243bn in 2010, up from $186bn in 2009 and
$52bn in 2004.
Investment is shifting rapidly from West to East. The
Europe, Middle East and Africa (EMEA) region was still tops in
attracting new clean energy funding with $94.4bn in 2010.
Looking at third-party private capital alone including funding
for small projects, China is the undisputed single national
leader with $54.4bn. Germany ($41.2bn) and the US ($34bn) lag
far behind.
China is the world's leading exporter of solar modules and
top producer of wind turbines though it has exported very few
of the latter to date. The US-China clean energy relationship
is hardly a zero-sum game, however. Integrated supply chains
allow the US to supply capital equipment and key high-value
components to Chinese manufacturers. Both countries could
benefit as equipment costs drop and deployment increases,
creating more local installation jobs.
Major progress has been made in recent years to cut costs of
clean energy equipment, particularly photovoltaic (PV) modules.
PV is now cost-competitive with fossil sources in some markets
where local electricity prices are high and/or solar resources
are exceptional.
Still, much progress remains to be made on PV and
technologies such as advanced batteries and next generation
biofuels. A consistent problem: the so-called 'Valley of
Death', which hinders projects employing new technologies from
being built at scale. Venture investors are willing to take the
risk on such large-scale projects but generally lack necessary
funds. Banks have the needed capital but lack the appetite for
risk.
The US Department of Energy seeks to address this quandary
through its loan guarantee programs. While the agency has made
major progress in making such guarantees available, it has
faced major challenges due to its conflicting roles.
1. INVESTMENT UPDATE
1.1. Global investment
Global clean energy investment surged 30% in 2010 to a new record
of $243bn. This represents a major milestone for a sector that enjoyed
an average compound annual growth rate of 37% between 2004 and 2008,
but then saw growth stall in 2009 in the face of the worst recession in
half a century (Figure 1)\1\. While overall growth has remained strong,
however, the patterns behind the capital flows have changed
dramatically. Investment is up substantially in Asia, China in
particular. Installations and financings for small-scale solar have
soared while wind installations and financings have slipped. Interest
continues to grow in energy efficiency technologies, batteries and
electric vehicles.
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\1\ Figures 1-9 have been retained in committee files.
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The largest investment asset class in 2010 was, as usual, the asset
financing of utility-scale projects such as wind farms, solar parks and
biofuel plants. This investment in deploying proven technologies rose
19% to $127.8bn last year.
Meanwhile, venture capital and private equity investment, which
traditionally supports start-ups and new technologies had an improved
year, up 28% from a relatively depressed 2009 total to reach $8.8bn.
That total still fell far short of the all-time high for venture
capital and private equity of $11.8bn in 2008.
Public market investment (funds raised via initial public offerings
and others on the stock exchanges) bounced back from its recession-
driven lows in 2008 and 2009, up 18% to $17.4bn in 2010, though well
short of the record of $24.6bn in 2007. This rebound came despite
weakening sentiment among public market traders regarding the sector.
The WilderHill New Energy Global Innovation Index (NEX), which tracks
the prices of 100 clean energy stocks traded globally, lost 14.6% of
its value in 2010 and under-performed the S&P 500 by more than 20%
(Figure 2).
It was investment in small-scale, `distributed' generation projects
which really stole the spotlight in 2010, surging by 91% to $59.6bn,
and accounting for approximately one in four dollars invested in clean
energy overall. This was almost entirely due to the installation of
residential and small-scale commercial photovoltaics (PV). Germany
alone saw 7.5GW of new PV capacity added in 2010, an all-time record
and over one-third of the total 20.3GW installed globally. Other
countries, including Italy and the UK also saw rapid growth, as did
certain US states. Still, the US represented a relatively small share
of the overall PV market; the Czech Republic installed nearly twice as
much new solar capacity (1,727MW) in 2010 as the US (937MW).
The mass scale-up of small-scale solar is being driven by an
extraordinary decline in the cost of photovoltaic modules and financial
support for project investment worldwide. For several years, high
demand for solar led to a bottleneck in solar-grade processed silicon.
This kept prices high, even as the underlying cost structure continued
to improve. That bottleneck in silicon broke in 2008, allowing prices
to fall very quickly thereafter. Today, solar technology is effectively
cost-competitive with fossil generation in markets with either high
utility electricity prices, particularly good solar resources, or both.
This includes Hawaii and Italy. As costs continue to drop in 2011 and
beyond, Bloomberg New Energy Finance anticipates PV reaching `grid
parity' in markets such as Turkey, Portugal, France, Greece and
California in the next 5-10 years, perhaps even much sooner.
On an individual country basis, China is now the undisputed leader
in attracting new clean energy investment (Figure 3). In 2009, the
country surged into the top spot of the Bloomberg New Energy Finance
rankings published in conjunction with the Pew Charitable Trusts. In
2010, China extended its lead, attracting $54.4bn in new third-party
private capital (venture capital/private equity, asset/project finance,
small-scale financings, and public market fundings). By comparison,
Germany attracted $41.2bn, primarily due to the tremendous growth in
small-scale solar installations. The US finished in third place with
$34bn.
It is important to note that these figures do not take into account
the extraordinary but difficult-to-quantify amount of public sector
support provided to the clean energy sector by the Chinese government
at both the national and provincial level. Bloomberg New Energy Finance
has tracked a total of $46.9bn in economic stimulus commitments to
clean energy in the country. In addition, the China Development Bank
made no less than $35.3bn in credit facilities available to just six
domestic solar and wind equipment makers in 2010. These companies are
now using these funds to bankroll entry strategies to key developing
markets such as Brazil and India. Finally, there are the local tax
breaks and other benefits routinely offered by provincial governments
to attract clean energy investment to their regions.
The surge in new private investment in China has gone primarily to
fund expansion of wind and solar manufacturing and toward wind power
generating assets. Today, China is the biggest player in the export of
PV modules but installs relatively few (513MW in 2010) of them
domestically.
By contrast, the country's wind turbine manufacturing plants have
been producing equipment that has been deployed almost entirely locally
to date. In 2010, China set a global record with 17GW of new wind power
generating projects installed representing almost half of all capacity
added worldwide last year. By comparison, the US installed
approximately 4.9GW in 2010, down from 10GW in 2009.
Longer term, China's wind turbine makers hope to match the success
enjoyed by the country's PV equipment makers. Backed with substantial
capital raised on the public exchanges and from the China Development
Bank, they look to enter markets including Brazil, Turkey, India,
various parts of Africa, and the US.
1.2. Clean energy investment in the US
As recently as three years ago, the US was the top country in
attracting new clean energy investment, thanks to a surge of investment
in new wind and corn ethanol projects (Figure 4). However, funding fell
dramatically in the first half of 2009 in the wake of the global
financial crisis as credit for new wind, solar, geothermal and biofuels
projects became difficult to secure. Investment bounced back in the
second half of 2009 and into 2010 thanks to significant support from
the American Recovery and Reinvestment Act (ARRA), which allocated
$63bn to clean energy companies and projects. Today, the sector faces
uncertain prospects. State renewable energy mandates (renewable
portfolio standards) are not driving investment as they did several
years ago; low natural gas prices are making it difficult for wind in
particular to compete; and uncertainty remains around key federal
policies.
Investment in large-scale projects in the US has been hampered
since the onset of the financial crisis in Q4 2008. At that time, it
was 'tax equity' investors that were primarily responsible for funding
the country's wind installations by taking advantage of federal tax
credits and accelerated depreciation. As the crisis grew, the pool of
available tax equity capital all but evaporated leaving projects
starved for capital.
In Q1 2009, Congress approved ARRA, which included a new program
allowing project developers to, in effect, take the roughly equivalent
benefit of the tax credits in the form of cash grants. The `1603
program' as it has come to be known sustained the US clean energy
sector through a particularly difficult period. It also disbursed
taxpayers' funds to clean energy projects in a substantially more
efficient and cost-effective manner than the tax credits did. It
supported financings in 2010 that will result in project constructions
in 2011 and 2012. The program is now due to start expiring at the end
of 2011 and the Production Tax Credit sunsets end of 2012.
Wind installations in the US fell by half in 2010. Bloomberg New
Energy Finance anticipates somewhat of a pick-up in development
activity in 2011 with between 5.8GW and 7.3GW to be installed this
year. We anticipate new installation activity to remain relatively flat
from 2012 through 2014, barring a major change in natural gas prices or
a major new policy shift. Our forecast of wind capacity growth in the
US assumes 1603 expires as planned but the PTC is extended. If the PTC
is not extended, the US will likely see a sharp drop in project
installations.
Today, the market both globally and in the US is fundamentally
over-supplied with wind turbines. On US soil in 2011 (Figure 5), we
anticipate over 12GW of final turbine assembly capacity, far above what
will be demanded domestically. This will likely compel manufacturers to
export their equipment elsewhere, run their plants below capacity, or
take them offline altogether.
It is for this reason that Chinese equipment makers are likely to
have difficulty making significant inroads into the US market, at least
in the short run. Thanks to over-supply, wind turbine prices have
fallen from their highs of approximately $1.5m-$1.8m/MW to a current
price of approximately $1m-$1.3m/MW. With equipment readily available
from established Western companies with strong existing reputations in
the US, market entry should prove challenging, at least for now.
By contrast, low-priced Chinese equipment has played an integral
role in growth of the US PV sector, which has grown quite rapidly in
the past three years, though off a very small installed base. In 2008,
342MW of new PV capacity was installed in the US. That jumped to more
than 900MW in 2010 with over half of all installations coming in
California and New Jersey, both of which have solar-specific subsidies
in place.
Chinese PV equipment makers such as Suntech and Yingli played only
a minor role n the US market less than four years ago. In California
during the first three months of 2007, Chinese equipment accounted for
15% of all installations that requested rebates under that state's
Solar Initiative (Figure 4, measured in terms of megawatts capacity).
By the last quarter of 2010, Chinese equipment makers were the
suppliers of choice on installations representing over half the
megawatts to be installed. US-headquartered solar equipment makers such
as SunPower and FirstSolar now account for a smaller share of what is
now a much larger market.
Looking ahead, Bloomberg New Energy Finance anticipates strong
growth in PV installation in the US with the market potentially
doubling in 2011 to 1.8GW installed, then rising to 2.8GW in 2012.
Still, the US market will remain relatively small when compared to
Germany, Italy and Spain unless the federal government and/or states
enact broader, more supportive policies.
1.3. The US-China clean energy trade relationship
Some have painted competition between the US and China on clean
energy manufacturing and development in stark terms with China feared
or admired as an exports winner and the US criticized or dismissed as a
manufacturing also-ran. But the relationship between the nations defies
simplistic assumptions defined by economic nationalism. Chinese PV
modules are often manufactured using US-made equipment while US wind
turbines regularly contain Chinese-made components. In this area as in
so many others, China and the US are mutually dependent; each must rely
at least in part on the other to achieve its clean energy and carbon
reduction objectives.
For instance, as with most technology products, PV modules comprise
a number of parts from all over the world. Figures 7 and 8 break down
where the parts are manufactured for a hypothetical module from
Suntech, a China-headquartered firm, and for SunPower, a California-
headquartered company. Suntech procures polysilicon from producer MEMC
of Missouri, while ingot, wafer and cells manufacturing take place in
China. Suntech now does some final module assembly at a new facility in
Arizona. In some cases, over half the economic value of the module
manufacturing goes to the US. (However, it should be noted that Suntech
still does most of its final assembly of modules in China).For
SunPower, silicon comes from the US or South Korea, while wafers and
cells are manufactured in the Philippines, and module assembly can take
place in Mexico.
The US-China clean energy trade has proven to be a flashpoint
between the two nations in light of a 2010 complaint filed with the
United Steelworkers with the US Trade Representative. Concerns have
been raised among US policymakers that Chinese policies have made it
difficult for US clean energy equipment suppliers to compete in China.
Questions of fair trade aside, there can be little doubt that
China's extraordinary entry into the clean energy marketplace has
played a major role in driving down the overall cost of clean energy
equipment. The country's support for the largest PV and wind equipment
manufacturing plants the world has ever seen has allowed for
unprecedented economies of scale and lower prices. As discussed above,
solar is rapidly moving toward grid parity. This is in no small part
due to the build-out in China and its extraordinary financial
resources.
Finally, it should be noted that the faster clean energy equipment
prices fall, the more quickly such equipment can be deployed into the
field at costs competitive with conventional energy. This has major
implications for job creation. Much of the 'green jobs' discussion to
date has centered on manufacturing jobs. But clean energy can create
significant employment opportunities at the final stages of the value
chain as well. Bloomberg New Energy Finance calculates that for every
megawatt of PV capacity installed on a residential rooftop, a total of
15.1 full-time workers are required. No less than 10.5 of them are
involved in the final stages of installation, on average. By contrast,
manufacturing accounts for just under one-third of the total employment
per megawatt of new capacity.
2. THE `VALLEY OF DEATH' CONUNDRUM
Thanks to a massive investment surge, clean energy technologies
have made exceptional progress down their respective learning curves in
recent years. Still, much work remains; the cost of generating a clean
kilowatt-hour is still generally above that of generating one from coal
or natural gas on an unsubsidized basis, assuming no associated costs
are assessed for carbon pollution. One of the biggest impediments to
further progress is a persistent dearth of capital for potentially
lower-cost breakthrough technologies that have advanced out of the
laboratory but still require extensive and expensive field testing and
trial installations before being deployed at scale. Financing has
existed in the past for early stage, potentially high-risk/high-return
technologies in the form of venture capital. It is also available for
late stage, potentially low-risk/low-return technologies in the form of
project financing. But what about those technologies that fall
somewhere in between?
As the old adage among entrepreneurs goes, `banks will always be
the first in line to finance your second project'. This so-called
commercialization `Valley of Death'--located somewhere between Silicon
Valley VCs and Wall Street banks--poses a long-standing challenge to
the clean energy sector, just as it has to other capital-intensive
industries in the past. Bridging this gap is critically important;
existing technologies have an important role to play but costs must
come down further.
Today, there are in effect two valleys for clean energy
technologies. The first comes at the very earliest stage when the
potential commercial applicability of a technology remains unclear. The
later, better-known valley takes place as a new technology looks to
scale up. The tends to occur somewhere toward the end rounds of venture
capital investment.
In response to this conundrum, Congress in 2005 established a loan
guarantee program intended to help bridge this gap. The program offered
its first guarantee in 2009 and has served as something of a lightning
rod in recent months. Developers and investors regularly complain that
the application process for loans guarantees is confusing, difficult to
navigate, and far too costly and time-consuming. Meanwhile, some in
Congress have expressed concern that DOE has cut corners while
conducting due diligence on potential guarantee recipients. In essence,
industry is frustrated that DOE has moved too slowly while Congress has
complained that it has moved too fast.
In our view, the loan guarantee program puts the federal government
in a fundamentally awkward position. On the one hand, it has been
charged with helping to finance potentially game-changing technologies.
On the other, it must serve as a careful guardian of taxpayer funds. As
private sector investors know well, investing in new technologies
inevitably involves a high degree of risk. We believe the loan
guarantee program can foster important breakthroughs, but will also
inevitably result in some number of failures. If the federal government
is going to guarantee financing for technologies, it must also be
comfortable with the inherent potential downsides. As any serious
investor in stocks, bonds, or other securities knows, having a
portfolio of both winners and losers is inevitably part of the game.
Success is determined by the portfolio's overall performance.
The loan guarantee program aside, the fundamental challenge of the
valley of death remains for many new companies seeking to build their
first pilot-scale project. From a larger strategic point of view, we
would argue that whichever nation puts in place policies or financing
schemes to bridge this gap stands to reap the greatest economic benefit
in the long haul.
The Chairman. Thank you very much.
Ms. Gallagher, please go right ahead.
STATEMENT OF KELLY SIMS GALLAGHER, ASSOCIATE PROFESSOR OF
ENERGY AND ENVIRONMENTAL POLICY, DIRECTOR, ENERGY, CLIMATE, AND
INNOVATION PROGRAM, THE FLETCHER SCHOOL, TUFTS UNIVERSITY,
MEDFORD, MA
Ms. Gallagher. Chairman Bingaman, Senator Murkowski and
other members of the committee, thank you very much for
inviting me to come here today.
Let me start with 3 basic points.
First, in my view the United States is undoubtedly a leader
in clean energy innovation in many dimensions. Other countries
like Germany, Denmark, Iceland, Brazil, the United Kingdom and
Japan have also become leaders in clean and efficient energy
technologies and industries. We also have new contenders most
notably China that have recently emerged as well.
In order for the United States to remain competitive in
clean energy it must strengthen its energy innovation system
and ensure that's firms are not operating at a disadvantage in
the global marketplace. As my testimony will reveal U.S.
strategies, policies and investment for clean energy innovation
are significantly different from the efforts of many of our
competitors in clean energy. I do believe we could do better.
The United States needs to set clear and measureable goals.
Determine and articulate strategies to achieve these goals.
Then implement practical energy policies that are stable,
credible, aligned and consistent to realize the deep and
currently unrivaled potential of the U.S. energy innovation
system. Such policies are likely to catalyze the creation of
new firms, strengthen others, generate new jobs, capture
growing markets, improve energy security and address important
environmental challenges as they have in other countries.
Let me give you a few examples.
Denmark has achieved remarkable success in the development
and deployment of wind technology which now accounts for 20
percent of electricity generation there through a mixture of
many policy instruments. At the Danish wind farm, Vestas, or
wind firm, Vestas, has a 13 percent market share of the global
wind market which the largest of any single firm.
Like Denmark, Germany established renewable targets far
into the future, 18 percent by 2020 and 50 percent by 2050.
Germany accounts now for nearly half of solar PV capacity
today. Its firms are leading renewable equipment suppliers
around the world.
Indeed during one visit to a solar PV factory that I made
last summer, I noticed that many of the manufacturing equipment
came from Germany and Japan. Was startled to discover many
dozens of Germans in the company cafeteria at lunch time, all
of whom were there to install equipment in the new assembly
line. German feed-in tariffs created market demand upon which
solar, Chinese solar PV firms have capitalized based on
equipment sold to them by German equipment suppliers.
The UK government created a renewables obligation similar
to renewable portfolio standard in 2002. This standard is
scheduled to ramp up through 2037. It's also imposed a climate
change levy and established the carbon trust which provides
zero interest loans to firms, tax relief, energy management
advice, certification labels and direct support for advanced
technology in firms.
As you know Brazil is well known for improving its energy
security and de-carbonizing its transportation system through
their development of a sugar cane based ethanol beginning in
1975. It's now the largest ethanol exporter in the world.
China recently codified its commitment to support a low
carbon energy efficient growth strategy in its 12th Five Year
Plan. It has 2, a renewable portfolio standard which has been
revised to 15 percent by 2020. It's established feed-in tariffs
for wind.
It's supported the deployment of high efficiency, ultra
super critical coal. Approved the construction of GreenGen,
which is an integrated gasification combined cycle coal plant
capable of capturing and storing CO2. This plant is
now anticipated to be in operation well before the U.S.
equivalent FutureGen.
China has extensive procurement policies that are used to
encourage the development of clean and efficient energy
technologies. It ensures that its firms have relatively easy
access to finance on quite favorable terms. Chinese firms now
hold 23 percent of the global market in solar PV manufacturing
and 23 percent of the wind market, wind turbine manufacturing
market.
The topic for today is current investment trends in clean
energy. I'd like to present some findings from a recent paper
with colleagues on trends in public investments in energy
research development and demonstration. These are--include
clean energy investments but are not limited to clean energy.
In this paper we found that 6 major emerging economies,
Brazil, Russia, India, Mexico, China and South Africa, are
investing slightly more than all of the OECD countries
combined. These BRIMCS countries, as we call them, spent $13.8
billion in 2008 compared with the OECD total of $12.7 billion
for a global total of $26.5 billion that year. For reference
the U.S. total in that year was $4.1 billion.
Japan and more recently China are the only 2 countries that
have historically, steadily increased their investments in real
terms. By contrast in the United States there's been a 1 in 3
chance that any given program will receive a funding change,
either an increase or a decrease, greater than 27 percent each
year between 1978 and 2009.
So to sum up here. Ideally the U.S. Government will adopt a
portfolio approach to investing in clean energy technologies
taking into account the different stages of technology
deployment. Which technologies are likely to be substitutes or
complements to existing technologies and knowledge about the
private sector investments to avoid duplication of effort and
to better design public/private partnerships?
Of course it is also critical to take into account the
investments made by other governments. Not only to understand
the competition per say and to determine one's strategic
interests, but also to identify potential areas for technology
cooperation. The United States must therefore carefully monitor
investment trends and policy developments in other countries as
they will strongly affect market conditions for U.S. firms and
workers.
Thank you.
[The prepared statement of Ms. Gallagher follows:]
Prepared Statement of Kelly Sims Gallagher, Associate Professor of
Energy and Environmental Policy, Director, Energy, Climate, and
Innovation Program, The Fletcher School, Tufts University, Medford, MA
summary
Chairman Bingaman, Senator Murkowski, and other members of the
Committee, thank you very much for inviting me to testify before you
today on the topic of global investment trends in clean energy
technologies\1\, and the impact of domestic policies on that
investment. I am Kelly Sims Gallagher, a professor of energy and
environmental policy at The Fletcher School, at Tufts University. I
direct our program on Energy, Climate, and Innovation, and concurrently
serve as a Senior Research Associate at the Belfer Center in the
Harvard Kennedy School. I served as a Visiting Professor at Tsinghua
University's School of Public Policy and Management last summer where I
conducted research on global energy commercialization, with emphasis on
the role of China.
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\1\ I define ``clean energy technologies'' to include solar, wind,
nuclear, energy efficiency technologies, coal with carbon capture and
storage, geothermal, and hydroelectric electricity. None of these
technologies is without liability, but all can be considered cleaner
than conventional fossil-fuel based alternatives.
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The United States is undoubtedly a leader in clean energy
innovation in many dimensions. Other countries like Germany, Denmark,
Iceland, Brazil, the United Kingdom, and Japan have also become leaders
in clean and efficient energy technologies and industries. New
contenders, most notably China, have recently emerged as well.
In order for the United States to remain competitive in clean
energy, it must strengthen its energy innovation system, and ensure its
firms are not operating at a competitive disadvantage in the global
marketplace. As my testimony will reveal, U.S. strategies, policies,
and investments for clean energy innovation are significantly different
from the efforts of many of our major competitors in clean energy
technologies, and I believe we could do better.
The United States needs to set clear and measurable goals,
determine and articulate strategies to achieve these goals, and then
implement practical energy policies that are stable, credible, aligned,
and consistent to realize the deep and currently unrivaled potential of
the U.S. energy innovation system. Such policies are likely to catalyze
the creation of new firms, strengthen others, generate new jobs,
capture growing markets, improve energy security, and address important
environmental challenges, as they have in other countries.
