[Senate Hearing 110-63]
[From the U.S. Government Publishing Office]
S. Hrg. 110-63
ADVANCED ENERGY TECHNOLOGIES
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HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
TO
INVESTIGATE MARKET CONSTRAINTS ON LARGE INVESTMENTS IN ADVANCED ENERGY
TECHNOLOGIES AND INVESTIGATE WAYS TO STIMULATE ADDITIONAL PRIVATE
SECTOR INVESTMENT IN THE DEPLOYMENT OF THESE TECHNOLOGIES
__________
MARCH 7, 2007
Printed for the use of the
Committee on Energy and Natural Resources
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36-077 PDF WASHINGTON : 2007
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota LARRY E. CRAIG, Idaho
RON WYDEN, Oregon CRAIG THOMAS, Wyoming
TIM JOHNSON, South Dakota LISA MURKOWSKI, Alaska
MARY L. LANDRIEU, Louisiana RICHARD BURR, North Carolina
MARIA CANTWELL, Washington JIM DeMINT, South Carolina
KEN SALAZAR, Colorado BOB CORKER, Tennessee
ROBERT MENENDEZ, New Jersey JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
JON TESTER, Montana MEL MARTINEZ, Florida
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Frank Macchiarola, Republican Staff Director
Judith K. Pensabene, Republican Chief Counsel
Michael Carr, Counsel
Kathryn Clay, Republican Professional Staff Member
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 1
Denniston, John, Partner, Kleiner Perkins Caufield & Byers, Menlo
Park, CA....................................................... 20
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 2
Liebreich, Michael, CEO and Founder, New Energy Finance Ltd,
London, England................................................ 27
Musk, Elon, Chairman, Tesla Motors, El Segundo, CA............... 13
Peters, Jerome P. Jr., Senior Vice President, TD Banknorth N.A.,
Westport, CT................................................... 17
Reicher, Dan W., Director, Climate Change and Energy Initiatives,
Google, Mountain View, CA...................................... 3
APPENDIX
Responses to additional questions................................ 55
ADVANCED ENERGY TECHNOLOGIES
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WEDNESDAY, MARCH 7, 2007
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:30 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. All right, why don't we go ahead and get
started?
Thank you all very much for being here. Today we're taking
testimony on how we can stimulate investment and advance energy
technologies.
The challenges we face in the energy arena are very
substantial, as we all know. It's going to take a lot of
combined effort and coordinated effort between government and
industry and the investment community to make progress on this.
The problems of over-reliance on fuels from unstable or
unappealing regimes and the looming problem of global warming
lead to the conclusion that we need to find a new way forward
on energy that reduces our reliance on foreign energy sources,
and at the same time reduces the greenhouse gas intensity of
our energy use. Whether you focus on the national security
issue of energy independence or the environmental problems,
obviously you wind up somewhat at the same place.
There are near-term technologies that appear to be very
promising, such as electric and plug-in hybrid electric
vehicles, using advance batteries, ultra efficient lighting and
appliances, bio-fuels, renewable energy sources such as wind
and solar generators, and near-zero emission coal plants with
carbon capture and storage. These are all technologies that we
believe can be commercialized, and in many cases, are being
commercialized.
In addition to the use of these technologies, there's a
great opportunity for us to establish U.S. leadership in the
development of these technologies and the marketing of them.
Other countries such as Japan, in the case of solar technology,
and Denmark, in the case of wind power generation, have begun
to stake out leads in commercializing technologies in these
emerging markets.
There's no lack of innovation here in our own country, but
we do need policies in place to ensure that we are a major
participant in the development and commercialization of these
technologies.
So we have a great group of witnesses today who are expert
on these issues. We very much appreciate them being here.
Before I introduce the witnesses, let me call on Senator
Domenici for his opening comments, and then we'll introduce the
witnesses.
I was told earlier there would be a vote or two votes at 10
o'clock. I'm now told that those have been put off. So we will
just proceed after Senator Domenici's comments to the
witnesses, and we'll go as long as we're able to.
Senator Domenici.
STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM NEW
MEXICO
Senator Domenici. Thank you, Mr. Chairman. I have a
statement for the record, so we can get on with it.
[The prepared statement of Senator Domenici follows:]
Prepared Statement of Hon. Pete V. Domenici, U.S. Senator From
New Mexico
Let me begin by thanking our distinguished panel of witnesses for
being with us today. All of you are involved in an important area for
our nation's future--helping to make it possible for new energy
technologies to make their way from the drawing board to the real
world.
Our nation faces important challenges that we will need new energy
technologies to address. Our reliance on imported oil and increasingly
liquefied natural gas is a detriment to our national security. And
concerns about the potential risks of climate change are driving us to
promote innovative technologies that do not contribute greenhouse gases
to the atmosphere.
I believe one of the most significant contributions of the Energy
Policy Act of 2005 was authorizing the Secretary of Energy to issue
loan guarantees for investments in innovative energy technologies.
I was pleased by the Department's announcement yesterday that it
has received 143 pre-applications for loan guarantees. This is real
evidence that there is significant private-sector interest in bringing
cutting-edge technologies to market to re-invent our energy sector.
I continue to support DOE's efforts, and in fact I hope that the
Department goes further to implement the loan guarantee program on the
scale that was envisioned in the Energy Bill. In some cases, quick
action on the loan guarantee process may make the difference between
the United States gaining or losing the lead in commercializing new
technologies.
I noted an example of this last week when we reviewed the EIA's
annual energy outlook, but it bears repeating here. There is a company
currently planning to build the world's first commercial cellulosic
ethanol plant in Idaho, that has submitted a pre-application under the
loan guarantee program. If the Department of Energy delays too long in
its process of awarding loan guarantees, this potential capital
investment in cellulosic ethanol will almost certainly be deployed
elsewhere in the world first.
I also believe it is important to promote cleaner coal and advanced
nuclear technologies. These are the bedrock of our power generation
system. I noted that none of the witnesses discuss these technologies
in their written testimony. I hope that we might have a discussion on
financial incentives for nuclear and clean coal technologies at another
time.
Ultimately, it is up to the private sector to build the systems
that will ensure our access to clean, reliable, and affordable energy.
But the government can, and should, partner with industry to encourage
the development and deployment of new energy technologies. I look
forward to hearing from today's witness how we can best accomplish this
task.
Senator Domenici. It seems to me that nothing is more
important than that we find ways to adequately finance the
transition from the current economy to whatever the economy is
going to look like after we have created innovations,
innovations in the use of coal, other innovations.
A bill that we passed the year before last, had a title--
title XVII, I didn't bring it with me--but I'll ask that it be
made part of the record at this point as if it were here.*
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* The information referred to has been retained in committee files.
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Senator Domenici. Anybody that reads it and contemplates
that paragraph would know that we did expect to give to the
administration power for all kinds of financing mechanisms for
innovative technology, in particular loan guarantees. We
provided methods and manners for it.
We even provided a method for loan guarantees that was
turned on its head by the people at OMB. They read it
completely wrong. It was just intended to be a provision that
said that we can have loan guarantees, and it won't cost the
Federal Government anything, because the borrowers will pay the
risk. There's a risk factor to be attached to the loans, and
you'd pay that in advance, and it goes into a pool and that
pool is there to save the government harm.
We've just been able to get that program started and it
should be a very giant fund in my opinion. We're still pushing
very hard, both the Chairman and I and many others, pushing the
administration to do more, but I think eventually we're going
to have to do more ourselves by being more specific in loan
guarantee authority and loan guarantee mandates on the
administration.
This need is across the board as we make the transition
from nuclear fuels to wind technology, nuclear energy to wind
technology, and I hope we can make some strides during the
remainder of this year.
Thank you, Mr. Chairman.
The Chairman. Thank you very much. Our witnesses today are
Dan Reicher, who's the director of energy and climate
initiatives for Google, out of Mountain View, California; Elon
Musk, who is the chairman of Tesla Motors from El Segundo,
California; Jerome Peters, the senior vice president with TD
Banknorth in Westport, Connecticut; John Denniston, who's a
partner with Kleiner Perkins Caufield and Byers in Menlo Park,
California; and Michael Liebreich who is with New Energy
Finance. He's the co-founder and CEO on New Energy Finance out
of London, England.
We very much appreciate all of you being here. Why don't we
just go in the order in which you're seated, from left to
right--our left to our right--and just take 6 or 8 minutes, if
each of you would make the main points. Obviously, your full
statements will be included in the official record of the
committee hearing, but if you could make the main points that
you think we need to understand, we would appreciate that. Dan,
go right ahead.
STATEMENT OF DAN W. REICHER, DIRECTOR, CLIMATE CHANGE AND
ENERGY INITIATIVES, GOOGLE, MOUNTAIN VIEW, CA
Mr. Reicher. Thank you, Mr. Chairman. Good morning to
Senators Domenici and Thomas, and Senator Bunning. I'm very
pleased to be here today, and pleased to talk about this very
important topic of how we accelerate investment in clean energy
technology.
I am at Google; have been there for the past 3 weeks. A
year ago, Google set aside well in excess of a billion dollars
to make major investments in climate and energy, global poverty
and global health. I'm directing the climate and energy
investment and policy unit at Google and we're intensely
interested in this area of how you move clean energy projects
and technologies to market. We want to be a big player in that.
I spent several years with a private equity firm, New
Energy Capital, where we invested in several ethanol plants,
bio-diesel plants, co-generation facilities and bio-mass power
facilities. I also was with a major engineering procurement and
construction firm that built major energy projects around the
world, and for a number of years I was at the Department of
Energy, where I was Assistant Secretary of Energy for Energy
Efficiency and Renewable Energy.
To start, Mr. Chairman, I would note there is a very well-
worn pathway for investment in clean energy. It starts, as you
know, with high-risk, generally government-backed research to
move technologies forward. It goes from there to venture
capital and corporation-backed commercialization of that
technology, and then it goes from there to actual deployment of
the technologies--as we say, ``steel in the ground,'' and that
is the world of project finance and related financial
mechanisms. Those are different steps along this pathway.
I think today's hearing is focused primarily on that final
stage. The actual deployment of clean energy technologies at a
scale that is significant enough to actually address our
energy-related challenges, climate change, national security,
poverty alleviation and economic competitiveness.
The good news, Mr. Chairman, is that there are an array of
clean energy technologies that can be developed, that have been
developed, with government and private sector investment, that
can address many of these energy-related challenges. The not-
so-good news is that investment, in the actual deployment of
these technologies--again, ``steel in the ground''--is lagging.
Sometimes the risk profile of the technology is too high. I
think about cellulosic ethanol projects in this category.
Sometimes the return profile of this technology is too low. I
think about energy efficiency projects in this category.
Sometimes the technology is too costly in comparison with
competing technologies. I think about clean coal projects in
this category.
The single most important point I'll make today, Mr.
Chairman, is that aggressive Federal policy can drive private
sector investment, measured in the trillions--trillions--of
dollars that would be required to move the Nation and the globe
toward a more sustainable energy future.
There are several very critical steps the Federal
Government must take. First, the Federal Government must put a
price on greenhouse gas emissions in order to internalize the
cost of climate change and move energy investments toward lower
carbon and more efficient technologies.
Second, we must remove barriers to cleaner and more
efficient technologies and establish reliable, long-term
incentives and rigorous standards to move these technologies to
market.
Third, we must significantly increase public funding of
research development and deployment of these technologies.
And fourth, the Federal Government must support fluid,
transparent markets to monetize the environmental benefits that
these technologies provide.
Let me highlight three technology areas where there are
important lessons to be learned about the important role of
Federal policy in stimulating private sector investments. First
is the unprecedented level of investment in new corn ethanol
projects in the United States which reflects, in large part,
major Federal policy mechanisms adopted by the Congress: a
renewable fuel standard, a blender's tax credit that's good
through 2010, and a phaseout of MTBE.
In contrast, investment in cellulosic ethanol plants--which
hold the prospect of a more sustainable approach to bio-fuel
production--has lagged because of the higher risk associated
with the projects and the weakness of the Federal Government's
response--in particular, uncertainty surrounding the Federal
appropriations for cellulosic ethanol projects and problematic
Federal loan guarantees.
The second area I would highlight is wind projects. There
is no better example of the role of Federal policy in
stimulating and retarding investment in clean energy projects
than the on-again, off-again, investment in U.S. wind projects,
because of the on-again, off-again nature of the wind
production tax credits. For more than a decade these credits
have been here for a year or 2 and then gone for months or
years. Investors simply will not back a U.S. wind project if it
looks like the tax credit authorization will expire prior to
completion of the project. This has caused a damaging boom-and-
bust cycle in the industry. I would also note that largely
because of IRS rules, the actual monetization of the tax
credits is highly complex and expensive and there is a limited
group of investors who actually qualify to use these credits.
The third technology area where there are policy lessons to
be learned is energy efficiency. Mr. Chairman, energy
efficiency is the real low-hanging fruit in the U.S. and global
economy. From cars and homes to factories and offices, we know
how to cost-effectively deliver a vast quantity of energy
savings today, and the exciting fact is that this low-hanging
fruit grows back.
The incandescent light bulb we replace today with a compact
fluorescent, we will be able to replace again with an even more
efficient bulb in the future. Similarly, we can take our gas-
guzzling SUV today and replace it with a more efficient full-
featured hybrid gas-electric model, and down the road we will
replace the hybrid with an advanced model that runs on ethanol
or bio-diesel and plugs into the electric grid.
However--and this is the important point--relatively little
investment has found its way to commercializing or deploying
energy efficiency technologies despite their cost effectiveness
and reliability. Explanations range from the simple to the
arcane. The less sexy nature of efficiency technologies, the
often more disaggregated nature of their deployment, the
greater challenge of financing savings versus production and
weaker policy support.
In testimony last week that I gave before the Senate
Finance Committee, I addressed how Federal policy can enhance
private sector investment in energy efficiency. I highlighted
an array of Federal policy instruments that can enhance
investment, including automobile fuel economy standards,
applying sufficiency standards, low income home weatherization
investment partnerships, tax credits and research and
development funding.
One policy mechanism that I want to end up with, and that I
urge you to take a look at, is the Energy Efficiency Resource
Standard, which could drive massive new investment in energy
efficiency. The EERS, as it's called, sets efficiency resource
targets for electricity and gas suppliers over the period of
2008 to 2020. It builds on policies that are now in place in a
number of States across the United States, policies that have
been quite successful, for example, in Texas and in Vermont.
The EERS is a compelling complement to a renewable
portfolio standard. By moderating demand growth through an EERS
and increasing clean generation through an RPS, we can slow and
begin to decrease carbon emissions in the utility sector while
we work to adopt more comprehensive climate change legislation.
In conclusion, Mr. Chairman and members of the committee,
the investment community is ready, willing and able to back
massive deployment of clean energy technology throughout this
Nation and around the globe. However, without a major policy
push by the Federal Government, that starts with long-term and
reliable incentives and rigorous standards and includes putting
a price on greenhouse gas emissions, we will simply not see the
massive investment that our critical energy-related challenges
require. The bully pulpit will not be enough to drive this
critical investment. The Federal Government will indeed have to
pay to play. Thank you very much.
[The prepared statement of Mr. Reicher follows:]
Prepared Statement of Dan W. Reicher, Director, Climate Change and
Energy Initiatives, Google, Mountain View, CA
Mr. Chairman and members of the Committee, my name is Dan W.
Reicher and I am pleased to testify today on federal policy measures
that can enhance investment in clean energy, particularly energy
efficiency. I recently joined Google where I serve as Director of
Climate Change and Energy Initiatives for the company's new
philanthropic venture called Google.org. Google.org has been
capitalized with more than $1 billion of Google stock to make
investments and advance policy in the areas of climate change and
energy, global poverty and global health.
Prior to my position with Google, I was President and Co-Founder of
New Energy Capital, a private equity firm funded by the California
State Teachers Retirement System and Vantage Point Venture Partners to
invest in clean energy projects. New Energy Capital has made equity
investments and secured debt financing for ethanol and biodiesel
projects, cogeneration facilities, and a biomass power plant. Prior to
this position, I was Executive Vice President of Northern Power
Systems, the nation's oldest renewable energy company. Northern Power
has built almost one thousand energy projects around the world and also
developed path-breaking energy technology.
From 1993 to 2001, I served in the Clinton Administration as
Assistant Secretary of Energy for Energy Efficiency and Renewable
Energy, Department of Energy Chief of Staff and Deputy Chief of Staff,
and the Acting Assistant Secretary of Energy for Policy. Mr. Chairman,
we have a broad array of options for addressing the nation's energy
challenges, as other witnesses demonstrate in their testimony today.
The federal government, through Congressional and Presidential
leadership, has a powerful role to play in moving these energy
solutions to market. I am honored to share with you my views as an
investor, former policymaker and most importantly, as a professional
dedicated to ensuring our success in meeting today's energy-related
challenges: climate change, national security, economic competitiveness
and poverty alleviation. There are several steps the federal government
must take to drive massive private sector investment--measured in the
trillions of dollars--that will be required to move the nation toward a
more sustainable energy future:
First, the federal government must put a price on greenhouse
gas emissions in order to internalize the costs of climate
change and move energy investments toward lower carbon and more
efficient technologies.
Second, we must remove barriers to cleaner and more
efficient technologies and establish incentives and standards
to move these technologies to market.
Third, we must significantly increase public funding of
research, development and deployment of advanced energy
technologies.
And fourth, the federal government must support fluid,
transparent markets to monetize the environmental benefits that
these technologies provide. The market needs clear definitions
of and ownership rules for renewable energy certificates,
carbon offsets, white tags, and other environmental assets
created by regulation at the federal and state level.
energy efficiency--our cheapest, cleanest and fastest energy option
Today I have been asked to focus my attention on how to spur
investment in what many see as our fastest, cheapest and cleanest
opportunity to address our energy challenges--energy efficiency. Duke
Energy CEO James Rogers has termed energy efficiency our ``fifth fuel''
and energy efficiency guru Amory Lovins measures it in ``Negawatts''.
The federal government has the power to leverage vastly more private
sector investment in energy efficiency thereby dramatically increasing
U.S. competitiveness, improving our quality of life, and addressing
climate change.
Energy efficiency is the real low-hanging fruit in the U.S. and
global economy. From cars and homes to factories and offices, we know
how to cost effectively deliver vast quantities of energy savings
TODAY. And the exciting fact is that this low hanging fruit grows back.
The incandescent light bulb we replace today with a compact
fluorescent, we will be able to replace again with an even more
efficient bulb in the future. Similarly, we can trade our gas-guzzling
SUV today for a more efficient full-featured hybrid gas-electric model.
And down the road we will replace the hybrid with an advanced model
that runs on ethanol or biodiesel and plugs into the electric grid.
We have made an important transition in this country away from a
focus on ``energy conservation'' and toward the more recent concept of
``energy efficiency'' (or ``energy productivity''). In the era of
energy conservation in the 1970's and 1980's we were asked to ``do less
with less''--to lower the thermostat, turn off the lights, don a
sweater and leave the car in the garage. Energy efficiency takes a
different approach, offering the opportunity to ``do more with less''.
As McKinsey and Company states in a 2006 report, ``By looking merely in
terms of shrinking demand, we are in danger of denying opportunities to
consumers--particularly those in developing economies who are an
increasingly dominant force in global energy-demand growth. Rather than
seeking to reduce end-user demand--and thus the level of comfort,
convenience and economic welfare demanded by consumers--we should focus
on using the benefits of energy most productively.''
The main finding of the 2006 McKinsey report is that while energy
demand will continue to grow, ``there are sufficiently economically
viable opportunities for energy-productivity improvements that could
keep global energy-demand growth at less than 1 percent per annum--or
less than half of the 2.2% average growth to 2020 anticipated in our
basecase scenario.'' According to McKinsey, ``Energy-productivity
improvements can come either from reducing the energy inputs required
to produce the same level of energy services, or from increasing the
quality or quantity of economic outputs.'' The report concludes that
globally the largest untapped potential for cost-effective energy
productivity gains (>10% Internal Rate of Return) lies in the
residential sector (e.g. better building shells and more efficient
water heating and lighting), power generation sector (e.g. more
efficient power plants and electricity distribution) and industrial
sector (e.g. less energy-intensive oil refineries and steel plants).
However, McKinsey concludes that capturing this vast potential will
require a significant policy push. McKinsey says, ``market-distorting
subsidies, information gaps, agency issues, and other market
inefficiencies all work against energy productivity. Furthermore, the
small share of energy costs for most businesses and consumers reduces
end-use response to energy-price signals. Therefore shifting global
energy demand from its current rapid growth trajectory will require the
removal of existing policy distortions; improving the transparency in
the usage of energy; and the selective deployment of energy policies,
such as standards.''
As we consider this policy dimension we also need to consider how
to harness an important and heartening new trend--the unprecedented
flow of private capital toward clean energy. Who would have thought
even a few years ago that Goldman Sachs, Citigroup, John Hancock
Insurance, General Electric, Morgan Stanley, the Carlyle Group, Kleiner
Perkins and other titans of Wall Street and Silicon Valley would be
major investors in clean energy technologies and projects? In fact, in
just the last year we have seen literally billions of dollars invested
in companies commercializing advanced energy technologies and tens of
billions of dollars invested in building clean energy projects.
``CleanTech'' has recently become the hottest new area of venture
capital investing, while clean energy projects have become an important
new element of the project finance world.
At the same time, most of this increasing investment in
technologies and projects has been on the supply side involving key
technologies like solar, wind, and biofuels. However, little investment
has found its way to commercializing or deploying energy efficiency
technologies despite their cost-effectiveness and reliability.
Explanations for this range from the simple to the arcane: for example,
the less ``sexy'' nature of efficiency technologies, the often more
disaggregated nature of their deployment, the greater challenge of
financing ``savings'' measured in Negawatts than production measured in
Megawatts, and weaker policy support.
Regarding the last point, aggressive federal policy can make a
major difference in the development and deployment of energy
technology. In the case of ethanol, for example, Congress has enacted
both a significant federal tax credit and major federal mandate which
have helped stimulate massive new investment in production plants as
well as new technologies. Energy efficiency has simply not enjoyed this
kind of policy support and the investment that it generates. Below I
address how federal policy can enhance private sector investment in
energy efficiency, as it now supports critical investment in renewable
energy.
I should emphasize that by moderating demand growth through energy
efficiency, and at the same time increasing clean generation using
renewable sources, we can slow and begin to decrease carbon emissions
while we work to adopt and implement a comprehensive approach to
addressing climate change. Congress should pay careful attention to
this complementary strategy involving both energy efficiency and
renewable energy as an important down payment on reducing carbon
emissions, while it deliberates the more complex issues entailed in
enacting and implementing an economy-wide climate policy.
federal policies to increase investment in energy efficiency
There are an array of federal policy instruments that can enhance
investment in energy efficiency including standards, tax credits, and
RD&D funding.
Automobile Fuel Efficiency
The single most effective energy efficiency policy ever adopted by
the federal government is the Corporate Average Fuel Economy
requirement (CAFE). Since its adoption in 1975, CAFE has cut U.S. oil
consumption by over 1 billion barrels each year. Even with this
progress, passenger vehicles today consume approximately 40% of the
petroleum in the United States--with the transportation sector
projected to generate 89 percent of the growth in petroleum demand
through 2020. And the federal government has not significantly
strengthened the CAFE standards in years, further diminishing their
effectiveness. Raising fuel economy performance to 40 mpg over the next
10 years--through revision of the CAFE standards--could alone cut
passenger vehicle oil demand by about one-third or 4 million barrels
per day by 2020--about twice current daily imports from Saudi Arabia
and Kuwait.
