Phase II of Renewable Energy in America

National Policy Conference

November 28-29

Cannon Caucus Room, Washington, DC

American Council On Renewable Energy (ACORE)

I would like to start by telling you I think the whole thing today for me is to share the perspective of the investment community on renewable energy.  I used to have a mentor for whom and with whom I worked for many years and he used to repeat to me so many times, John do not read the headlines, follow the money.  So, let us, if we might, follow the money.  One of the things that I want to do Mike is acknowledge the excellent work that you New Energy Finance does in keeping track of the financials of the industry.  You need to know that there are tremendous pools of capital that have now been allocated to investment and renewable energy.  And Hank made a very telling comment.  This is extremely sophisticated, educated money.  It knows as much about renewable energy as the bankers, as the CEOs and the CFOs who operate within the sector.  On a very conservative basis it appears that $100 billion, I know you have heard this a couple of times, will be invested in this space this year. This is actually a conservative number.  The United Nations found that that $100 billion might have been the spend for 2006. It is very interesting to see where the dollars are going.  Europe accounts for half of that spend, the Americas one third. And I think someone earlier had mentioned this, what's very important is this $100 billion spend is in the context of a total $1.2 trillion spend on energy infrastructure globally this year.  And the investment the community, the smart money, fully anticipates that that fraction, $100 billion to $1.2 trillion will increase dramatically over time.  I think Ernest and Young put out an analysis.  They are anticipating a renewable energy spend of $750 billion in 2016. And very importantly what should be noted is, while the U.S. may not be leading the way in climate change, the fact of the matter is that it's U.S. capital markets are in fact doing a tremendous amount in the capital formation process around the sector.  So what has been the experience to date?  It's actually been very positive.  Even for bio fuels where the economics today are extremely challenged, there's a lot of optimism.  You can look at the valuations of bio fuels, wind and solar and the context of the valuations that are being attributed to traditional energy companies, power and utilities in oil and gas.  So let's quickly move to what are the drivers for all of this investment?  Well in ascending order, you know clearly there is the notion of an aging energy infrastructure.  I think someone earlier made a comment that fully 94 percent of all power outages are due to transmission and distribution issues.  So there is a need for infrastructure investment on the transmission side.  I think Dennis alluded to the energy security issues in a very important way.  He made the comment yes the U.S. is sitting on two percent of the world's reserves in oil and consumes roughly 26 percent of the oils production.  I think actually the later two drivers are very important. What we are seeing is sustained elevated commodity prices.  There is a whole population of peoples globally that are transitioning to ever higher consumption levels.  And it has created a dislocation in the supply demand curve, which is not going to go away. And I think most importantly, what is going to sustain what we do is the global acceptance of the reality of climate change and the need for renewable energy and energy technology, which is going to rein in green house gases.  Why has the investment community embraced these drivers?  This is my favorite slide.  It's actually a composite photograph of the earth taken at night from the U.S. satellite system.  And it says al lot about the potential magnitude of growing green house gas emissions and growing supply demand dislocations in energy.  When I look at this picture, I see a lot of cars that yet have to be driven and a lot of lights that yet have to be turned on.  As an example, in the United States per 1,000 adults there are 1,023 cars.  In India, that number is 11 and in China, it is nine cars per 1,000 adults.  If we look at electric consumption per capita, in the U.S. it is 13,250 kilowatt hours.  In India, it's 435.  So what the investment community is doing, what the smart money is doing, is they are understanding directionally what is happening with climate change and the supply demand dislocation for energy and they are centrally trying to avert what looks like a train wreck in the making.  So what are the results of the capital spend to date?  Well as you can see, the market cap of public solar companies has grown to over $100 billion.  I actually think our numbers are wrong. We have three clients up there, First Solar, Sun Tech, Sun Power and I think we have short-changed them, so I hope they are not watching.  But what it's there is, it's there to address a market that is growing at an annualized rate of 30 percent, which is absolutely mind-boggling.  On the wind side, we are seeing a growth rate of 20 percent, with I think someone mentioned 75 gigawatts of wind installed.  And in bio fuels, albeit a challenged investment environment, we have 13.5 billion gallons in ethanol produced globally in 2006. And this is not to mention the dollars that have been very importantly invested in carbon capture and sequestration  technology, demand management technology, battery technology, other energy storage, fuels cells, hydro, geo thermal, clean coal technology, clean coal to gas, clean coal to liquids, smart metering, smart grid, so the dollars are there.  There is smart money being put to work the right way.  But what is missing from this equation and this is where I would like to really focus.  What is the fly in the ointment?  While oil prices near $100 a barrel, over $1 billion a day in oil consumption here in the U.S., and climate change is front and center in our consciousness, much of the investment community shuns investment in renewables and why.  There are very deep pocketed investors who say to me, I will not invest in a sector that depends upon subsidies that are subject to political whimsy. The fact is the body politic has the deepest moral and social responsibility to put political differences aside and come together on the issues of climate change and energy independence.  The smart money believes that government should in fact subsidize technologies that are coming down steep, declining cost curves. I think the Katrina actually alluded to this in her presentation.  They understand that conventional generation is escalating in cost dramatically.  It is both the plant cost and the fuel cost. They understand that these technologies are in fact enjoying a steep cost curve decline.  I will tell you this. There have been demand supply imbalances in wind and in solar, in solar, shortages in poly silicon, in wind, shortages in turbines.  