What do we know about how energy innovation works?
Research and development (R&D) is often used as shorthand for
energy innovation. But, research and development are only one component
of the energy innovation system (see Appendix A for a visual depiction
of the energy innovation system). In the linear growth model of
innovation, we used to think technologies were invented in the R&D
stage, before they proceeded to demonstration, and eventually were
``diffused'' in the marketplace. This model is still a useful one to
consider, but I would emphasize that the diffusion ``stage'' is not so
simple. If and when a new technology is successfully demonstrated, it
must somehow gain entry into the market, and this can be difficult
because:
New technologies are unfamiliar and seemingly risky,
They are often initially more expensive,
They usually do not have equivalent government support, and,
The incumbents will try to prevent them from entering.
Clean and efficient energy technologies face an even bigger hurdle
because their benefits are not fully valued by the market. In other
words, even though they may offer significant advantages in terms of
reduced pollution, improved public health, or greater energy security,
the market will not naturally reward these advantages. We can see,
then, that there is an important intermediate stage between
demonstration and diffusion that is ``market formation.'' In the market
formation stage, government can help to reduce the barriers to cleaner
technologies (and indeed, these can be barriers once created by
governments), provide niche markets, and incentivize firms to reduce
the costs of advanced technologies. Once a technology is sufficiently
competitive, it can freely enjoy widespread commercial diffusion.
While the linear model is helpful conceptually, we now know that
there needs to be coherence to the entire system, encouragement of
feedbacks, with a balance of effort on ``pushing'' and ``pulling'' new
technologies into the market. We know that there are at least two
important ``valleys of death'', one between R&D and demonstration, and
another between demonstration and commercialization.\2\
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\2\ Grubler A., Aguayo F., Gallagher K.S., Hekkert M., Jiang, K.,
Mytelka L., Neij L., Nemet G., Wilson C. 2011, ``Energy Technology
Innovation Systems,'' in, Nakicenovic et al., eds., The Global Energy
Assessment, Cambridge University Press.
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How does the United States compare?
Around the world, governments are engaged in substantial market
formation activities, some more successfully than others. I will
provide some examples.
Denmark has achieved its remarkable success in the development and
deployment of wind technology (now 20% of electricity generation)
through a mixture of many policy instruments. It established a goal for
wind generation, required utilities to achieve the goal, permitted the
formation of local co-ops to own and operate turbines of many sizes,
provided testing stations and certification, established a feed-in
tariff for wind, guaranteed loans for turbine exporters, and joined the
EU emissions-trading regime. Denmark now has established a more far-
reaching goal of 50 percent of generation. Danish wind firm, Vestas has
a 13% market share of the global wind market, the largest of any single
firm.\3\
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\3\ REN21. 2010. Renewables 2010 Global Status Report, Paris:
REN21 Secretariat.
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Like Denmark, Germany participates in the EU emissions trading
regime. It established renewables targets far into the future 18% by
2020 and 50% by 2050. It also established a feed-in tariff system for
renewable energy technologies, which guaranteed a price at which
renewables would be bought for a certain period of time. While this
program proved to be expensive, it was also effective. Germany accounts
for nearly half of solar PV capacity today.
Its firms are leading renewable equipment suppliers around the
world. Indeed, during one visit to a Chinese solar PV factory last
summer, I noticed that most of the manufacturing equipment came from
Germany and Japan, and was startled to discover dozens of German
technicians in the company cafeteria at lunch, all of whom were there
to install their equipment in the new assembly line. German feed-in
tariffs created market demand upon which Chinese solar PV firms
capitalized, based on equipment sold to them by German equipment
suppliers.\4\
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\4\ Ibid.
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The UK government created a renewables obligation, similar to a
renewable portfolio standard in 2002. This standard was initially set
at 3 percent and is scheduled to ramp up through 2037. The current
obligation is 11 percent. The UK also imposed a climate change levy in
2001, which taxes fossil fuels and nuclear energy. The British
government also created the Carbon Trust in 2001. This not-for-profit
organization provides services to firms and local governments including
zero-interest loans, tax relief, energy management advice,
certification labels, educational materials, and direct support for
advanced technology development in firms.
Brazil is well known for improving its energy security and
decarbonizing its transportation system by shifting to sugarcane-based
ethanol beginning in 1975. This shift was achieved through the
combination of many policy measures, including guaranteed purchases by
Petrobras, taxing gasoline to make ethanol more attractive at the pump
to consumers, mandates to achieve a certain percentage of its fuel from
ethanol, and low-interest loans for farmers and agribusinesses to
produce sugarcane. Brazil is the largest ethanol exporter in the world.
China recently codified its commitment to support a low-carbon,
energy-efficient growth strategy in its 12th Five Year Plan. The plan
sets clear goals adding 70 gigawatts of additional wind generation
capacity and 40 additional gigawatts of new nuclear power by 2015,
sending strong positive signals to investors in low-carbon energy.
China also had a renewable portfolio standard of 10% by 2010, which has
been revised to 15% by 2020. It has established feed-in tariffs for
wind energy. It has supported the deployment of high-efficiency ultra-
supercritical coal plants, and approved the construction of GreenGen,
an integrated gasification combined cycle plant capable of capturing
and storing carbon dioxide, which is now anticipated to be in operation
well before the U.S. equivalent, FutureGen. The Chinese government set
fuelefficiency standards more stringent than even the most recent U.S.
corporate average fueleconomy standards for its motor vehicle fleet.
Extensive procurement policies are used to encourage the development of
clean and efficient energy technologies, and it ensures that capable
clean tech firms have relatively easy access to finance on favorable
terms.\5\ Chinese firms now hold 23% of the global market in solar PV,
and 23% of the global wind market.
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\5\ For more on this subject, see Hout, T. and P. Ghemawat 2010,
``China vs. the World: Who's Technology Is It?,'' Harvard Business
Review, December.
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The policies of these countries are far from perfect, but there is
much to be learned from their and our experience experimenting with
different types of policies, over different time horizons, in different
places. Common features include the setting of long-term goals,
establishment of stable and credible policies that are aligned to
achieve the goals, provision of consistent signals to the marketplace,
and support of firms.
The topic for today is current investment trends in clean energy
technologies, and findings from a recent paper with colleagues on
global trends in government investments in energy research,
development, and demonstration (RD&D) are striking.\6\ This analysis
includes all public investments in energy innovation (including, but
not limited to, investments in clean energy technologies). We found
that six major emerging economies are together are investing slightly
more than all of the OECD countries combined (see Appendix B for a
table with countryby-country breakdowns). The six countries studied
were Brazil, Russia, India, Mexico, China, and South Africa (BRIMCS).
These BRIMCS countries spent $13.8 billion in 2008 compared with the
OECD total of $12.7 billion for a global total of approximately $26.5
billion that year. I note that these BRIMCS figures include state-owned
enterprise investments in these BRIMCS countries, and are adjusted for
purchasing power parity. For reference, the U.S. total was $4.1 billion
in 2008. The line between public and private investments in energy
innovation in these countries is hard to draw due to the dominance of
state-owned energy companies. The data underlying these figures is not
standardized or complete; rather, this picture of current investment
levels should be considered a rough sketch. As an important aside, it
would be wise to expand the International Energy Agency's data
collection efforts to include these BRIMCS countries so more accurate
statistics are available.
---------------------------------------------------------------------------
\6\ Gallagher, K.S., Anadon, L.D., Kempener, R. and C. Wilson 2011,
``Trends in investments in global energy research, development, and
demonstration,'' Wiley Interdisciplinary Reviews: Climate Change, Vol.
1, in press.
---------------------------------------------------------------------------
The volatility of investments in both industrialized and developing
countries is striking. Within the OECD, nuclear fission and fusion RD&D
have been the single largest type of investment since 1974. Japan, and
more recently China, are the only two countries that have historically
steadily increased their investments in real terms. By contrast, in the
United States, there has been a one-in-three chance that any given
program will receive a funding change (increase or decrease) greater
than 27% each year between 1978 and 2009.\7\ Sharp jumps and declines
in energy RD&D funding are also evident in Brazil, India, and Mexico.
Like energy RD&D in the United States and other OECD countries, BRIMCS
country energy RD&D appears to mainly be devoted to fossil fuel and
nuclear technologies. In general, the large emerging economies appear
to be ramping up support for energy RD&D, with the exception of Mexico.
It was not possible to complete a similar survey of market formation
and other deployment activities due to the lack of systematic and long-
term data, even in industrialized countries.
---------------------------------------------------------------------------
\7\ Narayanamurti, V., L. D. Anadon, and A. D. Sagar 2009,
``Institutions for Energy Innovation: A Transformational Challenge.''
Paper, Energy Technology Innovation Policy research group, Belfer
Center for Science and International Affairs, Harvard Kennedy School,
September.
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A related important question is how successful the United States
currently is in penetrating global markets for clean and efficient
energy technologies through trade, licensing, and foreign direct
investment. I believe other witnesses will address this issue, but I
want to note that the largest energy market is now China, which became
the largest consumer of energy last year. The International Energy
Agency's 2010 World Energy Outlook forecasts that 36% of the growth in
energy demand for the next two decades will be from China. As such,
China is a key export opportunity for American energy products and
services. Expanding access to China's market for energy goods and
services should therefore be a major concern for the U.S. government.
In terms of the market for clean energy, HSBC has projected that
the global clean energy market will triple to $2.2 trillion by 2020.\8\
Such figures depend greatly on whether or not governments around the
world put create the incentives for clean energy technologies to be
used, so again, we should be doing all we can to secure a competitive
position for U.S. firms to take advantage of opportunities in these
markets.
---------------------------------------------------------------------------
\8\ HSBC 2010, ``Sizing the climate economy'', available for
download from http://www.research.hsbc.com/midas/Res/
RDV?ao=20&key=wU4BbdyRmz&n=276049.PDF
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The global trends I presented here are intended to support your
decision-making about U.S. government investments in clean and
efficient energy technologies and industries, and the policy tools that
can be employed to create incentives for more rapid and greater
deployment of advanced energy technologies. Ideally, the U.S.
government will adopt a portfolio approach to investing in energy
technologies, taking into account the different stages of technology
development, which technologies are likely to be substitutes or
complements to existing technologies, and knowledge about private-
sector investments to avoid duplication of effort and to better design
public-private partnerships. Of course, it is also critical to take
into account the investments made by other governments, not only to
understand the ``competition'' and determine one's strategic interests,
but also to identify potential areas for technology cooperation. In
theory, governments might be able to better pool resources and share
risks in pre-commercial collaborative activities, as well as learn from
each other's endeavors. Policy support during the market formation
stages can strongly affect energy markets around the world, and in
turn, energy RD&D needs. The United States must therefore carefully
monitor investment trends and policy developments in other countries,
as they will strongly affect market conditions for U.S. firms and
workers.
The Chairman. Thank you very much.
Mr. Coleman, go right ahead.
STATEMENT OF WILL COLEMAN, PARTNER, MOHR DAVIDOW VENTURES,
MENLO PARK, CA
Mr. Coleman. Mr. Chairman, Senator Murkowski and
distinguished members of the panel, I appreciate the
opportunity to be here today.
As mentioned I am a partner at the venture capital firm,
Mohr Davidow Ventures. Since 1983 we've been investing in early
stage technologies. We were one of the first mainline venture
funds to start investing in the clean energy space. We've
experienced the challenges associated with building successful
businesses in the clean energy space. As always is the case in
venture capital, we've also had our share of unsuccessful ones.
As venture investors we sit on the front lines of the
innovation process. While we continue to see enormous
opportunities to invest in the clean energy sector, in many key
sectors as a Nation we are falling behind. I do think this
should concern us.
First, because clean energy is one of the largest
opportunities of the 21st century. The IEA predicts that $5.7
trillion will be deployed in the next 2 decades to clean
energy.
But second and more importantly, our ability to lead on
clean energy is critical to our competitiveness as a Nation
going forward.
I think our dependence on unsecure and unaffordable
conventional energy supplies is not just an energy problem,
it's an economic problem. In 2010 we paid $337 billion to
foreign countries for oil imports. That's money that could have
been reinvested here in the U.S., in U.S. businesses and jobs.
We'll spend $72 million just in the time it takes to have this
hearing.
Solving this problem would cut our trade deficit by almost
half. So while I know we are focused on cutting budgets and
deficits. We should be clear that proactively solving this
problem could do as much as anything to strengthen our economy.
Countries like China, India and Brazil, as mentioned,
recognize the opportunity. China has already committed $738
billion to clean energy over the next 10 years. They're
investing because they intend to leap frog the U.S. in these
technologies like they did in high technology manufacturing and
wireless communications among others.
Now I'm not suggesting that the U.S. Government should try
to outspend the Chinese government. But I absolutely believe
that the private sector can out invest and out compete the
Chinese government if given the right policies. Unfortunately
here in the U.S. we have 2 major impediments to private
investment in next generation energy technologies.
First, many energy markets are very difficult to penetrate
because they are heavily regulated and dominated by incumbents.
Let me give you an example. A couple of weeks ago I saw a
technology that would have made the grid more stable, easier to
manage and lower cost. The technology had been tested. But when
I spoke to the grid automation engineers inside the utility
they described a 5 to 10 year process for piloting the
technology.
At that point they imagined a classic hockey stick adoption
curve. But the problem is it takes too long to get there. So I
think the challenge is is that with any new entrant they need
to go through the utilities and a patchwork of 50 different
public utility commissions, none of whom have an incentive to
take technology risk. So without a national policy aimed at
adoption it is very hard for investors, like us, to invest and
innovation tends to dry up.
The fuels market is similar except the problem there is
that it is dominated by vertically integrated incumbents. To
enter the market a new technology must go through these
incumbents who tend to control the channels or reinvent the
entire supply chain. This raises the second impediment which is
that most new technologies need to get to commercial scale to
compete.
Solar is a great example of what can happen if you get
there. First Solar, a leading American solar company, unlocked
huge reductions in cost just through its novel approach, but
they were able to reduce their panel production costs from over
$3 a watt in 2004 to under 80 cents a watt today. That was
largely because they ran production 2,500 percent over the same
time period.
At these costs they are already competitive with many
combined cycle gas plants. That's part of the reason why First
Solar is now more valuable as a company than every U.S. coal
company except for one. First Solar is a great story, but it
was largely possible because they had a unique set of very
patient investors and an open market.
In many strategic markets the private financing needed to
scale new technology remains on the sidelines. If markets were
open and accessible some equity investors would flow in. But
when markets are tough to enter equity investors are hard to
come by.
The good news for America is that our scientists and our
entrepreneurs are still churning out great ideas and innovative
companies. We have a robust national lab system, some of the
best university labs in the world which we interact with on a
regular basis and leverage able private markets. As venture
investors we see plenty of opportunities around clean energy.
We don't need hand outs, but we also won't invest in certain
strategic areas unless the market conditions change.
The solutions need not be complex or expensive.
First, we need policies that create long term targets and
transparent criteria like a clean energy standard or an open
vehicle standard. These would open markets for new entrants and
let them compete in the marketplace.
For those sectors where the financing gaps are most
pronounced we need support for innovative technologies to get
through the commercial demonstration gap. These need to be
performance driven. They need to rely on the market to dictate
winners and losers. Most importantly, prioritize innovation
which means the government needs to be tolerant of taking some
level of risk. We have seen some programs deployed through the
DOE and the USDA as mentioned. But there are other proposals
some of which this committee has proposed, that would go much
further.
So in conclusion, let me just say that we are behind. In PV
and wind we have seeded the lead to China in just a few years.
If we don't move forward urgently I'm concerned that we will
not only seed the current opportunity but we'll lose the
knowledge and the experience necessary to compete going
forward.
The question is whether America builds the next generation
of energy technologies here that will be the bedrock for our
competitive economics over the coming century. If we act now we
can do this. I think we will prosper as a result.
Thank you for your time and attention here today. I look
forward to questions.
[The prepared statement of Mr. Coleman follows:]
Prepared Statement of Will Coleman, Partner, Mohr Davidow Ventures,
Menlo Park, CA
introduction
Thank you Mr. Chairman, Senator Murkowski and distinguished members
of the Committee. I appreciate the opportunity to be here today. It is
an honor and a privilege to speak with you on an issue that is so
critical to our nation.
I am Will Coleman, a partner at the venture capital firm Mohr
Davidow. We invest in early stage companies on behalf of some of the
largest endowments, foundations, and families in America. Since 1983,
we have funded over 250 companies, helping entrepreneurs transform new
ideas into thriving businesses and create new jobs in information
technology, life sciences, and energy.
We were one of the first mainline funds to move into energy and
have since invested in a range of sectors including solar,
biochemicals, coal gasification, transportation, and battery materials,
among others. So we have had the opportunity to experience the
challenges of building successful businesses in these segments.
I'm here today to talk about some of those challenges, but I also
want to start with a premise. Clean energy may well be the largest
opportunity of the coming century. But more importantly, taking a lead
on the next generation of energy technologies is absolutely critical to
our continued competitiveness as a nation.
Unfortunately, on both fronts we are falling behind.
american competitiveness requires next-generation energy solutions
As venture investors, we sit at the front edge of innovation in
this country. Globally we are seeing investment in clean technology
continue to grow. In 2010, $7.8 billion was invested by venture
capitalists into clean tech companies and over $127 billion was
invested globally in renewable energy project financing. The
International Energy Agency (IEA) forecasts that over $5.7 trillion
will be invested in renewable energy globally over the next two
decades. Unfortunately it is looking less and less likely that
investment will be here in the U.S. We are not only seeing companies
start here in the U.S. and then move overseas, but we are increasingly
seeing companies start overseas and stay overseas.
As Americans, we pride ourselves on our ingenuity and our
pioneering nature. Our greatest strength is our ability to take on
great challenges, and to lead the world in transformations that have
impacted every facet of our lives. In the past, we've embraced change
and we have prospered as a result. As Americans we take risks.
However, in energy we seem to fear change, and it is paralyzing us.
I am concerned that if we don't work to develop the next generation of
solutions here in the U.S. we will lose the capability and know how to
innovate in these sectors in the future.
Why is this a problem? The single biggest challenge we now face as
a nation is our dependence on unsecure, unsustainable, and unaffordable
conventional energy supplies.
In 2010 we paid $337 billion to foreign countries for oil imports;
stated differently, we transferred $337 billion of America's wealth--
that could have been reinvested in businesses and jobs in the U.S.--to
oil-exporting countries. That represents over 42 percent of our trade
deficit--42 percent! The number will be even higher in 2011. In the
time it takes to have this hearing we will have paid $36 million for
foreign oil--and that's only direct spending. So while we talk about
reviving our economy and cutting deficits, the single largest cost to
our economy is our dependence on oil.
And I say ``oil,'' not just ``foreign oil,'' for a reason. The
issue is not oil itself. It's that it is a global commodity. Although
domestic exploration may provide important security and economic
benefits in the short term, we don't have the domestic capacity to
offset the long-term trend of rising global demand. In essence, we lack
a portfolio approach or a hedging strategy, which could cushion us from
the most severe commodity price swings.
That means, American families and businesses will remain at the
mercy of global energy prices. The oil price shocks of 1973-74, the
late 1970s and early 1980s, the early 1990's, and 2008 were all
followed by recessions (EIA). As long as we don't have alternatives we
cannot avoid the price swings.
Our dependence on oil is not just an energy problem. It is an
economic problem. Our biggest competitors recognize the opportunity and
are seizing leadership positions with the clear goal of out-competing
an increasingly dependent and out-dated America.
China, India, and Brazil are increasingly focused on developing and
deploying the next generation of energy technologies. China is now the
number one global producer of photovoltaic solar cells. They were
barely on the map a few years ago in solar production. Just last week,
Suntech, a Chinese solar manufacturing company overtook America's
leading solar manufacturer, First Solar, as the world's largest
producer of solar modules. This emergence of Chinese manufacturing
certainly has something to do with the $22.5 billion in low cost loans
that the Chinese government provided to five domestic solar producers
in Q2-Q3 2010. However, they are also heavily focused on nuclear and
now coal gasification and have recently stepped up their engagement
with American startups to deploy leading edge technologies in China
instead of the United States. China is the world leader in installed
hydro power capacity and overtook the United States in 2010 for the
number one ranking in installed wind power capacity, too.
Over the past few years, China has committed to clean energy
deployment targets that dwarf the U.S. commitment and last year
announced plans to spend as much as $738 billion through 2020 to reach
those targets.
Some people would argue that we cannot afford to outspend the
Chinese in this effort, and we all know you don't want to bring a knife
to a gunfight. I would not argue that our government should try to
outspend theirs, but I can't accept the premise that we should concede
anything. Our economy is still more than two times larger than China's
with one quarter the population. I absolutely believe that the U.S.
private sector can out-innovate and out-invest the Chinese government.
We won the Cold War in large part by outspending the Soviets. We
can't let our competitors do the same thing to us in the energy race.
Instead of letting capital flee to China, India and Brazil, we need to
create the investing climate that draws our own private capital stocks
into the market and draws foreign capital flows here into the U.S. We
can create such a climate without massive government spending, but we
do need government action and support.
challenges of investing in u.s. energy markets
Few people in this room today would challenge the notion that
America's commitment to free market principles has played a key--if not
decisive--role in building our global economic leadership. The venture
industry is predicated on belief in the power of the private market to
generate and adopt better technologies.
I am not here today asking for help. We as venture capital
investors have plenty of opportunity to invest in energy and clean
technology models that fit our return needs. That said, we see a number
of obstacles in certain segments. As a result of these obstacles, there
are specific industries and segments where private investors can't or
won't go today, and there are others where investors will only go
selectively. These are often the most strategically important
industries for our nation's future. We must resolve these obstacles to
remain competitive.
obstacles to technology adoption
First, the U.S. does not have an innovation problem, but rather, we
have an ``innovation adoption'' problem. Most energy markets are either
a) heavily regulated or b) dominated by incumbents. In either case,
markets are extremely hard to enter for a new player.
And in the case of electricity markets we actually have both. The
patchwork of state and federal regulations is incredibly challenging to
navigate for any company--let alone a fledgling startup. The only path
to market is often through utilities and public utility commissions,
both of which have incredibly low tolerances for risk. Market entry for
any new technology, particularly on the grid side, can take 5 to 10
years of piloting and small deployments before a single state is ready
to deploy that technology broadly. This timeframe eliminates a whole
category of technologies for venture investors who need to see rapid
growth much more quickly to make the investing model work.