Existing technologies--hybrid electric automobiles, drive train
improvements, lighter weight materials--can today get us to roughly
double the mileage of our current passenger fleet. Perhaps the most
exciting technological development has been the recent emergence of
plug-in hybrids--a technology that will enable us to exceed any fuel
economy proposals under consideration at this time. Plug-in hybrids
have a more powerful battery than traditional hybrids and are designed
to be connected to the electric grid for recharging. This allows the
vehicle to cut gasoline use and, if charged at night, use lower cost
and cleaner off-peak electricity. These cars can also benefit electric
utilities when plugged in during the day by sending power back to the
grid to meet peak power needs, thereby supplanting some of the most
costly and often most polluting power generation. According to
analysts, this benefit to utilities could be worth thousands of dollars
per year per car, a value that could rapidly exceed the incremental
cost of the vehicle's more powerful battery if shared with consumers.
By increasing vehicle use of electricity over liquid fuels, we
should have an easier time improving the environmental profile of our
automotive fleet. This is because lowering emissions from hundreds of
power plants will likely be a more rapid and straight forward task than
influencing the fuel purchases and driving behavior of millions of
individuals. Even charged with electricity from coal dominated parts of
our electric grid, a plug-in hybrid is generally cleaner than a
gasoline powered car. In addition, plug-in hybrid vehicles enabled to
run on biofuels can reduce greenhouse gasoline emissions up to 80%, and
oil consumption by as much as two thirds.
The multiple benefits provided by plug-in hybrids call for
significant federal actions to move this technology to market as
quickly as possible. In addition to controls on greenhouse gas
emissions and increased CAFE standards, the federal government can
partner with the private sector to address outstanding technological
barriers such as battery cost and performance. Even more importantly,
the federal government should support deployment of plug-in hybrid
vehicles through tax incentives and federal fleet procurement.
Energy Efficiency Resource Standard (EERS)
Just as the Senate has voted in favor of a Renewable Portfolio
Standard, it should strongly consider a similar--and highly
complementary--mechanism called the Energy Efficiency Resource Standard
(EERS). The EERS sets efficiency resource targets for electricity and
gas suppliers over the period of 2008-2020. It builds on policies now
in place in eight states--California, Texas, Vermont, Connecticut,
Nevada, Hawaii, Pennsylvania, and Colorado--designed to cut the growth
in electricity demand through energy efficiency. The Texas and Vermont
policies have been implemented for several years and have been very
successful. Texas utilities, for example, are required to meet 10% of
their load growth needs through efficiency programs. Utilities are
easily exceeding this target, resulting in current consideration of
raising the standard to as high as 50% of load growth. Vermont created
an energy efficiency utility that has helped the state in recent years
meet more than two thirds of load growth (typically 1.5 to 2% per year)
through energy efficiency and the state is on a path to avoid all load
growth in the near future.
Under the proposed federal EERS, suppliers are required to obtain
energy savings from customer facilities and distributed generation
installations in amounts equal to at least 0.75% of base year energy
sales for electricity, and 0.50% for natural gas. This requirement is
phased in over three years and cumulates during the compliance period.
The requirement applies to retail suppliers, be they local distribution
utilities or competitive energy suppliers, who sell annually at least
800,000 megawatt hours of electricity or 1 billion cubic feet of
natural gas.
Eligible energy savings measures include efficiency improvements to
new or existing customer facilities, distributed energy technologies
including fuel cells and combined heat and power systems, and recycled
energy from a variety of defined commercial and industrial energy
applications. Savings are determined using evaluation protocols that
can be defined by the Department of Energy (DOE), with state protocols
available that the Department can build upon.
Suppliers may obtain and trade credits for energy savings under
procedures to be defined by DOE. This will enable suppliers with energy
savings beyond the requirements of the standard to sell them to
suppliers unable to obtain sufficient savings from their customers
within a given compliance period.
The EERS is a compelling complement to a Renewable Portfolio
Standard (RPS), which the Senate has passed before and will consider
again this year. EERS moderates demand growth so that RPS targets can
actually reduce fossil fuel consumption. The RPS provision the Senate
supported in 2005 calls for 10% of U.S. electricity generation to be
generated from non-hydro renewable energy sources in 2020. However, the
Energy Information Administration forecasts electricity demand to grow
more than 22% by 2020. Unless we bring down demand growth, the RPS will
not likely reduce fossil energy consumption or carbon emissions. The
EERS proposal, as analyzed by the American Council for an Energy
Efficient Economy would reduce 2020 peak electricity demand by about
10% or about 133,000 MW--equivalent to almost 450 power plants at 300
MW each. This would bring demand growth down to a level where a 10% RPS
could meet all new electricity generation needs. ACEEE also estimates
that by 2020, this provision will reduce natural gas needs by about 2
billion cubic feet, reduce CO2 emissions by more than 340
million metric tonnes, and result in cumulative net savings to
electricity and natural gas consumers of about $29 billion. Moving to a
15% or 20% RPS level, as proposed in recent bills, would further
accelerate the move to a less carbon-intensive electricity system.
These two policies, EERS and RPS, figure prominently in a
forthcoming report, prepared by the American Council for an Energy
Efficient Economy and the American Council on Renewable Energy and
supported by the Rockefeller Brothers Fund, that explores the synergies
between energy efficiency and renewable energy. These two energy
sources offer a highly complementary approach to managing the
challenges of the U.S. power sector in the coming decades.
By moderating demand growth through an EERS and increasing clean
generation through an RPS, we can slow and begin to decrease carbon
emissions in the utility sector, while we work to adopt and implement a
comprehensive cap-and-trade system. Congress should give strong
consideration to this EERS-RPS approach as a straightforward down
payment on reducing carbon emissions, while it deliberates the more
complex issues entailed in enacting and implementing an economy-wide
climate policy.
Utility Revenue Decoupling
The recent National Action Plan for Energy Efficiency (http://
www.epa.gov/cleanrgy/actionplan/eeactionplan.htm) provides joint
recommendations from federal agencies, states, the utility industry and
environmental groups regarding energy efficiency. One area of focus in
the report is the concept of ``revenue decoupling''. This approach,
first instituted in California, decouples sales from profits, so that
electric and gas utilities do not have a disincentive to promote energy
efficiency. The current ``throughput'' incentive (the more electricity
or gas a utility sells, the more it earns) is a significant impediment
to energy efficiency. As state utility commissions work to advance
decoupling, Congress and the Administration (especially FERC and DOE)
should consider further incentives to promote energy efficiency. One
important federal role would be to promote ``best practices'' and
provide technical assistance to interested parties to facilitate energy
efficiency.
Tax Credits for Efficient Buildings
Thanks in part to the efforts of this Committee, the Energy Policy
Act of 2005 provided important tax incentives for efficient buildings
and equipment, in addition to significant support for renewable energy
and other advanced energy technologies. Legislation introduced last
year by Senators Snowe and Feinstein, called the EXTEND Act, extends
and expands these building-related incentives to enhance investment in
energy efficiency. The principal purpose of the bill is to extend the
temporary 2005 EPACT tax incentives for a sufficient length of time so
that the business community can invest in complying with the
significant requirements for the incentives.
Commercial buildings and large residential subdivisions have lead
times for planning and construction of 2-4 years, so many businesses
will refrain from making investments to qualify for tax incentives if
the duration of the incentive is only 2 years.
The EXTEND Act provides four years of assured incentives for most
situations, and some additional time for projects with particularly
long lead times, such as commercial buildings. The EXTEND Act also
makes an important modification to the 2005 EPACT incentives so as to
phase out incentives based on the cost incurred in saving or producing
energy and replace them with incentives based on the actual performance
(measured by on-site ratings for whole buildings and factory ratings
for products like air conditioners, furnaces, and water heaters.) The
legislation provides a new home retrofit tax incentive for ambitious
levels of energy savings that are verified by a third-party rater.
A goal of this bill is to provide a transition from the EPACT 2005
retrofit incentives, which are based partially on cost and partially on
performance, to a new system that provides greater financial incentives
based on performance. These larger incentives should not cost the
Treasury more because the ambitious requirement of a minimum 20 percent
savings will effectively eliminate free ridership, which is the problem
that caused the current EPACT incentives to be scored as high as they
were.
The Snowe-Feinstein bill also extends the applicability of the
EPACT incentives so that the entire commercial and residential building
sectors are covered. The current EPACT incentives for new homes are
limited to owner-occupied properties or high rise buildings. The Snowe-
Feinstein bill extends these provisions to rental property and offers
incentives whether the owner is an individual taxpayer or a
corporation. This extension does not increase costs significantly, but
it does provide greater fairness and clearer market signals to builders
and equipment manufacturers.
Public-Private Partnership on Low Income Weatherization
Across the nation, poor families often increasingly face the choice
between heating and eating as prices for natural gas, heating oil,
propane and electricity have skyrocketed and millions of poor Americans
have found themselves spending more than one-quarter of their income to
run their furnaces, air conditioners and keep the lights on. In a
survey of low income families--before the energy price spike in 2005-
2006--32% went without medical or dental care, 24% failed to make a
rent or mortgage payment, and 22% went without food for at least one
day due to energy bills.
Congress continues to debate the traditional fix for this problem:
additional funding for the Low Income Home Energy Assistance Program
(LIHEAP). But we need to recognize the serious limitations of the
roughly $2 billion we spend annually on federal fuel assistance,
particularly as Congress considers the Fiscal Year 2008 budget. LIHEAP
is essentially a one-shot buy-down of energy bills that covers only a
modest percentage of eligible families--an absolutely critical but in
no way sufficient answer to the energy woes of the poor. Together,
federal and state fuel assistance funds provided less than 10% of the
total energy costs for low income households in 2006.
The longer-term answer for the poor is home weatherization. By
upgrading a home's furnace, sealing leaky ducts, fixing windows, and
adding insulation we can cut energy bills by 20-40%--for years--and the
substantial savings accrue with summer air conditioning as well as
winter heating. And by adding energy efficient appliances and lighting
the savings are even greater. Replacing a 1970's vintage refrigerator
with a new energy efficient model will cut an average home electricity
bill by 10-15%. Weatherizing low-income homes also improves comfort,
reduces illness, and creates jobs.
Unfortunately, we have taken a penny-wise pound-foolish approach to
low-income weatherization with less than $245 million in the 2006
Department of Energy weatherization budget, enough for only about
100,000 U.S. homes. And while the nation has weatherized about 5.5
million low-income homes since 1976, more than 28 million remain
eligible. While the Bush Administration has supported increases in the
weatherization program in the past, the 2008 budget proposes only $144
million, a cut of about $100 million that will have serious
consequences for the nation's poor.
Instead of cutting weatherization funding, the President and
Congress should make a national commitment to weatherize at least one
million low-income homes each year for the next decade. This program
would go a long way toward helping the most vulnerable among us--
something the nation pledged it would do after Hurricane Katrina
emphasized the extent of American poverty. The price tag for
retrofitting 10 million low-income homes is relatively modest--about $2
billion annually when fully implemented.
With such a commitment there would be other benefits that directly
address our current energy and environmental challenges. Stresses we
are seeing today on the U.S. energy system--from blackouts to natural
gas shortages--will be dampened with every additional home weatherized.
For example, weatherizing all the low-income homes that heat with
natural gas would cut residential U.S. use of this clean-burning fuel
by about 5%, dampen its price volatility and reduce the call on federal
fuel assistance funds.
The advanced technologies pioneered in the federal low income
weatherization program can also be readily applied to the U.S. housing
stock at large, with even greater energy savings. One technology
developed in the Department of Energy weatherization program uses a
pressurization device and a simple infrared sensor to pinpoint leaks
down to the size of a nail hole for about $100 per home. With this
information insulation can be installed in the right places with the
least amount of waste.
As we cut energy demand we also cut air pollution. An Ohio study
showed that weatherizing 12,000 homes not only cut the average consumer
bill by several hundred dollars each year but overall avoided annual
emissions of 100,000 pounds of sulfur dioxide as well as 24,000 tons of
carbon dioxide--the primary global warming gas. As Congress and the
Administration consider changes to the Clean Air Act and how to address
climate change we ought to create an effective way to encourage power
plant owners to invest in weatherization and other ``downstream''
pollution reduction opportunities. This could leverage substantial
additional private sector capital for low-income weatherization and
avoid the need for new power plants.
More broadly, we believe there are a variety of potential
mechanisms to spur private sector investment in weatherization and we
are currently exploring these within the financial community. One
approach would:
aggregate thousands of homes eligible for weatherization in
a locality,
establish a base-line of energy use as well as associated
greenhouse gas and other emissions across the portfolio of
homes,
install advanced metering to monitor post-investment savings
as well as provide utility load control,
secure federal and state funding as well as carbon off-set,
pollution credits, and utility capacity payments,
leverage private sector investment in the aggregated
portfolio through a ``shared savings'' approach or other
financial mechanism,
benchmark the investment to enhance replication.
There may also be an opportunity to provide an extra incentive or
credit in the Energy Efficiency Resource Standard for investment by an
electricity or gas supplier in low income home weatherization.
State Building Codes
California has demonstrated the significant efficiency gains that
can be achieved through state building codes that are well designed and
implemented. Title 24 of the California Code has been the national
model, helping the state avoid thousands of Megawatts of new generation
capacity. Despite this impressive track record in California, many
states have inadequate state building codes or none at all. Section 128
of the 2005 Energy Policy Act authorizes $25 million per year for
FY2006-FY2010 ($125 million total) for states that have adopted, and
are implementing, both residential and commercial building energy-
efficiency codes that meet or exceed specific standards. For states
where there is no statewide code, the money will be allocated to local
governments that have implemented codes that meet the above standards.
Unfortunately, the funding authorized in the 2005 EPACT for state
building codes was never appropriated by Congress and therefore this
important incentive for adoption of state building codes has not been
implemented. Congress should appropriate the funds authorized in the
2005 EPACT.
Appliance Efficiency Standards
One of America's least-heralded energy success stories involves
federal appliance efficiency standards. In the last 15 years, Congress
and the Department of Energy have set new standards for dozens of
products. Refrigerators sold since 2001 in the U.S. use just one-third
the energy of comparable models sold in 1980. Home air conditioners are
nearly twice as efficient as those sold at the start of the Reagan
administration.
Standards in place today will save American families and businesses
about $200 billion cumulatively by 2020, cutting electricity demand and
carbon emissions substantially. The 16 products in the Energy Policy
Act of 2005 will save another $50 billion, and will cut carbon
emissions by another 16 million tons in 2020.
Unfortunately, DOE has issued only two new appliance efficiency
standards during the tenure of the current Administration. In the
settlement of recent litigation brought by states and environmental
groups, DOE agreed to issue 22 overdue standards in the next four
years. Congress should ensure that DOE has the funds to conduct the
necessary analysis, that the Department stays on schedule, and that it
adopts rigorous final standards.
Section 124 of EPACT 2005 authorizes a new program to encourage
deployment of high efficiency appliances, based on a successful New
York program. The program, however, has not been funded. Congress
should appropriate the authorized funds.
Federal RD&D Funding
Research and development is essential to supplying the ``technology
pipeline'' we need to provide this century's clean energy solutions.
Unfortunately, R&D on energy efficiency, as well as other energy
technologies, has been falling. The Bush Administration's 2008 request
for efficiency R&D is 18% below the FY 2006 levels, and more than a
third lower than the 2002 budget. Total federal spending remains far
below the peak of investment that occurred in the 1970s. And the
private sector has not yet picked up the slack; efficiency funding in
the electricity and gas industries has fallen even faster than federal
investment. Some states, like California, Iowa, Wisconsin, and New
York, are trying to pick up the slack, but their work is no substitute
for federal support. Congress should ensure that adequate funds are
appropriated in Fiscal Year 2008 and beyond to advance critical clean
energy R&D.
Beyond R&D there are a number of deployment-oriented programs that
Congress authorized in EPACT 2005 but has either not funded or has
provided insufficient funds. These cut across many areas including
buildings, appliances, energy codes, state energy programs, low income
programs, public information and education, public buildings, and pilot
projects. Also, the loan guarantee program authorized by Congress in
EPACT 2005, which could be a significant help in energy efficiency
projects, has yet to back any loans. All of these deployment programs
help ensure that the technologies developed in the national
laboratories or nurtured by federal R&D funding, actually get to the
marketplace.
conclusion
Mr. Chairman and members of the Committee I am confident that a
concerted policy push by the federal government, as outlined above, can
greatly increase private sector investment in energy efficiency,
resulting in many benefits for the nation. I look forward to working
with the Senate to develop, enact and implement legislation that will
stimulate this much needed investment.
The Chairman. Thank you very much. Elon, go right ahead.
STATEMENT OF ELON MUSK, CHAIRMAN, TESLA MOTORS,
EL SEGUNDO, CA
Mr. Musk. Thank you, Mr. Chairman, members of the
committee. The efforts of this committee really properly
reflect our country's renewed emphasis on global climate change
and on dependence of oil from nations that don't always have
our best interest in mind.
I credit the committee with recognizing in the theme of
today's hearing that the fundamental technologies required to
address those challenges already exist in our national labs,
universities, and private sectors at the base level.
The Tesla electric car is, I think, a clear example of
technology that's here today that needs to be commercialized to
the mass market. Let me talk a bit about Tesla's initial
product, because this is a very good example that a lot of
people are probably not aware of, of a working electric
vehicle.
Tesla's initial product is called the Roadster. It's a high
performance electric sports car, and as our unveiling of the
Tesla Roadster has demonstrated, reports of the death of the
electric car are greatly exaggerated. Moreover, the Roadster
defies the conventions associated with electric vehicles,
particularly with respect to performance.
My apologies for the brief commercial, but I think it's
important to understand the key facts in order to appreciate
what this car can do. It does 0 to 60 mph in 3.9 seconds. It
has a 250-mile range, and that's an EPA highway range, that's
not a figure we came up with by ourselves. It has a 135 mile-
per-gallon equivalent, again calculated by the EPA. It costs $3
for a full charge, so less than a gallon of gas, of premium gas
in California, about a penny a mile effectively. It's fully DOT
compliant, crash tested, with air bags, crash structures, etc.
and it has a price of $92,000.
So the Roadster is designed to beat a regular gasoline car,
like a Ferrari or a Porsche in a head-to-head competition, but
it has more than twice the energy efficiency of a Prius, the
fully calculated energy efficiency of a Prius. So, in other
words, it's a great car, without significant compromise.
Now some may question whether this really does any good for
the world. Are we really in the need of another high-
performance sports car? Will it really make a difference to
global carbon emissions and our oil dependence? Well, the
answers are no, and not much, however that's not the point.
Almost any new technology initially has a high unit cost
before it can be optimized, and this is no less true for
electric cars. The strategy of Tesla is to enter at the high
end of the market where customers are prepared to pay a
premium, and then drive down market as fast as possible to
higher unit volume and lower prices with each successive model.
We've seen this in, really, many industries. When cell
phones first came out they were very expensive and then over
time that technology cost got driven down. The same thing with
laptops. Even things as mundane as airline tickets used to be
very expensive, and now you can buy a round-trip ticket from
L.A. to London for $400.
So, I should say Tesla's second model will be a large four-
door family car, starting at $50,000 and the model that follows
that will be an even more affordable family car, hopefully in
the region of $30 to $35,000, again with similar statistics
approaching a 250-mile range and that sort of thing.
In keeping with a prospering technology company, all free
cash-flow is plowed back into R&D. We don't issue dividends;
the management team doesn't get big bonuses, or any of that
sort of thing. When someone buys a Roadster sports car they're
actually helping to pay for development of a low-cost family
car.
So the question becomes what public policy initiatives
would be effective in accelerating the development of companies
like Tesla Motors? What programs would inspire other companies
to enter the arena? I believe that strategy boils down to three
elements.
The most important area to which I would direct the
committee's attention is the challenge of financing the mass
market commercialization of new innovations and alternative
technology. How do we really bring this to the American people,
to the average consumer?
While the scale of various forms of equity investment in
green technology has grown significantly in recent years, these
sources of capital are expensive and volatile. Oil prices
suddenly decline for a year and investment dries up, so what we
really need is some form of debt financing that could be a very
powerful catalyst for companies contemplating large scale
production.
In the absence of government loan guarantees, or some other
sources of credit surety, the cost of such debt is prohibitive.
But a part of energy's loan guarantee program would, properly
conceived and executed, provide an ideal vehicle for early- to
mid-stage innovators to access necessary production capital at
a reasonable rate of interest.
The delay of the loan guarantee program means that the
tools for executing these programs are not yet in place at the
Federal level. Our government has a number of departments and
agencies, ranging from the Small Business Administration to the
Department of Agriculture to Fannie Mae, that regularly engage
in lending and other credit-related activities. I think we all
agree that those do a very good job and serve an important
purpose. To address America's pressing need for affordable,
clean energy solutions, I urge you to provide maximum support
for the DOE loan guarantee program.
As another means of accelerating innovation, I would
counsel the committee to explore the use of competitions such
as the X Prize. This is a no-lose proposition for the American
taxpayer. Unlike cost-plus contracting where failure is often
perversely rewarded with additional money, failure to win a
prize costs nothing.
Offering prizes of meaningful size for achievements in
alternative energy could pay substantial dividends. We've seen
this be very successful in the Ansari X Prize, a prize for
suborbital space transportation. It was also very effective in
aviation with the Orteig Prize, which was won by Charles
Lindbergh for crossing the Atlantic non-stop in a plane. It was
very effective in figuring out how to determine longitude, the
prize for ocean navigation.
In closing, I would direct the committee's attention to the
need to incentivize consumer acceptance of alternate energy
technologies. The rate of growth of these technologies is
reliant in large part upon how soon they become affordable;
incentives such as income tax credits for the purchases of new
technologies of proven devices would spur the adoption of
hybrid vehicles and solar installations.
I urge the committee to support the current effort to
replace the recently expired electric vehicle tax credit with a
meaningful tax credit that will catalyze the market for
electric vehicles.
A tax credit is particularly necessary in the case of
electric vehicles, because pricing, the normal economic
mechanism that causes a shift in use, is broken in the case of
oil consumption. I am not, myself, someone who's generally a
big fan of tax credits, but I think in cases where the normal
economic pricing mechanisms break down, as is the case here, I
think we do need a tax credit. The price of gasoline would
actually be far higher than what we see at the pump if it
reflected the true cost of climate change and our Nation's
vulnerability to the whims of oil exporting nations. Thank you.
[The prepared statement of Mr. Musk follows:]
Prepared Statement of Elon Musk, Chairman, Tesla Motors, El Segundo, CA
Mr. Chairman and Members of the Committee, thank you for inviting
me to testify today on the subject of advancing the commercialization
of advanced energy technologies. The efforts of this Committee properly
reflect our country's renewed emphasis on addressing global climate
change and dependence on oil from nations that do not always have our
best interests in mind.
I credit the Committee with recognizing in the theme of today's
hearing that the fundamental technologies required to address those
challenges already exist in our national labs, universities and private
sector. The Tesla electric car is stark evidence that the inventions
necessary to develop viable alternatives to oil based automobiles are
in place.
Tesla's initial product is a high-performance electric sports car
called the Roadster, but the intent is to build electric cars of all
kinds, including low-cost family vehicles. As our unveiling of the
Tesla Roadster has demonstrated, reports of the death of the electric
car have been greatly exaggerated. Moreover, the Roadster defies all
conventions associated with environmentally friendly cars, particularly
those of a purely electric nature. My apologies for the brief
commercial, but to understand what is possible, I must present the key
facts of the vehicle:
0 to 60 mph in 3.9 seconds,
250 mile EPA highway range,
135 mpg equivalent, per the conversion rate used by the EPA,
$3 for a full charge,
Fully DOT-compliant: crash tested, with airbags, crash
structures, etc.,
$92,000 price.
