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The Global Race for Sustainable Energy - The U.S Needs to Get Back on Track

By Sandip Sen, Managing Director & Global Head of Alternative Energy at Citigroup

There is a global race for sustainable energy development underway and it would appear that the U.S. is satisfied being a mere spectator. Driven by global concerns about climate change and the universal objective of energy security, global policy-making is expected to continue to encourage investment in the renewable energy industry. A generational change is afoot and it is critical that the U.S. stay in the race.

More than 96 countries have national policy targets or comprehensive energy plans. In addition to being a planning tool, these plans incentivize renewable energy development. This list includes economic powers such as Germany and Japan as well as developing nations like Moldova and Tanzania. Astonishingly, The United States is absent from this list.

China continues to hit milestones and via its Five-Year Plans, is seemingly challenging itself and the rest of the world by setting ambitious long-term targets. The most recent Five-Year Plan sets an unofficial target of 150 - 200 GW of renewable generation capacity by 2020. In comparison, the U.S. has yet to adopt a comprehensive energy policy. Helpful mechanisms like the production tax credits have been allowed to expire; the cash grant will expire at the end of this year; and the logjam in congress has all but eliminated any chance of a federal energy policy initiative in the near term. In the global context, this situation is embarrassing and unacceptable. The U.S. cannot just stand by and watch the parade go by. The U.S. must get back in the race and it must craft a plan to be a leader. The world expects this. In this regard, the country's elected officials must adopt, as an immediate priority, the establishment of a comprehensive energy plan.

The plan should incentivize the deployment of renewables via supportive and consistent policies. It should also promote technological innovation via grants and/or guarantees. The plan should also seek to level the playing field for both fossil-based industries and alternative energy providers. For renewables to ultimately constitute a meaningful percentage of the power generation mix, they need to be cost competitive with existing generation technologies. This parity is only achievable if renewable energy technologies are manufactured and deployed in scale. This requires investment from both the private sector and the public sector.

Before surrendering to the recent criticisms of federal incentives for developing renewable energy - like the DOE's loan guarantee program - it is essential to examine the facts. The goal of the loan guarantee program is to enable the commercialization of new technology. Like any investment in something new and unproven, there exists the risk of failure. The loan to Solyndra, which has received much publicity, represents just 2.0% of the total loans issued under the DOE loan guarantee program. While a post-mortem of the Solyndra situation is arguably warranted, it is equally important to acknowledge the benefits that the program has bestowed on other companies and projects. The federal support has resulted in much-needed job creation and it has enabled the start of commercialization of many new technologies. The effectiveness of the loan guarantee program should be judged by the performance of the entire portfolio and not the success or failure of one individual investment. If the U.S. is serious about developing long-term sustainable energy sources - and it cannot afford to not be serious - it should be accelerating support for these types of programs instead of dismantling them.

As it has throughout the course of history - on all important matters -  the U.S. must show leadership in this critical area. It must lead by example and it must work to ensure a sustainable energy future. If policy-makers continues to avoid their duty of formulating a long-term energy plan, the U.S. will find itself in a race we cannot win.

*The views expressed in this piece are those of Sandip Sen, not those of Citi.

Sandip Sen is the Global Head of Citi's Alternative Energy Group.

Private Sector Investment in Renewable Energy -- a Good Business Decision?

Investments in renewable energy have received a great deal of attention in the last several months.  Between the media and political interest surrounding the Solyndra bankruptcy and the degree of support given to clean technologies by China's 12th Five Year Plan, investors in cleantech seem to be facing either a nuclear winter of uncertain duration or a pleasant spring in the East. 

Winter is often a good time for reflection and for building renewed energy for the upcoming spring. It is a time to contemplate the advice of Warren Buffet: "Be bold when others are fearful and fearful when others are bold." In that regard, now is a terrific time to be sitting on a pile of unused cash, as bargains are to be had and good times do lie ahead.

Those of us who invest in cleantech were originally motivated by one or more of the following: (i) concerns about climate change; (ii) concerns over secure access to energy resources; (iii) concerns about ongoing industrialization and GDP growth and that growth's impact on finite resources; and (iv) the natural need and desire to modernize the technologies involved in bringing us energy, water and valuable materials.

World events in the recent past have brought continuous support for every one of those motivations.  Between the oil disaster in the Gulf; the tsunami and nuclear disaster in Japan; the unrest in northern Africa; and the limitations on nuclear usage in Germany, Switzerland, Italy and Japan world events have borne out the validity of the concerns driving the cleantech agenda. Hedge fund investor Jeremy Grantham published a report outlining a fundamental paradigm shift in the availability and cost of critical resources and ever-mounting evidence of climate change. In fact, absent one major reality, cleantech investors could not have hoped for a better global climate for their companies.