In the fuels and chemicals industries, transportation, and other
industrial segments, the primary challenge for new entrants is that the
incumbents are often vertically integrated, own the channels, and have
a history of sharing IP. In many cases, profits depend more on
collaboration than competition. To enter the market, a new technology
must go through these incumbents or re-invent the entire supply chain.
Unless incumbents believe that that these new entrants can build large
stand-alone companies--in other words, pose a credible threat to their
businesses--then the incumbents have little incentive to adopt new
technologies.
Without these incentives, incumbents are unlikely to pay premiums
for new technology and we won't see the value creation necessary to
propel new public offerings or acquisitions. In the absence of valuable
exits, equity investors will not invest upstream in the technology
development necessary to prove out the technology. We see a reverse
domino effect and the innovation pipeline in those segments dries up--
which means that a whole set of improvements may never make it to
market.
financing gaps
The second obstacle is that even in markets which are free and open
there are often financing gaps that can prevent new technologies from
getting to market. Incumbent companies benefit from decades of
investment in infrastructure, legacy government support, fully
depreciated plants, economies of scale and operating track records that
afford access to low-cost capital.
My firm recently sold one of the companies in our portfolio to
Sharp--partly because the cost of the working capital required to grow
the company would have been much higher had we secured it through
private sources rather than through Sharp's balance sheet. The only
path to rapid growth was through a major corporate partner.
For startups, getting to cost competitiveness typically requires
getting to scale. As with any new product, particularly an industrial
or commodity product, part of the cost reduction comes from
technological innovation and part of it comes from economies of scale.
But this can be a Catch-22. Many people argue that the new alternative
energy technologies are not competitive so we shouldn't support them,
and if they were competitive then we wouldn't need to. But that misses
the point. The question isn't where they are on the cost curve today;
the question is whether their costs will ultimately get below existing
options. That is what makes them worth investing in.
All one has to do is look at the solar cost curves to see how this
works. Over the past thirty years, solar manufacturers have made
significant improvements in cost with every generation of new
technology--but the real cost reductions have been primarily when they
scaled production. For example, First Solar's panel production costs
have dropped from over $3.00/watt in 2004 to under $0.80/watt today,
due in large part to a 2,500% increase in production capacity from
2004-2008. And costs continue to drop. That is part of the reason why
First Solar is now more valuable as a company than every U.S. coal
company except one. Fortunately, we have a company we hope will get
even lower.
The challenge for most startups is that without operating track
records, they are unable to leverage low-cost capital to get there.
This means that they typically need to raise higher-cost equity or some
combination of equity, mezzanine financing (if available), and debt
(which often isn't available) to build early commercial plants.
Again, this triggers the reverse domino effect. If we as early
stage investors don't anticipate low cost capital being available to
scale these technologies, then there is no way we will invest in the
early technology development in the first place.
policies don't support startups
The third obstacle is that where we do have incentives and tax
credits to support new technologies, many of them are not designed for
small emerging companies. Startups do not have the balance sheets or
track records that larger corporations do and have trouble securing and
monetizing the credits, incentives, and loans that have been made
available. As a result, it forces startups to either construct some mix
of unnatural third-party relationships or go to market through the big
incumbents, which can have dramatic impact on their value and investor
interest.
If time didn't matter, if we were not in a race to remain
competitive in the global economy, if the private market valued our
national security, the domesticity of our products, and the health and
environmental impacts, then ideally we would let the market work to
adopt the best solutions. Unfortunately, time does matter and the
market does not value these national strategic interests. For these
reasons, whether we like it or not, our government must play a
proactive role in encouraging clean energy development.Accelerating the
Adoption of Clean Energy
The good news for America is that our scientists and entrepreneurs
are still churning out innovative clean technology ideas and companies.
We have a robust national lab system, which I have had the opportunity
to work with as an advisor to the National Renewable Energy Lab. And we
have some of the best university research labs in the world. We also
have a robust private capital ecosystem that has growing experience in
energy and clean technology. In 2010, the venture capital industry
invested more than $3.6 billion into clean technology companies, which
is second only to information technology. If the history of venture
capital is any guide, then those dollars can generate ten times the
investment downstream. The challenge is how to draw the necessary
investors into the segments that represent heavier capital lifts and
riskier market entry.
Fortunately, there are several ways in which the U.S can unleash a
wave of private sector investment and promote innovation at the same
time. Government can do this without ``picking winners'' and without
huge costs to the taxpayer.
1) Improve market access and demand
It all starts with demand. Where there are large, open markets that
can be captured by better performing technologies, you will see
investors, and you will see the development of a manufacturing base.
Germany accomplished this with a robust Feed-In-Tariff, which attracted
most of the top solar companies to build manufacturing facilities
inside the country. First Solar began as an American company but moved
to Germany to be close to the market.
Similarly, the Chinese have aggressive five-year plans that make it
clear which segments will reward investment. These policies are easy to
invest ahead of.
Here in the U.S., we have a patchwork of state renewable portfolio
standards and programs. While these programs have supported the
development of renewable energy in those states, we lack the kind of
nationally unified strategy that would create more attractive
opportunities and provide long-term signals to investors. We need to
implement a set of national standards for electricity and
transportation. Programs like a Clean Energy Standard and an Open
Vehicle Standard are the simplest market based approaches. They would
push incumbents to adopt new technologies more rapidly and give
investors the incentives to take larger capital risks.
2) Fill the financing gaps
For those segments that have high strategic value to our nation,
but do not attract private investment, we need a set of tools to help
fill the financing gaps and draw private capital in. These tools should
prioritize innovative technologies, and they need to be flexible,
efficient, and technology neutral. Above all else, they must be
predictable. Investors need to know that if a company builds a
technology that achieves a specified level of performance, they will be
able to access these tools to help finance them to scale.
The primary financing gap typically occurs where a company must
scale up to a demonstration facility or first commercial plant. We've
seen this in solar manufacturing facilities, biofuel plants, battery
production lines and a host of other technologies. The capital
requirements tend to outstrip the capacity of most equity investors
that are willing to tolerate technology risk. Without an operating
track record, debt is difficult to secure. We have already seen a mix
of government solutions, ranging from grants to loans that target this
gap. These are helpful but not complete. The solution need not be only
direct spending or billion-dollar governmentfunded demonstration
projects. There are existing classes of capital that could be drawn in
to fill these funding gaps--venture debt, mezzanine funds and other
lenders--but they need some inducements to come into these sectors. The
legislation co-sponsored by the Chairman and Ranking Member Murkowski
in the last Congress to create the Clean Energy Deployment
Administration is targeted to solve this problem.
The bottom line is that if we are serious about filling these gaps
in sectors that have high strategic value to our nation, then
government needs the capacity and flexibility to provide a mix of
different structures and adapt these structures over time to evolve
with the market.
3) Replenish the innovation pipeline
Thirdly, we need to make sure we continue to replenish the
innovation pipeline. We cannot starve the research budgets that not
only breed the next generation of innovation, but keep the talent here
in the U.S. I recently met with a professor who had started a battery
company in California. He had immigrated to the United States from
Vietnam to go to school here and stayed to become a professor. We had
seeded his research and other U.S. venture investors had backed the
startup. He had just returned from a trip to China and he was worried
about our ability as a country to keep pace with the Chinese. I could
see in his eyes that he desperately and earnestly wanted to build his
company here. This is where he and his team wanted to be, but he didn't
think he could pass up not only the financial support that the Chinese
were throwing at him, but also the lab and research resources they
would provide.
We have the talent, but we need a commercialization pathway that
can continue to keep that talent here. That's why it is critical that
Congress continue to support basic R&D at universities and labs, and
fund the Advanced Research Projects Agency for Energy. ARPA-E was
designed to spur exactly the type of early commercial research and
development that our innovators and venture investors look for. ARPA-E
is a small but critical program that has developed into a model program
for how government should tackle these challenges.
4) Accelerate the adoption and deployment process
Finally, the U.S. must streamline the process by which energy and
other clean technology companies obtain patents, permits, certification
and authorization to manufacture and sell their products. In short, the
pathway through the regulatory environment must be clear and
predictable, and it must be manageable by large and small companies
alike. Right now it is not. We need to show companies that America is
open for business.
One of the biggest solar projects in the country nearly died three
different times in California because regulators changed the permitting
process midstream and regulators couldn't appreciate the impact of
another six-month delay. If the project had died, the company would
have died and likely the technology with it. We cannot allow promising
technologies to die on the vine just because of regulatory friction.
conclusion
The challenge we face as a nation is complex. The solutions need
not be. We have to be careful not to let the perfect be the enemy of
the good as we take steps toward reinvesting in our infrastructure and
renewing our competitive position in the world. We must also recognize
the extraordinary urgency of this challenge. The pressure is building
on entrepreneurial American energy companies to move to China or Europe
to be close to growing markets, to secure financing for that first
commercial facility, or to snag additional research & development
funds. So the challenge is not just about supporting the most promising
growth sector of the next several decades. It is about ensuring that
America builds the next generation of energy technologies that will be
the bedrock of our economic competitiveness over the coming century.
If we act now, we can do this. If we let national interests
supersede parochial interests, we can do this. We can harness the
ingenuity and drive that we see every day in our entrepreneurs, and
leverage the strength of our private markets to maintain our leadership
and secure our economic prosperity for decades to come.
That, I am confident in.
Thank you for your time here today. I look forward to your
questions.
The Chairman. Thank you very much.
Mr. Auerbach, go right ahead.
STATEMENT OF NEIL Z. AUERBACH, MANAGING PARTNER, HUDSON CLEAN
ENERGY PARTNERS, TEANECK, NJ
Mr. Auerbach. Mr. Chairman, ranking member, members of the
committee, I thank you for the opportunity to testify before
this committee today. It's an honor to be here.
My name is Neil Auerbach. I'm the founder and managing
partner of Hudson Clean Energy Partners which is a global
private equity firm headquartered in the United States and
focused exclusively on investing in the clean energy sector. A
large percentage of our investor base is from the United States
and a substantial number of our investments are in companies
that are located here.
I have focused on many industries during my career in
financial services. But for the past 9 years, the clean energy
sector has been my passion. I'm here today speaking in my
individual capacity to offer my perspective on investment and
policy trends in this sector.
I believe that compelling national interest if served by
increasing both the manufacturing and deployment of clean
energy in the United States. It advances the interest of energy
security, economic growth and environmental protection better
than any other sector of the energy industry. However, I am not
coming here before you in opposition to any sector of our
energy industry.
The United States has a strong interest in maintaining a
well diversified portfolio of energy assets. As an investor I
understand well the value of diversification. In essence my
recommendation to this committee is to maintain a diversified
portfolio with an overweight to clean energy. My investment
horizon in making that recommendation is the next 10 to 15
years.
What prompts me to make this recommendation?
My written testimony answers this question in detail. But
I'm going to draw your attention to Figure 1 on page 4 of my
testimony which is also blown up in front of you. I'm sorry I
can't see some of the Senators to my left. But hopefully you'll
focus your attention on this chart.
There's a lot of information to unpack on this chart. I'm
going to simplify it for the committee. In essence in the power
industry all power sources start out expensive and only get
cheap as technologies improve and as economies of scale kick
in.
In comparison to coal fired, natural gas fired and nuclear
powered generation the wind and solar industries have proven
themselves much more adept at reducing the cost as technologies
improve and economies of scale kick in. As the leading investor
in and a close observer of this sector for the past 9 years I
look at the trend lines. They favor clean energy. If you'll
note on this here the steepest trend is for wind and solar.
Solar in particular coming down that dotted line, coming down
on the right, indicates the pace at which the cost of wind and
solar are declining. That's what I'm focusing on.
In my written testimony I review a number of policy tools
used by the United States and its trading partners to promote
clean energy manufacturing and deployment within the borders.
I'm not going to go through all of them with you now. Many of
them have already been mentioned by my colleagues on this
panel.
But I'm going to highlight 2 for you this morning.
One is reverse auctions for deployment of clean energy.
The other are financing incentives such as loan guarantees
for promoting manufacturing of clean technology products.
As the production and investment tax credits begin to
expire between 2012 and 2016 Congress needs to explore
replacement options. I believe that reverse auctions are an
attractive solution that I hope would receive strong bipartisan
support. The question is why.
First of all, reverse auctions use the market rather than
the government to arrive at the lowest cost incentive to meet
deployment targets.
Second, because reverse auction system can be designed to
enable the emergence of a national renewable energy credit
market which is one of the goals of a national renewable
portfolio standard.
Third, the system can be designed and implemented without
adding to the Federal budget deficit.
To incentivize manufacturers to locate their facilities in
the United States, financing incentives are critical. Based
upon my direct personal experience overseeing Hudson's
portfolio and I discuss 2 examples, very compelling examples in
my written testimony. I strongly believe that Federal financing
incentives such as the Loan Guarantee Program do create
thousands of jobs in the United States that probably would have
been created offshore without those incentives all the while
preserving U.S. technology leadership in one of the world's
fastest growing industries.
Thank you.
[The prepared testimony of Mr. Auerbach follows:]
Prepared Statement of Neil Z. Auerbach, Managing Partner of Hudson
Clean Energy Partners, Teaneck, NJ
current global investment trends in clean energy technologies and the
impact of domestic policies on that i
Mr. Chairman, Ranking Member, members of the committee, thank you
for the opportunity to testify here today. It is truly an honor.
My name is Neil Auerbach, and I am the Founder and Managing Partner
of Hudson Clean Energy Partners. Hudson Clean Energy Partners is a
global private equity firm that focuses exclusively on investing in the
clean energy sector. With over $1 billion in assets under management,
Hudson is a leading global investor in sectors that include wind, solar
and hydroelectric energy, biofuels, biomass, smart grid, electric
vehicles, energy efficiency and storage. Given our position on the
front lines of these fast-growth industries, we have seen firsthand the
impact of government policies on our sector, both at home and abroad. I
would like to offer some observations about how government policy
impacts private sector capital flows, and then offer some suggestions
as to how the United States can become a more attractive place to
invest, create jobs and generate wealth through adoption of smarter
policies. Before I begin, however, I would like to summarize the
reasons why encouraging the growth of the clean energy sector is of
paramount importance to the United States.
Why the United States has a compelling interest in clean energy\1\
---------------------------------------------------------------------------
\1\ The term ``clean energy'' has many definitions, as many
industries want the moniker of being called ``clean.'' Here, I used the
term to refer to renewable energy (wind, solar, biomass, geothermal,
hydropower, biofuels) and energy smart technologies (including smart
grid, building efficiency, industrial efficiency, transport efficiency
and storage).
---------------------------------------------------------------------------
Increased manufacturing and deployment of clean energy in the
United States serves three compelling national interests: (1) energy
security; (2) environmental protection; and (3) economic growth. No
other part of the energy industry can lay claim to impacting so many
fundamental interests of the United States. To date, the policy
response of the United States has not adequately supported a sector
critical to so many fundamental national interests. Much impassioned
rhetoric has been intoned in debates about the merits of supporting one
part of the energy industry or the other. I am not here today as an
opponent of any part of the energy industry, including the coal, oil,
natural gas and nuclear industries. I am a realist. Dreams are not part
of my investment thesis, and I harbor no illusion that any clean
technology breakthrough can, will or should eliminate any of these
industries. Furthermore, as an investor, I understand the value of
portfolio diversification. If we have learned anything about energy
over the past decade, it is the importance of maintaining an adequate,
diversified supply of energy. As an advocate of, and leading investor
in, the clean energy field, I heartily recommend an ``overweight'' to
the clean energy sector. My view is that a more fulsome understanding
of why increased investment in clean energy is of such vital national
importance can better inform the important dialogue about the most
appropriate means to do so.
The benefit of clean energy to U.S. energy security should be
obvious, but it warrants discussion anyway. In our transportation
sector, dependence on foreign oil weakens our national security. I have
nothing new to add to clarify what is already abundantly evident.
However, what might not be so clear to this Committee is the progress
being made in the search for long term replacements for oil as the
primary energy source for our transportation sector. Currently, the two
most viable, long term replacements for oil are biofuels and hybrid/
electric vehicles.
While second generation biofuel technologies have not matured to a
point where the cost curve could be definitively predicted, major
corporations in the energy space, including Chevron and ExxonMobil,
have made significant investments in these technologies. As an example,
ExxonMobil plans to invest as much as $600 million in algae-based
biofuel production, with a significant percentage going to Synthetic
Genomics, a California-based firm whose CEO is Craig Venter, one of the
human genome decoders. Some expect genomic science to be the key to
yielding a significant decrease in the cost of the biofuel production
cost curve. A more mature field is the Electric Vehicles (``EV'')
market, where we have seen volumetric energy density of lithium-ion
batteries, the most expensive component of a hybrid/electric vehicle,
improve by a factor of 2 and cost decline by more than 70% during the
last ten years. As production of these components scales, the cost is
expected to decline by another 70% by 2015.
If you accept the premise that there is a progress curve at work
reducing the cost of advanced batteries powering the next generation of
our transportation fleet, then smartly crafted incentives that
accelerate deployment of hybrid/electric vehicles serve a national goal
of improving energy security by reducing the dependence of the United
States on foreign oil. Admittedly, the truth is a bit more complex than
that, as we need to understand better the vulnerabilities of the U.S.
power grid as it accommodates its new electric vehicle fleet, as well
as the vulnerability of the supply chain of electric vehicles,
particularly as it pertains to the lack of globally distributed supply
of rare earth minerals.
Increased investment in clean energy clearly improves U.S. energy
security in the power sector as well. The tragedy unfolding in Japan
has put a spotlight on the security risks associated with nuclear
power, as well as the environmental risks.\2\ A nuclear power plant
seriously damaged by a natural disaster may take years to rebuild, even
if the damage causes no harmful radiation to escape into the
atmosphere. The aftermath of Hurricane Katrina illustrates the
vulnerability of many of our nation's natural gas wells and pipeline
infrastructure.\3\ Renewable energy sources, particularly wind and
hydro, have a long history of safe and reliable operation and are far
less vulnerable to massive disruption. For example, most wind turbines
are designed to stop spinning in a hurricane, and are designed to
withstand winds in excess of 150 mph.
---------------------------------------------------------------------------
\2\ I am not an expert in the nuclear power field, and offer no
opinion on an appropriate policy response to the concerns being raised
about the safety of our nuclear fleet in the wake of Japan's national
disaster
\3\ The natural gas supply disruption resulting from Hurricane
Katrina cost the consumer approximately $8.5 billion in higher natural
gas prices during the 45 day price spike that followed the hurricane,
exclusive of the cost of replacing damaged infrastructure.
---------------------------------------------------------------------------
Improving our environment has been a national goal and has been
enshrined in numerous pieces of legislation, most notably, the Clean
Air Act of 1970, amended in 1990, and the Clean Water Act of 1972. In
this regard, the nation continually searches for more environmentally
friendly methods to utilize its resources for energy production. Not
only does clean energy reduce the harmful environmental impact
associated with elevated levels of greenhouse gases, it also offers the
best way to reduce other harmful pollutants in our atmosphere such as
carbon monoxide, sulfur dioxide, oxides of nitrogen, particulates,
volatile organic compounds and hazardous air pollutants (e.g. mercury).
Finally, investment in clean energy promotes economic growth. The
clean energy market is forecast to triple in size during this decade,
from $740 billion to over $2 trillion, exceeding global GDP growth even
under the most conservative growth scenario.\4\ The U.S. currently
accounts for 21% of the clean energy market, but its pole position is
under competitive threat. China, which now accounts for 17%, is
expected to rise to account for 24% of the global clean energy market
by 2020. As is written in an old Chinese proverb, it is impossible to
stay in one's current position in a rapidly moving river. Either one
paddles hard to move ahead or one will be washed back.
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\4\ HSBC Global Research, ``Sizing the climate economy'', September
2010.
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Many critics of clean energy express concern about the elevated
cost of clean energy technologies as compared to their fossil fuel
counterparts, and posit that any support of alleged uneconomic
industries cannot possibly foster economic growth over any prolonged
period of time. Others focus on the small installed base of clean
energy technologies and wonder whether any of them can ever reach the
scale necessary to make a meaningful contribution to our long term
energy supply.
Both concerns are utterly misplaced, and the underlying myths must
be exposed. All conventional energy sources used for our electricity
grid have begun as very expensive power sources and have only gotten
cheaper as economies of scale have kicked in. Figure 1, which comes
from an article published by my colleagues in the Journal of
Environmental Finance,\5\ catalogues the history of price movements of
electricity powered by coal, natural gas, and nuclear energy since
1930. History teaches us that each of these power sources has required
achieving massive scale in order to achieve their current favorable
cost structures.
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\5\ Environmental Finance, ``Making the Case for Clean Energy'',
December 2010--January 2011.
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Hudson's research uncovered that the slow improvement in cost
structure accompanying massive increases in scale is not taking place
in the wind and solar industries. Rather, small increases in scale are
causing significant improvements in their cost structures. Figure 1*
clearly demonstrates that wind and solar energy have reduced cost more
rapidly than any other type of conventional energy source over the last
80 years.
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* All figures have been retained in committee files.
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The rapid reduction in clean energy's cost structure is projected
to continue, and will bring these technologies into grid or retail
parity with conventional power sources over time, even cheaper than
conventional power sources in more and more markets over time.
An annual survey of cost competitiveness of various forms of
electricity generation conducted by Lazard confirms this view. Figures
2 and 3 compare the wholesale and retail power prices for several clean
and conventional power sources, and shows their expected cost migration
from 2010 to 2015. Most striking is the forecast of rapid cost declines
for solar power. Data sources point to solar panel price declines of
approximately 50% over the past two years.\6\ Lazard's cost forecasts
for the wind industry are probably conservative, and do not adequately
account for intense price competition underway in the wind turbine
market that have resulted in cost declines exceeding 20% over the past
3 years. Significant further price declines are expected as leading
Chinese wind turbine manufacturers with lower cost structures, as well
as newer wind turbine models sporting improved wind turbine efficiency,
enter global markets.\7\
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\6\ Hudson estimates
\7\ Emerging Energy Research and market quotes from OEMs
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The concern I mentioned earlier about the scalability of clean
energy technologies is easily dismissed and I won't spend much time
debunking the myth. The wind industry today installs approximately 38
GW of wind turbines globally every year. The solar industry has grown
exponentially over the past 7 years since I entered the industry. Only
1 GW of solar panels was installed in 2004. Last year, nearly 17 GW of
solar panels were installed globally, and the industry is forecasting
annual installations of solar panels inexcess of 40 GW by 2014. By
comparison, approximately 50 GW of nuclear power were installed from
1990 to 2007.
No one needs to be concerned about the world's access to
commercially utilizeable wind and solar resources. Figure 4 should
allay any concern that we're running short on either resource any time
soon.