The Tesla Roadster is designed to beat a gasoline sports car like a
Porsche or a Ferrari in a head-to-head showdown, but has more than
twice the energy efficiency of a Prius. In other words, it is a great
sports car without significant compromises. Now, some may question
whether this really does any good for the world. Are we really in need
of another high-performance sports car? Will it actually make a
difference to global carbon emissions and our oil dependence?
Well, the answers are no and not much. However, that misses the
point. Almost any new technology initially has high unit cost before it
can be optimized, and this is no less true for electric cars. The
strategy of Tesla is to enter at the high end of the market, where
customers are prepared to pay a premium, and then drive down market as
fast as possible to higher unit volume and lower prices with each
successive model.
Tesla's second model will be a large four door family car starting
at $50,000 and the third model will be a smaller, more affordable four
door. In keeping with a fast-growing technology company, all free cash
flow is plowed back into R&D to drive down the costs and bring the
follow-on products to market as quickly as possible. When someone buys
the Roadster sports car, they are actually helping pay for development
of the low cost family car.
So the question becomes what public policy initiatives would be
effective in accelerating the development of companies like Tesla
Motors and what programs would inspire other actors to enter the arena.
I believe that the strategy boils down to three simple elements: lower
the cost of production capital, accelerate innovation and catalyze
consumer acceptance.
The most important area to which I would direct the Committee's
attention is the challenge of financing the mass market
commercialization of new innovations in alternative technology.
Specifically, how can companies like Tesla Motors accelerate the
substantial investments in manufacturing and technology optimization
that are necessary to bring electric vehicles to the average consumer?
While the scale of various forms of equity investment in green
technology has grown significantly in recent years, these sources of
capital are expensive and volatile.
Debt financing would be a powerful catalyst for companies
contemplating large scale production. However, in the absence of
government loan guarantees or other sources of credit surety, the cost
of such debt is prohibitive. The Department of Energy's Loan Guarantee
Program would, properly conceived and executed, provide an ideal
vehicle for early to mid stage innovators to access the necessary
production capital at a reasonable rate of interest.
The delay of the Loan Guarantee Program means that the tools for
executing these programs are not yet in place at the federal level. Our
government has a number of departments and agencies, ranging from the
Small Business Administration to the Department of Agriculture to
Fannie Mae, that regularly engage in lending and other credit related
activities. To address America's pressing need for affordable clean
energy solutions, I urge you to provide maximum support for the DOE
Loan Guarantee Program.
As another means of accelerating innovation, I would counsel the
Committee to explore the use of competitions such as the X Prize. This
is a no lose proposition for the American taxpayer. Unlike cost plus
contracting, where failure is often perversely rewarded with more
money, failure to win a prize costs nothing.
Offering prizes of meaningful size for achievements in alternative
energy could pay substantial dividends. We are beginning to see how
powerful this can be by observing the success of the Ansari X Prize, a
prize for suborbital human transportation. It was a very effective use
of money, as far more than the $10 million prize was spent by the
dozens of teams that competed to win. At least as important, however,
is the spirit and vigor it has injected into the space industry and the
public at large.
Beyond space, as the Committee is no doubt aware, history is
replete with examples of prizes spurring great achievements, such as
the Orteig Prize, won by Charles Lindbergh for crossing the Atlantic
nonstop by plane, and the Longitude prize for ocean navigation.
In closing, I would direct the Committee's attention to the need to
incent consumer acceptance of the alternative energy technologies that
are currently emerging. The rate of growth of these technologies is
reliant in large part upon the degree to which these technologies
become affordable.
Incentives such as income tax credits for the purchase of new
technologies are proven devices for spurring the adoption of hybrid
vehicles and solar installations. I urge the Members of the Committee
and the Senate at large to support the current effort to replace the
recently expired electric vehicle tax credit with a meaningful tax
credit that will catalyze the market for electric vehicles.
A tax credit is particularly necessary in the case of electric
vehicles, because pricing, the normal economic mechanism that causes a
shift in use, is broken in the case of oil consumption. The price of
gasoline would actually be far higher than what you see at the pump if
it reflected the true cost of climate change and our nation's
vulnerability to the whims of oil exporting nations.
Thank you for your time.
The Chairman. Thank you very much.
Mr. Peters, please go right ahead.
STATEMENT OF JEROME P. PETERS, JR., SENIOR VICE PRESIDENT, TD
BANKNORTH N.A., WESTPORT, CT
Mr. Peters. Thank you. I would like to thank the chairman
and the members of the committee for inviting me here today to
address the committee on matters which are vital to the
development of policy that can provide this Nation with
sustainable energy alternatives.
In order to properly address the issues surrounding the
impediments to the deployment of advanced energy technologies,
we must first identify the goals that we, as a Nation, expect
to realize from these technologies. The commercial promise of
any energy technology must be its ability to deliver cost
effective benefits to the consumer without putting a
significant burden on the Nation's taxpayers while lessening
our dependence on foreign sources of energy.
Historically, governments have played a significant role in
supporting the development of new energy technologies through
the critical period between demonstration stage and the scale
up commercialization. Over the last 25 years, U.S. policy
intended to support and promote the development of new energy
technologies has largely involved the availability of various
tax subsidies to the owners of assets employing those
technologies.
While this strategy has contributed to the deployment of a
significant number of mature technologies by subsidizing energy
production costs, tax subsidies alone have done little to
promote the early deployment of emerging energy technologies.
Since the passage of PURPA in 1978, Federal energy policy has
supported the notion that renewable and efficient energy
production must be cost-competitive with conventional sources.
Since this Nation generates the vast majority of its energy
from fossil fuel sources, continued cost competitiveness and
thus, sustainability of advanced energy projects has been
directly correlated to the volatility of fossil fuel prices.
History has demonstrated that energy projects which utilize
advanced energy technology cost more than conventional energy
projects; in many cases, 10 times as much. While efficiency
gains and lowered or eliminated fuel costs offset a significant
portion of the capital cost disadvantage inherent to these
projects, the availability of tax subsidies alone do not permit
such projects to be economically viable in certain low fossil
fuel price environments.
The capital cost disadvantage combined with fuel price
volatility present a risk environment that only a limited
number of sophisticated investors are willing to enter. Project
equity investors are generally bigger risk-takers and have
yield requirements to match. Because of this, advanced energy
projects funded with 100 percent equity will not be economic.
Risk adverse lenders with significantly lower yield
requirements can provide significant leverage. Debt lenders
however, have little appetite for either energy price
volatility or technology risk. While fuel price volatility can
be mitigated through the execution of price-hedging strategies,
technology risks cannot.
The Energy Policy Act of 2005 goes a long way in
establishing a framework for the mitigation of technology risk
for debt investors in advanced energy technologies; however,
the subsequent issuance of DOE's August 2006 loan guidelines
have dampened most, if not all, lender interest in
participating in this program. While title XVII of the Act
provides for loan guarantees up to 80 percent of total project
cost, the DOE guidelines undercut that protection in two
significant ways.
First, they limit the guarantee to 80 percent of the loan
amount, shifting 20 percent of the technology risk to the
lender, and seem to prohibit the substitution of additional
equity to make up for the un-guaranteed portion of the debt.
The addition of this technology risk component will
significantly reduce the pool of lenders willing to participate
in the program and will result in higher rates to the project
developers.
Even more damaging to lender interests is the fact that the
DOE guidelines require that any commercial debt brought into
the project must be subordinate to the government guaranteed
debt. The Superior Rights Provision of section 107(g) seems to
prohibit the recovery of any unguaranteed portion of any
commercial loan until the DOE's claim is paid in full.
Without collateral protection, the loan default and
guaranteed call would most certainly result in a loan loss
equal to 20 percent of that loan amount. While many lenders are
willing to assume some level of loan loss risk, none, that I am
aware of, are willing to take the first loss position in assets
in which the collateral is pledged to the guarantor.
To summarize, I do believe that properly structured Federal
loan guarantees can greatly assist in the accelerated
deployment of advanced energy technologies. The USDA's business
and industry guaranteed loan program comes to mind as a
properly structured Federal guaranteed program that has
contributed to the successful deployment of a large amount of
current ethanol production.
There also may be other mechanisms, in addition to loan
guarantees, that the Federal Government can facilitate in
cooperation with technology providers and the investment
community, that can overcome the current impediments to advance
energy technology deployment.
Many of these mechanisms may well be technology-specific;
for example, high capital costs may need to be overcome in
certain technologies, such as cellulosic ethanol production and
integrated coal gasification electric production, while
uncertainty over long-term component light may be the impeding
factor since the deployment of technologies such as fuel cells
or concentrated photovoltaics.
I believe that a focused dialog among the various
stakeholders, designed to create technology-specific,
federally-backed enhancement programs would result in an
accelerated deployment of advance energy technologies.
Properly structured, these enhancement programs need not
put an undue burden on the Federal taxpayers or on the Nation's
energy consumers. I, for one, would be happy to participate in
these discussions. Thank you very much.
[The prepared statement of Mr. Peters follows:]
Prepared Statement of Jerome P. Peters, Jr., Senior Vice President, TD
Banknorth N.A., Westport, CT
I would like to thank the Chairman and the members of the Committee
for inviting me here today to address the Committee on matters which
are vital to the development of policy that can provide this nation
with sustainable energy alternatives. In order to properly address the
issues surrounding the impediments to the deployment of advanced energy
technologies, we must first identify the goals that we, as a nation,
expect to realize from these technologies. The commercial promise of
any advanced energy technology must be its ability to deliver cost
effective benefits to the consumer without putting a significant burden
on the nation's taxpayers while lessening our dependence on foreign
sources of energy.
Historically governments have played a significant role in
supporting the development of new energy technologies through the
critical period between the demonstration stage and the scale up to
commercialization stage. Over the last 25 years, U.S. policy intended
to support and promote the development of new energy technologies has
largely involved the availability of various tax subsidies to the
owners of assets employing these technologies. While this strategy has
contributed to the deployment of a significant number of mature
technologies by subsidizing energy production costs, tax subsidies
alone have done little to promote the early deployment of emerging
energy technologies.
Since the passage of the PURPA in 1978, Federal energy policy has
supported the notion that renewable and efficient energy production
must be cost competitive with conventional sources. Since this nation
generates the vast majority of its energy from fossil fuel sources,
continued cost competitiveness, and thus sustainability, of advanced
energy projects, has been directly correlated to the volatility of
fossil fuel prices.
History has demonstrated that energy projects which utilize
advanced energy technology cost more than conventional energy projects,
in many cases 10x as much. While efficiency gains and lowered or
eliminated fuel costs may offset a significant portion of the capital
cost disadvantage inherent to these projects, the available Federal tax
subsidies often do not permit such projects to be economically viable
in certain low fossil fuel price environments.
The capital cost disadvantage combined with fuel price volatility,
present a risk environment that only a limited number of sophisticated
investors are willing to enter. Project equity investors are generally
bigger risk takers and have yield requirements to match. Because of
this, advanced energy projects funded with 100% equity will not be
economic. Risk adverse debt lenders, with significantly lower yield
requirements, can provide significant leverage. Debt lenders, however,
have little appetite for either energy price volatility or technology
risk. While fuel price volatility can be mitigated through the
execution of price hedging strategies, technology risk cannot.
EPACT 2005 goes a long way in establishing a framework for the
mitigation of technology risk for debt investors in advanced energy
technologies, however, the subsequent issuance of DOE's August 2006
Loan Guarantee Guidelines has dampened most, if not all, lender
interest in participating in this program. Title XVII provides for loan
guarantees up to 80% of total Project Cost. The DOE Guidelines undercut
that protection in two significant ways. First, they limit the
guarantee to 80% of the loan amount shifting 20% of the technology risk
to the lender and seem to prohibit the substitution of additional
equity to make up for the un-guaranteed portion of the debt. The
addition of this technology risk component will significantly reduce
the pool of lenders willing to participate in the program and will
result in higher rates to the project developers. Even more damaging to
lender interests, is the fact that the DOE Guidelines require that any
commercial debt brought into a project must be subordinate to the
government guaranteed debt.
The ``superior rights'' provisions of Section 107(g) seem to
prohibit the recovery of any un-guaranteed portion of any commercial
loan until the DOE's claim is paid in full. Without ``collateral
protection'', a loan default and guarantee call would most certainly
result in a loan loss equal to 20% of the loan amount. While many
lenders are willing to assume some level of loan loss risk, none, that
I am aware of, are willing to take a first loss position in assets in
which the collateral is pledged to the guarantor.
To summarize, I do believe that properly structured Federal Loan
Guarantees can greatly assist in the accelerated deployment of advanced
energy technologies. The USDA Business and Industry Guaranteed Loan
Program comes to mind as properly structured Federal guarantee program
that has contributed to the successful deployment of a large amount of
current ethanol production.
There also may be other mechanisms, in addition to loan guarantees,
that the Federal government can facilitate in cooperation with
technology providers and the investment community that can overcome the
current impediments to advanced energy technology deployment. Many of
these mechanisms may well be technology specific. For example, high
capital costs may need to be overcome in certain technologies such as
cellulosic ethanol production and integrated coal gasification electric
production, while uncertainty over long term component life may be the
impeding factor to the deployment of technologies such as fuel cells or
concentrated photo-voltaics. I believe that a focused dialogue among
the various stake holders, designed to create technology specific
federally backed enhancement programs, would result in an accelerated
deployment of advanced energy technologies. Properly structured, these
enhancement programs need not put an undue burden on federal taxpayers
or on the nation's energy consumers. I would be happy to participate in
these discussions. Thank you.
The Chairman. Thank you very much.
Mr. Denniston.
STATEMENT OF JOHN DENNISTON, PARTNER, KLEINER PERKINS CAUFIELD
& BYERS, MENLO PARK, CA
Mr. Denniston. Good morning, Chairman Bingaman, Ranking
Member Domenici, members of the committee.
My name is John Denniston. I'm a partner with the venture
capital firm, Kleiner Perkins Caufield & Byers in Silicon
Valley. It's my honor to be before the committee this morning.
So, Silicon Valley has long been the fount of innovation
and Kleiner Perkins has been there for a long time. It is one
of America's oldest venture capital firms. We're a founder of
TechNet, a network of technology entrepreneurs and CEO's and a
member of the National Venture Capital Association. My
testimony this morning reflects my own views.
Together with so much of the rest of America, venture
capital professionals, both Republicans and Democrats, are
concerned about the risks to our Nation's welfare stemming from
our energy dilemma but we are also in a unique position to see
how this enormous challenge presents new opportunities to build
our economy, creating jobs and prosperity. Several years ago at
Kleiner Perkins, we turned our attention to a new industry
which we dubbed green-tech, which encompasses clean power,
transportation and water.
You've asked me this morning to specifically address the
current market constraints to greater green-tech investment and
what kinds of policies might help unleash those sorts of
technologies. Before I speak to that, I'd like to make one
additional comment about how I and many members in the venture
capital community perceive the energy challenges and
opportunities in front of us.
I believe today that there's an unparalleled consensus in
America on the three challenges that we face regarding energy:
climate change, dependence on foreign oil, and the risk of
losing our global competitive edge. But I am optimistic. The
green-tech sector, in fact, is growing so rapidly it brings to
mind for me a tenant of the information technology industry
known as Moore's Law, and that's the idea that semiconductor
performance will double every 24 months with no increase in
price.
It's a remarkable phenomenon and this phenomenon almost
single-handedly explains how we have been able to transition in
a very short period of time from the era of huge mainframe
centralized computers that only the largest corporations in
America could afford, to today, all of us can see the headlines
in the news on our cell phones, a remarkable transition.
What I'm here to tell you this morning, Senators, is that a
similar wave of innovation and accelerating performance is
taking place right now in the clean energy field and could lead
to solutions none of us can even imagine, faster than most can
imagine. So your question is: what's holding back green
technologies?
In my written remarks I describe several different sectors
of our energy system and the specific constraints affecting
green-tech investment in each, but since our time this morning
is short, let me speak briefly about one of them: electricity
generation.
Here's the biggest barrier I see in the generation market--
green power costs more, relative to older, more established
power sources. Why? Primarily because it's so new. Being new,
it's at the very early stages of its inevitable cost reduction
curve, and today it's being produced in such low volumes that
the industry has yet to benefit from economies of scale.
On top of this, government policy today has provided
powerful economic aid to fossil fuel and nuclear energy. Direct
benefits over a period of decades include subsidies, tax
advantages and R&D funds. Society, meanwhile, has also
subsidized fossil fuel sources by bearing the costs of
pollution including greenhouse gases.
In view of the urgent threats we face for our environment
and to national security, public policy could and should at
least level the playing field between the old incumbent sources
and the new sources of energy. Indeed I would submit it should
go one step further by driving the adoption of green
technologies.
Thus, here are some recommendations for how Federal policy
might help unleash green-tech power. You will see others in my
written remarks.
First: adopt a market based national carbon cap-and-trade
system which, if it sets an appropriate price on carbon
emissions, will drive the adoption of green technologies.
Second: create a renewable portfolio standard that sets
minimum levels of clean, renewable energy sources.
Third: strengthen Federal clean energy incentives,
including tax credits, subsidies and yes, loan guarantees.
Fourth: ramp up research funding so it is commiserate with
the scope of the challenges we face.
Fifth: make energy efficiency improvements a high national
priority.
Sixth: lead by example, by making the Federal Government
the No. 1 energy consumer and also the single largest consumer
of green technologies.
Finally, seventh: follow through on President Bush's call
for a 20 percent reduction in gasoline use over the next 10
years by expanding the renewable fuel standard and
restructuring existing bio-fuel subsidies.
Once again I would like to thank the committee for inviting
me here this morning. It has been a privilege. I believe we all
have an opportunity to be part of the solution to our country's
energy crises.
[The prepared statement of Mr. Denniston follows:]
Prepared Statement of John Denniston, Partner, Kleiner Perkins Caufield
& Byers, Menlo Park, CA
introduction
Good morning, Chairman Bingaman, Ranking Member Domenici and
Members of the Committee. My name is John Denniston and I am a Partner
at the venture capital firm Kleiner Perkins Caufield & Byers. It's my
privilege to be here today and to have the opportunity to share my
views on moving advanced energy technologies to the marketplace.
Ensuring a sound energy future is one of the most urgent policy
challenges facing our nation and indeed the global community, and I
sincerely appreciate this Committee's leadership in this arena.
Along with the rest of America, venture capital and technology
industry professionals--Republicans and Democrats alike--are deeply
concerned about the risks to our nation's welfare posed by our energy
dilemma. Specifically, this includes the looming climate crisis, our
oil addiction, and the very real danger of losing our global
competitive edge. Yet our industry is also in a unique position to
recognize that each challenge presents dramatic new opportunities to
build our economy, creating jobs and prosperity.
Kleiner Perkins is a member of the National Venture Capital
Association and a founding member of TechNet, a network of 200 CEOs of
the nation's leading technology companies. I serve on TechNet's Green
Technologies Task Force, which next week will release a detailed set of
policy recommendations to drive the development and adoption of
technologies we believe can help solve some of the world's most
pressing energy and environmental problems. We refer to this emerging
industry as ``greentech,'' and for us, it includes clean power,
transportation and water. We look forward to sharing that report with
the Committee. My testimony today reflects my own views.
Based in California's Silicon Valley, and founded in 1972, Kleiner
Perkins is one of America's oldest venture capital firms. We have
funded more than 500 start-up companies over the years, backing
entrepreneurs who have introduced innovative advances in such vital
growth industries as information technology, medical products and
services, and telecommunications. More than 170 of our companies have
gone public, including Amazon.com, AOL, Compaq Computer, Electronic
Arts, Genentech, Google, IDEC Pharmaceuticals, Intuit, Juniper
Networks, Millenium Pharmaceuticals, Netscape, Sun Microsystems,
Symantec, and VeriSign. Today, our portfolio companies collectively
employ more than 275,000 workers, generate $90 billion in annual
revenue, and contribute more than $400 billion of market capitalization
to our public equity markets.
Before joining Kleiner Perkins, I was a Managing Director at
Salomon Smith Barney, where I served as the head of Technology
Investment Banking for the Western United States. Prior to that, I was
a Partner at the law firm Brobeck, Phleger & Harrison, where I was the
head of its Venture Capital Practice Group.
In the 1990's, I served on the Board of Directors of a California-
based fuel cell start-up firm. That experience opened my eyes to both
the daunting energy challenges our country faces and the myriad
opportunities we have to solve our problems through technology
innovation.
You've asked me specifically to address the current market
constraints to greater greentech investment, and what kinds of policies
might accelerate market adoption of alternative energy solutions.
Before I speak to that, I'd like to take just a few minutes to offer an
overview of how I and many of my venture capital colleagues perceive
the energy challenges and opportunities facing our country today.
the challenges
I believe there is an unprecedented degree of consensus in America
today as to our three main energy challenges: the climate crisis, our
dependence on oil, and the risk of losing our global competitive edge
by failing to champion new technologies that are becoming a huge new
source of economic growth, jobs and prosperity.
The Climate Crisis
Just last month, the most recent report of the more than 2,000
scientist members of the Intergovernmental Panel on Climate Change
warned us, once again, that the planet is warming, glaciers are melting
and sea levels are rising. The panel concluded, with ninety percent
certainty, that most of this warming is due to higher greenhouse gas
concentrations in the atmosphere, most of which result from human
fossil fuel emissions.
Many scientists predict we have only a short period of time to make
dramatic cuts in our greenhouse gas emissions or risk irrevocably
changing the climate. In fact, the IPCC report concludes temperatures
and sea levels would continue to rise even if we were somehow able to
immediately stabilize atmospheric concentrations. To date, we have
failed to heed such warnings.
I want to note that in the venture-capital profession, we never
make commitments without thorough research and consideration.
Professionally and personally, I'm convinced, on the basis of
exhaustive scientific evidence, we need to take bold action to solve
our climate crisis. But wherever you stand on this issue, it's clear a
lot of creative momentum is building in this country to seek solutions
to global warming, including new collaboration between energy
companies, civic groups and scientists, such as the United States
Climate Action Partnership (USCAP). This trend is promising not only
for our environment, but for our national security and our economy.
Energy Security
As for our energy security dilemma, this Committee is well aware
the U.S. imports about 30% of its overall energy needs, including
approximately 60% of its oil. Rapid growth in worldwide energy demand
has stretched supplies, tripling the price of both crude oil and
natural gas. And there is a significant risk this trend will continue,
as world population and energy demand increase.
Global Competitiveness
Finally, our future prosperity is at risk, and here I speak from
very personal experience. Just in the past year, as I've traveled on
business to China and Europe, I've witnessed how the rest of the world
is striving, and often succeeding, to emulate the technology innovation
that has been a hallmark of the U.S. economy and perhaps the single
most important driver of our enviable standard of living. Increasingly,
entrepreneurs overseas enjoy advantages in the form of determined
government policies, including financial incentives and large
investments in research and education.
Credible economic studies suggest our technology industries are
responsible for roughly one-half of American GDP growth. Our country
would look quite a bit different today had we not, several decades ago,
become a global leader in biotechnology, computing, the Internet,
medical devices, semiconductors, software and telecommunications.
Today, as our global energy challenges become ever more pressing,
it's clear future economic growth throughout the world will depend to a
great degree on new technologies to help us preserve our environment.
Green energy technologies could very well become the economic engine of
the 21st Century. Given its potentially massive market size,
``greentech'' could be the most powerful economic force of our lives.
