Stimulus Bill Constipation - How “Shovel Ready” Doesn’t Always Work for Clean Energy

In part, the 2009 stimulus bill was formulated by our legislative branch to get the deposit multiplier going through the grant funding of “shovel ready” infrastructure, healthcare and clean energy and efficiency projects. Since it is the current economic situation that needs to be jumpstarted, our politicians insisted that immediate economic effect was necessary. To this end, $43 billion dollars of grant money was allocated to clean energy and energy efficiency projects that were ready to start construction immediately.

Here is the rub. The lifecycle of large clean energy project is long (2-3 years for a decent size wind project). There are few clean energy developers that sit around with “shovel ready” projects waiting for the stimulus grant fairy to come and put a slug of grant money under their pillow. The time value of money prevents this tactic. By the time a project has become “shovel ready” the developer has already invested significant time, resources, and capital into getting it to that point. For example, it could take a year to negotiate and lock-up wind energy leases, and install meteorological towers to gather wind speed data on a site - next comes an arduous environmental assessment and permitting process. After that, a typical grid interconnection agreement can take 1.5-3 years to push through a PUC, and that is often needed BEFORE a power purchase agreement (PPA) can be negotiated with buyer! Finally, equipment procurement, wind turbine purchase agreements, and contractors must be lined up before you have a “bankable” project (i.e. before a tax equity investor will buy the project from you). A project is not “shovel ready” until it has all of these pieces in place. Morale of the story, this is not a fast process, and if there is no tax equity light at the end of the tunnel (i.e. September 2009 – through today) the process is often halted or delayed to preserve capital.

To be fair, there are the “lucky” distressed assets out there as a result of tax equity leaving the market in fall 2009. (Their wishes have come true, and projects that were ready to be scrapped as uneconomic are now looking very attractive). But for the most part, if a project was economic and “shovel-ready” without the grant money then it had already locked up its financing before being “shovel ready”.

The challenge for the Department of Energy and other governmental organization that are receiving these funds is to balance the pressure to get them out the door fast with the need to maximize the impact that they have. Not an easy task. Big projects that make the most sense take time.

Green IT - economics meets environment

IT and Energy

IT industry is amongst the faster growing consumers of energy and thus source of indirect emissions through electricity use. There's huge potential for energy efficiency in this area and thankfully wise people have taken notice and are already onto the task. 

"With a 10 percent improvement of overall energy efficiency in data centers by 2011, approximately 10 billion kilowatt-hours would be saved, equivalent to electricity consumed by 1 million U.S. households annually. This energy cutback would reduce carbon dioxide emissions by 6.5 million tons per year—equal to the removal of nearly 1.3 million cars from the road annually."

U.S. Department of Energy

Here's a brief discussion on the major players who can help the environment through economics of energy efficiency - 

Corporations through 'Green Grid' - 

Recognizing the potential to save energy and help environment in this regard, a consortium of leading IT co.s including AMD and Hewlett Packard founded the Green Grid. The idea behind the GreenGrid is to make IT more energy efficient. The initiatives range from reducing electricity used to run the servers in a data center as well as reduce the energy required to mantain sub zero temperatures in the data centers. The green grid has alliances with - The American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE), US Department of Energy (DOE), US Environmental Protection Agency (EPA) et. al and they work on developing standards for energy efficient IT operations. 

 

IT Consulting Companies -

Software Services companies like India's Wipro IT Consulting Services recognize the upcoming need for such solutions and are poised to realize the business potential in this arena. These companies are offering specialized consulting services to make IT operations more energy and environment efficient. 

http://www.wipro.com/greenit_new/pdf/whitepaper/wcir_the_green_data_center.pdf. 

Here's an example of potential energy and emissions savings as projected by Wipro - 

At a time when companies are looking for ways to reduce cost, savings to the tune of 80% will surely catch attention.  As this business area grows there can be a huge requirement for skilled professionals with experience and training to implement such initiatives. 

Non Profit Groups - 

An organization working on imparting training to professionals in this arena is the 'Environmental Defence Fund'. Through their Climate Corps internship program they tie up with companies looking for improvement in their energy profile to recruit summer interns from variuos MBA programs all over US, impart them training to optimize various business operations (in IT and other sectors as well) and send them to these companies over the summer to produce tangible results (http://www.edf.org/page.cfm?tagID=31477). 

IT is growing as a big consumer of energy. There's an intent in the industry to become more responsible in energy usage, as well as making green choices about the source of energy. In current economic conditions the initatives to purchase green energy for IT have been hurt, but at the same time the tough economic environment has accentuated the essentiality for IT companies to be more responsible, more efficient with energy.

Policy to Unclog the Renewable Energy Development Pipeline

Across the cleantech industry in 2008, the pain was evident. Commercial-scale renewable energy developers suffered as most tax equity players suffered financial losses, thereby losing their “tax appetite”. Seed-stage cleantech suffered as Venture Capitalist’s tightened their purse strings and shifted focus to keeping existing portfolio companies alive. Public equity, both IPOs and follow-on offerings also dried up, forcing many cleantech firms to delay much needed manufacturing scale-up strategies. The nail in the coffin was a massive sell-off in energy commodities due to the downturn in global consumption. Lower demand for coal and natural gas used for electricity generation caused a sell-off to ripple through power markets and the global carbon and emissions markets - dropping carbon allowance prices in the EU-ETS, RGGI, and offset credit prices in the CCX, CCAR, and CDM markets. Renewable Energy Credits (RECs) also sold-off in many U.S. states making electricity produced from renewable energy generation assets less competitive in the market.