If the importance of clean energy to vital national interests is so
clear, and the improvements in the cost structure of various clean
energy technologies is so rapid, why am I here advocating for increased
federal support for clean energy? There are essentially three reasons:
(1) innovation is not integral to the energy industry; (2) the degree
of federal support for clean energy is not commensurate with its
strategic importance, as discussed above; and (3) I sense that the
federal government may not be fully aware of the competitive
environment in which other countries are demonstrating greater
commitment as well as skill in supporting the growth of clean energy
manufacturing and deployment within their borders.
Energy is a commodity, not a consumer product
Energy is a commodity that affords consumers little opportunity to
express a preference in where it originates or how it is produced. The
market lacks a demand function that allows producers to supply
different products with different cost structures, as for example, in
the case of consumer electronics, where consumer preferences drive
manufacturers to invest in innovation and product diversification. In
electricity markets, there is baseload power, peak power, and off-peak
power at the wholesale level. At the retail level, there is the light
switch, and in certain markets, the ability to express some preference
in how to buy electricity through smart meters.\8\ In the absence of a
market incentive to encourage investment in new energy sources other
than that needed to meet new demand or obsolete supply, newer
technologies have a hard time getting to scale.
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\8\ For example, smart meter rollouts in selected regions across
the country offer customers Time of Use pricing.
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As pointed out by The American Energy Innovation Council in its
inaugural 2010 report\9\:
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\9\ American Energy Innovation Council, ``A Business Plan for
America's Energy Future'', 2010.
There are two reasons the government must play a key role in
accelerating energy innovation.
First, innovation in energy technology can generate
significant, quantifiable public benefits that are not
reflected in the market price of energy. These benefits include
cleaner air and improved public health, enhanced national
security and international diplomacy, reduced risk of dangerous
climate change, and protection from energy price shocks and
related economic disruptions. Currently, these benefits are
neither recognized nor rewarded by the free market.
Second, the energy business requires investments of capital
at a scale that is beyond the risk threshold of most private-
sector investors. This high level of risk, when combined with
existing market structures, limits the rate of energy equipment
turnover. A slow turnover rate exacerbates the historic dearth
of investments in new ideas, creating a viscous cycle of status
quo behavior.\10\
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\10\ The report points out that research & development spending as
a % of sales is 18.7% of the pharmaceuticals industry, 11.5% of
aerospace and defense, 7.9% of computers and electronics, 2.4% in
automotive and 0.3% of the energy industry.
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Global investment in clean energy is surging
When I entered the clean energy sector in 2004, global investment
in our sector was approximately $50 billion. In the last seven years,
global investment in clean energy surged fivefold to nearly $250
billion, over 30% ahead of 2009. In 2004, the United States was the
destination for approximately 20% of the clean energy capital invested
in the sector, while China accounted for just 3%. Last year, however,
the United States dropped to 19% of global clean energy investment, and
China recorded over 20% of that investment.
Our international trading partners, conspicuously led by China, are
laying plans for massive investments in the clean energy sector. They
are witnessing the dramatic growth of vibrant markets for clean power
and energy smart technologies, such as smart grid, ultra high capacity
transmission, advanced energy storage, LED lighting, and electric
vehicles, as they seek to address the energy infrastructure needs of
their own economies while nurturing the growth of export-driven
industries. Other countries have succeeded in attracting significant
amounts of capital for investment in manufacturing and deployment, and
have used a wide variety of policy tools to attract that capital.
Although the types of policy tools employed by countries to accomplish
their clean energy goals vary widely, most of the policy tools fall
into the following four categories: (i) installation mandates or
targets; (ii) revenue incentives; (iii) manufacturing incentives; and
(iv) financing incentives.
Installation Mandates and Targets
Three of the most active countries last year in attracting capital
for deployment of clean energy had either a mandate imposed on
utilities or grid operators, or targets that had the respect of both
the private and the public sector. China leads the world in both the
pace of new policy adoption as well as the scale and scope of its
ambition. New clean energy targets include (i) 15% renewables in
primary energy consumption by 2020, and (ii) 35%--40% energy intensity
reduction by 2015 from 2005 levels. In gigawatt terms, China seeks to
deploy roughly 7.6 times the amount of clean energy in 2020 as compared
to its 2009 levels.
While federal policy toward clean energy has not kept pace with
other countries, the United States has benefitted from a wide range of
state and local policy incentives directed at financing the scale-up of
clean energy. Texas, California and New Jersey represent the top three
U.S. states in terms of installed renewable energy capacity, with their
combined installed capacity exceeding one-third of the U.S. total.
California leads the country with a 33% Renewable Electricity Standard
(``RES'') by 2020, an active Renewable Energy Credit (``REC'') market,
the California Solar Initiative and state feed-in tariffs. Texas has
implemented a mandate to produce 5.9 GW of renewable energy by 2015 and
10 GW by 2025. New Jersey has set a target of reducing greenhouse gas
emissions 80% from 2006 levels by 2050.
Leading the way in Europe, Germany has set an accountable target to
achieve 80% of electricity from renewable sources by 2050 while also
adhering to the EU's 20% by 2020 target.
Revenue Incentives
Revenue incentives have been one of the most popular and impactful
policy tools to stimulate investment in clean energy deployment. Some
of the more popular tools have been feed-in tariffs\11\, renewable
energy credits\12\, tax credits, and carbon credits. Several of these
policy tools have been criticized, most notably feed-in tariffs, as
overly generous in cases where Government agencies have attempted to
set market prices based on often-outdated information about the rapidly
evolving industry cost structure. For example, in Spain, a generous
feed-in tariff of approximately #455/MW hour for solar power resulted
in a building boom of over 3,200 MW of solar capacity over a two-year
period between 2007 and 2008, representing over 35% of the global solar
market at the time. Gross margins for various suppliers of solar panel
components exceeded 80% for some companies taking advantage of the
Spanish Government's largesse, until Spain fitfully redrafted its feed-
in tariff rules in late September of 2008, causing massive dislocations
in the global supply chain.
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\11\ For example, Spain, Germany, China, UK and Ontario Province,
Canada.
\12\ Includes RECs in various states, green certificates (Italy),
renewable obligation certificates (UK).
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A much more market friendly and disciplined form of revenue support
has gained considerable traction. Reverse auctions, used successfully
in many other industries, have recently been used with great success in
Brazil, in place of its former feed-in tariff system, to auction off
nearly 2.1 GW of wind energy tenders, and resulted in a 42% average
price drop in the price paid for wind energy in comparison to the feed-
in tariff previously in force.\13\ In concept, reverse auctions are
simple. They are auctions conducted by buyers to encourage sellers to
sell at the lowest possible price. In practice, reverse auctions
require careful planning to ensure a successful outcome.
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\13\ 13 Bloomberg New Energy Finance, ``Wind Tender Analysis in
Brazil: Winner's Curse?'', September 2010.
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As this Committee considers how to support the accelerated
deployment of clean energy in the United States at the lowest possible
cost to the Government and consumers, reverse auctions are a compelling
option. I will discuss the benefits of this approach for the U.S. later
in my testimony.
Manufacturing Incentives
Incentive programs in foreign countries for the deployment of clean
energy have made relocating U.S. manufacturing facilities overseas
extremely attractive. In China, Malaysia, Brazil and others, mechanisms
such as free-trade zones, long-term tax holidays, cheap electricity,
accelerated permitting and cash grants have led to increased clean
energy deployment as well as meaningful job creation.
To achieve installation targets, some governments explicitly
require a certain amount of domestic content to drive manufacturing.
China and the Province of Ontario have employed competitive domestic
content rules to maximize job creation from domestic subsidy programs,
which has attracted substantial domestic and foreign capital to these
areas. China has implemented a 70% local content requirement, which has
forced some of the largest players to build manufacturing hubs in these
areas.
In the United States, we have been fortunate to have the
manufacturer's tax credit (MTC) under section 48 (C) of the Internal
Revenue Code. One of Hudson's portfolio companies, Calisolar, has been
awarded a $51 million MTC for its solar cell manufacturing facility in
Sunnyvale, California. That manufacturing facility has been built, in
part, with the proceeds of that MTC award. It is important to note,
however, that Calisolar faced a challenge in utilizing all of the MTC
that many other recipients of the MTC probably faced. The MTC program
assumes that the award recipient pays current federal corporate income
tax, since the award entitles the recipient to reduce its federal
income tax liability. Many young, innovative companies simply haven't
matured sufficiently to generate the level of profitability needed to
incur a tax liability against which to apply the MTC. Instead, these
companies must hire brokers, accountants and lawyers to identify other
companies that pay tax and would be willing to ``pay'' to ``buy'' the
credit, so that the award recipient receives the intended economic
benefit. One suggestion for improvement of the MTC program is to allow
award recipients to apply to the Treasury Department to receive the
award in cash, much like the current 1603 program for the investment
tax credit. Administrative guidelines have been established that permit
taxpayers to rely on the transparency of the procedures that must be
followed to claim the credit, while providing the Government with an
efficient oversight mechanism so that the cash paid in lieu of the
credit goes to the intended recipient.
Financing Incentives
A key enabler of both clean energy deployment and manufacturing has
been the provision of financing and financing assistance from public
funding sources. The clean energy industry is very capital intensive.
Renewable technologies, in particular, effectively convert operating
expenses normally incurred over 30 or more years (e.g., fuel costs)
into up-front capital expenditures for the installation of the
generation equipment. For example, a combined cycle gas plant can be
built for approximately $1,000 per kilowatt of capacity, whereas a wind
farm requires approximately $1,900 per kilowatt to install, and a solar
plant requires approximately $3,000 per kilowatt to install.\14\ Access
to reasonably priced capital is critical to ensure that clean energy
manufacturing and deployment can take place at low cost and on time.
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\14\ In the case of wind and solar energy, once the plant is built,
the fuel is free.
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In this regard, the United States has struggled to keep pace with
many of its international trading partners. For example, in 2010, the
Federal Financing Bank supplied over $2 billion in financing to the
clean energy sector, whereas China Development Bank supplied over $35
billion in financing to its clean energy sector.\15\ In Germany, KfW, a
state-owned bank, loaned #9.6 billion to the clean energy sector. In
the United States, nearly $46 billion was invested in the clean energy
sector in 2010, of which approximately 10% received federal financial
assistance, primarily in the form of loan guarantees.
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\15\ Bloomberg New Energy Finance, ``China Development Bank--How It
Came to Be a Giant Lender to Clean Energy'', 11 March, 2011
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International support is growing for the provision of financing
incentives, and there is no evidence that China Development Bank
intends to slow down its pace of capital commitment to the sector. For
example, the UK is seriously examining the support for a ``green bank''
that will act as a lender to and guarantor of private market
participants in their domestic clean energy industry.\16\
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\16\ Green Investment Bank Commission, ``Unlocking Investment to
Deliver Britain's Low Carbon Future''.
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The case for continuing federal support for clean energy manufacturing
and deployment in the U.S. is clear
I acknowledge that the United States desperately needs to put its
financial house in order, and that the size of the federal budget
deficit will constrain its ability to spend money in the pursuit of its
interests. I also acknowledge that the realm of government accounting
is not an expertise that I possess, and so the ultimate choices made by
this Committee in advancing legislation is likely to be shaped by
budgetary rules and limits that I simply cannot anticipate. With those
caveats, I believe that the United States cannot afford to cede
technology leadership in one of the world's fastest growing sectors
that addresses so many core national interests any more than it can
afford to spend the taxpayers' money far faster than it collects it.
But in this climate of budgetary constraints, I also believe that there
are approaches that can be taken to promote clean energy that do not
impose a material burden on the federal government.
It seems implausible to me that the United States can again enjoy
sustained periods of brisk economic growth without producing high value
goods and services domestically that are in demand both here and
abroad. The ability of the United States to compete effectively in key
industries is in peril in the absence of bolder leadership by the
federal government. Below, I discuss the importance of existing federal
programs and the need to think more broadly about the direction of
future policy.
Historical Perspective: the Development of Solar PV Manufacturing
Though Asian manufacturers dominate the solar industry today, the
solar industry was born in the United States, and U.S. firms led the
world for decades. Sadly, and quite avoidably, the center of gravity
moved abroad at precisely the time the solar market began to take off.
Why? Largely because other countries created attractive policy
incentives to promote local demand and local manufacturing.
Scientists at Bell Laboratories developed the first crystalline
silicon photovoltaic cell in 1954. Four years later, the U.S. Vanguard
space satellite carried a small array of PV cells to power its radio.
The U.S. market for solar energy systems grew in the early 1980s in
response to federal and state programs and incentives such as income
tax credits, property tax exemptions, sales tax exemptions, costsharing
grants, government purchasing programs, and government-funded
demonstrations. In 2004, before the solar industry began its most
recent dizzying growth spurt, the United States was the home to
approximately 10% of the world's solar manufacturing capacity. Today,
only around 6% of worldwide PV cell production takes place in the
United States and approximately 59% of global cell production takes
place in China\17\.
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\17\ Solarbuzz 2011
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In late 2005, I spearheaded the pre-IPO investment made by Goldman
Sachs into First Solar, which today is the world's most successful
solar company. Although First Solar is based in the United States, most
of its solar panels are manufactured outside of the U.S. Time will tell
if my prior investment success will be repeated with the two solar
companies currently in Hudson's portfolio. That being said, I am
convinced that both companies have the technology promise and the cost
discipline to emerge as leading contenders in the next wave of great
solar companies that is emerging in this fast-growing industry. What is
important to note for this Committee is that both companies have
expressed a strong interest in locating their next manufacturing
facilities in the United States, and that the Loan Guarantee Program is
of critical importance to each company's decision.
Calisolar is a California-based manufacturer of silicon, wafers and
cells that are sold to manufacturers for use in making solar panels.
Calisolar is unique in its ability to manufacture silicon feedstock
that is much cheaper than conventional silicon without compromising
quality. With manufacturing scale only a fraction of its more
established competitors, Calisolar is manufacturing its silicon far
cheaper than most of its industry peers. And in an all-too-rare
industry role reversal, our American company is exporting its product
to China. When Calisolar builds its first large-scale manufacturing
facility, we believe it will be the lowest cost manufacturer of silicon
in the world.
Facing the choice of whether to locate this large-scale
manufacturing facility in the U.S. or elsewhere, Calisolar sought out
the best incentives available. The most compelling incentives to build
a plant in the U.S. have come from individual states seeking to attract
new jobs. State incentives have included: preferred power prices, low-
cost land and buildings, free trade zones, grants for job training, and
assistance with permitting and necessary approvals. Asian countries are
currently offering similar incentive packages and access in the U.S.
through the Loan Guarantee Program to the type of low cost financing
offered by many Asian nations would help a company in Calisolar's
position to choose to locate its next manufacturing facility inside of
the U.S.
Another example of how the Loan Guarantee Program is helping
companies in our portfolio select the United States as the home of
their next manufacturing facility is SoloPower. SoloPower is a
Californiabased manufacturer of unique lightweight, flexible, high-
power solar panels that possess critical advantages for both rooftop
and ground mount solar market applications. By flexible, I mean thin,
bendable, and utterly unlike the traditional flat-plate solar panels
familiar to most people attending today's hearing. This unique form
factor expands the total addressable market for solar energy given that
approximately three quarters of commercial and industrial rooftops in
sunny environments are not designed to bear the load of rigid glass
solar panels, which weigh about five times as much as SoloPower's
panels. SoloPower's product can be integrated into a roofing membrane
and unrolled on a rooftop much like carpeting. Alternatively, it can be
adhered directly to a rooftop without the need for physical
penetrations or racking systems. This speeds installation time and
reduces balance-of-system (``BOS'') cost, delivering an industry-
leading levelized cost of energy that is competitive with retail
electricity prices in many regions of the world.
Demand for SoloPower's product far exceeds its current
manufacturing capacity, and the company has decided to build a large-
scale manufacturing plant in the state of Oregon. The company selected
Oregon because of the attractive incentives made available at the state
and local level, including: low-interest loans, cash grants, and a
state tax credit that can be converted into upfront cash through
partnership with a local taxpayer. In addition, SoloPower received a
conditional commitment from the U.S. Department of Energy for a $197
million loan guarantee. Without these incentives, SoloPower probably
would have located its manufacturing operations outside of the United
States.
Historical Perspective: Development of Hybrid-Electric Vehicles
The history of hybrid/electric vehicles tells a similar story.
Thanks to the Toyota's Prius, most people assume that the hybrid
electric vehicle was invented in Japan. In truth, the first full-sized
hybrid vehicle was built in America in 1972. This first hybrid was not
a Toyota, but rather a Buick Skylark which had been provided by General
Motors and converted by an American engineer named Victor Wouk. The
underlying technology behind the nickel-metal hydride (``NiMH'')
battery, one of the most important components of today's hybrids, was
invented by Stanford Ovshinsky, an American and founder of the Ovonics
Battery Company. General Motors acquired the NiMH battery patents from
Ovonics and shut down GM's Electric Vehicles program before the battery
could be commercialized. The patents ultimately ended up under the
ownership of Chevron, which took no steps to deploy the technology in
the U.S.
U.S. automakers would have been less likely to miss out on the
opportunity of leading the world in hybrid vehicle technology if not
for a stagnant government policy which failed to focus on an energy
efficient future. In 1978, the Corporate Average Fuel Economy
(``CAFE'') standard for passenger vehicles was 18.0 miles per gallon.
By 1990, it had increased to 27.5 miles per gallon. And for the next 20
years, until 2011, the CAFE standard remained at 27.5 miles per gallon.
In the meantime, Japanese automakers were busy seizing the lead in
hybrid vehicles using NiMH batteries as it sought to build vehicles for
consumers seeking more fuel efficient vehicles. In 1997, Toyota
unveiled the Prius, capitalizing on consumer interest in fuel
efficiency. The rest is history.
With respect to the new generation of EVs, the batteries of choice
are based on lithium ion technology. It should be no surprise that the
underlying technology came from the U.S.: experimentation with lithium
batteries begun in 1912 under G.N. Lewis, the dean of the chemistry
department at University of California at Berkeley, and a research team
led by an American chemist John B. Goodenough in the 1980s advanced the
technology substantially and made commercialization possible. Today,
Japanese manufacturers are the leaders in lithium-ion battery
production, with South Korean and Chinese companies making significant
inroads. U.S. battery companies, including A123 and Ener1, have
excellent designs, but have outsourced their initial production
overseas. However, with federal support now in place, Ener1 is building
a plant in Indianapolis and A123 plans to build in Michigan. The
lithium-ion battery market is projected to become a $40 billion market
globally by 2020, so it is imperative that support continues for
battery manufacturers.
California, the leading test ground for electric vehicles, passed
its Zero Emission Vehicle (``ZEV'') Mandate, which required two percent
of the state's vehicles to have no emissions by 1998 and 10 percent by
2003. However, the law was repeatedly scaled back over the following
decade to reduce the number of pure ZEVs it required.
Developing a New Approach that Provides Effective Support for the Clean
Energy Industry
Over the last several years, Congress has explored enactment of a
number of approaches for promoting clean energy. Such approaches have
great merit for this industry. But in this era of severe budget
constraints, I recognize the importance of finding an approach to clean
energy support that imposes limited costs on the federal government.
Speaking from the industry's perspective, clean energy developers
seek certainty and long-term support for their investments. As I have
explained above, the reverse auction approach has had great success in
other countries because it provides certainty to the industry. And it
has great appeal to consumers because it drives down the cost of
renewable power. I have been working with industry partners on a
reverse auction approach that would (1) use a market-based approach to
incentivize renewable development at the least cost; (2) would promote
the development of a national REC market; (3) would transition the
industry away from reliance on federal support; and (4) would not add
to the federal budget deficit. I would be honored to appear before this
Committee again at a later date to discuss reverse auctions and their
potential role in U.S. energy policy in greater detail.
This Committee, and others in the Senate and House, will examine
many specific pieces of legislation during this session of Congress. I
have mentioned reverse auctions and financing incentives in my
testimony today. Let me briefly discuss how they fit together.
Depending upon the structure of a federally supported reverse auction
program, further financing incentives offered by the United States
might not be required to accomplish national clean energy policy goals
for commercialized technologies. The devil is in the details. However,
consideration of a federal reverse auction program must be coupled with
assurance to the market that existing federal support mechanisms for
clean energy will remain in place and will sunset as currently
envisioned. With those ground rules in place, market participants will
be encouraged and no unintended consequences will take place.
For technologies that are reaching the commercialization phase,
risk capital will flow best from the private sector if federal support
is focused on minimizing the cost of capital and improving access to
liquidity through successful financing incentives such as the Loan
Guarantee Program.
Conclusion
The U.S. has been the global leader in inventing the clean energy
products that the world is currently using, and that leadership
position, while threatened, has not yet been lost. However, without a
national commitment to becoming a global manufacturing leader, and
consuming those products at home to reinforce scaling of the market,
the United States will not be able to retain its technology edge. With
a bold renewed determination to reassert its leadership role in
manufacturing and deploying critical technologies in the clean energy
sector, the United States can retain its technology edge, create an
abundance of high-value-added jobs, and afford Americans the
opportunity to build a more prosperous economy.
I thank the Committee again for the opportunity and honor to
present my views on this important topic of national interest.
The Chairman. Thank you very much. Thanks to all of you for
your testimony.
Let me just start, Mr. Auerbach, to ask you if you would
elaborate on how the reverse auction proposal that you're
advocating would work and how--what action Congress would have
to take to put such a thing in place?
Mr. Auerbach. Sure. There is actually a bill in front of
the House right now. It's of interest.
I'm not a political observer. I'm an investor. But it's
interesting that there are a large number of Republicans that
are signing onto the bill as part of a larger package but it
does support clean energy.
So I think that one piece of good news is that there are a
lot of Republicans that believe, at least in the House, that a
reverse auction market can work. In essence what you need to do
is to focus on a revenue source that is currently outside of
the scoring. So it would be a new source of revenues and to put
those revenues into a trust fund.
Then to designate a reverse auction authority that would in
effect put out to bid those that have clean energy assets say
on a quarterly basis or semi-annually basis in different parts
of the country. They would enter bids to take cash out of that
trust fund in order to supplement their revenue streams to
ensure that those investors in clean energy earn the adequate
rate of return. It's outlined in that piece of legislation,
that draft.
We believe or I believe personally that are some important
improvements that could be made to not only allow for cash to
come out of that trust fund, to supplement the revenue streams
for sale of power in the markets. But can actually be designed
to encourage the formation of a national renewable energy
credit market. The way that one would do that is in effect by
having only clean energy assets in States that have state
renewable portfolio standards be eligible to participate. Once
you do that the States will come piling on board. They will
want to participate.