But will America again lead the way?
the opportunities
Kleiner Perkins has been investing in the greentech field for the
past seven years, backing more than 15 innovative companies in the
fields of biofuels, coal gasification, energy efficiency, energy
storage, fuel cells, solar energy, thermoelectrics and transportation.
In the process, we've witnessed how technological progress is already
revolutionizing our relationship with energy, solving problems that
only recently seemed all but intractable. Solar manufacturers are
innovating their way around silicon shortages, with next-generation
materials including pioneering thin-film technologies. The agriculture
industry is producing transportation fuels from plant matter--even from
microscopic algae--and is developing technologies so we can
economically convert non-edible plants to biofuels. And nanotechnology
breakthroughs are creating the promise of new ways to store energy,
which in turn could dramatically accelerate market adoption of solar
and wind power.
At Kleiner Perkins, four accelerating trends have encouraged us to
make greentech a core investment sector:
The promise of exponential growth in the energy technology
field. The rapid cost-reduction curve we are already witnessing
will become ever steeper over time, making emerging sources of
energy more and more competitive in the marketplace;
Rising prices for fossil fuels--oil and natural gas--are
making competing alternative energy sources more attractive;
World class talent, with both missionary and monetary
motives, is racing into the greentech sector;
Americans are growing much more aware of and concerned by
our energy crises, a development we believe will lend support
to more sweeping policy solutions.
Moore's Law & The Pace of Technological Progress
In Silicon Valley, we often refer to a principle known as Moore's
Law, which I'd like to explain briefly here, as it's fortunately quite
relevant to what we see happening in the energy field. Intel co-founder
Gordon Moore has been credited with predicting, back in the 1960s, that
semiconductor performance would double every 24 months. That prediction
was spot on, and helps explain the information technology revolution of
the past three decades. Better, faster, and cheaper silicon chips led
our transition from an era--remember, it was just 25 years ago!--of
big, mainframe computers used principally by university researchers, to
our capacity today to read the morning's headlines on our cell phones.
Today, we can already see a Moore's Law dynamic operating in the
energy sector, giving us confidence the rate of greentech performance
improvement and cost reduction will offer new energy solutions we can't
even imagine right now. At Kleiner Perkins, we are excited by the
technical breakthroughs we have seen in a host of scientific
disciplines relating to the energy sectors, including material science,
physics, electrical engineering, synthetic chemistry, and even
biotechnology. We are particularly encouraged by innovations resulting
from combining breakthroughs in several of these separate disciplines
into single products.
Witness some of these examples of the greentech equivalent of
Moore's Law:
The price of wind power has plummeted by an order of
magnitude since 1980, to the point where, in some regions, it
is now very close to being able to compete with coal and gas
power;
Solar power costs have fallen by more than 60% over the past
fifteen years;
Ethanol production efficiencies per gallon have improved by
more than 45% since 1982. Back then, state-of-the-art
technologies produced a gallon of ethanol using 55,000 Btus
with a capital cost of $2.25 per gallon of annual production
capacity. Today, we can produce that same gallon of ethanol
with nearly half the energy previously required, and at nearly
half the cost.
These and other improvements have occurred over a period of time in
which there was relatively little government policy or entrepreneurial
focus on these sectors. Imagine what American ingenuity could
accomplish in the future as more and more of our best and brightest
devote their efforts to the greentech field.
But now I'll move on to speak specifically about my perspective on
how government policy might encourage this emerging industry.
barriers to greater investment and market adoption: the five faces of
the energy market
The energy market is not monolithic. In fact, it comprises several
distinct markets, each massive in scale and each with its own unique
challenges and opportunities. These include energy generation, energy
storage, transportation fuels, transportation, and energy efficiency.
Energy Generation
For the energy generation market, the high cost of new energy
sources, relative to the incumbent competition, is the most serious
barrier to greater capital investment and more rapid adoption of clean
power. Why does green power cost more? Primarily because it's so new.
Being new, it is still at the very early stages of its cost-reduction
curve, and is presently being produced in such low volumes that the
industry has yet to benefit from economies of scale. We can be certain
American scientists and engineers will continually innovate to improve
the performance and reduce the costs of these technologies going
forward. But the speed at which they do so will depend to a large
degree on government policy that is as bold and innovative as they are.
There's another way older power sources benefit from their
longevity. Most coal-fired and natural-gas plants were constructed many
years ago, and are now fully amortized. That means those facilities'
owners no longer need to charge rate-payers for initial construction
costs. Clean-power companies, in contrast, still need to include
construction financing costs in their customer pricing, putting them at
a major disadvantage.
On top of this, government policy to date has provided powerful
advantages to fossil fuels and nuclear energy. In some cases, the
federal government itself has paid directly for electrical generation
facilities and transmission and distribution infrastructure. This
pattern of favorable public policy goes back many years, and it made
sense in its time. But times, as we all know, have changed.
Beyond government subsidies, the fossil fuel industry has long
benefited by escaping responsibility for the costs of the environmental
consequences of its emissions--instead, society has paid the price.
Clearly, traditional power sources would become much more expensive,
and alternative sources of energy more cost-competitive, if plant
owners had to take on the true costs of these emissions.
In the special case of nuclear power, the federal government has
for many decades assumed enormous research and development, operating,
waste disposal and containment costs, which if borne by nuclear plant
operators would dramatically change the industry economics. As an
example, private insurance companies are unwilling to insure nuclear
power plants, which leaves the federal government as the insurer by
default. The federal government has gone one step further with laws to
specifically relieve nuclear plant operators of liability in case of
accident. Further, the federal government has spent billions of dollars
on nuclear waste disposal, and will need to continue to do so far into
the future.
In view of the urgent threats we face to our environment and
national security, public policy could, and should, level the playing
field between old and emerging energy generation sources, and go
further by driving the adoption of green technologies. There are indeed
already several federal programs in place intended to encourage the
adoption of renewable energy. Yet the incentives and benefits they
provide pale in comparison to the advantages enjoyed by traditional
energy sources, and have been inadequate in scope to meaningfully
address the problems. In many cases, they are also of short duration,
leading to a lack of predictability.
Energy Storage
Technical difficulty and the relative scarcity of investment
opportunity are the two leading barriers to higher capital investment
in the energy-storage sector. Energy storage has historically been a
challenging technical field: essentially, scientists have to operate
within the performance limitations provided by the periodic table of
elements. Lead-acid batteries were first developed more than 150 years
ago, and are still widely used.
Lithium-ion batteries alone have offered a significant jump in the
amount of energy stored, yet still have safety and durability
limitations. Until recently, we have seen only modest improvement in
the performance characteristics of lithium-ion technology. It is
important to note lithium-ion research and development has been
dominated by Asian producers, leveraging off of their development of
cells for consumer electronic applications. The number of U.S.-based
electrochemistry experts is relatively small in comparison to U.S.-
based expertise in other greentech fields, as a result of which there
are not as many investment opportunities. Some of the investment
opportunities in the field today involve basic research, whose
particularly high risk makes it unattractive to most private investors.
Transportation Fuels
Private capital investment in the alternative fuels market
increased significantly through the first three quarters of 2006,
driven by excitement over ethanol's potential to address our oil
dependence. However, these capital flows declined drastically in the
fall of 2006, when in short order, crude oil prices plummeted from $78
per barrel to $49 per barrel, and corn prices skyrocketed from $2.50
per bushel to over $4 per bushel. The combination of higher feedstock
costs and lower ethanol costs squeezed the profitability of the ethanol
industry. As a result, the market capitalizations of public ethanol
companies dropped dramatically, and these events had a similar ripple
effect on private biofuels companies. I expect some of the publicly
announced biofuels plants will not be completed on schedule, and others
will not be completed at all.
In addition, gasoline has benefited from favorable public policy,
including direct and indirect subsidies going back many decades, as
well as from a free externality in the form of costly environmental
emissions which are not reflected in the price of gasoline at the pump.
The retail price of gasoline would increase meaningfully, and cleaner
alternative fuels would become much more competitive, if the United
States required gasoline to reflect the societal costs stemming from
emissions.
Transportation
The market success of hybrid electric vehicles has produced
heightened interest in high efficiency, low-cost vehicles. Most of the
development work is taking place within the labs of major automobile
companies. However, I expect several start-up automobile companies to
introduce innovative vehicles in the coming years. Many hope the
industry will be able eventually to produce commercially attractive
plug-in electric vehicles in large volumes, although battery technology
will need to improve considerably for that to become a reality, in my
view. A relatively small percentage of automobiles sold in the United
States today are flex fuel vehicles capable of being powered by
gasoline or high blend ethanol (``E85''), in part because very few gas
stations sell E85.
Energy Efficiency
In the case of buildings, we have today a range of available
technologies for building systems and equipment, including improved
lighting, windows, heating and cooling, and appliances. Collectively,
these hold the promise of significantly improving building energy
efficiency. Still other building-related innovations remain under
development, including solid-state lighting, electrochromic windows,
and solid-state refrigeration systems. However, the construction and
building industries are among the most fragmented in the United
States--no single company has the ability to drive efficiency into a
meaningful portion of the market. In addition, many owners of existing
buildings do not have the capital budgets to retrofit them to increase
energy efficiency, even if the investment to do so is quickly recouped
in the form of energy savings.
key policies to drive deployment
Federal policy can do a great deal to help advance clean technology
in all five of the energy markets. These are some of the policy
initiatives I urge Congress to implement:
1. A Market-Based National Carbon Cap and Trade System.--A
well-designed national cap-and-trade system could
simultaneously address all three of America's energy-related
crises: climate change, national security threats stemming from
energy dependence, and the danger of losing American
competitiveness. America had great success with such a system
in the 1990s, when it was used to curb sulfur-dioxide emissions
causing acid rain. The system would place a price on carbon,
today a costly externality of our energy production and use,
and reward companies for progress in adopting clean power. I
urge Congress, in planning such a system, to assure that all
credible green technology solutions have a shot at the market.
It is impossible at this moment to predict which clean energy
sources will have the most impressive Moore's Law-like
properties in the future, and ultimately the lowest production
costs. In addition, the cap and trade system should also
include transportation fuels, as roughly 25% of U.S.-generated
greenhouse gas emissions emanate from our transportation
system.
2. Renewable Portfolio Standard.--A cap-and-trade system is
no guarantee, by itself, of solving our carbon problem. Even if
adopted and signed into law, it may not require deep enough
reductions in carbon emissions to solve the problem, or it may
well encounter other problems in its implementation. A national
renewable portfolio standard would insure against such problems
by establishing minimum adoption levels of clean and renewable
energy sources.
3. Federal Incentives To Drive Clean Energy Development.--In
my view, the federal government should dramatically expand
financial incentives to drive the market adoption of green
energy sources, with mechanisms including tax credits,
subsidies, loan guarantees and other programs. Leading
scientists tell us we need to have a national program of the
urgency and scope of the Manhattan Project to stabilize our
climate. Considering the added motivations of our national
security threats and the U.S. competitiveness crisis, I believe
such urgency and ambition is more than warranted. In addition,
Congress should consider creating incentives for U.S. greentech
companies to manufacture their products in this country.
European and Asian countries offer incentives for U.S.-based
companies to establish manufacturing operations overseas, in
some cases including government payment of 40% of upfront
capital costs and 15 year tax holidays. Loan guarantees may be
an important part of this set of incentives, as long as they
are structured to be attractive to lenders and to be available
to both large and small projects.
4. Federal Research Funding.--Our urgent need to ramp up
government assistance to clean energy sources certainly also
applies to research and development monies. Total federal
research funding for renewable energy (excluding nuclear power)
and energy efficiency amounts to less than $2 billion per year.
Energy consumption and transportation account for roughly 15%
of U.S. gross domestic product, which is approximately the size
of the U.S. health care system. But research and development
funding for new and necessary technologies is not by any means
commensurate. By comparison, the NIH budget this year is around
$28 billion. To oversee our federal energy research funding, I
suggest Congress consider creating a new agency--you might call
it the National Institute of Energy--to consolidate and
rationalize federal energy research funding.
5. Energy Efficiency.--The United States can make a
significant dent in our energy challenges simply by making our
energy system more efficient. Congress should strengthen CAFE
standards, require energy efficiency standards for electronic
equipment and appliances, and work with states to create energy
efficiency standards for buildings. Congress should also
evaluate how to work with utilities so their profit potential
is driven as much by introducing energy efficiency as it is by
selling power.
6. Federal Procurement.--The Federal government is the single
largest U.S. energy consumer. As such, it can lead our energy
transition by becoming the single largest green-technology
user. Congress could establish a deadline for federal agencies
to meet minimum clean energy use requirements. In addition,
Congress could require all new federal vehicles to be hybrid
electric, electric or flex fuel vehicles.
7. Biofuels.--Congress could take several steps to strengthen
the rapidly emerging biofuels market. I recommend an increase
in the Renewable Fuels Standard, consistent with President
Bush's call to reduce gasoline consumption by 20 per cent over
the next ten years. Another contribution would be to
restructure the existing blender's credit so it is paid to
ethanol producers rather than gasoline distributors, provides a
credit level that is inversely related to the price of gasoline
so as to create a safety net for ethanol producers in the case
of a sudden drop in gasoline prices, and is made available to
all alternative fuels, not just ethanol and specific molecular
formulations of butanol. Finally, Congress should provide an
additional subsidy for producers of biofuels from non-edible,
and thus more sustainable, feedstocks; mandate flex fuel
vehicles and E85 pumps; and create a fast-track approval
process for energy crops.
8. Batteries.--Congress should define a program for the
objective analysis of rechargeable batteries, possibly using
one of the U.S. national labs. The battery industry has been
plagued by wild claims, most of which are compilations of one-
off ``best-of'' single values. The industry would benefit from
a standardized, scientific-based testing program.
government program structures
To my mind, two main structural issues significantly impede the
effectiveness of existing federal policies and programs in driving new
technologies.
First, to drive the necessary level of private sector investment in
new energy technologies, we need stable, long term and predictable
incentives. I believe these incentives should be in place for a minimum
of five years, and, ideally, longer. Existing tax credits, including
the Production Tax Credit and Investment Tax Credit, have experienced
lapses and short-term extensions. For example, the Investment Tax
Credit, created by the 2005 Energy Policy Act, was scheduled to expire
at the end of 2007 and was only recently extended through the end of
2008. Such uncertainty limits the capacity of incentives to support
projects with long lead times.
Second, federal policy should not attempt to pick winners and
losers. Federal tax incentive programs today frequently deter
innovation by specifying a limited set of eligible technologies. For
example, the Investment Tax Credit sets a cap on fuel cells that limits
the credit's value in driving fuel cell development. None of us can
predict which of these various technologies will have the lowest
production costs in the future. We need to open up incentive programs
to a wide range of promising technologies.
Once again, I want to thank the Committee for inviting me here
today. I believe we all have an opportunity to be part of the solution
to our country's energy crises. I look forward to today's hearing and
to learning about how we can work together to build a more secure
future.
The Chairman. Thank you very much.
Mr. Liebreich, we're very glad to have you here. Thanks for
coming.
STATEMENT OF MICHAEL LIEBREICH, CEO AND FOUNDER, NEW ENERGY
FINANCE LTD, LONDON, ENGLAND
Mr. Liebreich. Thank you very much, Mr. Chairman. Thank you
very much, Senator Domenici and the other Senators. I want to
say how honored I am to be the only overseas representative
here to give testimony today.
Just in case anybody's wondering why a Brit is here doing
this, I will let you know a little about New Energy Finance. We
are a research and information provider with about 50 people.
All we do is track renewable energy, biofuels, low carbon
technologies and the carbon markets. We cover all stages of
investment and we offer it globally, so we have offices in
London, Washington, Shanghai, Beijing, Delhi, Perth, Tel Aviv
and New York. So I hope to give a little bit of international
perspective on the flows of financing and perhaps some figures
to put in context the investment that is going on here today in
the United States.
I've prepared some written remarks which you should have in
front of you, and I'd like to refer to them as I go through.
But rather than go into every point in detail, I want to draw
your attention to some of the key points and some of the key
statistics and research on investment flows.
So I want to start by saying that at this point in time
there's no shortage of capital available for new energy
ventures and for new energy projects, and this is what I refer
to as the convenient truth. So if I direct your attention to
the chart, in Figure 1* on page 2 of the testimony, there's
investment overall globally in clean energy that has grown from
$27.6 billion in 2004 to $70.9 billion. It's more than doubled
over the past 2 years globally, and just to put that in
perspective, the total investment globally in energy is
somewhere in the order of $800 billion which means that around
9 percent of all energy investment currently today is already
going into clean energy.
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* Graphics have been retained in committee files.
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I won't go into the reasons for this rapid growth over the
last 2 years. Senator Bingaman, in his introduction, touched on
them and they've been much discussed, I think, already by this
committee, but I would point out one of the results of this
inflow of capital has also been a strong rise in valuations of
new energy companies.
We track company valuations in the clean energy sector by
means of an index, the NEX and you can see from Figure 3 in the
written testimony, the NEX has outpaced the border market for
the past 4 years. The increase in valuations have companies
operating substantially in the clean energy space has been just
over 30 percent per annum for the past 4 years. So that the
overall global environment is a more than doubling of the
amount of money flowing into the sector over the past 2 years.
That's some indication of the sort of returns that are
available to investors.
So let's turn to what's happening in the United States. In
order to have a healthy clean energy industry you need to draw
on different sorts of investors and Dan Reicher, in his
testimony, referred to the difference between the technology
investment side and the deployment investment. Indeed you need
to kind of relay-race between different sorts of investors.
So we take the first leg of the relay, which is venture
capital and private equity, it turns out that the United
States' performance is actually extremely strong, contrary to
what one might guess reading the press. In fact, the United
States has a strong leadership position in investing in clean
energy technologies.
Last year a total of $7.1 billion invested in venture
capital and private equity in clean energy worldwide, of which
$4.5 billion, just 63 percent, was here in the United States,
so that's a very strong position. When you break it down even
further and you start to look at the early stage technology
investment, then the earlier the stage you get to, the stronger
the U.S. position. So the United States actually out-invested
Europe by a factor of something like 3-to-1 in early stage
venture capital in 2005 and by 7-to-1 in 2006.
U.S. venture capitalists puts $390 million into American
solar start-ups last year, and overall we know of no fewer than
627 funds in the United States that are either actively
investing in clean energy technologies or looking to invest in
clean energy technologies. We've got here on the panel, I
think, some of the evidence of some of the people who've been
so instrumental in building that leadership position and thanks
to their efforts, the United States is among the leaders in
some of the technologies that could eventually be
revolutionary, such as thin film photo-voltaics and cellulosic
ethanol, to name just a couple.
So that's the good news. The not-so-good news is that when
these earlier stage companies need to look for more capital and
they go to the public markets, the United States has not been
the best place to do that. So under one-third, 28 percent of
$10.3 billion raised by the public markets last year was in the
United States and Europe has quite a substantial lead.
So you've got not a single pure play wind turbine
manufacturer trading on a major U.S. stock exchange and you've
got publicly-quoted Japanese, German, and Chinese companies
that are clear leaders in silicone photo-voltaics as a result.
There's a number of reasons for that weakness--one can
hypothesize on many more--but certainly the high cost of
regulation for going on to the U.S. public markets currently is
one and also among the reasons is the perception that Europe is
more committed to clean energy and is therefore a safer place
to operate.
Project finance is now the deployment part of the picture,
as these technologies are rolled out, wind farms built, bio-
fuels, refineries built. There the United States was far
behind, but has been catching up quite aggressively, adding 5.5
billion gallons of capacity total now and also adding 2.5
gigawatts of wind capacity last year. It has helped close the
gap very substantially there, and so although the United States
is still behind Europe, it has closed the gap substantially.
But the fastest growing region is actually Asia.
Finally, I want to mention the carbon markets. I think a
number of the panelists, my fellow panelists, have mentioned
the need for a Federal mandated cap-and-trade system. I'll come
onto that in a second, but just to give a feel for the amount
of money: there is now no less than $11 billion in carbon funds
worldwide. London is the leading location for the management of
private carbon funds at 60 percent of the private money. The
United States is not doing badly, particularly considering the
fact that the United States did not ratify Kyoto and in fact,
$1.8 billion is managed out of the United States of that $11.2
total, so that's a good sign of the fact that the United States
will be a strong player in the carbon markets if and when on
the State or Federal level joins in.
So we're not a policy think tank. I came here with a few
ideas of policy areas that you might want to look at in order
to increase these numbers and spur further investment. I think
almost all of the five areas have been mentioned individually
by others, but I will just list them.
First: there need to be some level of support. These
technologies are more expensive. Clean technologies are more
expensive currently and for the foreseeable future than dirty
technologies. There needs to be a level of support but it needs
to be stable and long-term support. The on-again, off-again
nature of the current arrangements is very detrimental.
Second: there are cheap ways to reduce risk. It's often
cheaper for taxpayers, for policymakers to work on reducing
risk, rather than increasing returns and providing subsidies.
Third: accelerating, permitting, and time-to-market.
There's nothing that our clients like less than projects that
get delayed. It makes them feel like they're working in the
wrong country, in the wrong region, on the wrong technologies.
Fourth: strong, long-term signal on energy efficiency. The
United States can and should be a world leader on energy
efficiency. The leadership is currently being displayed by
Germany, by Denmark, Netherlands, and Japan. That should change
and investors need a long-term signal to change their
investment patterns.
And then, fifth and finally: a Federal carbon credit
market. It needs to be one that establishes a cost of carbon
that is sufficient to change investment decisions of the very
large emitters.
Those are the five policy areas to be thinking about in our
opinion. I'll finish this by thanking you once again for
inviting me to come here to testify.
[The prepared statement of Mr. Liebreich follows:]
Prepared Statement of Michael Liebreich, CEO and Founder, New Energy
Finance Ltd, London, England
Good morning.
First, I want to say how honoured I am to have been invited to here
today to share my thoughts on investment trends in renewable energy,
low carbon technology and the carbon markets.
Some of you may be wondering what a Brit is doing discussing the
U.S. clean energy market. So, I thought I'd take just a moment to tell
you a little about New Energy Finance. We cover all sectors of
renewable energy, as well as biofuels, energy efficiency, carbon
capture and sequestration, hydrogen and fuel cells, and the carbon
markets. We cover all stages of investment, and we are global, with 50
researchers in offices in London, Washington, Shanghai, Beijing, Delhi,
Perth, Tel Aviv and New York. Our clients cover the spectrum of clean
energy investors in a total of 26 countries.
I have prepared written remarks, which you should have in front of
you. Rather than go into every point in detail, I would like to draw
your attention to some of the key points. Along the way, I may refer to
the charts, so if you have the testimony in front of you, feel free to
follow along.
I'd like to start by saying that at this point in time, there is no
shortage of capital available for new energy ventures and projects,
either globally or in the U.S. This is what I call ``the Convenient
Truth''. I would direct your attention to the chart in Figure 1 on page
2 of the testimony. It shows that investment in clean energy worldwide
has more than doubled in the last three years, from $27.6 billion in
2004, to $70.9 billion in 2006.
To put these figures in context, total investment in energy
worldwide is of the order of $800 billion, so around 9% of all
investment in the world in energy today is already clean.
The reasons for this rapid growth in investment--concerns about
climate change and energy security, high energy prices and so on--have
been much discussed and I don't intend to go into them in detail here
today.
One of the results of this inflow of capital has been a strong rise
in valuations of new energy companies. We track these via a global
index of publicly-traded clean energy stocks, which is published under
the symbol NEX. You will see from Figure 3 that the NEX has outpaced
the broader market in the last four years, recording a compound
increase of 30.2% per annum for the past four years.