According to New Energy Finance, the newly elected Obama administration is looking to appropriate about $78 billion of the still-in-the-works $825 billion economic stimulus package to clean energy, energy efficiency, and smart grid technologies. This impressive amount of funding illustrates the new administrations long-term commitment to energy security and desire to rejuvenate the clean energy industry after a very challenging 2008.

The remaining challenge is to see how effectively new policy out of the House and Senate can deploy this capital. Unfortunately, a critical element to the bill given the current economic conditions has already been tossed out of the Senate’s version.

In the House version, project developers may forgo the benefit of the Production Tax Credit (PTC/ITC) altogether and instead receive the equivalent benefit in the form of a cash grant from a program administered by the US Department of Energy. This component was aggressively lobbied by the wind and solar industry just before Obama’s inauguration.

But in the Senate version, these DOE grants were tossed out. “Appropriating $78 billion dollars to clean energy without the DOE grants is the equivalent of turning the water tap on but not unkinking the hose”, industry lobbyists argue (New Energy Finance, Week in Review, 1/27/2009). This is because the economic downturn has dried up the tax equity that developers need to complete the bottom layers of the capital structure in renewable energy projects. Without sufficient equity capital, the project financing stalls before debt capital can be raised. The option to receive the DOE grants instead of federal tax credits is a quick-thinking patch to the bill that solves for the lack of tax appetite in the market today.

Many industry fingers are crossed that the Senate will recognize the current and foreseeable tax equity shortfall and agree to an alternative incentive structure.

Beware the Impending Reign of Big Solar!

Given the hype, I'll admit that I was expecting the Bullock Museum's oil exhibit to be a bit more substantive, but I definitely enjoyed learning about Christmas Trees and Boll Weevils as they apply to the oil industry. What really got me thinking though, was the Walter Cronkite narrated Oil Tank Theatre in a room lined with funky old gas pumps and early/mid 1900s advertisements portraying the oil industry's wonderful services to America. Oil companies are improving your summer driving with NO-NOX fuel (referring to engine knock, but still quite ironic)! Oil companies are helping us win the war (WWII) with new high power fuels! Enjoy your time at the filling station while our attendant helps wash and service your vehicle!

Once upon a time, the oil industry was seen in a very positive light, and that sentiment is clearly reflected in the Bullock Museum's display of the oil industry's influence on Texas's economic growth. Now, however, most people only think of Big Oil and men in business suits around an oak conference table making decisions that squeeze the pockets of the average American while making record profits.

Right now, we typically view wind, solar, and other "green" energy industries as generally benevolent entities working to help us move past our energy crises and into a sustainable world. Yet we've read proposals such as Dr. Makhijani's "Carbon-Free and Nuclear-Free" and Scientific American's "Solar Grand Plan" that would inevitably put a great deal of our energy supply in the hands of these now up-and-coming "wholesome" energy industries. Once any energy industry (or industry in general) has a significant level of control over our lifestyles, public opinion is apt to shirt towards negativity. May there be a day when we scoff at Big Solar and shout at Big Compressed Air Storage? Imagine the diner conversation: "Those crooks manipulate our energy prices by turning their valves on and off at will!"

A hint of that sentiment already exists in this article where some homeowners in the Catskills complain that a proposal for wind farms in the mountains "is all about big business making money." Humans don't just want energy, we need it, and while it will become increasingly important to have a diverse energy supply, we will inevitably become relatively dependent on whatever sources are most prevalent. Public opinion is a funny animal, but I guess in the end we always need something to complain about.

Emerging "Clean" Energy Leader: Abu Dhabi?

I found this BBC article very interesting. Oil rich Abu Dhabi just announced that it's going to spend $15 billion over the next 5 years to build a "clean energy" (how do they define clean?) city for 50,000 people that uses a variety of cleaner (since nothing can be declared clean) energy technologies along with the world's first power plant that reforms hydrogen from natural gas and captures the resulting CO2 for storage or enhanced oil recovery. For a little perspective, the entire U.S. Dept. of Energy budget is about $23b, and it's only $13.5b if you subtract money specified for national defense.

Now there is no time line specified in the article, and I am certainly skeptical of the feasibility of the project, but hey, if anyone is going to spend $15 billion, I'd hope that they're serious about what they're getting for it (though I guess if you look at the US budget...). I also find it funny that the article quotes the Abu Dhabi goverment as declaring the initiative "the most ambitious sustainability project ever launched by a government." So you may not be emitting CO2 at your hydrogen plant, but you are using natural gas to make it... doesn't sound so sustainable (or efficient) to me.

But personally, I think that we're going to have to live with unsustainable energy sources for quite some time, so lets work on cutting their emissions before all the ice melts. It's going to take lots of big investments like these all over the world to prove the technologies that can help us mitigate climate change, and I applaud any individual, company, or government that takes such a bold step.