There's a lot more here. I'd be delighted to elaborate on
this and answer questions. But if the Chairman would permit
I've done a lot of thinking about this. I'm working with other
industry partners. I would love to submit a supplementary paper
for the record that would outline some of these ideas.
The Chairman. We'd be anxious to see that. Why don't you go
ahead and do that.
Mr. Auerbach. Thank you.
The Chairman. I think it's an interesting concept. One we
need to understand better.
Mr. Coleman, let me ask you.
I think you point out and I think it's clear that China has
overtaken the United States as far as in the production of
photovoltaic cells and wind turbines. I gather that--I guess my
question is are we to a point, say in the case of photovoltaic
cells, where you're almost to a commodity situation where the
competition is so fierce or is headed in that direction that
the margins of profit are going to be so limited that it's not
going to be realistic for U.S. firms or others to really get in
and compete in that area. I don't know what your thought on
this is?
Mr. Coleman. I think we've hit a point now where there's
obviously quite a bit of volume in the market. I think the
Chinese are clearly doing quite well in that. I think their
approach to crystalline, silicone, in particular has changed
the dynamics in the market.
On the other hand, you know, we're investors in several
companies that we think can get to much lower costs than what
exists out there in the market today. We do believe that there
will be room for those players in the market. But I think we,
as the American economy do lead in several commodity industries
where we do compete and we have large businesses here in the
U.S. around those commodity industries.
So I don't think the fact that it's a commodity is a
problem. I think part of the challenge of investing in the
sector is that you are investing in commodity industries in a
lot of sectors. But what you need to do is you need to find
technologies that have the potential to get below the
competition on the cost curve. That's going to mostly happen at
scale.
The Chairman. Let me just ask one other question.
Senator Stabenow and I and many others here have strongly
advocated for putting additional money into this tax credit,
48C. I'd be interested in your thoughts as to whether that
worked as it was intended to, whether that should be continued.
I know the President is a strong advocate on it.
Do you have any thoughts? Then Ms. Gallagher might have a
thought on it.
Mr. Coleman. Yes, so, I think the 48C program is a great
program in its design. I think that it came at an important
time for a lot of these technologies. I think the fact that
it's targeted at manufacturing and prioritizes some of the
innovative technologies out there. If you see it to what
technologies it went to it's actually been very good.
I think the challenge with 48C has really been in the
execution and deployment of it which is that as startups and
this is really a challenge for startups engaging with some of
the larger tax credit programs and what not that the government
provides. As startups they don't necessarily often meet the
criteria that the OMB or other, the Treasury puts out there. So
the challenge of 48C is that--has been that a lot of the
companies that have won 48Cs have had trouble monetizing it.
Part of that is that they've had to go to third parties to try
and figure out ways to--people who actually had the tax
appetite.
Then the other challenge is that there's some requirements
around the balance sheets of these businesses. These businesses
are typically, especially the early stage ones, you know,
they're funded in 18 to 36 month cycles. So they're not--they
don't have 5 year horizons on their balance sheets and cash-
flows in a way that is often required to access some of these
tax credits.
So I think it's a great program. I think working out some
of the kinks in the execution is important. We'll be happy to
work with any offices in trying to do that.
The Chairman. Ms. Gallagher, did you want to make a comment
on that or not?
Alright.
Senator Murkowski.
Senator Murkowski. Mr. Zindler wanted to----
The Chairman. Oh, Mr. Zindler, go ahead.
Mr. Zindler. If you don't mind I would add just a couple
quick comments on both questions.
First on photovoltaics and I guess our view is that the
answer is the current generation of photovoltaic technology has
indeed become quite commoditized. Actually if you look at chart
6 that I've submitted. You can see that in the California
market in the fourth quarter of 2010, Chinese modules accounted
for about the majority of new capacity that was requested to be
added under that State's solar initiative program. So we have
seen a real commoditization.
That said. There is all still essentially to play for
because if you look at the cost of generation from current PV
technologies they are still not competitive on a truly
unsubsidized basis with the fossil generation. So the long term
goal is indeed to drive down that learning curve that Neil
showed earlier. Those--and thus at some point whoever is able
to produce photovoltaics at a much lower cost is going to be, I
guess you would say the winner in this long term game.
So we're not there yet. The market is being driven by
subsidies today primarily California, Germany, other places
like that.
Second, on 48C, if I could for just a moment. I would
completely agree with Mr. Coleman's comments. Of the, I think
it was $2.3 billion that was allocated we've tried to do some
research into this.
It is not clear to me that all the companies on the list
have been able to take advantage of the tax credits that were
offered. In fact quite a few, I think, have not been able to.
The larger, publicly traded ones that are profitable or
attached to larger conglomerates with profits have been able
to, but a number of the startups haven't.
I know that one of the ideas that has been kicked around is
to be able to make the tax credit a cash grant or something
else. I might suggest that that might work better potentially
than the existing system.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman.
I mentioned in my opening comments that sometimes when
we're talking about the U.S./China energy race, if you will,
it's not entirely a fair comparison, that it may be a little
bit apples to oranges. I mentioned a couple different scenarios
there where people were displaced, environmental issues were at
play. So it's not always about just getting the lowest cost. I
think we need to keep that in mind.
I think we have accepted some tradeoffs here. We want to
have fair labor standards. We insist on those. We want to have
environmental compliance. We insist on that.
But Mr. Coleman, you mentioned another area that I think we
suffer from some hurdles here in this country because of, call
them bureaucratic delays or the red tape or just the government
processes. You indicate in your example a 5 to 10 year process
for testing. How much of the delay that causes us to be less
competitive, I mean, we're talking about turning things around
quickly, working to reduce that timeline that Mr. Auerbach has
shown us.
How much does this play into our ability to be a competitor
here out on the world scene? We're causing it ourselves. Mr.
Coleman, if you want to start?
Mr. Coleman. Yes, so, I think it's a big challenge. I think
that for whether it's renewables you're talking about or
whether it's conventional energy sources. I think everybody is
going through the challenge of deploying these technologies and
the hurdles you have to jump through in order to do that.
You know, I think though that if you look at some of the--
what I was referring to in terms of the 5 to 10 year process,
that's really a challenge because you've got a regulated market
where people don't have the incentive to take a risk. The
challenge there is how we prioritize certain technologies or
certain sectors that we think are strategic and therefore that
we can push these technologies through the pipe faster than
they would otherwise. I think we are facing a bit of a
challenge here in terms of cutting budgets on the one hand and
then also having to deal with the friction, the market
friction, on the other hand associated with regulation.
I think it's hard when you pick up the phone and you call
an agency and there's no one there on Friday to answer the
phone. I think we have to figure out how to handle that
balance. Part of that is going to be streamlining regulations
to accelerate some of the deployment of the technologies that
we think are critically important to this country.
Senator Murkowski. I've got a very important question that
I want to ask that doesn't relate to this. But does anybody
else want to comment?
Mr. Auerbach. Yes, if I could--thank you, Senator
Murkowski.
If I could just point to footnote 10 on page 7 of my
written testimony. I highlight a report that perhaps many of
the Senators have already read from the American Energy
Innovation Council. It compares the percentage of research and
development spending as a percentage of sales in a variety of
industries. In the pharmaceuticals industry it's 18.7 percent,
in the aerospace industry, 11 and a half percent, in the energy
industry, 0.3 percent.
I think that that's a symptom of some root causes that Mr.
Coleman mentioned and that the Senator asked questions about.
So it's endemic to the industry. I think that it needs to be
resolved if we are actually going to capture the mantle of
leadership or retain that mantle of leadership in the energy
industry.
Senator Murkowski. Let me ask a question about the
materials supply chain because I think this is an area where
China is going, you know, literally from cradle to grave type
of an approach. They've got all the cards when it comes to the
front end of the clean energy supply chain. They've very
aggressively expanded their minerals production and their
processing capabilities for the raw materials that we need to
manufacture clean energy technologies.
We're doing a lot of talking around here now about rare
Earth minerals. We all know China holds 95 or 97 percent of
what is being produced right now. They're using that as
basically an energy weapon, if you will.
I think it's an extremely important issue. I think it plays
into what we're talking about here in terms of the--how we
lower the costs. We might be able to lower the financing of our
clean technology projects.
But what difference does it really make if we're not able
to gain some control over the front end. You've got a Nation
like China that basically has made sure that every step along
the way they've got the ability to be engaged. How big of an
issue is this in your view?
Mr. Auerbach.
Mr. Auerbach. Senator Murkowski, it is a big issue that
China does have roughly 97 percent of the world's production of
rare Earth minerals. But they only have approximately one-third
of the actual resources, the 17 minerals in the Periodic Table
that are well, rare Earth minerals. So the United States
actually has an abundant supply.
There have been some shuttered minds in the United States
that are now reopening. It's actually a perfect example of the
struggle between manufacturing critical components and
environmental safety. The environmental safety concerns are
abundant.
Actually China is focusing on them and they've expressed
concern. I think legitimate concern about health and safety
issues associated with production of rare Earth minerals. So
it's an issue that the country has to face. I think a decision
has to be made to support an environmentally acceptable way for
greater production in the United States.
There are also technologies that are in embryonic stage to
get away from rare Earth minerals. That is another possible
avenue for movement.
I will note however, that for example in the PV industry
silicon is manufactured mostly in the United States. We're
actually still a leader in poly silicon manufacturing which is
in the early stage from raw material to the initial finished
goods in the PV value chain. It emerged, of course, in response
to the growth of the integrated circuit industry in the 1970s
and 1980s. So it's still present here.
One of our portfolio companies will most likely, if all
goes well, make a decision to locate their manufacturing
facility here of the most advanced silicon manufacturing in the
world which will have the lowest cost beating out competitors
in China. So it is possible under the right conditions to site
manufacturing in the United States that is competitive of the
front end materials.
Senator Murkowski. Mr. Chairman, my time is expired. Mr.
Coleman wanted to comment. I don't know if you want to allow
that.
The Chairman. Sure, go ahead.
Senator Murkowski. Thank you.
Mr. Coleman. I just wanted to add. So I think that as Mr.
Auerbach pointed out it is in large part a production issue as
opposed to a resource issue. I--but there are some areas where
we don't have the resources, but in a lot of areas we do have
the resources. We think about it more not just in terms of rare
Earths, but also in terms of strategic minerals.
I'll give you just one example. We're an investor in a
company that extracts lithium out of geothermal brines. What
they've managed to do is figure out how to use the waste stream
of the geothermal brine plant and extract lithium, zinc and
manganese.
Now lithium is something that we all know is going to be
important in our electric vehicle capacity. But typically it
comes from either South America or China. With one plant they'd
be able to produce 16 percent of the world's supply of lithium.
So there are ways to do it. The challenge for this company
is that they're now getting to the point where they're building
production facilities. They're actually building a
demonstration plant. We haven't been able to necessarily get
interest from the U.S. Government in terms of the priority for
lithium.
The people who have showed the most interest have been the
Japanese. So the Japanese government was actually interested in
taking an equity stake in the company. So, you know, I think
it's a matter of whether or not we prioritize these areas and
how we think about them strategically and investment.
Senator Murkowski. Thank you.
The Chairman. Senator Udall.
Senator Udall. Thank you, Mr. Chairman. Good morning to the
panelists.
The Chairman. Here's the order that I've got here.
Franken, Udall, Shaheen, Stabenow, Manchin, Coons,
Cantwell. So if various people come and go that we'll still try
to do it in that order.
Senator Udall. Thank you. Thank you, Mr. Chairman. Again,
good morning to all of you.
I wanted to ask you which financing policies that you've
seen around the world have been most effective in promoting
clean energy development? On that list for me would be things
like feed-in tariffs on renewable energy standards, even a
price on carbon, imagine that. But before I turn it over to you
all I wanted to mention in this spirit a wildly popular program
in Colorado. Some of you may be familiar with it.
It's called the Property Assist Clean Energy Program or
PACE for short. It's a bipartisan local government initiative
that provides a way in which property owners can finance energy
efficiency in renewable energy projects for their homes and
businesses. Simply, and without any government subsidies, there
are some studies that suggest modest implementation of this
more broadly would very quickly produce over 100,000 jobs. Then
you have the benefits to the homeowners, better cash-flow,
reduced energy usage, sustainability, property values are
increased.
In my opinion, and I think the Chairman shares this with me
because he's a big supporter of this PACE concept, is this gets
the government literally out of the way. It leverages the value
of that real estate. Then the way in which those loans are
repaid is through a lien on the property. I know the Chairman
and I really want to see this kind of program expand and
succeed.
So in that spirit of what we're doing here would you in
turn talk about what you see worldwide as ways that are
effective in promoting clean energy development?
Mr. Zindler. I guess I'll start off. I think everybody
probably got something to say about this.
I would argue that we've not seen a perfect clean energy
policy and probably never will. So, you know, all of these
should be taken with some degree of, you know, grain of salt. I
think if you look in terms of most effective in terms of just
spurring very large volumes of deployment the feed-in tariff
program in Germany or the one that they had on the books in
Spain has been very successful in that regard.
On the other hand when you set a fixed tariff for the
amount that you're going to pay for clean energy. You have to
be very careful that you set it at a reasonable rate. That
you'd be able to adjust it as conditions change.
Because what's happened in Spain and to a lesser extent
Germany is they set the rates at a certain amount and then blow
that, the cost of equipment just plummeted. Essentially they
overpaid. So that's--that works in terms of deployment. But one
has to be careful to make sure that it's not wasteful.
This concept of reverse auctions is an interesting one that
Neil mentions. In fact we've seen a few examples of it in Latin
America. I mean the way it works down there though is you have
a state of grid. Essentially they say, ok, we need 2 gigawatts
of wind capacity. We're going to put it out for bid. Then they
conduct a reverse auction.
I would say the results so far have been intriguing and not
perfect, particularly in Brazil. One of the more interesting
things that's happened in the most recent round of auctioning
is that developers have come in with what we view are, in many
cases, unrealistically low bids. So they come in with a number
that they sell. Say they'll sell their power for because they
really want to get into the queue. They want to have an
agreement signed.
It remains to be seen in Brazil whether or not those
projects are going to get built because the economics may not
actually work. So I think the key to designing something like
Neil is talking about is that you need to put in some kind of
penalties for those who bid in at unrealistically low rates. Of
course the U.S. policy map has been more of a hodge podge of
different kinds of policies. State level, you know, renewable
portfolio standards plus a Federal level production tax credit
which taken together has, you know, proven to be somewhat
effective, but hardly a long term plan and on a per capita
basis obviously compared to Germany or Spain or some of these
other countries the U.S. has not deployed nearly as much
capacity as those other countries have.
Senator Udall. Ms. Gallagher, did Mr. Zindler leave
anything on the table to discuss?
[Laughter.]
Ms. Gallagher. Yes. No, I do have a few more comments.
Senator Udall. Great.
Ms. Gallagher. As a Colorado native it's nice to be here
before you.
I think that the most important thing we need to bear in
mind is that we need market certainty. I mean if there's a
common theme I'm hearing here and the one I was trying to make
most clear in my testimony it's that in the absence of market
certainty whether it's achieved through a feed-in tariff, a
renewable portfolio standard or a clean energy portfolio
standard, carbon tax, whatever it is. I think there's pros and
cons to each of those policy instruments. That will catalyze a
market.
I think the finance will come. I do think we have problems
with finance in the United States now. But I think the bigger
problem is that we don't have some kind of market formation
policy that's steady and credible and long term. You know,
right now what we have largely are these production tax credits
that start and stop.
You compare all the other countries that I referred to and
they have set, you know, long term targets and steady, credible
policies. You see the results. I mean, they've had good
results.
I think one just friendly amendment to the feed-in tariff
comment is I think the point he was making was really
important. The feed-in tariffs are very attractive because
they've proven quite effective in the deployment. But they're
very hard to ratchet down. We should expect that the costs of
these technologies will come down with more deployment through
learning by doing and so forth.
So I worry about feed-in tariffs from a cost effective
point of view. I think the auctions are an interesting
possibility or even some kind of tradable permit regime within
a portfolio.
Senator Udall. Thank you for that. My time is expired. I
want to stay on the Chairman's good graces. But Mr. Coleman,
Mr. Auerbach, maybe you could respond to that question for the
record?
So thank you again--actually for the record so we--I will--
if you'll do that for the record.
Mr. Auerbach. Yes.
Senator Udall. Then my colleagues can continue to ask
questions. But thank you.
Mr. Auerbach. Yes, Senator Udall, I would be delighted also
to follow up by providing more information again on the reverse
auction concept what Ethan Zindler mentioned about the issues
associated with getting it right are correct. I would love to
be able to talk with the Senator about how to make that kind of
a concept work. It addresses the concerns about overpaying.
Lets the market set the standard and increase deployment.
The Chairman. Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman. Thank you all for
being here.
Mr. Auerbach, you pointed out that in the energy industry
only about 0.3 percent is spent on R and D. Can you speak to
why that is?
Mr. Auerbach. Sure. It was a--thank you. It is a report
that was produced by the American Energy Innovation Council. So
I didn't do the initial research on it. But I do think
anecdotally that there are a few reasons why.
First of all, in a commodity market where the consumer does
not necessarily know what they're buying it is difficult to
express consumer preference in a way that drives behavior to
pay for something new. So, you know, in the consumer
electronics industry, for example, if I want to spend money
buying the IPad 2, even though I just bought the IPad 1 a few
months ago, I could decide to do that because I want to buy the
features. For electricity I want to have the light go on when I
turn on the switch. So there isn't really a consumer preference
that drives behavior that encourages adoption of new
technologies.
That kind of attitude I think is embedded also in the 50
public utility commissions that govern at State level the
regulation of the utility industry. Also I think up until very
recently governed the transportation industry. It's changing in
the transportation industry. But in the utility industry
security and stability of supply are paramount and consumers
don't necessarily express their preferences.
What we have now interestingly in the transportation sector
now that the customer, the consumer, has been able to get into
the act and there's been more competition that has opened up
over the last several years. All of a sudden consumers are
saying we want electric vehicles. We want hybrids. We're
willing to pay more for them.
In the long run you're not going to get mass adoption by
paying $15 or $20,000 more per car. But you'll see early
adoptive preference which will have its own cascading effect.
That's starting to change the transportation industry.
But for the energy industry, it's more difficult.
Senator Shaheen. You've all talked about certainty in the
market and the need to have demand for new energy technologies.
So can you talk about why that's so important if we're ever
going to get a robust new energy sector here in this country?
I mean, why does--you referred to it, Mr. Auerbach when you
were talking about electronics. We've seen it happen with
electronics. We've seen it happen in a number of industries.
So why are we having so much trouble getting to that point
in the energy industry? You know, as Senator Udall raised the
question about what's most effective. You've thrown out a
number of things, but none of them are a magic bullet to
getting us where we need to go.
So what do we do to unleash the private sector investment
that we all know is so critical and you know that's dependent
on American demand. But we haven't seen the demand. So the
investment is not there. So how do we get over that hurdle?
Mr. Zindler. I think you touch on it just right, Senator
which is that the problem has been lack of demand for these
technologies to some degree. I mean the stimulus bill, I like
to say is probably the most important piece of legislation ever
to support the clean energy sector. But the challenge with the
bill was that it only focused on subsidizing the supply of
clean energy equipment and services. That was a challenge given
that the market was not--had a lot of pull on the other side.
So I guess I would argue that the sort of, the simplest top
down approach as was mentioned by Ms. Gallagher, some kind of a
target. I mean, I know there's been discussion about a
renewable electricity standard or a clean energy standard at
the State level, these renewable portfolio standards. Something
that sets a goal and says, OK we have to get from here to there
by a certain year. By the way also includes some kind of
penalties for those who do not actually live up to those
obligations.
That's, in my mind at least, is probably the simplest way
to get about it. But there's obviously a variety of different
policies.
Senator Shaheen. So, let me just interrupt you for a
minute. Would everybody on the panel agree that the single,
most critical policy that we could put in place at the national
level to move us toward clean energy, is a clean energy
standard? I mean, is that what I hear you saying?
Mr. Zindler. I guess----
Senator Shaheen. Is there agreement on that?
Mr. Zindler. I'm not a policymaker. I'll just say what I've
seen work have been these kinds of standards in States around
the country. Also----
Senator Shaheen. Come on. Take a risk.
[Laughter.]
Senator Shaheen. You can go for it.
[Laughter.]
Mr. Zindler. You're the policymaker, Senator.
Mr. Auerbach. Do you want someone to second that motion? Is
that----
Senator Shaheen. I just want, you know, I want to hear what
you all think. You're the experts. What's the single best
policy proposal we can put in place that would move us in the
direction of new energy technologies?
Mr. Coleman. I would say it's 2 things. I'm probably going
to disappoint you because one isn't going to be that clearly
defined which is something along the lines of a clean energy
standard. Something that is on the market side that is a long
term target that gets mature industries to open up to new
technologies.
Because to your point before about R and D. The reason the
companies spend on R and D is because they actually either see
a competitive threat in the marketplace or they see a massive
opportunity.
Senator Shaheen. Right.
Mr. Coleman. So you see it in drug development all the time
because if they develop a drug for a certain disease State then
they can go out there and actually capture that whole market.
In mature commodity industries that's not the condition. In
fact they have a history of swapping IP back and forth in order
to, sort of, march down the cost curve together.
So I think you do need some sort of long term policy out
there that says this is a national priority. We need to move in
this direction. Here are the long term targets. Induce us to
move forward in that direction.
I think the second thing is something that actually helps
fund the early commercialization of these technologies. I think
the challenge there is that when you don't have open markets,
when you have markets that are very difficult to penetrate.
Then investors are sitting there at that early
commercialization stage and saying I'm not so sure that we can
come in where the capital intensity starts to ramp up and take
the risk that we're actually going to be able to penetrate this
market and get down the cost curve at scale.
So you don't see a lot of investment in that space in the
clean energy industry. So we do need some sort of entity out
there. If you want to attract private capital into that space
you do need some sort of entity out there that helps support
that.
Senator Shaheen. Thank you. My time is out, actually.
The Chairman. Senator Stabenow.
Senator Stabenow. Thank you very much, Mr. Chairman. Thank
you to all of you. I sense a sense of urgency.
I feel it in terms of what's happening in a global
marketplace where everyone is running to these new
technologies. Doing whatever they need to do to get there
understanding that it's jobs. It's innovation. It's creating a
middle class from Germany high wage, high regulatory country to
China where they said come and we'll build it all for you.
I mean, we're losing to a wide variety of countries that
are much more focused on clean energy and frankly
manufacturing. Because innovation and manufacturing,
commercializing end up together sooner or later. If the idea
that we can lose manufacturing and not eventually lose
innovation I think is not understanding how all of this works.
So thank you to all of you.
We have done some things. But they have been short term. I
absolutely agree that we need a broad policy that's in place.