So that is the overall environment, globally, in terms of the
volume of money flowing into the space, and the sorts of returns that
are available.
Now let's turn to what is happening in the U.S. A healthy clean
energy industry needs to be supported by a range of different
investors. On the one hand, you need investors to support the
development of technologies and equipment providers. On the other hand,
you need other investors to fund the roll out of capacity-to-build wind
farms, biofuels plants, etc. It's a kind of relay race.
In the first leg of that relay, venture capital and private equity
(which have been such an engine of growth in this country), the U.S. is
extremely strong. As you will see in Figure 4, in 2006 the U.S.
dominated in this area, investing $4.5 bn out of the worldwide total of
$7.1 bn. And when you break it down within that $7.1 bn, the earlier
the stage of investment, the more the U.S. holds a dominant position.
The U.S. out-invested Europe by a factor of nearly three to one in
early stage venture capital in 2005, and by seven to one in 2006. Last
year, U.S. venture capitalists put $390 m alone into American solar
start ups.
My fellow panellists here with me today are all outstanding
examples of the sort of people who have created this leadership
position. Thanks to their efforts and others like them, the U.S. is
among the leaders in a number of technologies that could eventually
revolutionize the energy industry, including thin-film photovoltaics
and cellulosic ethanol.
So that's the good news. The not-so-good news is that when these
earlier-stage companies start to need more capital and look to the
public markets, the U.S. has not been the best place to raise it. Note
in Figure 6 that just 28% of the $10.3 bn in funds raised via the
public markets in 2006 was in the U.S., with European stock markets
taking the lead.
There is not a single ``pure-play'' wind turbine maker that trades
today on a major U.S. stock exchange, despite the fact that wind is by
far the most mature of the renewable energy technologies. Publicly-
quoted Japanese, German, and Chinese companies are clear leaders in the
production of materials used in silicon-based photovoltaic panels.
There are a number of reasons for this weakness, among them the
high costs of regulation in the U.S. and the perception among investors
that Europe is more committed to clean energy and is therefore a safer
place to operate.
When it comes to project finance, the U.S. was far behind, but has
aggressively begun to close the gap in the past two years. Last year,
the nation's ethanol capacity more than doubled to approximately 5.5 bn
gallons. A total of 2.5 GW of new wind projects were commissioned,
bringing the installed base to 11.6 GW. As you will see on page four of
my written evidence, the U.S. still trails Europe, but has made giant
strides toward catching up, particularly in the last 18 months or so.
One final area I would like to mention is the carbon markets. As
shown in Figure 9, no less than $11.2 bn has now been raised by
investors looking to purchase and trade in carbon credits. A
substantial proportion of this will be invested in clean energy
projects in the developing world, under the terms of the Kyoto
protocol. Despite the fact that the U.S. did not ratify this treaty, a
total of $1.8 bn of these carbon funds are being managed here in the
U.S.
London leads the world with 60% of all private carbon funds under
management, but if and when carbon trading is rolled out in the U.S.,
whether on a state or federal basis, there is every sign that the U.S.
financial sector will be a powerful player.
New Energy Finance is not a policy think-tank, so I have not come
here with any specific policy suggestions. What I would like to do is
highlight five themes the committee might consider as it seeks to craft
policy to promote further investment in clean energy in the U.S. I do
this very much with our clients' perspectives in mind: these are the
areas they are telling us they would like to see addressed in order to
make the sector a more attractive place to invest.
First, it's not just about subsidy and support. Clean energy is
more expensive than dirty energy, so some level of support is needed.
But when you do provide support, make sure it is long-term and stable.
More than anything, investors want to know that the laws and
regulations under which they created their original financial
projections will remain the same for three, five, or even 10 years. A
number of federal renewable energy policies provide subsidies which
are, in some cases, generous but which periodically terminate. The
recurring expiry of the wind Production Tax Credit, for instance, has
pushed up the industry's cost of capital, causing bankers to
incorporate ``political risk'' premiums into financing packages, and
has kept turbine manufacturers from investing in the U.S. at the level
required to create a domestic supply chain.
Second, look for ways to reduce risk. It is often cheaper for the
taxpayer for policy-makers to reduce risk than to provide subsidies. To
produce adequate equity returns even pilot projects must be partly
debt-financed, but debt providers will not accept technology risk so
there is a role for loan guarantees and for other sorts of pooled
technology insurance mechanisms. Similarly, volatile prices for
commodities cause investors to demand higher interest rates and equity
returns. Government cannot (and should not) seek to eliminate commodity
risk, but should design policy to shield this embryonic industry,
perhaps via a mechanism under which support for biofuels projects is
linked to corn and oil price spreads, so that in good years the subsidy
falls away but in bad years cuts in.
Third, accelerate permitting and time-to-market. There is a strong
correlation between the growth in clean energy capacity in any region
and the speed with which permit applications are processed. Investors
hate delays because they reduce returns and make them feel they are
missing opportunities elsewhere. The U.S. should consider designating
``clean energy zones'' where developers know they will receive
expedited consideration of wind, solar, geothermal, marine, mini-hydro,
biomass, or other projects.
Fourth, lead the world in energy efficiency. This is an area where
government must take the lead because consumers have shown they are
generally not price-sensitive to energy costs and are thus rarely
willing to make long-term investments to improve the energy efficiency
of their homes or automobiles--even where such investments have
positive pay back. There will be a huge economic prize for countries
that lead--rather than lag--the trend. The U.S. can and should take the
lead. Achieving improvements will take political leadership to change
consumer attitudes, new regulations to insure compliance, and funding
for new technologies. Investors need a strong signal of commitment in
order to support the sector.
Fifth, establish a federal carbon credit market. To take serious
aim at greenhouse gas emissions, a system needs to be put in place that
seeks to raise the price of carbon to $40-$50 per tonne. All the
research shows that this is the level needed to make new coal plants
uneconomic and spur the closure of the oldest and least efficient
plants.
Such a programme must be economy-wide, set long-term goals, and be
locked in place for 20 years. And it has to be federal to prevent
competition between the states to offer the most lenient emission
terms.
With that, I'd like to once again thank the committee for this
opportunity. I look forward to your questions.
The Chairman. Thank you, and thank you all for being here.
I think this has been very useful testimony. Why don't we take
5 minute rounds of questions here, and maybe do a second round
if people still have an interest in doing that?
Let me start with Elon. Let me ask you, and maybe Mr.
Denniston or anybody else who wants to comment, Dan Reicher.
This issue of energy storage and battery technology is one that
I think is key to either plug-in hybrid or electric cars, or a
variety of the clean energy opportunities that may be there in
the future.
In your view, what are we doing and what should we be doing
to try to get this technology developed and commercialized, the
battery technology that's essential for us to realize the
opportunities that you've discussed?
Mr. Musk. That has actually been the primary area of
research which has, of all the R&D money that we spent thus
far, developed money, that's been the single biggest area. I
think you've correctly highlighted what I think is the single
biggest challenge in getting away from oil.
Gasoline happens to be an excellent energy storage
mechanism and we need to have something which is competitive
that is capable of storing electricity at a similar level of
density too. We've been able to do that thus far, get 250 miles
comparable to an electric, power to a gasoline car.
As far as what's needed, it's innovation needed at the cell
level and at the pack level. Both are quite difficult. It's
worth noting that currently, to the best of my knowledge, there
is no mass-manufactured lithium-ion cell in the United States.
I think it's actually very important that that capability get
developed, that there is some--there's R&D activity in the
United States but there's not manufacturing activity of the
cell.
Tesla does intend to manufacture its lithium-ion pack in
the United States, long-term, but I think, very important to
making that happen is something like the DOD loan program. I
think that would be very effective because it is very capital-
intensive, and as I'm sure you're aware, in places like Japan,
the government is very supportive of such activity and helps
make that happen.
Senator Domenici. What was that again?
Mr. Musk. I beg your pardon, sir?
Senator Domenici. Your last comments, what were those
again?
Mr. Musk. I was just saying that the lithium-ion cell is
it.
Senator Domenici. I got it. Thank you.
Mr. Musk. Okay.
The Chairman. Mr. Denniston, did you have a comment on
that?
Mr. Denniston. Yes, I do, Senator Bingaman.
So, energy storage has historically been technically a very
challenging field and essentially scientists are limited,
they're bounded by the periodic table of elements. Scientists
can't invent a new element. They have to deal within the
periodic table that you saw in your chemistry class in high
school and so the lead acid battery, which is still used today
in autos and in other applications, was invented over 150 years
ago. The only significant innovation that has come since then
is in lithium-ion batteries, which offer advantages but still
have limitations in terms of safety. You've all read about
recalls of lithium-ion batteries' durability as well, and in my
opinion you're question is what we can do.
My answer is there needs to be more dollars going into
basic research. I agree with Mr. Musk that the Asian
manufacturers have led in research and development in energy
storage, and my recommendation is that there be a research and
development effort in energy storage in the United States.
A number of efforts are here today. They have difficulty
finding funding because it's early-stage basic research, and
this is where the government can be enormously helpful. I
believe that the DOE's budget for energy storage is very, very,
very small. I don't know the number exactly, but I believe it
to be a very small effort.
I think you've asked an excellent question. Energy storage
will help electric vehicles. It will help photovoltaics and
wind power to become more valuable, lower their cost per
kilowatt hour. Because when the sun is producing energy, if
it's producing more than a house needs, then the homeowner can
store that, but right now that's not economical.
The Chairman. Dan, did you have a comment on this?
Mr. Reicher. Yes, Mr. Chairman. I was just going to mention
that there was the advance battery consortium, the ABC that
Senator Domenici and others funded in the 1990's. I'm not sure
what's happened to the ABC, but I suspect that funding which
was pretty significant and did advance battery technology in
the 1990's has in fact diminished. So I would encourage you to
take a look again at that.
Second, I do think government procurement can drive this as
well, as we've heard from a couple of our, my fellow panelists.
The government deciding to step up and whether it's a large
buyer like the DOD and buy advanced storage technologies,
battery technologies that can help as well.
And the last thing I think is, the other big storage
technology is, of course, hydrogen. I think it's worthy of some
debate about whether that's in fact, the place to be putting
large amounts of money in storage these days.
The Chairman. Thank you very much. My time's up.
Senator Domenici.
Senator Domenici. Thank you very much, Mr. Chairman and let
me say to all of the witnesses, I really thank you, thank you
very much and appreciate your testimony, whether I agree with
the whole testimony or not, I think your analysis for us of the
need for money is in the right places.
I think what you are also saying is that it is strange that
money can't go to the right places in large abundance right
now, when there is such an obvious disparity between the price
of crude oil and the cost of the new things that we're
building. If it was back down to $25, or $20, we'd be
wondering, but when you've got oil at higher than $50, it just
seems like all kinds of money should flow into those
alternatives that heretofore had a difficulty competing with
that black stuff. I think you've told us it is, not like I
would like or not how you would like, but it's flowing.
I, myself, want to put in the record the fact that the
administration, it has been noted that the first cellulosic
plant is proposed for Utah. Somebody wants to build it up
there--Idaho--and has indicated to the Secretary that they
would like to do that, and that they are looking for a loan
guarantee and they will move with Canadian technology. That's
not because of anything other than the fact that what they need
to use for their basic fuel is in abundance in Idaho and not in
Canada. It has nothing else to do with Canadian taste for
research or the like, but that happened.
That would be interesting if in fact we could get the first
one. It's the big major one and they would build it there. You
agree we should move with cellulosic and ethanol too, do you
not? I think somebody mentioned that in spite of all the other
things we should do that also. Do you think we should do that
too, Dan?
Mr. Reicher. Yes, absolutely and the good news, Mr.
Chairman, is that in fact, the technology level, there is in
fact, fairly significant money moving into a whole host of
companies to develop various kinds of cellulosic technologies
either biological or thermo-chemical.
The challenge right now though, as you're indicating, is
actually getting real plants built.
Senator Domenici. Yes.
Mr. Reicher. We made a prediction in 1999 when I was at the
Energy Department that in fact by 2007 or 2008, we would be
producing more ethanol in this country from cellulosic sources
than from corn. We were terribly wrong and part of that is that
technology didn't develop as quickly as we expected. But much
more importantly is that it has been extremely difficult to get
real projects built for all the reasons that we've discussed
already.
Senator Domenici. I also wanted to indicate--I didn't read
my opening remarks--as evidence of the fact that there are
plenty of people looking for loan guarantees, the Department of
Energy has announced yesterday that it has received 143 pre-
applications for loan guarantees, and that's even without
having the program that's worth very much. I mean the program
is all, for many months was backward and had the wrong
criteria. I think maybe it's getting there.
I do give the two head men at the Department--I don't talk
to them without telling them this story first. If they say,
``Hello, Pete,'' what I say is, ``You're really messing up the
portions of this bill on loan guarantees. Now we can talk. What
are you going to do about it?'' It looks like it's slow, might
say fellow Senators, it is slow. That's caused by some people
at OMB that do not like them.
Let me ask: you've spoken about a variety of things in the
finance area that we need, but would loan guarantees work in
the Department of Energy that were the kind we thought we
ordered them to do? I don't know if you understand how it
works, but essentially, you pay a premium for 80 percent and
get 80 percent funding. You pay a premium. That premium is
calculated on the basis of what Congressional Budget Office
estimates for these kinds of loans, what the risk is on these
kinds of loans. As a consequence the Federal Government doesn't
lose any money. We don't get charged in our budget, so we
thought we had a very good proposal which could have ended up
with quite a few billions of dollars.
I wanted to ask, do you think that it would be helpful, if
we got that in and it was a large portfolio maybe in the
neighborhood of $3, $4, $5 or $10 billion? Could I ask Mr.
Denniston, John, what do you think?
Mr. Denniston. Yes, Senator Domenici. I think that's a
fabulous idea and yes it would be helpful; you've heard
comments this morning on the need to build plants.
I would make two comments, Senator. The first is in the
case of cellulosic, and we have invested in some of these
projects so we have first-hand knowledge of this. There is a
property at play for some of these technologies where they can
work at relatively low volumes, and the physics and the thermal
properties are relatively well characterized, and yet there's a
risk as you scale a plant up, that those properties change, and
so there's technical risk. We call it scale-up risk in a number
of these projects, and so that's where the financing difficulty
comes in. Yes, having a loan guarantee would be an excellent
way to propel some of these plants that otherwise might not get
built.
My second comment is as much as I am a fan of loan
guarantees, and I am, I would respectfully submit that it's
important to continually step back and ask ourselves what are
the problems that we're trying to solve? I submitted three--
climate change, oil dependence and global competitiveness--and
really ask ourselves what the policy initiatives are that we
ought to adopt, that move the needle most on those three core
issues. Loan guarantees are a part of the puzzle, really
important, but only part of the puzzle.
Senator Domenici. I understand that. If you read this Act
you would see we did that.
Mr. Reicher. Mr. Chairman, I would just say quickly that
they really work in the real world. In my last position with
New Energy Capital, we got a loan guarantee for a bio-diesel
plant in Delaware, the first large scale bio-diesel plant in
the Northeast or Mid-Atlantic. We got it from the USDA.
There was some paperwork, but it allowed a regional bank,
small regional bank that would otherwise have not made a loan,
to make a loan for that plant and the plant is now up and
running. So, it's pretty straightforward.
The Chairman. And is that at 80 percent of the cost of the
plant or do you remember the percentage of the cost of the
plant that was guaranteed?
Mr. Reicher. It was about 70 percent of the cost of the
plant in that case.
The Chairman. Okay, all right. Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman. I was going to
ask Mr. Denniston or anybody else who wants to answer this
question. The investment in energy technology and other
technology that you've invested in the past, I'm assuming it's
a similar model, right, that VC's look at the investment. You
don't expect everybody you invest in to be successful. Well,
you hope they're all successful, but what is that model or that
number that you're looking at?
Mr. Denniston. Yes, sure, great. It's a wonderful question.
The venture capital business is a high-risk business. By
definition we invest in early-stage projects that have
technical risk, and sometimes that technology doesn't work out
and sometimes there's market risk, where we think a product
will succeed in the market. It's a novel product, a browser for
the internet for example, and sometimes that works and
sometimes it doesn't.
So, yes it's a hits business and in the venture capital
industry at large. Some companies don't make it, they fail and
that's an accepted part of the model.
Senator Cantwell. What are we talking about like 1 in 13?
Mr. Denniston. Well, industry-wide you can see different
estimates from 2 in 10 to 3 in 10--20 to 30 percent failure
rates. Something in that range is probably an industry average
measured over decades.
Senator Cantwell. And so, and energy technology is
following this similar model, is my question? Is it or is it
not?
Mr. Denniston. I would say, Senator, it's too soon to say.
Let me give you some numbers that will help, I think, put this
in perspective for you.
The last year the venture capital industry in the United
States invested about $2.5 billion in energy technologies.
That's up from around $100 million, a mere $100 million, 5
years previously. So typically the cycle for venture capital
portfolio companies to mature and go public is 3, 5, 6 years,
and I would say it's too early in the cycle to know what the
batting average will be for this cohort of green-tech
companies.
Senator Cantwell. But that shift that you just articulated
is a huge shift in energy investment.
Mr. Denniston. Okay, so.
Senator Cantwell. But I want to get to my point because my
point is this. I didn't hear a lot about predictability per se
and one of my questions is, given that model that we're talking
about and I know we're talking about R&D and loans and grants
and things, but I'm more interested in predictability and a
level playing field. So in that context, the tax credits and
tax horizons that we were looking at have, up to this day, have
been more near, you know, short-term, 2 to 3 years.
I'm assuming that if we're going to follow a similar model
that's worked in other technologies' success, yes. VC's know
they're going to choose well in some instances and not in
another, but they want to understand issues over that horizon
of the business. What are the likely other advantages that that
technology investment might receive? So predictability from us
in a longer horizon on tax credits, I would assume, would be an
integral part of the strategy for investment.
I didn't hear a lot about that, maybe I missed it in the
written testimony, but if people could comment on what you
think the appropriate horizon is for these various tax
incentives that we're considering, that would be great.
Mr. Denniston. I'll offer a point of view and then the
other panelists, I'm sure, have a point of view.
So, Senator, I think you put your finger on a critical
shortcoming with existing subsidies, which is--and a number of
my fellow panelists have given examples of subsidies and tax
measures that are year to year--and I would submit it is close
to impossible for companies to gear up their business plans not
knowing whether these incentives are there for the longer term.
In the case of wind, some of these projects take a couple
of years to plan, get permitted and built, and if they have a
12-month expiration on the programs----
Senator Cantwell. So because I only have 56 seconds left,
what length of time are you thinking?
Mr. Denniston. I would suggest, and this is in my written
remarks, no shorter than 5 years, hopefully much longer.
Germany puts 20 years in.
Senator Cantwell. And if you could in answering this, tell
me also what you think the number is to actually get
manufacturing of some of these facilities in the United States.
My first question was just about investment, for your
business model what horizon do you need to see so that you have
that component in looking at what you think the return is, but
when I look at this equation, I see manufacturers of technology
like wind technology.
They don't build wind turbines in the United States because
they don't have the predictabilities and not only are we
missing out on the ramp-up of wind, we're missing up on the
ramp-up of manufacturing of wind. So what is the number for
this, if it's 5 years for some predictability just on
financing? What's the horizon that would actually get us job
creation in the United States on this?
Mr. Denniston. I'll answer, and then I want other panelists
to answer as well because you directed the question at me,
Senator. Minimum 5 years.
I'm glad that you raised the point on manufacturing. You'll
see that I addressed that in my written remarks as well. It is
very important we try to hold manufacturing here in the United
States through these kinds of incentives.
Senator Cantwell. So how many years?
Mr. Denniston. I said minimum 5 years, hopefully longer.
Senator Cantwell. Okay, all right.
Mr. Reicher. Senator, let me quickly draw an important
distinction. There's venture investing which is in
technologies, very high-risk, you know, put money up to lots of
companies, only a few may succeed in a big way. That's simply
to get the gadget ready to be used.
The bigger issue right now is project investing, much lower
risk, the banks get involved and it's there where the amount of
capital that's required is vast compared to the early
technology investing, actually getting projects built. It's
also there where the tax credits become so critical. The
duration of the tax credits--a project developer needing to
know that a tax credit is going to be available for multiple
years in order to make the numbers work, to go to a bank to get
this high level of debt that they can on the project, put in as
little equity as possible to make the project work, so it's
that world.
The venture world has a related but different set of issues
and of course the venture world looks out ahead and says all
right, I'm going to develop this gadget, can I ultimately get
it deployed? What is the policy framework?
I just urge you to think that there are these two separate
worlds with very different investments.
Senator Cantwell. I understand your point, but then you
answered my question, which is you need predictability.
Mr. Reicher. Long-term, stable, predictable support from
the Federal Government.
The Chairman. Senator Thomas.
Senator Thomas. Thank you, Mr. Chairman. The purpose of
this meeting, as you know--and thank you all for being here--
was to investigate ways to stimulate additional private sector
investment into the deployment of technologies. You all have
advocated and most of us do, for massive Federal subsidies.
How do we get private companies to unleash a little more
into this? We all tend toward government intervention to cause
it to happen.
How do we achieve advanced technology with the minimal
amount of government intervention, other than spending
taxpayers' money? I'd like each of you to comment on that.
Mr. Musk. Actually, the point I wanted to make about the
specific example of Tesla Motors. Tesla Motors receives
actually no Federal support in any way either at the consumer
level, at the company level, loans, any form whatsoever right
now, and it's bringing a very competitive electric car to
market starting manufacturing this year.
The issue is not one of whether the companies will succeed;
I think they will. I think the amount of private funding will
grow over time and will succeed even if there's ultimately no
Federal intervention at all.
The question is whether we want to accelerate that pace or
not, and I think we do need to accelerate that pace. The reason
we need to accelerate that pace is because as I mentioned in my
testimony, the normal way in which the economy drives
innovation in a particular area is by pricing, and
unfortunately the gasoline price at the pump does not reflect
the true cost of gasoline. Even though we may think it's a
little high, it does not reflect the true cost of gasoline
because the cost of the damage to the environment, the cost of
oil dependence, global warming, is not priced in.
So we have a failure in the normal mechanisms of economics,
which will result in a slower pace of transfer of private
capital into that industry. That's why there is Federal
intervention required, and ordinarily I would not be an
advocate of Federal intervention.
Mr. Denniston. Senator Thomas.
Senator Thomas. Yes.
Mr. Denniston. I think it's a fabulous question. I'd like
to go back to the three problems I think we're trying to
solve--climate change, oil dependence and our competitiveness--
and I think echo a little bit of what Mr. Musk said. I'm a fan
of the free market but it so happens in the case of those three
problems, the free market is not set up to react to those
issues.
So in the case of climate change: climate change is caused
by greenhouse gases, which are a free externality. There's no
way without government intervention that the market will
recognize the real cost of those emissions and price it into
the product, which in turn will reduce demand for the product.
That will not happen in the free market.
In the case of oil dependence, the price of gasoline at the
pump, $2.50, $3.00 doesn't reflect the fact that two-thirds of
known oil reserves are in Middle Eastern countries and that
percentage will go up to over 83 percent in the next 15 or 20
years. The free market will not recognize that risk. That's a
risk that all of you are aware of. The market, the pricing
mechanisms don't know, can't deal with that. That isn't what
the free market does.