Unfortunately, that one other reality is a big one: ongoing economic woes in the U.S. and Europe. The result was as if at least the G8 countries collectively said: "We'll get back to you about energy, water and materials, just as soon as we figure out a way to save ourselves out of our collective budget crises." 

The result has been a very significant cutback in government support for solar, wind and other forms of renewable energy both in Europe and in the U.S. These cutbacks came at almost the same time as China dramatically increased its lending for factories to build solar, wind and other renewables. This, in turn, resulted in dramatic price drops in solar panels and in the stock prices of almost all renewable energy generating businesses. So, while the first half of 2011 certainly looked hopeful with a number of successful renewable energy IPOs, the second half has more than given back those gains and introduced a decidedly nuclear-winter-like investment outlook, at least in the United States.

Those of us who make a living investing in the innovation economy have been here before. Investments in biotechnology took an almost five-year tailspin in the early 1990s (leading a number of investment entities to walk away from the sector), before turning the corner into a continuing 15-year upward trend. Similarly, investors caught up in the late 90s boom of internet and data communications stocks were handed their lunches in 2001 and 2002, only to see those sectors rebound continuously to the point where we are wondering if the lessons of the 2001 crash were really learned at all, at least with regard to some internet stocks. Even renewable energy has its prior periods of boom, bust and revival, look at the wind sector in the late 1980s, its downturn in the 1990s (leading to bankruptcies and massive consolidation) and its return to health post 2000.

In 2000, less than 1% of innovation finance went into energy, water, and materials-related investments. Today, more than 15% of venture capital goes into cleantech startups, and more than $40 billion of private venture capital has been invested in cleantech since 2002. The total dollars invested per year dipped after the 2008 financial crisis, but the cleantech deal count has climbed every year since 2002. As with prior new investment sectors, one can legitimately ask: has this been too much money too soon?

This - too much money too soon question - is one we ask at about this stage of virtually every wave of technological innovation. I, for one, see it differently: without an outpouring of creativity, entrepreneurial zeal and capital, little happens anywhere. Just because the early returns aren't good, doesn't mean that many of those early failures weren't a critical part of getting to real success, and that real success will ultimately more than compensate for the early failures (the rewards may, however, land in disparate hands). The collective degree of innovation that has taken place can no longer be reversed. Even though some now want to declare cleantech investing a failure, many of its inventions are beginning to take hold, from rooftop solar, to electric vehicles, to LED lighting, to the smart grid, to industrial biotechnology. Some, if not many, of cleantech's pioneering companies will one day be as much household words as Apple, Microsoft, Cisco, Google and Facebook.

It is important to recognize that cleantech is a long-term investment theme that is still in its teen (if not infant) years and is likely to play out in successive waves over the next 30-50 years. Any look at cleantech today should be juxtaposed against information technology in 1985 or biotechnology in 1990, a mere ten years into active venture financing of those respective technologies, and prior to their most active "investment heydays".

A straight index of all cleantech investments, if measured in aggregate today at the 10-year mark, would likely not have produced attractive returns to date. However, the majority of private venture capital investment in cleantech has taken place during just the last five years. There is also a wide range of experience and expertise among those who have made private cleantech investments to date. In some cases early investors have assessed technology poorly or have under-estimated capital intensity and scaling timelines; these investors have traded near-term returns for learning experiences.

Using a baseball analogy, for private cleantech investment thus far, there have been some hits, some strikeouts, and some runs scored, but it is far too early to "call the game." For the most part, we still don't even know what a real home run in cleantech looks like. We are still fairly early in the process of growing the first set of major global cleantech powerhouses, which serve some of the biggest industries on the planet. We have seen the birth and growth of some very meaningful companies in the wind, solar, and biofuels sectors, and yet these companies have by no means reached the zenith of their growth potential.

One need only look to the biofuels and renewable chemicals space to see the danger of "calling the game" too soon in cleantech markets. Just a few years ago, biofuels were seen by many as a failed sector within cleantech - a black hole of sunk cost that was unlikely to generate interesting returns. But leading chemical producers and other industrial product companies have become increasingly focused on their need to find renewable substitutes in order to avoid the price volatility of petrochemical inputs, driving significant interest in renewable chemical companies. The future for biofuels is also growing brighter and brighter, with policy shifts in both the United States and Europe putting in place greater support for renewable fuels (in addition to the support of regions like Brazil). We have seen a recent crop of successful public exit activity in both renewable chemicals and fuels - e.g. Amyris, Codexis, Gevo, Kior, Solazyme. These companies are still growing and for those investors who had the fortitude to keep investing past the supposed death of cellulosic fuels should find their way to attractive outcomes.