We need incentives. We need financing mechanisms. I'm very
interested in what you were talking about, Mr. Auerbach, in
pursuing that further with you.
We need policies on rare Earth. I want to really complement
and associate with our Ranking Member on the rare Earth
elements. What's happening in China which is extremely
concerning on a wide variety of things whether it's defense,
whether it's cell phones or whether it's batteries right now as
we are trying to move forward on new electric battery
technology and the materials that are caught up in this.
My question though, relates to some things we have begun to
do. Batteries being one. I mean, we did put a $2 billion
investment into the Recovery Act which has unleashed billions
of dollars and new companies in my State and other places.
We're going from according to DOE, 2 percent of the world's
battery manufacturing to 40 percent within the next 4 years.
That's a pretty big deal if we can keep it going. A123
batteries, Dow Kokum, LG Chem, GM, Chrysler, Ford, I mean I
could go on and on with folks that are now investing.
So I'm wondering if any of you would want to respond just
to talk about in more detail what kind of impact these kinds of
investments can have. Understanding we need a broad policy. We
need long term.
But we actually have seen some movement because we've been
willing to make some investments to do that whether it's 48C,
1603, whether it's battery technologies. But when we're talking
about manufacturing, looking at what we have done in the
investment in batteries as well as 48C is certainly having an
impact, certainly in my State. So I wonder if you might talk
more about the impacts of those kinds of actions.
Mr. Zindler.
Mr. Zindler. I guess I'll just make a very quick comment
which is I would agree that I think that the advanced vehicle
loans at the DOE, has really played an important role in doing
a lot of things obviously in Michigan in the auto sector.
Senator Stabenow. Right.
Mr. Zindler. I would also say though that as we look sort
of further ahead the key is going to be to scale up the number
of batteries that are being produced to drive costs down.
Senator Stabenow. Right.
Mr. Zindler. This is where we do get back to the question
that Senator Shaheen raised about demand. You know, we've
looked at the economics of electric vehicles. Generally
speaking, not surprisingly, obviously without the subsidies
they're not competitive. Then even with the subsidies in some
cases it's a tough call for a lot of consumers.
So the question is when those subsidies, the existing
credits that are on the books start to run out what happens
next to create more demand for electric vehicles so that the
battery industry can continue to scale up and drive costs down.
So I would say it is--I think it's very good news so far.
Senator Stabenow. Right.
Mr. Zindler. But I think there's certainly--there's plenty
of, you know, room to go at this point.
Senator Stabenow. But what it relates to also is the
ability to have a broader market, right? The ability--and we
can help do that by purchasing with the Federal Government. We
can do that with the $7,500 credit. We could do that by front
loading it, as I proposed and as the President talked about in
the State of the Union. So it's more user friendly for
consumers because it's at the front end as well.
Ms. Gallagher.
Ms. Gallagher. Yes. I just wanted to kind of add another
rationale for investment in manufacturing in these advanced
technologies. Because as I compare China with United States I
think it's important kind of coming back to some of the
comments Senator Murkowski made to differentiate between what
we're doing well and what China is doing well.
I, having done a lot of research in China over the last
decade or so I would say it's clear our technological
capabilities are much stronger than China's, with one
exception. That would be coal gasification which presents some
concern for me. But where China's getting ahead of us is in
market share.
So, you know, that relates to jobs, how much are they
manufacturing, how many jobs do they have? But over time they
will learn and catch up technologically. You know, this whole
through manufacturing. They're going to learn a lot.
I think if we're not manufacturing, we're not going to be
learning as efficiently as we could. It's going to be hard for
us to stay at the cutting edge, at the front the way we should
be.
Senator Stabenow. Thank you. I know my time has expired,
Mr. Chairman. Thank you.
The Chairman. Sure.
Senator Manchin.
Senator Manchin. Thank you, Mr. Chairman. Let me just say
to all of you, thank you for being here today. As you know I
come from a State that's an energy producing State. With that a
lot of people think that just as coal. Coal is all we do in
West Virginia. It's the biggest proportion.
Because--but the other thing is people don't know that we
have an energy portfolio. Most West Virginians believe that the
most important thing that we can be concerned about is the
security of this Nation, being more energy independent. We're
so dependent on foreign oil. We see what's going on around the
world today.
With that we have to use everything. We don't try to pick
winners or losers. We try to use it all.
So we've adopted, 2 or 3 years ago as an energy portfolio
standard. We're using everything. We can reduce our carbon
footprint by using our coal in cleaner fashion. But it means
more investment and we see less investment coming from the
Federal Government.
ATL is one of our research lab. We're concerned about that.
We do more wind or much more wind than most anyone on the East
Coast right now. We're developing it.
We'd love to do solar. We're doing net metering. We net
meter back. We're doing everything we can.
With that and there's a lot of comparison to China. You,
Ms. Gallagher you talked and Mr. Zindler, you talked as far as
economy. Is China using less coal now than they did?
Ms. Gallagher. No, no. Of course they're using far more
every year.
Senator Manchin. Right. Are they over regulating or over
legislating their base load coal? Do you see them being more
stricter on what they're doing or they're advancing their clean
coal technology more rapidly? Because you mentioned it was a
concern of yours on the coal gasification why would that be?
Ms. Gallagher. I think there's 2 areas in which I think the
Chinese are moving much more aggressively than we are.
One is on ultra super critical, very high efficiency coal
technology. They have built many, many more ultra super
critical plants than we have.
On the coal gasification front the Chinese have similarly
deployed far more coal gassifiers than we have. Arguably----
Senator Manchin. They're contained to have that in their
base load for many, many years.
Ms. Gallagher. Yes. Arguably I think that's the one area
that I've studied where technologically they have actually,
their capabilities are as strong or stronger. They have started
to license that technology----
Senator Manchin. Would be that because we have put less of
an effort for that. We're putting more--and I'm not saying this
in any disrespect for--because I think we need it all. But
we're throwing all of our eggs in a basket of clean--I mean of
renewables.
Ms. Gallagher. Renewables.
Senator Manchin. Basically which are high priced right now
and can't carry a base load. If it wasn't for the credits
you're receiving would you all be in business?
Would you be investing in what you're investing in right
now, Mr. Auerbach?
Mr. Auerbach. Without any Federal support?
Senator Manchin. Without any Federal support.
Mr. Auerbach. We would not be investing right now.
Senator Manchin. You would not be in business?
Mr. Auerbach. That's correct.
Senator Manchin. Mr. Coleman, would you be in business?
Mr. Coleman. We as a firm would be in business, yes.
Senator Manchin. But not going--but not investing in, you
know----
Mr. Coleman. I think that the answer to that is that it
depends on the sector.
Senator Manchin. So----
Mr. Coleman. We have companies that are both solar
companies. We have companies that are--we have an underground
coal gasification company that actually works on that. The
project in Alaska actually that they're working on.
Senator Manchin. What I'm saying is if we're going to keep
pace with China. It looks like we're using China as the
standard bearer right now and what they're doing and how far
they're advancing. We know that upstream, the upstream part of
energy, coal plants are about 34 percent efficient in the
United States.
We've done very little to improve that except for the
scrubbers and the low nox boilers. But we have done very
little.
We're not going to be able to keep pace at a price that we
can compete with. Mr. Zindler, I'd like for you from an
economic standpoint.
Mr. Zindler. If I could just make one point on, not about
the technology but about at least what I perceive to be the
Chinese strategy. You're exactly right. They're adding a
tremendous amount of coal capacity over there. If you look at
the renewable sector and what, you know, if you try to divine
what the long term goals are, I would argue that I think the
Chinese government views it as a tremendous export opportunity
now.
Senator Manchin. Sure.
Mr. Zindler. That potentially more of a domestic
opportunity later. So while China has put in 17,000 megawatts
of wind last year, an all time record. They clearly are putting
more coal in the ground as well.
They've put very little actual solar, actual generating
capacity in the ground in China because they see the export
opportunity there. My only point is that they recognize that
this is probably one of the greatest economic opportunities of
the 21st century and are investing a great deal to try and
scale up----
Senator Manchin. But they haven't left base fuel?
Mr. Zindler. They have not left their base fuel.
Senator Manchin. But we are leaving our base fuel and are
increasing our prices dramatically.
Mr. Zindler. You've officially veered beyond my area of
expertise.
Senator Manchin. Let me just say this. That I think you
know what I'm saying is that we should be having a more robust
portfolio than basically picking winners and losers.
Mr. Zindler. My view is that, you know, that there's a
great economic opportunity in newer----
Senator Manchin. Everybody is excited to talk, I can tell.
Mr. Zindler. In new technologies. I think that the
government, you know, the governments around the world would be
well served to make investments in that.
Senator Manchin. Yes. I just--I'll finish up real quick. I
just want to say that basically I just believe very strongly
that we need a balanced portfolio. We need an energy--for a
lack of a portfolio we're sitting here trying to pick, OK.
If we give you this you can go in business. But you might
not stay. If we don't keep it going you're in trouble.
We should be supporting that by having a good solid base
load through this transition period. Do you agree?
Mr. Auerbach. Senator, not only do I agree. But that was in
my opening comments of my oral testimony. I fully agree that
the Nation should have a balanced portfolio for energy security
reasons.
Ultimately because technologies will leap ahead in
different parts of the energy complex at different points in
time and that was really the purpose of the chart that I
showed. So I believe that the Senators on the----
Senator Manchin. One final comment and I'll close real
quickly is that I don't know anyone really realizes how much
our coal is being purchased. How many of our reserves are being
owned by foreign countries such as China, India, Russia. That
scares me to death because some of the best coking coal in the
world, we don't own anymore. Other countries own it which makes
the best steel in the world.
So I think that we're getting ourselves in serious problems
here because we don't have anything to pick up the load. Thank
you.
The Chairman. Senator Coons.
Senator Coons. Thank you, Mr. Chairman. Thank you to the
panel for your testimony today. This is, as you can tell, a
topic of great interest to many of us even though we have other
hearings going on at the same time.
As someone who practiced as In-House Counsel for a global
company that was in technology. I'm very concerned about
intellectual property. In particular we've had a number of
members of the panel here as you questions about China and
where we are in terms of our partnerships with them.
We are investing significantly. A main focus of the
meetings, between President Obama and President Hu earlier this
year was on clean energy collaboration. We've got $150 million
joint clean energy research center. We have a U.S./China
electric vehicle initiative, a U.S./China renewable energy
partnership.
I'm interested in your views on how important these
partnerships are. But also how do we do a better job of
promoting clean energy research and manufacturing in the United
States and of protecting the intellectual property of American
companies that are moving to China. The Chinese, my impression
from a number of folks I've spoken to, are striking very tough
deals where they're offering human capital, property,
investment, but largely taking the critical intellectual
property of American inventors in exchange for the opportunity
to access the Chinese market.
So I'd be interested in what value do you see in these
ongoing U.S./China partnerships? What risks do you see in terms
of the exposure of critical American intellectual property?
What could we do to more effectively defend U.S. intellectual
property particularly in the energy space?
All of you if you would, please.
Ms. Gallagher.
Ms. Gallagher. Thank you very much.
I'm working on a book on this subject right now. I spent
the last summer in China working on 4 case studies specifically
examining this question about intellectual property
infringement in cleaner energy technologies. I looked at gas
turbines, coal gasification, solar PV and advanced batteries.
I have to tell you that I was very surprised by the
response that I got. I anticipated hearing that there was
significant problems with IP infringement. In dozens of
interviews that I did with both Chinese and foreign firms
alike, I found no case. I could uncover no case of IP
infringement in energy in China which was rather surprising.
So then you might ask, why? How can this be? When you know
we know that there's rampant infringement in some industries. I
think there's a couple of points I'd make.
The first is that the energy industry is quite different
from media or pharmaceuticals where you have--it's very cheap
and easy to copy the manufacturing process where as it's
actually quite difficult to copy a manufacturing process for an
energy technology.
I think second, the government has put a lot of effort. The
Chinese government has put a lot of effort into trying to
increase its IP protection in this sector because they know
they need to get this foreign technology into the market. Most
firms I spoke with felt reasonably confident that they'd be
successful in a case of IP infringement in the courts in China.
Then the third hypothesis really is that their capabilities
are just not very good yet. I think that that's true in every
case except for the coal gasification case. But it's notable
that in the coal gasification case that that is indigenously
developed. Nobody is disputing that.
Senator Coons. Anyone else have a brief comment on that?
I've got one more question I'd like to get to, if I could.
Mr. Coleman. Just a brief one which is I think that if you
look at what's going on in China there was a 2006 report from
the Chinese government that coined the term indigenous
innovation.
Senator Coons. Right.
Mr. Coleman. You know, I think in a double edged sword kind
of way, the more you see that the more you'll see respect for
IP in this space because they'll have their own IP that they're
trying to develop and protect. I think the way that we counter
that is programs that help support the national labs and other
research and development programs to develop new IP here in
this country.
I think RPE is a perfect example of that that helps what
has been a very traditional research set of institutions here
in the U.S. focus more on the commercialization of some of
these technologies.
Senator Coons. Briefly if I could, my other question. In
the UK the public sector and the private sector are investing
billions of pounds a year in really ramping up for offshore
wind, specialized ports, specialized manufacturing facilities,
special purpose installation vehicles, training of tens of
thousands of workers. The U.S. Department of Energy has a
program to invest at most$ 50 million a year in offshore wind
development and testing.
Are the current U.S. Federal programs sufficient to induce
adequate private investment in the United States to take
advantage of what I think is an enormous opportunity, oddly
just off the Delaware shores. If not, what Federal policies
could we pursue that would be more constructive in rapidly
developing what I think is one of our most promising
alternative energy technologies for the United States.
Any member of the panel?
Mr. Auerbach. Senator.
Senator Coons. Sure.
Mr. Auerbach. Yes, Senator, I'm not going to get in the way
of offshore development of wind off the coast of Delaware. So I
will support that.
The fact is that in the United States there is such
abundant terrain onshore for a cheaper cost to produce wind
energy that market forces hopefully will focus first on the
cheapest way to access the wind resources in the United States
which are most likely onshore. I'm not sure how much Delaware
has onshore. So I'm sorry if I might be putting other States in
competition.
But ultimately the approach that I think works for the
Nation is to focus on developing its natural resources and
commercializing them at lowest cost. So what is happening
actually offshore in the UK is good news for Delaware, but
perhaps in a different way. What's going to happen is the cost
of offshore wind is going to come down over the next 5 years as
they scale up massive investments in probably in the hundreds
of billions of dollars equivalent offshore.
We're going to get the benefit of that learning as the U.S.
develops its offshore wind industry. But now we have the
ability to take advantage of great learning curves or progress
curves that have taken place onshore in the United States. I
would advocate that as a Nation we focus on trying to do, try
to utilize the resources that we have and get it out there at
lowest cost. That would apply across the board, but
particularly in clean energy.
Senator Coons. Thank you, Mr. Chairman.
The Chairman. Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman, for having this
hearing, and thank you to the panelists for being here this
morning. I know in your written testimony you talked about
providing certainty by eliminating price distortions and by
creating new financing mechanisms.
One of the things that was in the last energy bill passed
out of this committee, the ACELA bill, was the CEDA bill that
both Senators Bingaman and Murkowski provided great leadership
on. We want to continue this dialog and consider how we can
help with financing of energy projects, particularly given
developments in the marketplace in recent years. One of the
turnkey approaches that was also included in that legislation
was the provision of Federal loans at 1 percent interest, with
a payback period of 30 years.
So I'm asking the panelists, does it make sense to harness
the government's ability to provide patient capital and provide
low interest financing for something as important as this
national interest?
Mr. Coleman. Do you want to start?
Mr. Zindler. If you do deem this to be in the national
interest. That developing a new generation of energy
technologies is critically important than absolutely I would
say that some kind of a program that takes a longer view of
this would be very important. In my opening comments I sort of
alluded to the fact that the view I see just from the feedback
of talking to people in our industry is that the Loan Guarantee
Program puts the Federal Government in kind of a tricky
position of trying to take very risky bets but at the same time
trying to play it safe because that is what they try to do as
guardians of the public trust.
I think the idea that's been discussed. I know did pass out
of this committee of creating some kind of entity that was sort
of at arm's length away from the central function of the
government. That may help address this question.
That said that's not intended as a criticism of the Loan
Guarantee Program because I think that everybody's probably
doing the best they can with what they've got. It's just that
these are difficult circumstance to try and make work as things
stand.
Senator Cantwell. You know, I think of these as actually
distinct different things needing varying degrees of oversight
and decisionmaking. But the more that government chooses, as
opposed to a separate financing mechanism, the longer the
approval process is going to take. I would like to see greater
opportunities for access to patient capital for financing that
a more turnkey financing mechanism can offer, perhaps something
similar to what we do with SBIR. What's particularly attractive
in this case is the fact that you have a revenue stream from
electricity generation.
We've had very good results with the payback of Federal
Government loans to small business. But in this case we
actually have a steady revenue source through the generation of
power, which makes it even more attractive from the standpoint
of financial risk to the government. So, Mr. Coleman, do you
think it would be good for startups to have access to financing
through a mechanism like this?
Mr. Coleman. Yes. I think, you know, as I mentioned in my
opening remarks I think that the importance of having an entity
like this is very high. I think that we need some set of
programs that help companies get through what people refer to
as the Valley of Death. It is the demonstration/early
commercialization point in the development of these
technologies in these companies.
Part of that is because there's not yet an open market
that's drawing all of the private capital in to actually
support these technologies. Part of it is just because the
capital intensity at that point for certain types of
technologies in certain sectors is extremely high. So I think
you mentioned several different options for solving the
problem.
I think we need a portfolio of solutions. I think that the
thing to focus on, the thing that's really critically important
is how do we create mechanisms that are somewhat predictable?
So how do we create mechanisms where we, as early stage
investors, are saying there isn't necessarily a Valley of Death
anymore, right?
We can look at them. We can see that there's a mechanism if
we build a certain type of technology. Do a certain performance
criteria that we can access in order to get across that valley.
You know, I think one of the challenges has been that when
you have spot programs here and there, hard to know whether
you're actually going to be able to access them with your
company. I think when you have an entity that has--that is
defined a certain set of criteria it's much easier to
anticipate and therefore easier to invest ahead of.
Senator Cantwell. Thank you.
Mr. Auerbach.
Mr. Auerbach. Yes, if I could just add a personal
experience from Hudson's portfolio. Fully agree with the
statement. We've actually seen it in one of our portfolio
companies called Solar Power we recently received a $197
million loan guarantee to site a major manufacturing facility
actually in Senator Wyden's State in Oregon in order to build a
plant that will manufacture one of the most innovative products
in the solar industry.
The CEO of that company that we had recruited had actually
been a specialist at building and running plants in South East
Asia in other industries. So it was refreshing to see the U.S.
Government providing the competitive capital to keep this
technology onshore in the United States because other countries
were offering similar attractive financing packages. I think
that's one other point to make, Senator Cantwell, that other
countries are providing those kinds of competitive financing
packages to incentivize manufacturing facilities to locate
abroad.
Senator Cantwell. Thank you. Thank you, Mr. Chairman.
The Chairman. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. I want to thank the
panel. I'm sorry to have not been here all the time. I heard a
little bit in the office and just lots of meetings today.
I want to ask about the global markets as it relates to
green energy. I also chair the Trade Subcommittee of the
Finance Committee. A number of us are on both this Committee
and the Finance Committee. I think clearly there is an
intersection.
With renewable energy playing a bigger and bigger role I
put a special focus on looking at the practices of China. I'm
troubled by a number of them. I organized an effort. Chairman
Bingaman was very supportive of this effort that was led by the
steelworkers to petition, the trade representative, to look at
some subsidies and discriminatory practices employed by China,
the World Trade Organization effort led by Ambassador Kirk.
Some progress clearly has been made as a result of that.
Certainly there's some indications that China will look at
their subsidies as it relates to wind. But I'm of the view that
there's a lot more to do. This is not going to go away without
some significant and bolder action.
For example China is restricting, in my view, the export of
rare Earth minerals. They're doing it for blatantly
protectionist and discriminatory, you know, reasons. I think
it's going to take a toll. I'm pressing for action on this
point.
So the question I'd like to ask, let me pose it to you, Mr.
Coleman, if I could. If China played by the rules would this
conversation this morning be different?
Mr. Coleman. I actually think it probably would. I think
that there's 2 answers to your question.
I think the first is that there are a whole lot of
structures out there that China leverages that they've given an
advantage. I think that the world would be a different place if
they didn't necessarily leverage those structures partially
because I think we overestimate sometimes the competitive
advantage of China. I think we assume too much about lower cost
base, you know, lower labor costs, etcetera.
I think if you go and you look at some of these
technologies that are being developed both here and in China
the costs aren't that much lower at the end of the day. But the
government has been a lot more supportive of these
technologies.
I think the other side of it is that we could be doing a
lot more here. So they've taken a proactive stance on a lot of
these things. I think, you know, we can compete with a
proactive stance.
Senator Wyden. I ought to probably quit while I'm ahead.
Would any of your contemporaries like to add to that?
Mr. Zindler. I guess I'll wade in carefully here. Just say
that I don't think--I think that most of the Nations in the
world that are very involved in clean energy in one way or the
other have some kind of policies in place to help their
domestic industries. That has included Canada which has
domestic content requirement. It includes the United States
which imposes a tariff on imported ethanol from Brazil and
other countries. So I think we need to look at this a little
bit holistically in that it's not one country alone that's
involved in this.
I'd also really endorse Will's point which is that, you
know, China has scaled up by making commitments of
unprecedented amounts of capital. That that's really in many
ways helped it get, I would argue, helped it get more of a lead
than whatever kinds of trade policies that they have put in
place to date. So I think it's important to keep focused on
what it is that's really allowed that country to flourish in
terms of attracting clean energy investment as opposed to other
Nations.
Senator Wyden. I don't think there's any question that
there are others that are part of these practices. That this is
a global kind of question. I think the Chinese have taken this
to a very different, you know, level, particularly the speed
with which they move to protect rare Earth minerals I think is
a signal of what this is really all about.
They saw that this was going to be enormous ramifications
for key, you know, industries, electronics and others. They
moved so rapidly. I think is reflective of why I've been
concerned throughout my time in public service.
I voted for every market opening, you know, agreement that
we've had. In my youth I was a member of the House as well. So
we had a number of these there. I think this challenge is very,
very different.
My time is about up. Would any of--Mr. Auerbach, would you
like?
Ms. Gallagher. If I could just make one comment which I
tried to emphasize on my testimony. I think the market access
issues are very serious in China. As we look forward to China
being by far the largest market in energy, period, for the next
2 decades. This is something we really need to focus on.