And finally with respect to global competitiveness, I can
tell you because in the past year I've traveled to Asia, I've
traveled to Europe and I can see what the governments there are
doing. They recognize that the United States for a century has
been dominant in technologies and our standard of living has
benefited from that. They're on to this game. They are
investing. Their public policy is aligned to succeeding and
having them be a leader in technology innovation in these green
technologies. So we're in a flat world, globally competitive,
and my answer to your very good question is: I love the free
market. I just don't know that these three issues are ones that
the free market is well-suited to address.
Senator Thomas. Anyone else want to comment on that?
Mr. Liebreich. Very quickly, if I can comment. I think that
there is also--you can't get over the fact that the clean
technologies are more expensive than the dirty technologies
currently.
Wind power does cost more than power from coal or power
from gas, so having decided that you think it's a good thing to
have some, there is almost no way away from some sort of
regulation or some sort of subsidy-based support. But that is
only a very small part of the answer, because I think there are
other ways you could make an area interesting for investors by
reducing the risk and by accelerating the implementation of
projects. So there are a number of things that one can do on
the policy front that don't require just pouring in more money.
I think in terms of risk you can look at whether it's the
way that the production tax credit has been on-again, off-
again. That has increased the cost of capital to developers of
these projects. It has stopped turbine manufacturers from
investing. There is no wind supply chain in the United States
because you never know whether there's going to be a market or
no market.
On bio-fuels, there's commodity risk which even if, as
Senator Domenici pointed out, when the oil prices are $50, $60,
everybody should be pouring money into the sector. Well, they
don't, as much as they would, because they're concerned about
what happens to oil prices in the future. There are ways of
providing coliseum caps or insurance or reducing risk, that
don't necessarily cost a lot of money and that are being
experimented with in other countries, that can spur an enormous
amount of investment.
Senator Thomas. Thank you. I do have to say, however, that
I think there is a public feeling about the future and there's
a public feeling about global warming. There's a public feeling
about where we're going to go with these kinds of things. So,
there's more to it than just the economic side, I think. Thank
you.
The Chairman. Senator Salazar.
Senator Salazar. Thank you very much, Senator Bingaman, and
I know we're running really short on time here, so I would
appreciate it if you would be willing to provide some written
response to the question that I'm going to ask.
The question has to do with renewable portfolio standards
and renewable fuel standards, and whether or not those are
helpful in terms of incentivizing the investments from the
private sector.
In Colorado, for example, we passed an RPS a few years ago
that said that we would get the 10 percent of our energy
production from renewable energy resources by 2015. Lots of
investment has gone into Colorado. We are now upping the RPS in
Colorado in legislation just passed a couple of days ago to 20
percent by the year 2015. So my question, I mean, we passed the
RFS out of this committee just 2 years ago in the 2005 Act.
So my question is when we look at an RPS or we look at
changing the RFS in this committee as part of our energy bill,
what does that do in terms of the private market, looking at
investments in these renewable energy areas? Maybe, John
Denniston, why don't you take a quick answer to that, but I
would really appreciate hearing from each of you in writing in
the response to that question.
Mr. Denniston. I'll be brief to give time to my fellow
panelists.
I think it would be an enormous signal, Senator, for the
Senate to, for the Congress to adopt an RPS. Germany did this
in a somewhat different way. They have a feed-in tariff system,
but it really accomplishes the same purpose as an RPS, which is
a minimum level of renewable use throughout the country.
That would be an enormous signal to the investment market
and I think that single act would drive a lot of investment
capital into this sector. It's an excellent idea and I urge the
Senate to strongly consider that.
The renewable fuel standard goes to 7.5 billion gallons in
the year 2012, and I would urge that to be increased in concert
with President Bush's twenty and ten initiative. While I think
the current RFS hasn't really impacted the market, because
there's core demand because of MTD and pricing, I think if you
significantly increase the RFS that similarly would drive
demand and investment in the category.
Senator Salazar. Thank you very much.
The Chairman. Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman. I noticed in all
of your testimony, not one of you mentioned coal-to-liquid fuel
as a green technology that you are developing. Do you plan to
pursue coal-based transportation fuels as an alternative to
oil-based fuels? That's question No. 1.
I believe that coal-to-liquid fuels will dramatically be
cleaner than conventional fuels. It's proven in South Africa.
They're over 30 percent with that technology. The finished
product is nearly zero in sulfur, low in NOX
emissions and low in particulate matters.
I know the real concern is carbon and carbon sequestration,
and in the bill that I have put in, we sequester all the
carbon. We are now doing a survey to find out how we can best
serve by putting the carbon into either gasification and
recycling it to the oil fields, or doing a survey in the United
States and Canada right now on places to bury the carbon in the
ground, the sequestration.
The question I ask: since we do not have a cap-and-trade
system and China and India are not included in any of our
emissions caps, in other words, to do that to the United States
is fine. Let's get everyone else involved to do it, because we
can get to zero in emissions. But I've been to Beijing and
can't see. Every day, open my eyes and I can't see out, because
of the unbelievable pollution that is going on there.
So, what I'm trying to say is that in 2005, we passed a
bill. We're looking for help to go into 2007 now to refine that
bill and most of you have said 5 years minimum. In the bill
that I put in for coals-to-liquid, we put a 20-year because the
Department of Defense asked for a 20-year cycle. They would be
the biggest recipients and users of that type of fuels for not
only aviation, but for their regular transportation system. So,
anybody can pick up the ball.
Mr. Peters. Well, first of all, Senator, I think that the
coal-to-liquids technologies suffer from the same technology
challenge that we have today, and that's scale-up. I think that
loan guarantees are obviously something that are going to have
to be required.
Senator Bunning. But in the bill we require a 10,000 gallon
scale in each of the first ten plants that we would invest in.
Mr. Peters. Right.
Senator Bunning. For the Government.
Mr. Peters. But I think in addition to that, whereas with
the V-tech legislation, we have a scaleable amount of credit
that is available for cellulosic ethanol, for biodiesel, for
corn-based ethanol. We're going to need something like that
with the coal-to-liquids in order to be sure of the
sustainability, long-term, of the product that you produce at
the end of the day.
If we as investors, debt investors, are going to look at a
product that 1 day is competitive with $60 oil or $70 oil and
all of a sudden becomes uncompetitive with $30 oil, it's not a
technology we're going to invest in.
Senator Bunning. Well, we understand that, but for the
security of the Nation, for the Department of Defense, if we
can guarantee a certain price, like $40 a barrel and say put
that as a floor in the bill. I can tell you right now, they're
willing to buy and they have tested the coals to liquids,
particularly aviation side, and they have burned in B-52's.
They have a pilot program for that.
They also have a pilot program for on-ground vehicles for
diesel, and they're testing that in a pilot program. They are
ready to go if we can find the investors. Yes.
Mr. Denniston. Senator Bunning, my firm is an investor in a
coal-to-liquid, a coal conversion company, and one perspective
I'd offer to you is that coal can be converted to natural gas.
Senator Bunning. Yes.
Mr. Denniston. Natural gas itself can be a transportation
fuel. On my way here this morning, I saw many of your buses in
Washington, DC are powered by natural gas. So it has the
benefit of being both, coal to natural gas conversion, of being
both a prime mover for electricity generation and a
transportation fuel.
The company we invested in is Grade Point Energy, based in
Massachusetts.
If I could add one more thing, the 5 years that I said
before is absolute bedrock minimum.
Senator Bunning. Minimum, I know.
Mr. Denniston. I think anything less than that is not
worthwhile.
Senator Bunning. No, you have to have stability.
Mr. Denniston. Germany went 20 years. I think they did that
right.
Mr. Reicher. Yes, let me just follow up on that.
Senator Bunning. Go ahead.
Mr. Reicher. When you look at support that the Federal
Government has provided to energy generally in the traditional
energy sources, there has tended to be very long-term support.
I think about the oil depletion allowance, I think about
nuclear liability insurance which is a minimum, I think, of 15
years.
So, I think that we have to adopt a mindset as we think
about these newer technologies that not only is 5 the minimum,
we should be thinking much longer term, with Federal support of
the sort that the traditional technologies have enjoyed. I
think if we level that playing field, we're going to be a lot
further ahead as far as the investment community is concerned,
with investment in technologies and investment in projects and
investment in manufacturing facilities.
So, we ought to look at what we've already done in the
traditional sphere as we think about the measure for these
newer technologies.
Senator Bunning. The only reason I brought up coal-to-
liquids is we don't have to reinvent the wheel. It's already
there.
Thank you very much, Mr. Chairman.
The Chairman. Senator Corker.
Senator Corker. Yes, sir. Thanks again for great testimony.
It's great to have people that are actually out there taking
risk.
Talking about energy policy agenda, we actually are
piloting one of your companies in Chattanooga, Eye on America.
I know it's merged with another entity now, but we're actually
producing through a hydrogen fuel cell, power into the power
grid. I hope that that's commercially viable and hope we make
those in Tennessee when it is.
As it relates to the macro public market issue, we hear a
lot here in our country, obviously, about bio-fuels, and
there's a lot of interest in that. I just had a long briefing
this morning, but from the standpoint of investment that's
taking place worldwide, obviously real money, smart money
usually is going after those most promising technologies. I
know that some of the bio-fuels are actually more mature and
would be beyond venture capital funding at this point, but what
are you seeing on the public markets as it relates to bio-fuels
and their relevance? Or is most of the technology investment in
harder type technologies? Either one of you.
Mr. Liebreich. I'll start off and then pass it on to you to
comment on that.
I think that what you've got to bear in mind is that
there's no single solution to rolling out clean energy. You've
got a lot of different solutions, some including carbon capture
and sequestration, some including bio-fuels, solar, wind.
There's a whole broad spectrum with energy efficiency as well.
They're at different stages of maturity. So what we see is
that when you look at the public markets, fund-raisings, they
play a role of a particular stage in the development. So the
leading sector for public market fundraising last year far and
away, was solar, followed by bio-fuels. Prior to that there was
a spate of activity in fuel cells, in hydrogen and wind.
So, it goes in cycles to a certain extent. There's some
very real questions about what is the right sort of, who are
the right equity investors for asset-intensive industries
versus technology-intensive, depending on the different stages
of development. So we have at the moment in the U.K. an
alternative investment market called, the AIM, London Stock
Exchange AIM, which has been enormously successful at
attracting relatively early stage technology companies,
something like $1.5 or $1.6 billion of investment was raised on
London's AIM, and you don't have anything equivalent to that in
the United States.
There's a number of imbalances at the moment where venture
capital type investing, this sort of relay race, is not
working, because the investment at the early stage is
happening. But then there isn't the public market appetite here
in the United States for those investments as they move on.
Mr. Denniston. Senator Corker, let me retrace the history
of what's happened on the bio-fuels financing market for the
past 12 months. In the first 9 months of 2006, there was a
strong flow of capital into the sector, a lot of headlines, a
lot of excitement, a lot of new plants being announced and
planned, and then what happened in August and September 2006 is
the commodity prices changed radically. Crude oil went from $78
a barrel to $49 a barrel in a matter of 60 days. Spot prices
for corn went from $2.50 a bushel to over $4.00 a bushel, and
that sent a shock through the financial community as it relates
to bio-fuels.
I will tell you that the flow of capital into the sector
has slowed significantly since then, and if you look at the
market capitalizations for the public bio-fuels companies,
they're off significantly from their highs over the summer.
So one of the things that I asked for in my written
testimony, or suggest, is a safety net--I won't talk in detail
now, but a safety net for the bio-fuels community--so if the
Senate believes that it's important and a strategic imperative
for this country to have a domestic bio-fuel industry, where
we're self-sufficient, creating our own fuels here in the
United States with American farmers. Then I would submit that
it would be important to look at ways to assure the
sustainability and durability of the industry.
Mr. Reicher. Senator, could I just add that I urge you to
think even more broadly than bio-fuels when it comes to
biomass. There's a whole host of things that we can do with
biomass.
It starts with very primitive technologies like just
burning it to make heat and run a turbine based on that. We can
gasify it, a higher-level technology; pull more energy out of
it. We can turn it into liquid fuels, but even beyond liquid
fuels, companies like Dupont and Dow and others are looking at
biomass as a source of chemical feed stocks. Much higher value
than even liquid transportation fuels, which are higher value
than burning it for electricity in a fairly simple way.
So, biomass, in a way, is the modern version of a fossil
fuel. It's a fossil fuel that hasn't been underground for
millions of years and of course anything you could do with a
fossil fuel in terms of power, fuels and chemicals, you can do
with biomass. It's just that we're a lot further behind
technologically.
There's one interesting thing that I mentioned at the
Senate Finance Committee and I want to mention again here
today. If you sequester the carbon that comes out of the
conversion of biomass, essentially piggy-backing on the
technology we're developing for coal, you can actually cause a
net reduction in atmospheric CO2 because the
CO2 that's bound up in biomass is the same
CO2 you've pulled out of the atmosphere when the
tree grew or the corn stalk grew, unlike fossil fuels where
you're releasing the CO2 for the first time into the
atmosphere. So if we develop sequestration technologies, mostly
for the coal industry, we can apply those very nicely to
biomass and get a net, an actual net reduction in atmospheric
CO2.
Biomass has a huge commercial potential. It also has very
significant potential from a climate standpoint.
The Chairman. Senator Craig.
Senator Craig. And it doesn't take from the food chain.
Let's go back to John Denniston and your comments about how
market shift and adjust looking at impacts as to policy
shaping.
You, in your closing thoughts, John, mentioned something
that was really fascinating to me, and I'll flash back to the
early Clinton years when a bipartisan group of us went downtown
to try to convince the Clinton administration to floor stripper
wells at $13 a barrel. But it couldn't be done because somehow
oil was tied to big oil and big business and nobody wanted
their political fingerprints on stripper wells. Oh, gee if we
had a $13 floor, what a simple investment to make to keep a
million barrels a day in production. They got closed in. They
got concreted in. That's history.
A group of us have been talking about the reality of
flooring--that's a term I use--certain technologies at where
their break-even is or slightly above so that we don't get
these distortions in the marketplace. We also know that OPEC
plays a game and they watch markets and they know how to
manipulate them by turning the valves on and the valves off.
It is possible, some would suggest, that we might see $45
crude or less this summer. That rippled through the markets.
Why, because the $20 has come off from the $70 crude that was
speculative to begin with, based on risk, I suspect.
Would the rest of you respond to what John has mentioned as
it relates in developing new technologies and investing in
them? Whether it's private or public dollars, or the marriage
of the two, and the reality of bringing them to maturity. As
this Congress now believes it is good public policy to have a
large portfolio of energy, that we ought to get at the business
of looking at floors, or looking at a point to break even and
guaranteeing a certain level, as these technologies move into
the market are stood up and arrive at a commercial level or
value. Responses?
Mr. Peters. Well, I think that's an excellent idea. I think
that if we look at the history of the corn-based ethanol
markets and see the very turbulent nature of both the commodity
risk on the feed stock side as well as on the finished product
side. We have seen cycles of tremendous growth and depressed
growth, and I think that from my standpoint as one of those
low-risk debt investors, to the extent that I could have a
floor, some formulaic floor that would allow me to recover the
cost of production plus a capital cost recovery, I would be
more inclined to invest longer term at significantly lower
rates.
We don't have that now. I'm one of those investors that is
no longer interested in the corn-based ethanol market simply
because of the market dynamics today. If you could eliminate
that, I would be a full-time player in that market.
Mr. Liebreich. Can I suggest----
Senator Craig. Yes.
Mr. Liebreich. It is a very good idea. It needs to be
carefully thought through in two ways, particularly in the
ethanol space. It needs to be linked really to the spread
between the raw material of feed stock and oil. So it's not
just the question of the floor, it's got to be related to the
spread.
Senator Craig. I agree.
Mr. Liebreich. The other thing that's very important to
bear in mind is that there also needs to be a ceiling, because
I think one of the goals of whatever policy is enacted has to
be to continue to discriminate between good and bad
technologies, and also for the investors to discriminate
between good and bad management teams.
You don't want a situation where every single business
plant is getting funded because the oil price is now $78 and
then, the moment it dips down, you end up with a whole bunch of
investors losing their money.
So, you have to think about the floor but you also have to
think about, I think, the ceiling.
Senator Craig. You're reflective of the boom-and-bust in
the tech market, and the venture capital that would do anything
at one point and then got very silly and collapsed.
Mr. Liebreich. We saw that early in 2006 in the ethanol
space, where people had no background, even in venture capital,
let alone in commodities, let alone in the energy industry,
were able to raise funds. I think that's very exciting when it
happens, but we all know that it tends to be followed by a
headache.
Mr. Musk. Actually, if I could make a point about electric
vehicles which applies to my original testimony earlier.
It only costs $3.00 to go 250 miles in an electric car.
That's equivalent to having a gallon of gas at .20 cents a
gallon, because electric cars are so much more efficient than
gasoline cars. The electric motor in the Tesla runs at 93
percent efficiency compared with 20 percent efficiency in an
internal combustion engine.
Also, I think the biomass is by far the best way, if you
want to generate electricity, but by far the most efficient way
is to just put biomass into a co-gen electricity station which
generates better electricity at 60 percent efficiency. You
could also put coal. It's basically energy source independent,
sir.
Senator Craig. My time is up. Anyone else wish to respond
to that?
Ten years ago if you'd have said that about electric cars I
would have said it may have cost only that amount per mile but
the extension cord is very expensive.
[Laughter.]
Mr. Musk. You need range.
Senator Craig. You need range and we're getting it today.
Mr. Musk. We have a 250-mile range.
Senator Craig. Thank you.
The Chairman. Why don't we just do any additional questions
anyone has here? I'll go first.
I wanted to ask you, Dan, about your suggestion of the
energy efficiency resource standard. One of the things we run
up against, obviously, is a political reality around here. That
is any time you start saying we're going to impose requirements
on utilities, part of the push back is that this is the State
Regulatory Commission's job, they ought to be doing it. In fact
you pointed out, I think, there are eight States that have
something like an energy efficiency resource standard in place
now.
As an alternative to doing a national energy efficiency
resource standard, what if we were to provide some Federal
incentive and we can discuss what that would be, for States to
do that? Basically it seems to me there are sort of three main
things that State utility commissions ought to be doing to
increase efficiency in the use of electricity and natural gas.
One is this decoupling between the sales and the profit
that utilities can achieve. One may be something like you're
describing with the energy efficiency resource standard, and
perhaps a third is this feed-in tariff idea that they've
adopted in Europe, that the utilities have adopted, where
basically the utility says to the customer, if you go ahead and
produce energy through a solar system or through a wind system
or whatever, we, the utility, will agree to buy that from you
at an increased cost over what we can sell you electricity at.
Now that's been very effective in Europe. I think that
again there would be a strong sentiment around here that that's
something the States ought to be doing and not the Federal
Government, just because that's the way things have been done
historically.
What's your thought as to this idea? What can we do or
appropriately do at the Federal level? Is it more appropriate
for us to try to incentivize the States, State regulatory
commissions to do?
Mr. Reicher. Mr. Chairman, first of all the energy
efficiency resource standard, I think is a good idea and can be
pursued at the State or the Federal level. We've seen in a
number of States working now.
I guess I would go back to a question. We also see States
succeeding with renewable portfolio standards in the same way.
So, in my view actually, as a number of States have succeeded
at both of these, the question has become what about a more
uniform Federal approach? So I don't actually distinguish
between the jurisdiction of States vis-a-vis an RPS versus an
EERS, and energy efficiency resource standard.
I think we have a patchwork of State standards in
efficiency, a patchwork of State standards in renewables, and
we ought to adopt a broader Federal approach.
Interesting question whether you do a Federal RPS together
with an energy efficiency resource standard or whether they are
stand-alone, but I do actually feel like it's time to sort of
set a floor for energy efficiency as this committee has done
with respect to renewable portfolios.
Having said that, I also do agree that incentives can be a
very, very effective tool for driving efficiency. I think that
incentives for building codes are a good example. We have huge
success with building codes in certain States and in others,
they're non-existent, and that can drive a great deal of
efficiency investment.
I think that the decoupling that you talked about between
sales of electricity and profits is essential. States that have
stepped up and moved decoupling forward have really shown that
utilities can both make money and we can also reduce demand.
So, the bottom line I think is that I do in fact think we
have great complementarity between renewable portfolio
standards and an energy efficiency resource standard. You
should consider them both at the Federal level, but I also
think that incentives can drive a great deal of this as well.
The Chairman. John.
Mr. Denniston. Senator, great question. I have three
comments.
The first is to the question of whether there's a Federal
or State-by-State approach. I know that the history is State-
by-State. It just seems to me that if we have a sense of
urgency about solving these problems that a Federal approach
has advantages to moving quicker and pushing things along much
faster than State-to-State. Many States have shown leadership
in this, but it just seems that the Federal approach, properly
done, would have some advantages.
Second point is, I think it's very important for Congress
to analyze the differences between a renewable portfolio
standard and a feed-in tariff. An RPS regulates volume. Feed-in
tariff regulates price. Those are two completely different
approaches. Germany has gone with the feed-in tariff.
We don't have time to go through the complex differences
between the two, but the one issue that I would extract from
the debate for you, Senator, is that one thing I think Europe
has done well in structuring their program is to give a broad
range of renewable sources a chance.
So the risk of just doing a volume-based RPS is that the
U.S. utilities will buy what today is the lowest-cost renewable
source that by definition, will leave out other renewable
sources that may have cost reduction curves in the future that
beat the cost leaders today.
None of us can predict what these cost production curves
will look like, but the one principle that I would urge is give
a lot of different renewable sources a toe at the starting
line, and let them run, and let's see over time what the cost
reduction curves look like. So those would be my comments.
Mr. Liebreich. Could I just make a brief comment?
The Chairman. Certainly, please.
Mr. Liebreich. Because there's a very, very active debate
in Europe about the certificate-based system, so it's
equivalent of a renewable portfolio standard versus the feed-in
tariff. Particularly the European wind industry is extremely
keen to maintain the feed-in tariff structure.
It has been very, very kind to them. One could argue that
it's been too kind to them, because it's extremely difficult to
build it down in mind with the technology developments that
come around in the future. So going with the more volume-based
approaches, it feels like there's a lower chance of excess
subsidy or excess support, but it's a very, very active debate.
It's not a debate that anybody, I think, has a single
answer to, so I think I would take those two separate
questions. One is what's the best answer here on that debate,
and there's a separate question, which is should that then be
applied at a State or a Federal level? If possible I would
disaggregate those two questions, and it requires some analysis
to think about the cost of any programs under those two
approaches.
Mr. Reicher. And Mr. Chairman, just to follow up quickly.
The Chairman. Yes.
Mr. Reicher. The beauty of linking efficiency and
renewables is that in fact if you can lower demand, that rather
expensive green electron can go further. That's the point of
cutting demand as we move renewables, importantly, into the
mix.
We get more out of whether it's Federal dollars or private
dollars going into the development of those renewable sources.
So I think that's the beauty of linking efficiency and
renewables in a system.
The Chairman. Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman. Continuing on
the efficiency area, obviously one of the big advantages that
we have in this energy opportunity before us is distributed
generation. The notion that people can start creating sources
closer to home and delivering those energy supplies closer to
home and in that as we look at incentives along the energy
grid. Where do you think we should focus our attention? Because
there obviously are transmission efficiencies and digitizing
the grid itself, making it a smart grid.
There are incentives to businesses who might do things like
smart metering, or help with net metering, and then there's
incentives to consumers who may obviously invest in technology
that would help them with their energy use at home. So, I don't
know if you've given thought to that and whether you, the
Pacific Northwest Lab came out with an estimate that you could
get a double-digit savings out of energy efficiency if we made
these advances and what I just call, digitizing the grid? But
if you could comment on those two points. Where should the
incentives be, and do you believe this double-digit savings
estimate--anybody who wants to answer?