The last decade saw a period of increasing bullishness about all sorts of investment in cleantech, and recent events justify that a greater sense of fearfulness might have been wise. Equally true, however, is that history teaches us that now is the time when the masses are highly fearful and the last ten years of investing are beginning to mature, when the bold can make their fortunes by picking up bargains being left behind by the suddenly fearful masses. One can only hope that it is more than China's ruling elite that sees this reality and seizes upon it, for they surely have already signaled that move.

Stephan Dolezalek is a Managing Director and CleanTech Group Leader at VantagePoint Capital Partners. He has led VantagePoint's CleanTech investment group since its inception in 2002. VantagePoint manages more than $4 billion, with more than $1 billion dedicated to energy innovation and efficiency.


Freedom is an Electric Car

Sarah A. W. Fitts, Co-Chair, Energy and Natural Resources Practice Group, Debevoise & Plimpton LLP 

What if you had the solution for the United States' dependence on imported oil parked in your garage? Elected officials and wanna-be-elected presidential candidates lament the dependence on imported oil, the price of gasoline and the alleged costs of subsidizing the clean tech industries, but the solutions they propose remain mid-twentieth century: more oil drilling, maintaining subsidies and other benefits for oil and gas producers, pipelines across irreplaceable farmland and aquifers, and rolling back environmental regulations that protect health and safety to reduce costs. Meanwhile, programs to promote the twenty-first century solutions, such as the electric car and other advanced technology vehicles, have been targeted for dramatic cuts in the latest round of budget fights.

The facts are straight-forward and compelling, and if they were better understood, the push for wide-spread development and adoption of the electric car and other alternate fuel vehicles would be bi-partisan and not controversial. The simple logic is this: the United States spends billions of dollars per month buying oil, much of it from regimes we do not consider to be our friends. Roughly two-thirds of the oil used in the United States is used in transportation. Almost no electricity in the United States is generated from oil. Therefore, by shifting transportation from gasoline to electric power we can give up oil without giving up our cars. That is why organizations like Securing America's Future Energy and its affiliate the Electrification Coalition, an organization supported and led by serious U.S. multinationals such as FedEx, are championing the electric car. It may be the simplest and most cost effective way to reduce our dependence on imported oil.

The global competition to develop the best batteries and electric car technologies is off and running. China, Korea, Japan and others are all making significant investments in developing the technology and manufacturing capacity. The United States, through the Department of Energy's Advanced Technology Vehicle Manufacturing Incentive Program has made loans to companies like Ford, Fisker, Tesla and Nissan to increase battery and advanced technology vehicle component manufacturing in the United States. Vehicle manufacturing in the United States is not just about creating jobs. It is about nurturing and growing an entire industry that starts with intellectual property, including patents, know how, skills and includes the supply chain necessary to carry out the rapid innovation in this field. If next generation transportation is not developed here, it will surely be developed elsewhere, probably with assistance from other governments that want to build an industrial backbone, as we continue to allow ours to atrophy.

The electric car is not pie in the sky. The electric car is real and you could buy one. The Chevy Volt is already available in dealerships near you. Other cars are on their way. Some are new American car companies: Tesla or Fisker. Others are names you already know: Ford and Nissan, for example. These are large companies that are making a significant bet on technology.

The electric car has some attractive advantages in its own right. First, we already have a fuel distribution system -- every garage with an electric outlet could become a "filling station" every time a car is plugged in. Electric vehicles have limited or no tail pipe emissions, which could have significant positive benefits in congested areas. (The total air quality improvements, including green house gasses, will, obviously depend on what fuels are used to generate electricity, which is a separate but worthwhile discussion.) Finally, the cost of operating an electric car may be much cheaper than buying gasoline. FedEx's Gina Adams, in a keynote address at the RETECH 2011 conference in Washington DC in September, reported that FedEx operates vehicles in its electric fleet at the equivalent of 50¢ per gallon. If the front-end price can be reduced, the lifetime cost of car ownership could drop meaningfully.