I'm less worried about some of the issues you've raised
than I am about procurement, I guess, if I had to say it
specifically.
Senator Wyden. You're going to hear me say in a little,--my
time is up. You're going to hear me say a little more about
procurement because it is absolutely outrageous that the
Chinese have said again and again that they would not engage in
these practices indigenous innovation and these others that are
just blatant, you know, protectionism and yet one offer after
another sort of goes by the boards. So I'm going to have a
little more to say about it in the days ahead.
The fact that they are engaging in those practices in an
area particularly with digital goods and the like is going to
take a very substantial toll on our trade relationship. For
those of us who want market opening agreements, their
unwillingness to move on the procurement issue is going to harm
our relationship. I want to see that change. I'm going to press
hard to do it.
Thank you, Mr. Chairman.
The Chairman. Thank you. Let me just ask Mr. Coleman a
question here to clarify my understanding of what you're
saying.
You're indicating that, as you say, the problem is not that
we can't innovate it's that getting the innovation that we do
adopted, particularly in the electric sector. There's a problem
there. The problem there, of course, is because electricity is
produced and distributed by utilities which are in most cases
are regulated by public utility commissions in the various
States.
As you say there is not appetite for risk. No incentive to
take any risk. Everyone is just happy as a clam. So there's no
reason to do anything innovative.
The way to break out of that, as I understand what you're
suggesting is that we need some kind of incentive to be imposed
or some kind of requirement to be imposed, hopefully on a
national basis. Something like a clean energy standard or
something which would require utilities to go ahead and take
some chances and actually welcome some innovation in this clean
energy space and in the area of energy efficiency. Now is that
a fair statement of what you're talking about?
I mean, I guess the one point I want to just be real clear
on. The bureaucratic regulation which you referred to, is not
just a problem with the government. It is a problem with these
very large incumbent utilities which obviously are the only
game in town if you want to buy electricity when you plug in
your lamp.
Is that fair?
Mr. Coleman. Yes, I think that is fair. I think that the--
but there's a couple different components to it. So I think
that on one end it's a clean energy standard or something to
that effect which actually sets a target. Not only would it
push the utilities and public utility commissions to think
about new technologies in terms of meeting that target. But it
would actually give a signal to the market to invest in some of
those new technologies ahead of the horizon.
But the other component of it is also some of the ins and
outs of developing the next generation of grid technologies.
Some of that can be brought on board by a standard that drives
energy efficiency and what not. Some of it is also operational
efficiency and taking risk on some of the grid technologies
that have already been developed out there.
I think part of the challenge is that we, you know, the
States drive a lot of this. But those markets are very
fragmented. When you're looking at a technology, developing a
technology or investing in a technology, it's hard to know
whether if you're successful getting through to public utility
commission in one State whether or not you'll get through that
public utility commission in another State. So the market ends
up being one fiftieth and in many cases even smaller than that
of what it could be here in the U.S.
So that creates friction. Iit creates obstacles to us
actually wanting to invest. So I think there's 2 things.
One is the clean energy like standard.
The other is some effort by the Federal Government. I don't
know whether that's something that comes out of the Senate or
the House or whether it's something that comes out of the
Executive branch, to try and align some of these public utility
commissions around adopting new technologies in a more
accelerated fashion.
The Chairman. Alright.
Mr. Auerbach, did you have a comment on that?
Mr. Auerbach. Yes, thank you, Senator. I'd like to just
respond by also combining the observation made by Senator
Murkowski. If you actually look at the States as the laboratory
for how these policies actually play out at a State level you
find that almost all of the investment in clean energy
deployment has occurred in States with renewable energy
standards.
But also even if you have those standards, if you don't
have a permitting environment that recognizes the need for
environmental stewardship and also for safe commitment of
capital you run into problems. It's notable that over the last
5 years that Texas, in which it is easier to permit, to gain
permits for installing wind farms, has leapt ahead of
California as the Nation's leading place for wind turbine
installation. It's also now one of the most active or not the
most active State in the country for installing new
transmission to accommodate all these resources.
California, although they have the most ambitious renewable
portfolio standard in the Nation, has lagged behind because of
permitting obstacles on a relative basis compared to Texas. So
as we look at a Federal level of how to actually get this
right, I think learning some of the lessons of the States.
Trying to encourage the adoption of policies that streamline
the permitting process that allow all the relevant parties to
have a voice but to put more accelerated time limits so that
business can be concluded and capital could be deployed will
make it safer for risk capital to come into those States and
into the Nation.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman. Just one final
question and this relates to the subsidies. Because it would
appear that when you look to those countries around the world
that seem to be leading when it comes to the clean energy
investment, they also appear to be leading in the category of
subsidies as well.
So the question and I throw it out to all of you is whether
or not this is a sustainable policy for us is does it bring the
most efficient, the most effective technologies to market.
We're at a time when we are looking at budgets. We're pretty
quick to pick winners and losers through the budgetary process.
From the investment side of things I know one of the things
that I hear as I'm talking to folks is you don't give us any
level of predictability with the subsidies that are out there.
They are shorter term. They get caught up in the politics of
what goes on here in Washington.
So the question is is how sustainable is that? Is that the
most effective, efficient way for us to advance these
technologies? I throw it out to all of you.
Mr. Auerbach. Senator, if I could just start by saying in
my written and oral testimony I addressed that question. I
think it's a very important question. In my opinion the Nation
needs a balanced portfolio.
What we have seen over the last 10 or 20 years is
remarkable progress in reducing costs across a wide variety of
clean energy technologies. From where I sit I see those trends
as continuing quite aggressively. So that by encouraging
capital formation and deployment in this country ultimately
what we're investing in. I know it involves spending money, but
not necessarily depending upon how you design it, is actually
not just a cleaner energy future, but also a lower cost future.
So policies that promote a diversification of approach and
then also the investment behind risk capital that is really
deployed by folks like us, like Mohr Davidow and others is a
smart approach for the United States to be encouraging lowest
cost solutions over the course of time.
Senator Murkowski. Mr. Coleman.
Mr. Coleman. Yes. I want to echo what Mr. Auerbach has said
which is that I think that we need to be careful about not
looking at just a snapshot in time which is really where we are
today. I think we run the risk if we do that of sort of
stepping over dollars to pick up a penny, if that makes sense.
I think we're in budget constrained times. We think about
subsidies and the cost and that's very appropriate. The
question is where we're going to get to in 5 to 10, 15 years on
these technologies and their costs.
I think that the chart that was put up earlier showed the
way that these cost curves have pretty steep declines. They've
shown incredibly steep declines as they've scaled. Now much
more rapid declines than when we've scaled some other
technologies.
So I think we have to think about how we can get to a lower
cost base on an unsubsidized basis going forward. If subsidies
are one of the things that drive us to that point so that we
can manufacture those technologies here and we can deploy them
here, then I think we need to consider those as an option. You
know, but I think we should be focusing subsidies on those
technologies that can actually get there not on technologies
that will never get there.
So that's the challenge that we face which is how do we
decipher which of these technologies we should be focusing on
and which ones we should----
Senator Murkowski. Are we the ones that are in the best
position to make that determination? Last I know there's not
too many of us here in the Senate that are either scientists or
those that are involved in developing these technologies. But
we pretend we are.
Mr. Zindler? Ms. Gallagher? Any comments on the subsidies?
Ms. Gallagher. I think that that's just one tool in the
tool box. I would argue we need a broader set of tools. The
other point I'd make is that subsidies shouldn't last forever.
The point I've been trying to make is I do think we--I
think there's a role for subsidies. But we should make clear
that they will decline over time. That there's nothing wrong
with saying you can count on this for a certain period of time
and then a lower subsidy and then eventually they'll end.
There is evidence for that. Brazil is an excellent case of
they do not subsidize their sugar cane ethanol anymore and
they're market competitive. So I think, you know, there's
lessons we can learn about how to ramp those down over time. We
should start doing that.
Senator Murkowski. Mr. Zindler.
Mr. Zindler. I guess that there's not too much that--I
basically agree with almost everything that was said here
except for I would just say is that there's some--there is
always the question of how much does it cost to do nothing. You
know, every year, you know, companies across the U.S. spend
millions, billions of dollars on trying to hedge the price of
coal and natural gas and other fuels. So is that real value
that's being spent right now. Is there a way to eliminate that
if you can lock in over the next 20, 25 years exactly how much
it's going to cost to provide a megawatt hour of electricity.
What is the value of that to the U.S. economy?
I would argue that that should be part of the conversation
as well.
Senator Murkowski. I appreciate the comments.
Ms. Gallagher, I particularly appreciate yours. That we
shouldn't be afraid to phase these out, to be up front, to be
transparent to give some predictability within the industry as
to how long these are going to be here. Rather than just leave
them to the political whims of one Administration coming in
from an investment perspective we don't do much to help to
facilitate it when we can't give those indicators that you can
rely on.
I think part of the problem that we face is we start with
the subsidies and then people become very attached to them. In
representing our constituents that have gotten attached to them
it's difficult to undo them. We have subsidies in place that we
probably don't even know are still out there. We're paying for
them.
The real question is is how effective, how efficient are
they really in the process that we're all trying to advance?
Mr. Chairman, I appreciate the time and the testimony from
the witnesses today.
The Chairman. Thank you.
Senator Shaheen.
Senator Shaheen. Yes, thank you.
I wanted to get into one area that hasn't really come up
very much in discussion today. There's been a lot of talk about
China and the investments that China is making in various
sectors. But nobody or at least, I didn't hear anybody mention
carbon capture as part of that discussion.
It seems to me that that's one area where it's going to be
very important for us to think about how we might compete. I
speak from a very parochial perspective because we have a
company in New Hampshire called Powerspan that's working on
this technology and is making some real progress. But can any
of you talk to what kind of investments China is making in
carbon capture and whether there are any projections for how
long it will take them to get to real commercialization or
whether the prospects to get there are good?
Then how competitive technologies here in the United States
might be with what China is doing?
Ms. Gallagher.
Ms. Gallagher. Yes. I think there's 2 points I'd like to
make about China.
First, they came very late to carbon capture.
Senator Shaheen. Right.
Ms. Gallagher. They only recently decided to start
investing. The Minister of Science and Technology only recently
started to support carbon capture and storage technologies.
However, although they came late they're now moving fast. I
think you can actually attribute that to the leadership within
some of their leading firms.
So Huaneng, for example, which is the main builder of the
GreenGen plant, has already piloted demonstration projects for
post combustion carbon capture which I know is Powerspan's
technology too. Through the GreenGen Project they'll be doing a
number of demonstrations on pre combustion, Shen Hua also
moving very aggressively on carbon capture pilot as well. So I
think this is one area where we're starting to fall behind.
I also think this is one area where there's potentially a
lot of--it would be interesting to explore the possibility of
joint demonstration projects. The reason for that is that
carbon capture and storage is still very expensive. It's--we're
way pre-commercial at this point. But we all need to learn more
about this technology. By pooling our resources we could share
those risks and share those costs. I think this would be a
really promising area for future U.S./China cooperation.
Senator Shaheen. It's interesting. I'm sure you all saw the
James Fallows article in the Atlantic in December where he
proposes that exact idea. Suggests as you have that this is a
place where there might be a real opportunity for cooperation
that would benefit us both.
Anybody else want to comment on that?
If not, I would just say the other place where I think
there is an opportunity for us to encourage not clean energy
technologies, but energy efficiency through policy changes. You
were talking about Texas, I think, Mr. Coleman or Mr. Auerbach.
I'm--they were the first State in the country to put in place
an energy efficiency standard which I would guess has had
something to do with some of the energy progress they've made.
So that's another area where I think there's real
opportunity for us because it's the cheapest, fastest way to
deal with our energy needs. So, thank you all.
Thank you, Mr. Chairman and Senator Murkowski.
The Chairman. Senator Murkowski, do you have any other
questions?
Thank you all very much. I think it's been a useful
hearing. Yes, we appreciate it.
[Whereupon, at 11:26 a.m. the hearing was adjourned.]
APPENDIX
Responses to Additional Questions
----------
Responses of Neil Auerbach to Questions From Senator Bingaman
Question 1. You mentioned several companies that, though based in
the US, have taken advantage of incentives to move production overseas,
where I imagine much of this manufacturing is automated. Given the fact
that this results in low cost end products, should we be concerned if
the manufacturing isn't in the US? What effect does this have on the
competitive landscape--particularly when it comes to the next
generations of these technologies?
Answer. Chairman Bingaman, the US should be focused on increasing
its share of manufacturing in the renewable energy supply chain to
promote US competitiveness, increases domestic jobs and create wealth
that grows our GDP and reduces our trade deficit.
Our international trading partners--led by China--are laying plans
for massive investments in the clean economy. The clean energy market
is forecast to triple in size during this decade, from $740 billion in
2009 to over $2 trillion by 2020,\1\ exceeding global GDP growth even
under the most conservative growth scenario and annual capital invested
in additions to clean energy generation capacity is already pulling
even with fossil fuel generation capacity.\2\ The vibrant markets for
clean energy and energy smart technologies, such as smart grid, ultra
high capacity transmission, advanced energy storage, LED lighting, and
electric vehicles, will be dominated by countries encouraging
investments in R&D, manufacturing and deployment. In 2010, the U.S.
accounted for 14% of the clean energy market, but its pole position
fell for the second year in a row. Germany and China accounted for 17%
and 22% respectively in 2010, taking the number one and two positions,
which belonged to the US in the two years prior.\3\ Further, the United
States lags our trading partners in terms of clean energy manufacturing
capacity. For example, only 6% of worldwide PV cell production takes
place in the United States while 59% of global cell production takes
place in China.\4\ And, in terms of clean energy deployment, the US
leadership has begun to wane. For example, in 2007, the United States
installed nearly 6GW of renewable energy capacity, approximately 60% of
all domestic newly installed power generation capacity\5\. China, by
contrast, installed less than 5GW\6\ of renewable energy capacity,
approximately 6%\7\ of its newly installed power generation that year.
Just 3 years later the picture changed dramatically. In the United
States, only 5GW of renewable energy capacity was installed in the
United States, whereas nearly 17GW of renewable energy capacity was
installed in China.\8\ Over the same period, China moved up the league
tables of top ten manufacturers of wind turbines and solar panels (See
*Figures 2 & 3).
---------------------------------------------------------------------------
\1\ HSBC Global Research, ``Sizing the climate economy'', September
2010
\2\ Bloomberg New Energy Finance: annual capital invested in
additions to clean energy ($187bn) and fossil fuel generation capacity
($219bn)
\3\ Bloomberg New Energy Finance and Pew Charitable Trust ``Who`s
Winning The Clean Energy Race? 2010''
\4\ Solarbuzz (data includes Taiwan) http://www.solarbuzz.com/our-
research/recent-findings/solarbuzz-reports-world-solar-photovoltaic-
market-grew-182-gigawatts-20
\5\ U.S. EIA--Electric Net Summer Capacity http://www.eia.gov/
cneaf/alternate/page/renew__energy__consump/table4.html
\6\ Bloomberg New Energy Finance Database
\7\ Reuters: China installed capacity hits 710 GW in 2007 http://
uk.reuters.com/article/2008/01/09/china-power-capacity-
idUKPEK24321320080109
\8\ Bloomberg New Energy Finance and Pew Charitable Trust ``Who`s
Winning The Clean Energy Race? 2010'' Total installed renewable
capcity: US (58GW) China (103GW)--http://bnef.com/WhitePapers/download/
36
* All figures have been retained in committee files.
---------------------------------------------------------------------------
To be competitive, the US must not just maintain its edge in R&D
investment, but focus even more on encouraging the growth of
manufacturing and deployment at home, as are other countries around the
world. America is not predestined to remain home to the most vibrant
economy in the world forever. We need to rise to the challenge.
While striving to improve our global competitiveness, we must also
address our most immediate concerns at home: creating jobs and reducing
the cost of energy. Investments in clean energy today can support a
21st century industry in the United States and foster productive job
creation as the country diversifies its energy mix. Interestingly,
despite the recession, we are expected to see 143,000 jobs created in
the wind industry and 58,000 jobs created in the solar industry.\9\ Two
of our trading partners, China and Germany, boast even more jobs in
their home markets. China estimates that it employs approximately 1.4
million people in the clean energy sector.\10\ Germany, on the other
hand, estimates that it employs approximately 370,000 people in their
clean energy sector.\11\ A focused effort on making the United States a
more welcome home for clean energy manufacturing and deployment can
result in even more job creation here at home.
---------------------------------------------------------------------------
\9\ Lawrence Berkeley National Laboratory (LBNL) and The National
Renewable Energy Laboratory (NREL)
\10\ NY Times: ``China Leading Global Race to Make Clean Energy''
http://www.nytimes.com/2010/01/31/business/energy-environment/
31renew.html
\11\ Gross employment from renewable energy in Germany in 2010
http://www.bmu.de/files/english/pdf/application/pdf/
ee__beschaeftigung__2010_en_bf.pdf
---------------------------------------------------------------------------
Many people mistakenly believe that wind and solar, as well as
other forms of clean energy, are interesting technologies that may
become scalable and affordable in the future if we make sufficient
progress on the technology front. This is a serious error. More solar
energy capacity was installed in 2010 around the world than nuclear
power.\12\ The cost of solar energy today is cheaper than the cost of
nuclear energy from a Gen III nuclear power plant.\13\ The pace of
annual solar installations around the world will have increased nearly
fifteen fold between 2005 and 2011, and installations are forecast to
double again by 2015.\14\ Costs of wind and solar energy have come down
almost as quickly as the scale of the industries has increased. The
history of the power industry reveals that all new energy sources start
out expensive, and get cheaper with scale. Wind and solar are following
suit today, and at a pace even more dramatic than coal, natural gas or
nuclear did in their day. The cost of wind power, for example, has
fallen by 30% over the past 3 years.\15\ Recent anecdotes suggest that
in some markets, wind power is now cheaper than power generated from a
combined cycle gas plant (CCGT). The progress of the solar industry in
reducing costs is even more impressive. The cost of solar power has
dropped approximately 15% per year over the past several years, and is
expected to continue. On the current pace of cost reduction, solar
energy may be cheaper at distributed generation scale in many markets
than power generated by fossil fuels within 5 years.\16\
---------------------------------------------------------------------------
\12\ The World Nuclear Industry Status Report 2010-2011, Draft
Version--2010: 5GW of nuclear reactor startups http://
www.worldwatch.org/system/files/NuclearStatusReport2011_prel.pdf
\13\ ``Solar and Nuclear Costs--The Historic Crossover''--Solar
(14-18 cents/kWh) vs. Nuclear ( 20 cents/kWh) http://www.ncwarn.org/wp-
content/uploads/2010/07/NCW-SolarReport_final1.pdf
\14\ Photon Consulting Database: 2005-2011 annual installations
(1.8GW to 27GW); 2015 (51GW annual installation, 225GW total installed)
\15\ Hudson estimates
\16\ See comments of Mark Little, research director of General
Electric, reported in http://www.bloomberg.com/news/2011-05-26/solar-
may-be-cheaper-than-fossil-power-in-five-years-ge-says.html
---------------------------------------------------------------------------
The following chart, which was produced by my colleagues for an
article published in the Journal of Environmental Finance,\17\
catalogues the history of price movements of electricity powered by
coal, natural gas, and nuclear energy since 1930. History teaches us
that each of these power sources has required achieving massive scale
in order to achieve their current favorable cost structures. Hudson's
research confirmed that small increases in scale are causing
significant improvements in the cost structures of the wind and solar
industries. Figure 4 clearly demonstrates that wind and solar energy
have reduced costs more rapidly than any other type of conventional
energy source over the last 80 years.
---------------------------------------------------------------------------
\17\ Environmental Finance, ``Making the Case for Clean Energy'',
December 2010-January 2011
---------------------------------------------------------------------------
The rapid reduction in clean energy's cost structure is projected
to continue, and will bring these technologies into grid or retail
parity with conventional power sources over time, even cheaper than
conventional power sources in more and more markets over time.
Question 2. Many of the technology leaders of today, design
products and hold intellectual property in the US, but build their
products overseas. Is there something different about the clean energy
industry that makes this less likely to happen? How do we insure that
manufacturing won't eventually move offshore as support is inevitably
phased out over time?
Answer. Chairman Bingaman, the U.S. has been a global leader in
inventing the clean energy products that the world is currently using,
and that leadership position, while threatened, has not yet been lost.
The renewables energy industry relies heavily on large capital
equipment. Due to the capital intensive nature of this business, supply
chains tend to organize themselves close to end-use markets so as to
most efficiently accommodate and serve customers. The US is one of the
largest end use markets for energy consumption and already has a well
organized supply chain. We've seen many foreign companies, such as
Vestas, Gamesa, LM Glasfiber, Mitsubishi, Kyocera, REC, and Sanyo build
factories in the US to serve our wind and solar markets. Going forward,
however, without a strong and visible commitment to support the US
clean energy market through its maturation, the United States will not
only risk losing its technology edge but foreign companies will also no
longer commit capital to the US.
We've seen evidence that industry leaders naturally want to own
pieces of market share along different parts of the supply chain in the
US to optimize their own logistics, manage currency risk, and take
advantage of both state and federal incentives. However, the threat of
market contraction in the US will cause our existing supply chain to
contract as both domestic and foreign companies downsize. Therefore, in
order to ensure that manufacturing won't eventually move offshore, our
national goal should be to cultivate a strong and robust domestic
market so that the supply chain continues to develop in a way such that
it can provide the least expensive and best quality products to the
market. Without a robust domestic market, our trading partners will
seize on the wavering of our resolve and grab the mantle of clean
technology leadership to the benefit of their citizens and public
wealth.
Responses of Neil Auerbach to Questions From Senator Coons
Question 1. Several major policy think tanks (the Bipartisan Policy
Center's American Energy Innovation Council, Third Way, and others)
have suggested investing at least $15 billion in federal funding for
clean energy as a benchmark to target for the U.S. staying competitive.
This would support the government's partnerships in innovation with the
private sector, and help give the private sector greater access that it
needs to develop, deploy, and commercialize clean energy technologies?
Is this realistic given other nations' investments?
Answer. Senator Coons, it is my understanding that the policy
recommendation to which you refer calls for $16bn of investment on an
annual basis, specifically towards energy RD&D to support the
government's partnership in innovation with the private sector\18\. A
report published by the American Energy Innovation Council highlighted
that the US spends the least amount of its GDP on energy RD&D (0.3%)
relative to its trading partners China (0.4%), France (0.5%), Korea
(0.6%), and Japan (0.8%)\19\ Germany, for example, single handedly
catalyzed the global growth that we've seen over the past 6 years in
the solar sector. As a result of the country's targeted and steady R&D
spending in the early half of the decade,. More domestic innovation
will help keep our country competitive in this vital sector and clearly
the US should be investing more than it is currently. However, rather
than debate about whether the figure you've quoted is an appropriate
benchmark, perhaps I can point out some of the governmental support
being provided to the world's two largest clean energy markets, Germany
and China, in an effort to improve their global competitiveness.