Mr. Liebreich. I think the attractive aspect of those
ideas, those areas that you're talking about is that very often
they actually have a positive payback. Energy efficiency, power
saving, will actually have a positive payback, and very often
the reason they're not done is because the consumers have a
lack of access to either information, or lack of access to
capital, or they simply don't pay back quickly enough for those
consumers.
So, I think that incentives will work, perhaps, but there
also needs to be a level of regulation to cause people to do
even things like compact fluorescent light bulbs. People tend
not to unilaterally go out and change all the light bulbs in a
house even though it has a positive payback. So there is a role
there I think for regulation.
Senator Cantwell. Okay, John.
Mr. Denniston. Senator Cantwell. There's a very active
debate within the venture capital community about whether
there's an analogy between what we saw in the information
technology field that went through a transition from
centralized computing to distributive computing.
Senator Cantwell. I think everybody knows the web is a
distributive generation, obviously model cell.
Mr. Denniston. Right, exactly. So the question is, is that
an apt analogy for our energy system? The arguments in favor of
a future of distributive generation are what you said--
efficiency--where you don't have load loss if the energy
sources are localized, and there's also a security issue where
you have no single point of failure.
Senator Cantwell. But my question is and if you haven't
given enough thought to it yet, is we look at this, obviously,
the focus is of, given our challenges on foreign oil and other
issues, how can we make this change happen?
So my question is in looking at that, where do you think
the incentives should be? Should they be on transmission
capacity? Should they be more to businesses or should they be
to consumers, or maybe they should be on all three? I'm just
curious if people have given thought to that.
Mr. Reicher. I'd say that we have an electrical system that
we have today and it's going to change slowly, so in my view we
do need to make transmission investments if we want to pull
wind out of the Midwest and the Pacific Northwest and move it
to other regions. We need upgrades in major transmission.
At the same time incentives for distributed generation both
at the commercial level and at the residential level, I think
are very, very important. I think a tax incentive for onsite
co-generation, smaller scale co-generation, could be very, very
helpful.
I think incentivizing consumers to buy more efficient
products to more web-enabled products. I mean someone talked
recently, imagine a computer chip in a dryer so that on a hot
day in the summer when it's 100 degrees out you have a choice.
You can either, the power company can say to you, if you want
to dry your clothes now, it will cost you X dollars, if you're
willing to wait 4 hours when the demand has decreased
significantly, it's going to cost less. These interactive, web-
enabled sort of systems that frankly, my company is quite
involved with, I think are very, very powerful ways to get to
energy efficiency in a much faster rate then we have today.
Mr. Denniston. Could I just offer a very brief answer to
your question? I would urge Congress to give distributed
renewable energy sources a shot. I think, let the market prove
it.
What I told Senator Bingaman before is what I would urge,
in answer to your question, Senator Cantwell, which is, we
don't know what the costs of these energy sources will look
like 10, 20 years in the future. It could be that our energy
system migrates toward a distributive model, but unless we get
these distributed sources of generation in the marketplace,
they'll have to have a very difficult time in getting there and
getting there fast.
Mr. Peters. Connecticut has an example. We have
incentivized both the residential user as well as commercial
developers of distributive gen to provide a renewable source of
energy, while not taxing the existing distributive system,
because we simply have upgraded in southern Connecticut as much
as we can. We don't have any additional capacities, so the only
way that we could go forward was to provide these incentives.
They have been very effective for about two megawatts of
distributive gen in the last 2 years.
Senator Cantwell. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Corker.
Senator Corker. You all are all market people and you're
all putting real money out into investments albeit the industry
that you're interested in is one of alternative energy and
seeing growth there.
Is there a way--you know cap-and-trade is something that
most of you have referred to today, and obviously cap-and-trade
is one of those bought right have sold, meaning that on the
front end when the deal is made you either create tremendous
wealth for people just by virtue of the way you set it up, and
in some cases tremendous liabilities.
But assuming that could be overcome, which is very, very
difficult, is there a way in your minds, since you are market-
based, to create a cap-and-trade system that doesn't slow the
GDP of the United States but actually causes it to remain the
same or grow? Is that just absolute, is there any way of
actually doing that, and if so what would be the components of
that?
Mr. Musk. Well, I think part of it is where you set the cap
and if you set the cap high enough and maybe turn that down a
little bit over time that would certainly ease the burden of
introducing such a system. I think that's probably a good way
to go.
The details of a cap-and-trade system matter a huge amount,
as I'm sure you're aware. If there's some distortion in the
system, it will have a very negative effect. So I think
something like that must be thought through very carefully, but
I think the smart way to do it is just to start with a high cap
and see what happens and then turn it down over time.
Senator Corker. So a high cap in essence, one that has no
short-term impact.
Mr. Musk. I wouldn't say it's no, but it would be small.
Mr. Liebreich. I think the short answer in the short term
is probably naught, because if it's working then it is taking
out some of the lowest cost-generating capacity, generally
coal-based, and there's going to be a cost to that, but I think
you've got to take a long-term view of, if it also creates
technological leadership that spurs technological leadership in
the United States, or it causes the U.S. manufacturers to be at
the forefront providing the equipment and the solutions.
Then I think in the long term you could see that it could
be a benefit to the GDP, but I think it's a very difficult
question. It is clearly something that can have a negative
impact on international competitiveness, which is why I would
say that engagement in the global process is critically
important.
Mr. Denniston. I would echo that. I think there's no
avoiding the fact that a cap-and-trade system or carbon tax
imposes a tax on an emission that currently doesn't have a cost
in the system, so you're creating a new cost in the system. The
hope is that innovation and a new industry is created that
counteracts the effect of the new cost being imposed on the new
system.
The one analogy I can think of, Senator Corker, is the
Clean Air Act of 1990 created a cap-and-trade system for sulfur
emissions, and there were a number of pundits who predicted
that the costs per ton of that program would be $2,000. The
reality is, it's an order of magnitude less, $200 dollars a ton
and it's been a very, very, very successful program. Sulfur
emissions as a result of that program, single-handedly, as a
result of that program are down 50 percent.
Senator Corker. These are sort of outliers but we talked a
little bit about the public markets here in our country and
which is where Michael is, I think, and you guys are on the
venture side and of course on the debt side.
Is that a real impediment to your companies as it relates
to getting that point of equity that you're looking for in
venture capital? Is the fact that that most of the alternative
energy market is not based here, from the standpoint of public
financing an impediment to Kleiner Perkins or other venture
capital entities?
Mr. Denniston. I want to make sure I'm clear on the
question. Is it an impediment that----
Senator Corker. You're looking for a level of equity.
Mr. Denniston. Correct.
Senator Corker. Your whole deal is to put some money in.
Mr. Denniston. Right.
Senator Corker. And develop the technology, and you look
for equity. Many times, most of the time, I guess, it happens
in a public market.
Mr. Denniston. That's right.
Senator Corker. Is the fact that the technology you're
involved in mostly, the public financing for that is off shore
some other place, is that an impediment to yours, to way the
world is today, that simply just another place for that level
of equity to take place?
Mr. Denniston. It's a great question. My own view is that
just as we're seeing global competition for our products, we're
seeing global competition in the financial services industry. I
think it's a major issue for the United States. We are
outsourcing a lot of financing to other countries and so many
U.S. companies are now going public on the AIM for a number of
different reasons, and I do think that's an issue that does
need to be addressed. Yes.
Senator Corker. May I follow up?
The Chairman. Yes.
Senator Corker. And is that generally speaking, SOCS, or is
something else that's generating that movement to London and
other places?
Mr. Denniston. The pitch from the AIM bankers is come
public on AIM, not in the United States. It will take you half
the time, cost you half as much. You'll publicly report half as
often, twice a year, not four times.
You won't have to comply with SOCS and we don't have a
litigious environment in our country, and so SOCS is certainly
a major reason. But it's a package of different things.
Mr. Liebreich. Senator Corker, may I add that we've done
some analysis of the market performance of clean energy
companies within the countries that ratified Kyoto and the
countries--truthfully, the United States and Australia--that
didn't, and the performance difference was absolutely stark.
I don't have the exact figures with me here, but I'm happy
to follow them up as a written submission. But during 2005,
there was something like a 60 percent out-performance of clean
energy companies in Kyoto-ratifying countries and then there
was another 30-percent-odd in 2006.
This is just too big of a difference for those people who
are either financing pre-IPO, pre-public companies, or for the
managers of those companies simply to say, ``Well, you know we
want to go on NASDAQ anyway.'' So, it is a fact that the
European markets have been a more welcoming environment, I
think for the reasons that John has explained, but also because
the investors are more comfortable with those sorts of
companies operating in those industries.
There's more certainty about the future, and the current
levels of uncertainty about U.S. Federal policy is causing part
of that. It's causing part of that migration of good companies
to quote in Europe.
Mr. Reicher. Senator, could I follow up? Linking these two
questions that you asked about the economic impacts of cap-and-
trade and investments here in the United States, I think cap-
and-trade is necessary but not sufficient. We're going to have
to do an awful lot more than cap-and-trade in terms of our own
energy policy and things that this committee is looking at,
even if we were to set a cap and begin to trade under it.
Particularly if we want to see the investment made here in the
United States as much as possible in controlling climate
emissions, if we want to incentivize U.S. companies to do that.
So I think this sort of energy legislation that you're
looking at here, renewable portfolio standards, efficiency
standards, incentives, a whole host of things are going to be
very important complements to the ultimate cap-and-trade system
that I hope we adopt. But they'll also be very critical to
making sure that some of the up side that we see from
controlling carbon emissions come home to the United States
with the investment in wind farms, the investment in other
sorts of things in fact happens here, as well as other places
as it needs to.
Senator Corker. And I hear that, and that's exciting to me,
but just based on the past experiences I've had at the same
time it does sound like just without those certainties, we're
seeing tremendous amounts of investments right now on venture
capital and those technologies, so both can't be true.
Mr. Reicher. Both can't be true, meaning?
Senator Corker. Well, I understand about the uncertainties,
especially with petroleum prices fluctuating the way they are,
but at the same time I see huge, huge volumes of investment
going into new technologies, so both can't be true.
I mean we're seeing a tremendous escalation in investment
which truly is exciting to me. We play a role in that in my own
city and are excited about that, but there's, I guess, a
statement you want to make about that.
Mr. Denniston. If that's okay? To put this into context, I
don't think that the capital flows into green tech are large by
any means in the context of the scope of the industries that
we're talking about. They're microscopic.
So last year the venture capital industry in the United
States invested $2.5 billion in green tech companies, roughly
$1 billion of that were to build ethanol plants. So the core
technology investment piece is roughly $1.5 billion and the
energy and transportation markets in this country are $1.5
trillion, one-tenth of 1 percent, and if you think of that as
the research budget that we're putting to play in this vast
sector, it's microscopic. You can even add to that, DOE's
annual research on renewables, which is in the couple-hundred-
million-dollar range, and it's a rounding error.
So the growth rate has been large from almost nothing to
$2.5 billion but relative to the scope of the problem, we're
dealing with very, very, very small numbers, Senator.
Mr. Reicher. And Senator, you may have not been here when I
emphasized the distinction between technology investing and
project investing.
Technology investing, critical, but relatively inexpensive
compared to ultimately deploying these technologies globally.
We are literally talking, literally talking tens of trillions
of dollars over 30 years.
However we transform our energy system, hopefully toward a
more sustainable one, but just given world energy growth, given
turn over in stock, all sorts of things, we're putting
trillions into this sector of energy over the next few decades.
So even though as we've just heard it's absolutely exciting,
heartening the increase in technology, it's going to, I think,
give us a lot of benefits.
We have not seen a corresponding ramp, I think, in the
level of project investment that we're ultimately going to have
to get to if we really want to transform our system.
The Chairman. Do you have another question?
Senator Corker. Just one more.
The Chairman. Go right ahead.
Senator Corker. Obviously, and that was great testimony to
put it in perspective, obviously one has to precede the other.
Mr. Reicher. Right.
Senator Corker. The technology before you have the project.
I'd like to go back to one last question with Elon, and that
is: what is your production level? That is a project?
Mr. Musk. Yes, absolutely. It's a good question actually.
Basically with every new technology, you start off with low
production volume and roughly high unit cost. That's why we
start off with a sports car. It's $92,000, we expect to make
somewhere between 1,000 and 2,000 cars a year, starting later
this year. Development is essentially done, so we're just
spinning up the factory to get those done.
In 2009, we'll deploy our $50,000 sedan; that's a four-door
family car. That will also have a range of about 250 miles,
maybe more because we're attempting to advance the energy
density of the battery pack and that will be somewhere between
10 and 20,000 units a year.
Model three which will be probably a couple of years after
that, that's where we'd like to get down to the $30, $35,000
range and 100,000 to 200,000 units a year, eventually getting
to millions of cars per year.
Senator Corker. And capital flow is in place to make those
production levels happen at present?
Mr. Musk. It is for the roadster and it will be, I feel
quite confident for model two, which is code-named Whitestar.
Senator Corker. Mr. Chairman, thank you for being so
generous.
The Chairman. No, thank you, for having such an interest in
being here. Again thank you to all of the witnesses. I think
it's been very useful testimony and we will try to take your
good recommendations to heart and try to do some things
legislatively.
Thank you very much. That ends our hearing.
[Whereupon, at 11:40 a.m., the hearing was adjourned.]
APPENDIX
Responses to Additional Questions
----------
Responses of Jerome P. Peters, Jr. to Questions From Senator Bingaman
Question 1. One of your primary critiques of the Department of
Energy loan guarantee program is that it does not appear to take on
enough of the technology risk to entice debt financing. Do analogous
programs at the Department of Agriculture take on this risk?
Answer. It's not that the DOE loan guarantee program does not take
enough technology risk to entice debt financing, it's that the
structure of the guarantee program forces the ``First Loss'' risk on
the lenders. By only guaranteeing 80% of the debt amount, that leaves
the lender with 20% of the loan which is not subject to the guarantee.
The real problem with the DOE structure is that upon a call on the
guarantee, the DOE now has a first lien on the project assets and the
lender cannot recover the 20% un-guaranteed amount until the DOE has
fully recovered their guarantee payout, almost surely resulting in the
lender loosing 20% of the loan amount.
In customary ``project finance'' loans, the lender is given the
first lien on all of the project assets and if a guarantee is not
sufficient to repay the debt in its entirety, the lender can liquidate
the assets to make up the balance. Many lenders, including TD Banknorth
N.A., might be willing to accept a DOE loan guarantee program that only
covers 80% of the loan amount but only if they maintain the first lien
status and the rights to liquidate the assets to recover their loan
oustandings. In many cases a total ``call'' on the DOE loan guarantee
may not be needed. We may only need enough to ``fix'' the project so
that it can ``earn'' its way through the repayment of the debt. Again,
under the current DOE guidelines, this would not be possible. To my
understanding the USDA Business and Industry Guaranteed Loan Program
resolve this risk.
Question 2. Given that we are trying to push to commercialization
generally unproven technologies with some inherent uncertainty about
their eventual success, do you have some thoughts on how the government
could manage risk to the taxpayers while still fulfilling the financing
needs currently going unmet by private lending?
Answer. I will again revert back to an analogous program at the
Overseas Private Investment Corporation which takes on risks unmet by
private lending. It is nearly impossible for private lenders to assess,
much less mitigate, the sovereign risk involved with foreign government
backed loan guarantees. OPIC mitigates such risks by charging lenders/
sponsors ongoing fees to guarantee the obligations of such governments
based upon the relative risk that each government poses for non-
payment. In the same Way, the DOE would charge technology guarantee
fees based upon the relative risk presented by each technology. More
advanced technologies like fuel cells and IGCC might carry lower fees
while less advanced technologies would carry higher fees. I would not
rule out the possibility that the DOE might be able to obtain some sort
of ``equity kicker'' for providing guarantees to some of the more risky
technology deployments, much like what technology funds receive for
early technology investments.
Response of Jerome P. Peters, Jr. to Question From Senator Akaka
Question 3. What is the proper role of government and private
sector financing for large advanced alternative energy production
plants? How should technology-specific federal loan guarantees be
structured?
Answer. The role of government and the private sector differ
significantly in the financing of large advanced alternative energy
production. The private sector will always invest if they believe that
they can get an adequate return on their investment given the risks
that they have to take. The higher the risk the higher the return
expectations. During any commercialization process, there are very high
risks associated with scale-up and operational costing. These risks are
usually taken by venture capitalists but carry the cost of very high
rate capital.
Initially, most new technologies cost more to build and more to
operate than existing technologies until those costs are reduced
through the expected economies achieved through commercialization.
Historically, alternative energy production has had to compete with
conventional energy production on a cost of production basis. It is
doubtful that large scale new technology deployment will be
successfully achieved given its higher capital and operational costs.
Technology grants and technology guarantees from governments can often
level the playing field and enable new technologies to gain a foothold
against existing energy infrastructure until such time as the
commercialization economies are achieved.
Since the risks associated with new technology deployment vary by
technology, it seems reasonable that the structure and the type federal
guarantee might vary as well. I will explain by example. The technology
risks associated with the deployment of cellulosic ethanol projects
differ greatly from the technology risks associated with the deployment
of utility scale fuel cell projects. Utility scale fuel cell projects
are much further along the technology development timeline than
cellulosic ethanol projects.
While there are many unknowns in the commercialization of
cellulosic ethanol production, (capital cost per unit of production,
operating costs, collection and storage of cellulosic material to name
a few) there are far fewer unknowns with utility scale fuel cell
commercialization. A complete federally backed loan guarantee program
along with technology grants may be required to permit the deployment
of large scale cellulosic ethanol production to enable it to compete
with existing corn based ethanol production. With most scale-up
questions already answered, utility scale fuel cell projects may not
need a loan guarantee program and may only need the have the federal
government guarantee stack replacement intervals which could be
significantly less costly to the government than an 80% loan guarantee
if called.
There are many other examples of technology specific solutions
which could potentially be less costly and less capital intensive
(appropriations) which could be applied to enhance new technology
deployment. The establishment of a dialogue between the stakeholders
(government, technology providers and investors) will be necessary to
identify the risks, either real or perceived, of each technology and to
develop appropriate programs to mitigate them.
Responses of Jerome P. Peters, Jr. to Questions From Senator Salazar
Question 4. When we look at a Renewable Portfolio Standard (RPS)
and look at changing the Renewable Fuels Standard (RFS) in this
committee as part of our energy bill, what does that do in terms of the
private market looking at investments in the renewable energy area?
Answer. There is no question that the combined implementation of a
national Renewable Portfolio Standard (RPS) and a national Renewable
Fuel Standard (RFS) would significantly increase the pace of growth of
the renewable energy industry in the United States. Investors in the
renewable energy projects would take great comfort in knowing that
there will be a continued need for the renewable product produced by
their projects and that the products themselves would not necessarily
have to compete on the same cost basis as conventional energy products
due to the RPS/RFS requirement.
The traditional way our government has provided incentives for new
investment in renewable energy infrastructure projects has been through
the granting of tax incentives (investment and production tax credits
and accelerated depreciation). The major problems with tax incentives
is that (1) you have to be a current taxpayer to be able to utilize the
tax credits and (2) the incentive programs have lapsed several times in
the past 20 years causing fits and starts in project investment. Many
technology developers have invested significant amounts of capital in
the technology development phase with little or no revenue coming
through the door. These accumulated losses negate the benefit provided
by the tax credits. Most projects are thus sold by their developers to
``Tax Investors'' who require a premium return on their investment in
return for utilizing their ``tax base''.
The implementation of an national RFS/RPS would provide a long term
stable growth environment for renewable energy investment. The free
market atmosphere afforded by a national RPS/RFS would allow renewable
energy technologies to compete against each other and not with
conventional energy. Provisions could be made to allow emerging
technologies a chance to compete early in their development cycle by
providing a ``modifier'' for energy produced by that technology much
like what is currently contained in the RFS for cellulosic ethanol.
By far the most beneficial attribute to a national RFS/RPS would be
the elimination of tax incentives which would create a level playing
field for all investors and lower the cost of capital for these
projects by opening up the investment market to all investors
regardless of their tax base.
Question 5. Loan guarantees have been discussed as an important
federal incentive to drive clean energy development. Titles 15 and 17
of the Energy Policy Act of 2005 authorize the Department of Energy to
provide loan guarantees for energy projects that employ new or
significantly improved technologies to avoid, reduce, or sequester air
pollutants or reduce greenhouse gas emissions, and the FY 2008 budget
proposes implementing a loan guarantee program that includes $4 billion
in loans for projects that promote biofuels and clean transportation
fuels. In my opinion, the Department of Energy has been slow to
implement this program in a manner that best supports this industry.
Can you address ways that this loan guarantee program could be improved
to spur the use of cellulosic biofuel projects?
Answer. There are three problems with the current federal
legislation including loan guarantee program pursuant to Titles 15 and
17 of the Energy Policy Act which will negatively affect the
development of cellulosic biofuels: (1) the guarantees are unfunded,
(2) the DOE's program is flawed (see answer 1) and, (3) the current RFS
standards have already been achieved.
The Congress needs to fund the guarantee program and fix the flaws
in the DOE guarantee program before any investment will come from the
private sector into cellulosic biofuels production infrastructure.
Given cellulosic ethanol project's higher capital costs, it is not
likely that those projects can compete with corn based ethanol
production in the near. Congress, through the passage of a new RFS with
a similar cellulosic ``modifier'' would allow cellulosic ethanol to
compete.
Question 6. Can you explain further how you envision Congress
working with the utility sector to develop incentives to encourage the
utilities to promote energy efficiency with their customers?
Answer. I do not feel as though I am qualified to answer this
question.
Question 7. 25 Senators and 46 Representatives have endorsed the 25
x 25 initiative to get 25% of our energy from renewable sources by
2025. Do you have suggestions for policies Congress should consider
that would help us meet this 25 x 25 goal?
Answer. Various states have set renewable energy goals and have
backed them up with meaningful RPS's. I certainly don't see why the
federal government could not draft a national RPS which could achieve a
25% renewable source content in the next 25 years. History has proven
that when states have set a renewable energy use goal but have not
mandated a RPS that the states have failed in achieving the milestones
that they have set. In states where the renewable goal is backed up by
an RPS, those states have met their milestones. (NY and CA as
examples).
Question 8. In your testimony, you discuss how alternative energy
technologies are at a disadvantage because they have to compete for the
same capital against fossil fuel technologies, which may have
significant ``externalities,'' such as security concerns and
environmental footprint that are not priced in the cost of that fossil
fuel. What effect would a reasonable price on carbon have on the
economics of alternative energy technology demand? What is the most
efficient way to put a price on carbon?
Answer. In addition to a national RPS, a national carbon tax or a
cap and trade programs are both excellent means to provide that level
playing field to allow clean and renewable energy to compete with
conventional fossil fuel energy. A carbon tax program could be
developed to create a system of transfer payments from carbon emitters
to renewable and clean energy producers thus making the carbon emitters
pay the true cost of their energy production. The problem here is
setting the proper price for that carbon emission.
I prefer a ``cap and trade'' approach to carbon emissions where the
free market system set the price for carbon emissions.
Question 9. We hear a lot of talk about the need for next
generation energy technologies to address greenhouse gas emission
reductions and the role of federal policies to achieve that goal. To
what degree can Congress help bring these new technologies to market in
the absence of a market signal such as a cost on carbon emissions?
Answer. Again I believe a properly structured carbon cap and trade
program would provide sufficient incentive to those ``next generation''
of energy projects which will either sequester or not emit carbon. When
deciding how to replace existing fossil fueled energy production or
when adding new production, the generator must take into account the
market price for the carbon credits either avoided or added. In either
case, that market price for emitted carbon will dictate the technology
choice.