That hidden fact caused a flattening of that cost decline curve.  But with the right resources, we can continue that descend. And then with the appropriate carbon burden in place that these technologies will in fact be able to compete. And as Katrina indicated that the subsidies can in fact be peeled off and that these renewable energy sources will effectively compete with grid parody on their own.  I think the investment community appreciates the fact  that many of the states are playing very strong leadership roles within the U.S.  But I will tell you this, the smart money absolutely anticipates a national renewable portfolio standard, one that does in fact account for the different endowments, geothermal, hydro, solar and wind resources differentiated from state-to-state.  I think the investment community has really enjoyed the attention that the Lieberman Warner Bill has gotten in the Congress.  And I actually thing that the smart money anticipates that we are going to have a rational cap in trade legislation.  Every major finance institution has already put in place the resources that are required to implement such carbon cap in trade legislation. And while, you know these states, you have three regions of states that have in fact implemented their own carbon trade, cap in trade policies, they need to be applauded.  But it is smart money that actually anticipates and expects the federal government to act decisively on this issue and to act in a way that delicately balances the interest of traditional generators who do not want to see a radical value shift away from their assets and the interests of the conservationists who do not want to see polluters rewarded.  But the investment community, the smart money has already, in fact, taken into consideration an actual carbon tax on fossil fuel generation.  If you read the research analysis of all of the major Wall Street firms, you will see the issue front and center, when we see mergers and acquisitions transactions around coal fired assets.  We already see embedded in the valuation analysis what is anticipated to be the competitive position of that asset in a future carbon cap in trade regime. Sometimes legislation actually deters appropriate investment activity.  And I personally would like to address an example of legislation that is hard to understand, especially in the context of a nation which is trying to gain energy security.  I actually think that the importation tariff on sugar ethanol has hurt the corn ethanol industry.  It has kept investment in infrastructure that would take ethanol beyond the blend fuel and it has deterred that investment.  As a consequence, what you are seeing is corn ethanol pricing at the level of $1.85 a gallon.  I actually think with a critical mass of ethanol in this country, the investment community would in fact support on their own _____, the building of the appropriate energy infrastructure for the delivery of ethanol. Let me be clear though, I am not endorsing the growth of the corn ethanol industry or the expansion of the corn ethanol industry.  What I am saying is that there is a way to bring the assets that are there on the ground today into profitability which they are not enjoying.  As an example, Cozen is a Brazilian sugar ethanol producer.  It can actually produce a fully loaded gallon of sugar ethanol in Brazil for $1.06 and yes the BTU content, the energy content, is 70 percent of what a gallon of gasoline is, but on a BTU basis it's 30 percent cleaner.  And for a nation that wants to become independent, energy independent from volatile areas of the world, which we depend upon for oil, it's really interesting to me that we don't have the infrastructure in place, the 29,000 gas stations that Brazil has with full fuel switching flexibility, the cars that are manufactured with full fuel switching flexibility.  That's infrastructure investment that needs to be made. There are many, you know what I want to do is just kind of close by focusing on the cost picture, because every time we talk about subsidies for renewable energy that are required transitionally or carbon cap in trade program or national renewable portfolio standard, there are many who are put off by the cost to the economy of legislation, which in fact penalizes green house gas emissions and embraces renewable energy. There have been a number of studies about climate change programs initiated in Germany.  I think a lot of the speakers alluded to those studies. And there recently was a very detailed study out of the University of California Berkeley that examined the climate initiatives in California.  They have conclusively indicated that there has been real job growth and real economic growth as a result of those initiatives.  The smart money in the investment community assumes we will bear whatever cost is required, that the U.S. needs to ultimately assume the global leadership for climate change.  If in 1998 someone told you that the price of oil had declined below $10 a barrel in intraday trading, but that within a ten year time frame the price of oil would actually multiply in cost by ten times, what would have been your response?  I think your response would have been it can't be so.  The economy would shut down.  Demand would just abate to the point where it would stabilize the price of oil at much lesser prices.  I do not know about all of you, but I do know that the last time I was driving it was in a lot of traffic.  We spend over a $1 billion a day in oil.  Let's talk about the end user electric bill. In total, industrial, commercial, residential, the total end user commercial bill in the United States is $325 billion annually.  Carbon legislation will only increase that cost fractionally. Duke Energy, one of the great energy incumbents in this country, did an analysis of what they anticipated to be middle of the road carbon cap in trade legislation. They assumed that they would be required to purchase 44 to 50 percent of their allowances in 2012 at a cost of $30 per ton.  And they came to the conclusion that that would have a cost impact on them of 13 to 35 percent end user bill increases.  What does not get said is the fact that this carbon penalty is a transitional device, because clearly we have 1,000 gigawatts of stationary energy that must be completely rebuilt over the next 30 years.  The increase in demand is going to require another 500 gigawatts.  There will be renewable energy resources in alternative energies that will displace that fossil fuel generation.  So those carbon penalties really should not be presumed to be there forever.  The fact of the matter is the smart money says we will make the right decision.  We will do what it takes.  I want to close back on this page.  You've all heard the saying we did not inherit the earth from our parents.  We borrow it from our children.  Well maybe the reality is the rent is finally due.  Thank you. <Applause>.