---------------------------------------------------------------------------
\18\ Americans for Energy Leadership: http://leadenergy.org/2010/
06/news-american-energy-innovation-council/
\19\ ``A Business Plan for America's Energy Future''-- American
Energy Innovation Council: http://www.americanenergyinnovation.org
---------------------------------------------------------------------------
Germany, for example, single handedly catalyzed the global growth
that we've seen over the past 6 years in the solar sector. As a result
of the country's targeted and steady R&D spending in the early half of
the decade,\20\ followed by strong political support for the sector in
the latter half of the past decade, via its renewable energy Feed-in-
Tariff, Germany has nurtured the growth of the solar industry and
established a robust domestic market, spawning globally competitive
companies, such as Wacker Chemie, Roth & Rau, Schott Solar and Q-Cells.
To facilitate the country's exports, the German Federal Government
provides export credit guarantees to protect exporters against economic
and political risk in countries purchasing German products. And to
further support the country's developers outside of the country,
Germany's development bank, KfW, has been one of the largest financiers
of renewable energy projects around the world, having committed almost
25% of the bank's capital, =6bn over the past 5 years\21\, to
renewable energy. This combination of early stage research, domestic
demand-side policy support and export driven financing support helped
Germany create nearly 370,000 clean energy industry jobs\22\ and
attract roughly $41bn worth of investment in clean energy in 2010, $7bn
more than the US.
---------------------------------------------------------------------------
\20\ ``Evidence from RD&D spending for renewable energy sources in
the EU'' Ragwitz, Mario and Apollonia Miola; Fraunhofer Institute for
Systems and Innovation Research: http://www.scribd.com/doc/7311594/
Evidence-from-RDD-spending-for-renewable-energy-sources-in-the-EU
\21\ Bloomberg New Energy Finance Industry Intelligence Transaction
Database
\22\ ``Gross employment from renewable energy in Germany in 2010''.
Report commissioned by the Federal Ministry for the Environment, Nature
Conservation and Nuclear Safety, March 2011.
---------------------------------------------------------------------------
China, on the other hand, began to implement clean energy policy
support mechanisms in the middle of the past decade in an effort to
catch up with the rest of the world and attract investment to their
power hungry country. and attract roughly $41bn worth of investment in
clean energy in 2010, $7bn more than the US. \23\ Recently the country
announced seven strategic emerging industries in its 12th five-year
plan that it intends to have account for 8% of total GDP by the end of
the decade. Five of those sectors involve clean energy technologies.
Additionally, China has begun to build its first of what are likely to
be many billion dollar clean coal plants that utilize new carbon
capture and storage technology. It would be risky for us to assume that
we will maintain a meaningful share of the worlds clean energy supply
chain when China, for example, last year installed 17GW of wind
capacity whereas the US, by contrast, built just under 5GW\24\. In
2011, China is projected to install over 21GW of additional wind
capacity and the country has goals to build at least 70GW of new wind
and 5GW of new solar capacity within the next three years.\25\ As a
testament to China's commitment to clean energy development, China
Development Bank (CDB) lent over $35bn to its clean energy sector
during 2010, up 30% from the previous year, to strengthen the country's
competitiveness. Similar to Germany's strong political support for this
sector, China's continued dedication to its domestic clean energy
development is attracting both the supply chain and the focus for
innovation.
---------------------------------------------------------------------------
\23\ ``China's first clean coal plant underway''.http://
www.tpri.com.cn/eng/index.htm
\24\ Bloomberg New Energy Finance Industry Intelligence Transaction
Database
\25\ Bloomberg New Energy Finance Insight
---------------------------------------------------------------------------
The US has not yet lost this race with our global trade partners,
however, we must recognize where our relative strengths are and
leverage them in an effort to remain competitive. The United States has
the most robust capital markets in the world that are driven by the
private sector. These markets can be mobilized in partnership with the
government to continue supporting clean energy innovation in the US. In
order to give the private sector the access that it needs to develop,
deploy and commercialize clean energy technologies, there must be a
strong and continued policy commitment, which we haven't had to date.
Though China and Germany are currently leading the world in clean
energy investment and have developed more robust supply chains to
support this industry, the US still has an opportunity to build a more
competitive market and both the federal and state governments have a
pivotal role to play in partnering with the private sector to see this
through.
Question 2. There are many programs in place in the federal
government. Many are programs that are likely not widely known like the
Navy's ocean and wave energy program. Others are popular and high
profile--DOE's weatherization or EPA's Energy Star programs. We want
government to work more effectively with the states and private sector
in this area. In part, this is an issue of good communication and
coordination. Funding is important, but should also ask if some of
these federal programs are effective or redundant?
a. Follow up: Do we need new models (programs like ARPA-E and
Energy Hubs) to focus federal investments to areas of greatest need?
b. Follow up: Are there areas where the federal government is
lacking, where there are major gaps that the private sector and
entrepreneurs are not utilizing?
Answer. Senator Coons, the private sector does look to both the
armed services and energy departments for leadership, guidance and
partnership in energy related activities. Solazyme, for example, is a
company that provides algal-based biodiesel and jet fuels to the US
Navy in a partnership that is helping the armed service division
achieve its goal to create the Great Green Fleet by 2016. The
effectiveness of this and other programs and directives should be
judged based on their respective metrics for success.
The need for government programs to foster early-stage energy
technologies is largely rooted in the power industry's failure to
reward private research and development activity. R&D spending in the
energy industry overall as a percentage of sales, 0.3%, is the lowest
of all major technology-dependent sectors, such as the automotive
(2.4%), computers and electronics (7.9%), aerospace and defense 10
(11.5%), and pharmaceuticals sector (18.7%).\26\ The heavily regulated
power sector is structurally risk averse and programs, such as ARPA-E,
should exist to address this market failure in an effort to enhance US
economic security and ensure that the US remains a technological and
economic leader in developing and deploying advanced energy
technologies. There is strategic value in addressing this early-stage
research and development funding gap created by the market failure in
the power industry with programs that attract liquidity to grow these
new markets that would otherwise fail as a result of underinvestment.
---------------------------------------------------------------------------
\26\ ``A Business Plan for America's Energy Future''.American
Energy Innovation Council: http://www.americanenergyinnovation.org
---------------------------------------------------------------------------
Question 3. According to the Pew Charitable Trusts, jobs in clean
energy sectors grew two and a half times faster rate than jobs in the
economy as whole between 1998 and 2007. Furthermore, an analysis by the
University of Massachusetts, Amherst revealed that investments in clean
energy could create 1.7 million net new jobs in the next ten years.
Some have talked about all the jobs in the traditional energy industry.
Can you comment about the potential for these clean energy jobs as
factor in economic recovery?
Answer. Senator Coons, reputable studies showing positive job
growth in the clean energy sector are mounting. In fact, Brookings
recently released a study, ``Sizing the Clean Economy: A National and
Regional Green Jobs Assessment'' and concluded the following data
points\27\ relevant to jobs and economic recovery:
---------------------------------------------------------------------------
\27\ ``Sizing the Clean Economy: A National and Regional Green Jobs
Assessment'' http://www.brookings.edu/reports/2011/
0713_clean_economy.aspx
The clean economy, which employs some 2.7 million workers,
encompasses a significant number of jobs in establishments
spread across a diverse group of industries.
The clean economy grew more slowly in aggregate than the
national economy between 2003 and 2010, but newer ``cleantech''
segments produced explosive job gains and the clean economy
outperformed the nation during the recession.
The clean economy is manufacturing and export intensive.
The clean economy offers more opportunities and better pay
for low-and middle-skilled workers than the national economy as
a whole.
Among regions, the South has the largest number of clean
economy jobs though the West has the largest share relative to
its population.
Most of the country's clean economy jobs and recent growth
concentrate within the largest metropolitan areas.
The clean economy permeates all of the nation's metropolitan
areas, but it manifests itself in varied configurations.
Strong industry clusters boost metros' growth performance in
the clean economy.
As a policy recommendation, the study suggested a few points\28\ to
catalyze faster and broader growth across the U.S. clean economy:
---------------------------------------------------------------------------
\28\ ``Sizing the Clean Economy: A National and Regional Green Jobs
Assessment'' http://www.brookings.edu/reports/2011/
0713_clean_economy.aspx
Scale up the market by taking steps to catalyze vibrant
domestic demand for low-carbon and environmentally-oriented
goods and services.
Ensure adequate finance by moving to address the serious
shortage of affordable, risk-tolerant, and larger-scale capital
that now impedes the scale-up of numerous clean economy
industry segments.
Drive innovation by investing both more and differently in
the clean economy innovation system.
Focus on regions, meaning that all parties need to place
detailed knowledge of local industry dynamics and regional
growth strategies near the center of efforts to advance the
clean economy.
______
Responses of Kelly Sims Gallagher to Questions From Senator Bingaman
Question 1. One particular concern you voice about US policies with
regard to clean energy is the significant changes from year to year. Is
that more a function of shifting priorities in which technology is
being supported, or is support fluctuating across the board?
Answer. When I made that comment, I was mainly thinking about the
policies that the U.S. government employs to support the deployment of
cleaner energy technologies, and in particular our various tax
policies. The production tax credits, investment tax credits, income
tax credits all have proven relatively unpredictable. But, it is also
true that our level support for RD&D is inconsistent, both within
technology programs, and as measured as a total amount of dollars
invested. I've attached a graph* from a database that I maintain on the
DOE ERD&D budget, which shows the volatility as Appendix A here.
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* Graph have been retained in committee files.
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Question 2. You found that developing countries are significantly
out-investing developed countries such as the US in clean energy. Can
you break this down with regard to what part of the innovation process
these investments are targeting? Is there a particular place where the
US is falling further behind?
Answer. Yes, in a recent paper my co-authors and I found that the
major emerging economies were outspending OECD countries in energy
RD&D. One important difference between these BRIMCS countries (Brazil,
Russia, India, Mexico, China, and South Africa) and the United States,
however, is the large prevalence of state-owned energy (SOE) companies
in the BRIMCS countries. We include the expenditures of SOEs in our
estimates, and that is one reason why their investments are so large.
China's investments account for about 85% of the BRIMCS country
government investments. Chinese investments are mainly in fossil energy
technologies, and they appear to be 10 times larger than U.S. fossil
investments. We do not have good enough data to be clear about how much
of this investment is in research vs. demonstration so more analysis is
needed.
Question 3. You mentioned, and Senator Machin highlighted, that
China has actually taken the lead in development and deployment of
clean coal technologies, including high-efficiency boilers and the
like. Can you outline the policies China has in place in this area that
are likely spurring their technological advance? What can you tell us
about the regulatory environment in China for coal-fired generation?
Answer. China is far advanced in the demonstration and early
commercialization of advanced coal technologies, especially for coal
gasification and ultra-supercritical coal. As I'm sure you know, China
is on track complete its GreenGen project, which was inspired by the
original FutureGen, well in advance of the current FutureGen program.
In addition, the central government is now considering approval of 5-10
new integrated CCS projects.
Responses of Kelly Sims Gallagher to Questions From Senator Coons
Question 1. Several major policy think tanks (the Bipartisan Policy
Center's American Energy Innovation Council, Third Way, and others)
have suggested investing at least $15 billion in federal funding for
clean energy as a benchmark to target for the U.S. staying competitive.
This would support the government's partnerships in innovation with the
private sector, and help give the private sector greater access that it
needs to develop, deploy, and commercialize clean energy technologies?
Is this realistic given other nations' investments?
Answer. My own opinion is that we need to be spending much more
than we currently do, but whether or not $15 billion is the correct
figure is anyone's guess. I would advocate spending more on clean
energy demonstration and early deployment rather than R&D simply
because we already have many cleaner technologies ready to go that are
failing to penetrate the marketplace due to higher costs. Removing
subsidies from fossil fuel production would be one way to free up funds
for cleaner and more efficient energy technologies. Imposing a carbon
tax and recycling the revenue in the form of income tax reductions and/
or using the revenue to invest in subsidization of clean energy
deployment is another option. The point is that the nation does not
effectively deploy cleaner and more efficient energy technologies, and
therefore we lose the direct benefits of doing so as well as the
``learning-by-doing'' opportunities that arise from gaining experience
with a technology. Other countries are doing much more than the United
States in this respect.
Question 2. There are many programs in place in the federal
government. Many are programs that are likely not widely known like the
Navy's ocean and wave energy program. Others are popular and high
profile--DOE's weatherization or EPA's Energy Star programs. We want
government to work more effectively with the states and private sector
in this area. In part, this is an issue of good communication and
coordination. Funding is important, but should also ask if some of
these federal programs are effective or redundant?
Answer. No doubt there is some redundancy. I keep the most
comprehensive historical database that I know of on U.S. DOE RD&D
investments, and I've tried and failed to determine the energy
investments of the other agencies. A study would have to be done with
the full cooperation of the agencies to get a full picture of total
federal energy RD&D investments. This could certainly be done.
Question 3a. Follow up--Do we need new models (programs like ARPA-E
and Energy Hubs) to focus federal investments to areas of greatest
need?
Answer. ARPA-E and Energy Hubs appear to be productive new models.
They have special attributes, including less bureaucratic contracting
and HR, ability to make multi-year grants that make them quite
different from the regular DOE programs. They also appear to suffer
much less earmarking.
Question b. Follow up--Are there areas where the federal government
is lacking, where there are major gaps that the private sector and
entrepreneurs are not utilizing?
Answer. Because of the lack of climate policy in the United States,
many firms cannot justify investments in cleaner energy technologies,
either within their own operations or for their own R&D facilities.
This is the most pressing need. Neither the government nor the private
sector is particularly willing to demonstrate low-carbon technologies
because to do so is expensive, and there is no ``reward'' in the form
of benefiting from the climate policy at the other end.
Question 4. According to the Pew Charitable Trusts, jobs in clean
energy sectors grew two and a half times faster rate than jobs in the
economy as whole between 1998 and 2007. Furthermore, an analysis by the
University of Massachusetts, Amherst revealed that investments in clean
energy could create 1.7 million net new jobs in the next ten years.
Some have talked about all the jobs in the traditional energy industry.
Can you comment about the potential for these clean energy jobs as
factor in economic recovery?
Answer. I am optimistic, but these jobs will only materialize if
there is a market for clean energy. Currently that market mainly
resides outside the United States. The U.S. government will need to
enact some energy policies to incentivize the use of cleaner energy
technologies, which in turn will create a market for clean-tech firms
and workers.
I appreciate this opportunity to be of service to the Committee.
______
Responses of Ethan Zindler to Questions From Senator Bingaman
Question 1. Must the US match China's level of investment?
Answer. First, let me reiterate what I told the committee in my
oral testimony. The opinions I express here are mine alone, not those
of Bloomberg LP.
In my view, the actual number of dollars that get deployed into a
given country's clean energy sector is not the most relevant metric in
judging which country is most competitive in the global marketplace.
However, the total funds invested figure does signify investor
confidence in a given market.
Before continuing, let me clarify one point: the more than $50bn
that was invested into Chinese clean energy companies and projects in
2010 did not come solely from sources within China. China's wind and
solar companies regularly raise funds on the public stock exchanges in
New York or Hong Kong. For instance, wind turbine manufacturer
Xianjiang Goldwind Science & Technology Co. Ltd. raised just over $1bn
on the Hong Kong exchange in October 2010. There has also been a
limited amount of Western capital that has gone toward financing China-
based power-generating projects. A substantial portion of the China
clean energy boom has been financed with Western capital.
The more relevant metric in discerning if a country is a global
leader is whether it can manufacture clean energy equipment at the most
competitive cost. In that regard, in the conventional polysiliconbased
photovoltaics (PV) sector, China is the clear leader. The country's PV
players produce the majority of PV cells sold globally and do so
typically at a cost approximately 10% below their Western counterparts.
China's competitive position in the global wind market is less
clearly defined. While manufacturers there clearly are willing to sell
wind turbines on the international market at a significant discount
compared to those made in the US, Germany, or Denmark, it is unclear
whether there will be buyers. Questions remain about the quality and
long-term durability of Chinese-made equipment. Today, Western
financial institutions are reluctant to finance wind farms that use
Chinese-made equipment for this reason.
As far as the US is concerned, the question should be much less
about where the country stands today than about where it aims to be
five, 10 or 15 years from now when clean energy technologies become
even more cost competitive on an un-subsidized basis. The day is coming
soon when a homeowner or small business person will be able to install
a new PV system on his roof and earn a high return on investment
without the benefit of any local public programs. Will the US be home
to the manufacturing plants that make the equipment at that time? In
that regard, prospects at the moment do not look terribly promising,
given the rate at which other countries are attracting investment and
scaling up manufacturing.
It would be wrong to count the US out of the global clean energy
race, however. The country is home to an extraordinary culture of
innovation and each year attracts the vast majority of clean energy
venture capital. Significant further advances will be required in
various clean energy technologies for them to become cost-competitive
on a wider scale. The US could well be home to these breakthroughs.
Question 1.2 What is the effect of tightening margins on the PV
value chain? Is there still an incentive for US companies to
participate?
Answer. How and why US manufacturers might act based on long-term
opportunities is unclear. But one thing is apparent at this point:
margins in some segments of the PV production value chain have
essentially disappeared in recent months. That will no doubt impact
strategic decisions by various players in the market.
Each month, Bloomberg New Energy Finance surveys over 100 buyers
and sellers of PV equipment at key stages of the value chain for our
Solar Price Index. The May edition of the Index found PV prices
plummeting overall in the face of weakening demand from various markets
around the world. While this is potentially very good news for
consumers looking to install PV systems, it is bad news for equipment
makers.
Specifically, for what we refer to as ``International'' (non-
Chinese) PV cell makers, margins have virtually disappeared entirely.
The same is true of International ingot and wafer makers. The news is
actually not much better for Chinese makers of cells, ingots and
wafers. They too have seen their margins shrink in recent months due to
over-supply in the market.
Not all parts of the PV value chain have been equally impacted,
however. International and Chinese module makers continue to enjoy
strong margins, along with polysilicon producers. The PV sector has
seen its share of mini-booms and busts over just the past five years
and the current potential trend may not be long-lived. In the short run
though we anticipate that those manufacturers in segments of the value
chain still enjoying margins may start to feel the pinch more in coming
months.
Question 1.3 How significant is the ``Valley of Death'' given that
financial markets appear to have rebounded?
Answer. The old adage that banks will always be the first in line
to finance your second project remains true. These financial
institutions are simply are too risk-adverse to finance on their own a
first demonstration-scale project, particularly in light of the events
of the past several years. Meanwhile, venture capitalists, while
willing to take plenty of risk, typically lack the funds to bankroll a
project requiring $200m or more. In effect, there exists in the market
today no private player with the right risk/reward profile to
unilaterally finance new energy technologies looking to scale up.
We do not anticipate this situation to change any time soon. It
should be noted that even at the height of the recent financial boom--
when financial institutions were willing to take the greatest amount of
risk--new energy start-ups regularly had trouble raising funds for new
commercial-scale projects.
In addition, current regulatory structures governing the power
generation sector are not set up to encourage risk taking. Electricity
generation and delivery is primarily regulated at the state level by
public utility commissions whose primary mission is to insure power is
delivered to ratepayers reliably and at lowest cost. This makes it all
the harder for projects employing new technologies to enter the
mainstream.
Responses of Ethan Zindler to Questions From Senator Coons
Question 2.1 Is $15bn per year in federal spending needed to spur
clean energy's development in the US?
Answer. It is not my place as a clean energy industry analyst to
render judgment on what is realistic for the US government to spend,
given the current fiscal situation. However, I will share some basic
data our firm has collected on how much governments around the world
have committed to clean energy in recent years. By Bloomberg New Energy
Finance's count, a total of $194.3bn globally was committed in stimulus
specifically for clean energy starting in January 2009. Since then, a
bit over half those funds has been spent, in our estimation. While the
US and China led the pack in terms of funds committed with $111bn
between them, they came nowhere close to South Korea ($32.2bn) in terms
of funds committed on a per-capita basis.
As mentioned in response to Senator Bingaman's question 3 (above),
there remains a fundamental challenge for new energy technologies that
have yet to be proven at scale and seek to break into the mainstream of
the electricity-delivery infrastructure. Private sector financing alone
clearly will be insufficient. That of course raises the prospect of
government involvement.
Question 2.2. Are some federal programs supporting clean energy in
the US redundant?
Answer. As a taxpayer, I would always like my policy leaders to be
asking whether the government programs I'm paying for are effective and
non-redundant. However, while the US federal government has involved
itself in myriad ways in the clean energy sector, I cannot say that I
have seen any major redundancies. The programs you cite above are quite
different in their own ways. The Navy may be helping to foster the next
generation of marine power technologies. DOE's weatherization program
seeks to improve the energy efficiency of buildings while its Energy
Star program seeks to improve the efficiency of refrigerators,
dishwashers, and other appliances. These are all significantly
different goals.
Question 2.2a Follow up--Do we need new models (programs like ARPA-
E and Energy Hubs) to focus federal investments to areas of greatest
need?
Answer. In my view, the area that requires support now and will
undoubtedly need support in the future involves energy technologies
that have been proven at the lab or even pilot scale, but have yet to
be tried at demonstration or commercial scale in the field. This so-
called ``Valley of Death'' conundrum (addressed above in response to
questions from Senator Bingaman) appears to be intractable. If the US
wants to be a global leader in clean energy technologies, it must
address this issue in particular, above all others.
Question 2.2b Follow up--Are there areas where the federal
government is lacking, where there are major gaps that the private
sector and entrepreneurs are not utilizing?
Answer. Please see answers to prior questions above. The government
has an important role to play in helping new clean energy technologies
scale up by assisting with first-project financing support.
Question 2.3 What is the potential for clean energy jobs in the US
economy?
Answer. Clearly, hopes are high that clean energy will prove to be
a major engine of job growth as the US economy continues to rebound. It
is our view that the sector can indeed play an important part in the
ongoing recovery. That said, we would argue that the greatest economic
opportunity presented by this sector probably lies 5, 10, or 15 years
in the future at the point when new wind, solar, and geothermal
capacity can be deployed nearly everywhere at lower cost than
conventional generating technologies--without subsidies. Today,
national renewable energy markets tend to rise and fall in direct
correlation with the implementation or removal of supportive policies,
including subsidies. In the not too distant future, that will no longer
be the case; it will purely be the economics of clean energy that will
drive deployment. That is when the greatest economic opportunity will
arrive.