The electric car has its skeptics, and appropriately so. The models currently available have range limitations and cannot be charged fast enough to suit the needs of some drivers. In many parts of the country, the electric grid is decades old and some worry that it is not capable of serving the increased usage demands of electric cars. Electric cars remain expensive, relative to other cars, and reliability and maintenance are untested. And some people simply have a hard time imagining a car not run on gasoline. These are challenges that the car manufacturers and electric utilities will need to address to sell their products.

The twenty-first century car is electric. If the U.S. wants energy independence and doesn't want to cede its role as technology leader of the future, the rapid development and deployment of the electric car, and other alternate fuel vehicles, should be a national priority. As President Obama and Department of Energy's Secretary Chu have said "This is Our Generation's Sputnik Moment". The administration's push for wider investment in and adoption of energy efficient "green" technologies, including the electric car, should be a bipartisan effort. Contact your representatives and let them know that you want America to be energy independent, that you want to drive the car of the future and that you want that car to be developed and made in America. It would be a sad day for the United States if the only way to reduce our dangerous and expensive dependence on imported oil, is to replace it with a possibly dangerous and equally expensive dependence on imported batteries and electric drive components.

Sarah A. W. Fitts co-chairs the Energy and Natural Resources Practice Group at the law firm Debevoise & Plimpton LLP. The views she expresses are her own. She is based in New York City.

Take Leadership Where You Can Find It

By Mark Mizrahi, President and CEO, Enlink Geoenergy Services

The prospects for a comprehensive national energy policy that shifts the U.S. dramatically toward renewables seem to shrink with each day that we get closer to the 2012 elections. Amity and collegiality are not renewable resources in Washington, D.C., and right now there simply isn't enough of either to permit Congress to deal with anything as complex as energy.

As the CEO of a company that has built more than 100 geothermal heat pump systems in states from the Pacific to the Atlantic, the lack of a coherent energy policy at the federal level would be depressing if we weren't so busy keeping abreast with all the progress being made at the state and local level. While the feds talk endlessly about doing something someday, states, counties, cities and utilities are making things happen now. Today there are more than 30 states with a renewable portfolio standard (RPS) of one sort or another. Five states have voluntary programs, but more than 25 states have requirements that range from Maine's 40 percent to Pennsylvania's 8 percent. Just two months ago, California's increased its 20 percent RPS to 33 percent. It took nearly two years to get the law passed and signed by the governor, but it is now law for the country's biggest state. The state has set a 2030 deadline for meeting the new goal. Cities have also been a great source of leadership when it comes to going green. Dozens of cities, large and small, have adopted green building codes or energy efficiency requirements. Cities like Los Angeles, New York, Boston, Austin, Chicago, Seattle, Oak Park Illinois, and Atlanta just to name a few, have adopted some kind of green building programs.

One good example of local action is the City of Phoenix, which recently adopted its own "green building" code. According to The Arizona Republic, the program will award points for environmentally friendly features and will award bronze, silver, gold or emerald status based on how many points are accumulated. The voluntary code requires a minimum of two percent on-site generated renewable energy, and encourages the use of highly-efficient technologies, such as geothermal heat pump heating and air conditioning systems. California was the first state in the nation to develop a "green-building" code, which went into effect on January 1, 2011. In the meantime, Oregon and New Mexico have also adopted green building codes, as have local governments around the country. While these codes don't necessarily require renewable energy, they are indicative of a need and a desire to build green.

I'm hopeful that these state and local efforts will continue, and even broaden over the coming months, but there are troubling signs this may not be the case because of political interference, the way we've observed it at the federal level. In New Mexico, for instance, there are efforts to overturn the green building code that was implemented just last year after several years of work. We have seen ballot initiatives trying to strike down renewable standards and emission reduction standards in different states. This is a time to pour on the green, not cut it back. The green sector of our economy is one of the few bright spots during these days of depressing economic numbers. We should build more effective energy efficiency programs, continue our support of renewables, and implement those measures which will benefit the country's economy, environment and global competitive position.

Faced with what amounts to a national energy crisis, we need leaders to step up with the vision and sense of purpose that will get the entire country moving in the same direction on energy policy in general, and renewables, in particular. If the country isn't moving forward, it's moving backward; there is no standing still. And as positive as all the state and local work is, it will take a strong leadership on the national level to find the big-picture, long-term solutions to our energy problems.

Mark Mizrahi is President and CEO of EnLink Geoenergy Services, Inc., a design-build contractor of geothermal heat pump systems. Mr. Mizrahi is co-chair of the Renewable Energy, Green Building and Energy Efficiency Committee for ACORE, and sits on the Leadership Council.

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