How to finance large scale low-carbon investment
This guest contribution is by Daniel Goldman, Executive Vice President & Chief Financial Officer of GreatPoint Energy and co-founder of the early stage investment group, Clean Energy Venture Group. He has managed and invested over $4bn in energy technologies and projects and is a vocal advocate of financial solutions for overcoming technology commercialization challenges.
Commercialization of new low/zero carbon energy technologies is essential to addressing job creation, climate change, energy independence, economic competitiveness and long-term energy affordability. Historically, public sector dollars and venture capital investments have funded promising clean energy technologies from laboratory through demonstration scale deployment (i.e., in commercial-like conditions but not at the size necessary for economic commercial operation). Private equity and project finance debt capital markets have historically funded projects and manufacturing facilities once commercially proven. However, neither government, venture capital firms nor capital markets have tended to bear the risks associated with providing equity capital, which can amount to hundreds of millions of dollars, for initial deployment of capital intensive new clean energy technologies at commercial scale – described here as “first project commercialization”
Courtesy of Paul Maeder, Highland Capital Management
Consequently, many promising clean energy technologies that have been proven at pilot or demonstration size are unable to secure financing for commercial scale deployment. Examples include utility-scale concentrated solar projects, geothermal technologies, biomass and fossil advanced gasification with carbon capture and sequestration, cellulosic ethanol, other biofuels and clean energy manufacturing facilities (e.g. new wind turbine blade manufacturing). Proving out such technologies at commercial scale would enable deployment of multiple, large-scale facilities, financed by existing market participants (equity and debt), leading to hundreds of billions of dollars of investment, a material and more rapid impact on climate change, and ability to address other essential policy goals such as energy security, job creation and global economic competitiveness. Two examples of “shovel ready” technologies on the cusp of commercialization are shown below:
As one solution to this oft-recognized problem, often termed the “commercialization valley of death,” the federal government should establish a new corporation, proposed here as the “Clean Energy Accelerator Corp.”, or “CEAC”, as an agency of the US government on the model of the Overseas Private Investment Corporation (OPIC). Just as OPIC successfully provides support for the creation of privately-owned and managed investment funds in response to the critical shortfall of private equity capital in developing countries, CEAC would support the creation of domestically-oriented, privately-owned and managed investment funds focused on providing critical equity capital that is otherwise unavailable for first project commercialization. Just as the impact of OPIC’s support of funds that invest in emerging market companies has a multiplier effect (attracting additional investment and financing in companies), so too would the CEAC’s support have a multiplier effect in the following ways:
- Attracting additional private capital to commercialization of clean energy technologies;
- Accelerating the deployment of clean energy technologies and promoting a large market opportunity for follow-on funding; and
- Addressing policy objectives, such as job creation, global economic competitiveness, climate change, economic development, re-tooling of the supply chain infrastructure and energy affordability.
CEAC would provide support for privately-managed funds in a manner similar to the approach of OPIC, which typically provides debt (10-12 year maturities) to funds and also earns a profit participation component; these low-cost loans provided by CEAC, which are backed by the full faith and credit of the US Government, are sold to US eligible institutional investors. CEAC’s participation in multiple private sector funds, where a minimum of $5 billion could be deployed, would rapidly catalyze private sector investment. Moreover, like OPIC, the CEAC would establish pre-defined “scoring criteria” for each fund so that Office of Management and Budget could readily ensure that appropriate reserves are maintained based on the risk profile inherent in the portfolio of projects. Characteristics of the CEAC should include:
- Transparent investment criteria and an independent board that would include appropriate agency secretaries and other senior government officials as well as representatives from the private financial, technology and energy policy communities;
- Management stability, flexibility, agility and experience overcoming traditional federal agency obstacles and enabling effective fund management of complex financial transactions leading to rapid deployment and commercialization;
- Financially self-sustaining as returns on investments revolve to allow for continuing re-investment;
- Ability to accelerate and scale capital formation by mitigating risks facing investors in the deployment of clean energy technologies and increasing the amount and rate of private capital deployed in a time frame that is consequential;
- Use of a proven fund model with funds managed by highly qualified investment managers having a proven track record in equity investing and possessing deep sector expertise, private sector institutional/corporate investors providing equity, and governance over project investments enabling rational exit and liquidation strategies to be implemented; and
- Leverage historical precedent which indicates that the United States has customarily availed its balance sheet for long-term multi-generational national priorities.
A significant number of projects have been identified which would be appropriate for investment by privately managed funds leading to commitments of several billion dollars in a short time frame and providing an immediate springboard for implementation. The CEAC would address a distinct problem within the DOE loan guarantee program (Section 1703), which attempts to ensure pre-commercial projects with innovative technologies have access to private sector debt but leaves the challenge of attracting equity capital unresolved.
With the nation hungry for clean energy solutions and a large number of VC-funded technologies needing help to get through the commercialization bottleneck, the time is now for bold, intelligent and targeted government action to spur the private capital sector to invest in first commercial projects using the existing and successful OPIC model. While the OPIC model appears to offer the best analogy, other options, such as the Small Business Administration’s SBIC loan structure could also be considered.
The CEAC concept, which has been widely vetted within the investment community and clean energy industry, has received strong support and will naturally attract a broad coalition of interested constituencies including venture capital funds, private equity/project finance market participants, environmental advocates, economic policy makers, industrial, commercial and retail consumers and national security policy makers. Prominent members of the finance and clean energy technology community are committed to supporting policy makers to make this idea a reality through existing mandates or in new legislation as energy and climate change bills are introduced.