Responses of Jerome P. Peters, Jr. to Questions From Senator Domenici
Question 10. You note in your testimony that the USDA loan
guarantee program is properly structured. Can you describe the elements
of that program that you believe make it successful?
Answer. The USDA Business and Industry Guaranteed Loan Program as I
understand it, provides a full guarantee of the loan amount for up to
80% of project cost. The full guarantee level avoids the lenders need
for a first lien position.
Question 11. You note that some emerging energy technologies, such
as fuel cells and solar power units, have difficulties entering the
market because of uncertainty about their useful lifetime. How can the
government help these technologies enter this market?
Answer. In certain technologies, the lenders may need a loan
guarantee for the full amount of their debt due to the possibility of a
complete failure of the technology to deliver cost competitive products
such as in cellulosic ethanol projects. The two main risks associated
with cellulosic ethanol projects are the fact that no one has built,
and no one operated, a commercial scale project to date. Therefore no
one really knows how much it will cost to build a project and no one
really knows how much it will cost to actually produce a gallon of
cellulosic derived ethanol.
In the case of utility scale fuel cells and concentrated solar
thermal/PV projects, the primary risk issue is related to the expected
life of the components that make up the projects. In the case of fuel
cells, stack life expectancy and degradation in efficiency are the
primary risk issues. Solar cell life expectancy (concentrated solar PV
issue) and durability in tracking systems (solar thermal issues) are
the main risk issues in solar projects which are difficult for lenders
to get comfortable.
Most of the companies which are developing these technologies have
demonstrated that their products work quite well and that they can
deliver these products at a predictable cost. They have not been able
to demonstrate, to the satisfaction of private lenders, that their
products will last 20 or 30 years and will not degrade significantly
over time. This is due to the fact that their existing fleet of
demonstration projects have not accumulated enough operating time to
prove the point of long term durability and reliability. Most, if not
all of these technology companies, lack the financial strength to
provide a meaningful (and acceptable) long term warrantee on their
products.
I believe that, while the government could provide a full loan
guarantee, which would certainly satisfy most private lenders, a lesser
level of government support would satisfy most lenders. The government
may decide that is less costly to back the technology providers long
term warranties on its concentrated solar panels or back guarantees of
fuel cell manufacturers stack replacement intervals.
Under a worst case scenario, the government might find itself in
the position of paying for a few extra solar panels to make up for ones
that fail or paying for replacements of fuel cell stacks every 4 years
rather than every 5 years. The government might want to limit its total
exposure to no more than 80% of the project cost which would be
acceptable to most lenders. I believe that the potential long term risk
exposure to the government under this type of guarantee program would
be much less than a flat 80% federal loan guarantee.
Responses of Jerome P. Peters, Jr. to Questions From Senator Thomas
Question 12. At the hearing, every witness advocated for some form
of federal subsidies to advance energy technologies. I believe that the
central theme of the hearing was, primarily, how we get private
companies to unleash their ingenuity as part of a free market, however.
I am concerned about this tendency to advocate for more government
intervention. The question I'd like to see answered is how we achieve
advanced energy technologies with minimal government intervention. We
can, and should, advance energy technologies by doing something other
than spending taxpayer money. We can look at automobile mileage,
streamlined facility permitting, modernized efficiency standards, and
federal assumption of liability for demonstration projects. I do
believe we must do these things in the absence of a price on carbon
too, given that those costs will merely be passed along to consumers.
In that context, can you provide some purely regulatory approaches that
you believe would advance energy technologies without requiring a
significant expenditure of federal dollars through direct
appropriations, tax credits, or other forms monetary support?
Answer. I have no answers to this question.
Question 13. You stated in your testimony that the DOE Loan
Guarantee Guidelines prohibit the substitution of equity to make up for
un-guaranteed debt. Can you provide some examples of equity that could
be used to offset the 20% required of applicants? Do you believe that a
coal seam, to be used as a feedstock for a project, should qualify?
Answer. According to my interpretation of the DOE guidelines,
additional equity cannot be contributed so as to offset the 20% un-
guaranteed portion of the project debt. I would assume, that provided
the purchase of the coal seam was part of the qualified ``Project
Cost'' that its contribution by the sponsor in lieu of cash should
qualify a equity as defined in the DOE guidelines.
Question 14. You spoke of the need to establish goals that advanced
energy technologies should seek to accomplish. At the end of your
written testimony, however, you discuss technology-specific federal
backing that may be needed. Can you clarify for us as to what approach
you believe is most appropriate? I am concerned that politicians,
myself included, and not the free market may end up choosing the
technological winners and losers.
Answer. I believe that we as a nation should choose, through our
elected representatives, what goals we want our renewable technologies
to achieve. If we, for instance, choose that cost of production is the
most important criteria, then we must choose the lowest cost
technology. This has been the case for the last 10 years as state and
regional utilities have held competitive bidding solicitations for
renewable power generation. Wind generation has won the vast majority
of these solicitations on the basis of cost alone. It is currently the
cheapest technology to deploy and operate and was the only viable
technology benefiting from the Production Tax Credit until the passage
EPA 2005.
If on the other hand, we decided as a nation, that base load power
capabilities and utilization of our nations huge coal reserves was the
objective, then different technologies would be chosen which may not be
the cheapest to install of operate. My belief is that we as a nation
must deploy many diverse technologies in order to achieve a wide range
of objectives from reduction of greenhouse gases to providing more
efficient base load power. Only then can we begin to allow the
commercialization process to determine the cost effectiveness of each
technology.
______
Responses of Michael Liebreich to Questions From Senator Bingaman
Question 1. You mention as a primary constraint on investment in
the United States the lack of policy certainty with regard to clean
energy. In your survey of markets in other countries have you
encountered policy regimes that were particularly effective in spurring
investment in clean energy?
Answer. New Energy Finance is not a public policy think tank and it
is not our role to render judgement on which clean energy incentives,
mandates, or subsidies have accomplished the overarching goals of
promoting energy independence or reducing greenhouse gas emissions.
However, since our firm specialises in tracking capital flows in clean
energy, we can speak with some authority on which programmes have
successfully sparked investment activity. Below is a glance at key
policies around the globe.
In Germany, a generous feed-in tariff scheme for solar power
development has created its intended ramp in production and
consumption. Currently, the country dominates the world PV market,
making up an estimated 44% of all new build photovoltaic installations
in 2006 and driving up module prices worldwide. This has been achieved
through a feed-in tariff of $0.61-0.75 per kilowatt hour, and a tax
credit system for individuals. While smaller systems get a higher feed-
in tariff than large ones, the difference is not sufficient to
preferentially incentivise distributed generation, and so the German
market is slanted towards utility-scale power plants on agricultural
land.
The aim of the tariff was to foster the domestic PV manufacturing
industry, which indeed has seen incredible growth since 2004. But the
tariff declines 5% per year, and that has begun to slow the German
market. Moreover, there are questions over whether Germany was the
right place for such a generous tariff programme given the country's
unspectacular solar resources. Today, Germany's manufacturers are
struggling to diversify their markets to find more than just domestic
sales. And they are encountering stiff competition for large contracts
from lower cost producers in China.
In Spain, the government is also supportive of photovoltaic
installations on residential roofs and the development of large-scale
grid-tied solar thermal electricity generation (STEG) projects that
employ mirrors to generate heat and turn a turbine. In fact, the
country has a set a goal of 500MW of STEG capacity by 2010.
Under existing law, power generated from photovoltaic systems under
100kW in size in Spain can be sold for nearly six times as much as
power generated from other sources. This has led to large-scale
projects set up as multiple 100kW legal entities. The law is expected
to be reviewed in the next few months, but the market is growing fast.
Brazil's support for the use of alternative fuels is often cited as
a great success by ethanol supporters in the U.S. and elsewhere. But
the country's experience with clean fuels has seen its share of ups and
downs.
In response to the oil crisis of the 1970's, the government
initiated two parallel policies: increased oil prospecting and
increased substitution of ethanol for gasoline. This programme began
with a mandatory 10% ethanol/gasoline (``gasohol'') blend, which has
since increased to between 20-25%, set annually by the government.
The trajectory from 1975, when the programme began, to 2007 has
been discontinuous. By 1985, more than 90% of cars produced in Brazil
ran on ethanol--but at a high cost to the government in the form of
ethanol subsidies. These subsidies proved difficult for the government
to sustain as oil prices fell. When the government relaxed car import
regulations and reduced subsidies on the ethanol in the 1990s, many
consumers took the opportunity to switch to imported gasoline cars.
Flex-fuel vehicles had not at that time been developed, meaning that
consumers were tied either to gasoline or ethanol. Local car producers
were forced to adapt. By 1995, less than 5% of cars produced in Brazil
used ethanol.
Though falling oil prices had severely constrained demand for
ethanol, it did not destroy the industry. Brazil's ethanol was produced
primarily by family-owned sugarcane processors. These companies
regarded ethanol primarily as an alternative end use to their product,
so when sugar returns were higher than ethanol returns, they would sell
sugar, and vice versa. Today, the most advanced plants can switch from
producing one to the other in around an hour.
It was the introduction of flex-fuel vehicles that revitalised
Brazil's ethanol programme. In January 2004, FFVs made up a little more
than 10% of new light vehicle sales; by January 2006, they accounted
for almost 80%. FFVs allowed consumers to buy whichever of ethanol and
gasoline was the cheapest, and to run on any mixture of the two. Not
tying them into a particular fuel was evidently the way to persuade
consumers to accept ethanol through the market--but, of course, with
the implication that demand could dry up during a sustained period of
low oil prices.
In China, the country's National Reform and Development Committee
has set developmental goals for the country's renewable sectors for the
next decade to meet increasing energy demand and support a sustainable
economy. As of 2005, 7.7% of the country's primary energy use came from
renewable sources (including large-scale hydro) and the government has
aimed to up that to 15% by 2020.
To accelerate the development of renewables, Chinese officials have
announced plans to institute pricing mechanisms for wind, solar, tidal,
geothermal, biomass and hydro power. Officials say consumer electricity
rates will increase as the country's citizens bear the cost of
producing power more cleanly.
The government has also taken steps to insure that the economic
benefits of the development of clean energy projects stay within China.
For instance, a minimum of 70% of the parts in a utility-scale wind
turbine installed in China must be originated in the country. This rule
has compelled foreign wind turbine manufacturers to partner with local
companies in China in order to build out manufacturing capacity there.
Question 2. in your observations of other countries' public
incentives for development of clean energy technologies how have you
seen other countries manage the risks of investing in unproven
technologies?
Answer. Please see above.
Question 3. I'm intrigued by your comments about the effect on
domestic investment in clean energy technologies of ratifying the Kyoto
Accords. Can you give us some more information on what you've seen?
Answer. New Energy Finance closely follows the performance of
approximately 80 publicly-traded companies worldwide with a direct
involvement in clean energy through our WilderHill New Energy Global
Innovation Index, which can be tracked under the ticker ``NEX''. The
NEX includes a representation of the world's top wind turbine
manufacturers, solar cell producers, fuel cell developers, and other
companies with a significant involvement in clean energy.
We have found that NEX companies that trade on exchanges in
countries that are signatories to the Kyoto accords have performed
better than those trading on markets in countries which did not sign.
Over the course of 2006, Kyoto country stocks in the NEX gained 49%.
Meanwhile, non-Kyoto country stocks in the NEX rose 8%. Clearly,
investors have expressed a higher degree of confidence about companies
trading in Kyoto country markets.
Responses of Michael Liebreich to Questions From Senator Akaka
Question 4. You were quoted in Investment Dealers Digest (Feb, 12,
2007) as saying ``2007 will be a critical year for the clean-energy
industry. There has been no shortage of capital, but now the industry
has to deliver cost-effective power and fuels in large volume.'' If
capital is not an obstacle, what in your opinion, constrains large
power and fuels production?
Answer. In that comment, I was referring to the fact that over the
past 18-24 months, an enormous amount of venture capital has been
poured into early-stage technologies that have the potential to
revolutionise the energy infrastructure. The onus is now very much on
the firms that have received venture backing to prove their
technologies are viable. This will require a tremendous amount of
research, development, creative thinking, and hard work.
But technologists and entrepreneurs are not the only ones facing
challenges. Those who run the existing energy infrastructure are being
forced to adapt to a carbon-constrained world. For them, integrating
renewable resources into the grid poses a new challenge--significant
and unpredictable variability. By their very nature, wind and solar
projects offer intermittent sources of energy--when the wind doesn't
blow, a wind farm doesn't produce. As more such projects come on line,
utilities will be forced to find innovative ways to integrate them into
the existing power pool to insure demand is met seamlessly.
For policymakers, the challenge going forward will be to create
streamlined policies that not just promote renewables but ``get the
rocks off the rails,'' as Assistant Secretary for Energy Efficiency and
Renewable Energy at the Department of Energy Alexander Karsner so often
says. That could mean expedited permitting processes for clean energy
projects or the establishment of national transmission corridors such
as the two recently announced by the DOE.
Finally and inevitably, consumers themselves will be forced to make
some adjustments to living in a carbon-constrained world. This may mean
taking the steps to improve efficiencies in their homes by purchasing
compact fluorescent light bulbs or replacing drafty windows. It might
mean thinking twice before objecting to a local wind farm based on
NIMBY concerns. Or it could mean learning to accept slightly higher
monthly electricity bills that result from their state's commitment to
clean energy and energy efficiency.
Question 5. You were also quoted as saying, ``We need efficient,
minimally-distorting policy support frameworks.'' What would be an
example of this?
Answer. I believe the best policies are, in effect, technology
agnostic, i.e. they don't promote the use of one particular clean
energy technology or fuel. Rather, they set certain targets for an
industry or a region to achieve then leave it to the free market to
work out how best to reach the goal.
Governor Arnold Schwarzenegger of California's Low Carbon Fuel
Standard is an intriguing example of a technology agnostic policy. In
January, the Governor issued a directive requiring that passenger
vehicles in California reduce the carbon intensity of their emissions
by at least 10% by 2020. It is my understanding that Governor
Schwarzenegger intends to leave it largely to industry to sort out how
to achieve the target.
Responses of Michael Liebreich to Questions From Senator Salazar
Question 6. When we look at a Renewable Portfolio Standard (RPS)
and look at changing the Renewable Fuels Standard (RFS) in this
committee as part of our energy bill, what does that do in terms of the
private market looking at investments in the renewable energy area?
Answer. Raising and extending the U.S. standard could boost
investor confidence in the longevity of the U.S. biofuels sector. Over
the last six to nine months, major banks and private equity firms have
retreated from financing new ethanol plants after corn prices climbed
above $4 a bushel. Those higher feedstock prices have shrunk producers'
margins and also raised fears on Wall Street that publicly-traded
ethanol firms are over-valued. A higher RFS could convince investors
that there will be a strong market for ethanol longer term, regardless
of short-term corn or ethanol prices.
Question 7. Loan guarantees have been discussed as an important
federal incentive to drive clean energy development. Titles 15 and 17
of the Energy Policy Act of 2005 authorize the Department of Energy to
provide loan guarantees for energy projects that employ new or
significantly improved technologies to avoid, reduce, or sequester air
pollutants or reduce greenhouse gas emissions, and the FY 2008 budget
proposes implementing a loan guarantee program that includes $4 billion
in loans for projects that promote biofuels and clean transportation
fuels.
Answer. Energy Finance does not directly offer debt financing clean
energy companies or projects and thus I have had no direct experience
with DOE's loan guarantee programme.
Question 8. In my opinion, the Department of Energy has been slow
to implement this program in a manner that best supports this industry.
Can you address ways that this loan guarantee program could be improved
to spur the use of cellulosic biofuel projects?
Answer. Energy Finance does not directly offer debt financing clean
energy companies or projects and thus I have had no direct experience
with DOE's loan guarantee programme.
Question 9. Can you explain further how you envision Congress
working with the utility sector to develop incentives to encourage the
utilities to promote energy efficiency with their customers?
Answer. It strikes me that to a large extent there is little
Congress can do directly to compel utilities to pursue energy
efficiency programmes since utilities are primarily regulated by state
public utility commissions. However, Congress could provide
encouragement to both utilities and their regulators to pursue
responsible policies that promote energy efficiency measures such as
``de-coupling.''
Question 10. 25 Senators and 46 Representatives have endorsed the
25 x 25 initiative to get 25% of our energy from renewable sources by
2025. Do you have suggestions for policies Congress should consider
that would help us meet this 25 x 25 goal?
Answer. A federal renewable portfolio standard that codifies those
goals is one possibility. Another would be a comprehensive and
aggressive cap-and-trade programme that mandates major cuts in
greenhouse gas emissions. Such a programme would inevitably spur the
development of more clean energy projects as utilities and other
emitters seek to shrink their overall ``carbon footprints'' by
purchasing power from clean sources.
Question 11. In your testimony, you've discussed how alternative
energy technologies are at a disadvantage because they have to compete
for the same capital against fossil fuel technologies, which may have
significant ``externalities,'' such as security concerns and
environmental footprint that are not priced in the cost of that fossil
fuel. What effect would a reasonable price on carbon have on the
economics of alternative energy technology demand? What is the most
efficient way to put a price on carbon?
Answer. Please see my prior written testimony to the committee,
section six, item 5.
Question 12. We hear a lot of talk about the need for next
generation energy technologies to address greenhouse gas emission
reductions and the role of federal policies to achieve that goal. To
what degree can Congress help bring these new technologies to market in
the absence of a market signal such as a cost on carbon emissions?
Answer. I would argue there are a number of such options at
policymakers' disposal to promote the development of clean energy.
Please refer to questions 1, 5, 10 and others here for examples.
Responses of Michael Liebreich to Questions From Senator Domenici
Question 13. In your written testimony, you note that the United
States out-invested Europe by a factor of three in ``early stage
technology'' investing, while Europe invests more heavily in technology
deployment measures. If this trend continues, is it likely that
technologies originally developed in the United States will be
manufactured in Europe for their market, creating European jobs?
Answer. That is an undeniable possibility, given the nature of the
global economy. However, I would argue that it is more likely that
nations with substantially lower pay scales stand to benefit more than
Europe. China, for instance, has virtually overnight become a major
player in manufacturing the equipment used in photovoltaic panels.
Today, there are no fewer than five Chinese solar companies trading on
major U.S. exchanges with potentially more to come.
However, the nature of the global economy also offers opportunities
for U.S.-based manufacturing. For years, major wind turbine makers have
resisted investing to expand capacity in the U.S., primarily based on
concerns tied to the on-off nature of the federal Production Tax
Credit. With PTC extension now regarded as more likely, attitudes may
be changing. Indian wind turbine maker Suzlon, for instance, today
makes turbine blades and nose cones at a facility in Minnesota. In
March, Danish turbine maker Vestas announced plans to open a $60 m
plant in Colorado. And Spanish turbine maker Acciona plans to open a
facility in Iowa later this year.
Still, the majority of manufacturing of wind turbine components for
projects in the U.S. today takes place overseas. Should Congress pass a
long-term PTC extension, we could see further capacity build out in the
U.S. to meet expected demand.
Question 14. In your testimony, you noted that U.S. CEOs choose to
locate energy technology firms in Europe because of greater perceived
sophistication among energy investors. How can we address these
perceptions?
Answer. To clarify, what I intended to communicate is that in the
past we have seen U.S. companies float their shares on overseas
exchanges such as the London Stock Exchange's Alternative Investment
Market (AIM). The perception has been that investors in Europe were
more receptive to clean energy ventures because Europe has shown
greater commitment to cutting greenhouse gas emissions than the U.S. In
addition, the provisions of the Sarbanes-Oxley law generally do not
apply to U.S. companies who list on AIM, so going public there is less
expensive for small firms than debuting on NASDAQ or on the New York
Stock Exchange.
There are some signs that may be beginning to change, however. Over
the past 12 months, we have seen more U.S.-based solar, biofuels, and
other companies list their shares on U.S. exchanges. Clean energy has
been widely identified as a ``hot'' area for investing in the U.S. in
recent months. As discussed above, we are also seeing foreign firms
such as Chinese photovoltaic equipment makers listing on the U.S.
exchanges to tap into opportunities.
Looking ahead, the establishment of a comprehensive long-term
policy framework would demonstrate to the world that the U.S. is
committed to promoting clean energy and to cutting carbon emissions. It
would appear that this committee and others on Capitol Hill are well on
their way toward building such a framework.
Responses of Michael Liebreich to Questions From Senator Thomas
Question 15. At the hearing, every witness advocated for some form
of federal subsidies to advance energy technologies. I believe that the
central theme of the hearing was, primarily, how we get private
companies to unleash their ingenuity as part of a free market, however.
I am concerned about this tendency to advocate for more government
intervention. The question I'd like to see answered is how we achieve
advanced energy technologies with minimal government intervention. We
can, and should, advance energy technologies by doing something other
than spending taxpayer money. We can look at automobile mileage,
streamlined facility permitting, modernized efficiency standards, and
federal assumption of liability for demonstration projects. I do
believe we must do these things in the absence of a price on carbon
too, given that those costs will merely be passed along to consumers.
In that context, can you provide some purely regulatory approaches that
you believe would advance energy technologies without requiring a
significant expenditure of federal dollars through direct
appropriations, tax credits, or other forms monetary support?
Answer. Governments have a slew of ways to spur clean energy growth
without direct government spending in the form of tax credits or
subsidies.
Mandates requiring consumption levels of certain cleaner-burning
fuels (a renewable fuel standard) or certain cleaner sources of energy
(a renewable fuel standard) do not cost taxpayers directly. Rather,
they set certain benchmarks for industry to achieve on their own,
presumably with the help of private investment. In addition, government
can take specific steps to streamline the permitting for certain
projects it deems of high importance (see question four).
Question 16. You testified about your belief that the U.S. has
strong programs in clean coal. Can you explain what you believe the
economic and policy reasons are for a coal-to-liquids facility having
not been built yet here in the United States? We're told it's because
people haven't done it yet. How are the plants in China and South
Africa any different than what we'd build here? Why isn't there private
sector money available for coal-to-liquids plants given that it's been
done in other countries?
Answer. To understand why there has not been more development of
CTL projects in the U.S., it is instructive to look at the reasons
behind their construction abroad.
In the case of South Africa, the state oil company backed CTL
because the country was, in effect, isolated from the international
community and could not easily import crude. South Africa's need for
energy independence trumped whatever concerns there might have been
about the environmental impact of converting coal to liquid fuel.
In China, the high rate of economic growth has created an
insatiable thirst for liquid fuel. Much has been written about the
environmental conditions in China and the fact the country is bringing
one new coal-burning plant on line per week. The country is showing
similar disregard for the environment in the construction and operation
of CTL facilities. In both South Africa and China, as in Nazi era
Germany decades ago, energy independence concerns have been a driving
force in the construction of CTL capacity.
In the U.S., for decades there was no economic impetus for CTL
since the price of imported or domestically-produced crude was so low.
Today, with oil prices in the $60 to $70 barrel range it is
understandable that CTL is getting a serious look, given the U.S.'s
increasing desire for energy security and independence.
However, building a new CTL plant is highly capital intensive.
Among the relatively small number of players with the resources to
finance such projects are the major oil companies and they would appear
to have little interest in promoting a competitor fuel.
In addition, there appears to be a growing consensus within the
U.S., particularly in the power generation sector, that the federal
government will impose some kind of cap on carbon emissions.
Calculating the potential cost of complying with any new ``cap-and-
trade'' regime is nearly impossible for potential backers of CTL plants
and introduces far too much risk into the equation.