Investing in the Grid – Different Priorities Could Still Lead to Similar Results

In the developed world, we take for granted the infrastructure fundamentals that give us the good life.  Healthy drinking water?  Naturally.  Reliable electricity?  Of course.  But in the developing world, this infrastructure is out of reach for at least 1 billion people.  Last week the Center for Science, Technology, and Society at Santa Clara University in Santa Clara, California hosted an event that featured entrepreneurs who are making positive impacts in the lives of people in Africa and India.  For people living in energy poverty, electricity is as game-changing a technology as it is for us.  The hierarchy of needs around electricity has interesting parallels to how we might define the prioritization of a limited amount of electricity – particularly if we do not engineer grid resiliency in our buildouts of Smart Grids.

In developing countries, electricity is first allocated to light.  Lighting extends hours of productive work or study, and it provides safety.  The second priority is for charging mobile phones.  Developing economies are highly reliant on mobile communications, and mobile banking, which allows small businesses to flourish without requiring a financial services infrastructure complete with branch banks in remote villages.  Providing the power to keep mobile devices running helps keep their virtual finance systems running.  After these two needs are met, electricity is then used for entertainment – powering radios and TVs.  And finally, electricity is allocated to power agricultural equipment – running pumps for irrigation.

The entrepreneurs who spoke at this event are stimulating incremental changes that add up to economic, social, and political empowerment – not just in providing electricity, but providing new livelihoods and career options for underserved regions and populations.  What is happening would not fit the classic definition of a Smart Grid, but it is slowly building a grid, and doing it in very smart ways.  Contrast that to the level of activities to upgrade today’s grid, the greatest machine of the 20th century into a Smart Grid.  In our developed economy, our focus is much more on financial and regulatory innovation as opposed to technology and business model innovations for developing economies.   And while developing economies would be happy with reliable electricity, their highly distributed, small scale electrical generation deployments deliver inherent resiliency that our grid is lacking.  This is where our Smart Grid investments need to be focused.

The financial innovations are ongoing.  The Master Limited Partnerships Parity Act was re-introduced for consideration this year in the US Congress on April 24, with bipartisan support from Democratic and Republican senators and house representatives.  As noted in last week’s article, Master Limited Partnerships or MLPs are traded on public stock exchanges, offering cheaper access to capital than bank loans.  Making this financial mechanism available to renewable energy and energy storage projects would be a wonderful market-based stimulus for these types of projects, and accelerate deployment of distributed energy resources (DERs) into the grid.

Last week Solar Mosaic announced its latest investment opportunity for California-based investors.  As this and other models of crowd-funding proliferate, utilities will have to more rapidly adapt their own operations to support integration of these DERs into the grid.

It’s the evolution of regulations to allow for grids to become more resilient as well as reliable that is the area of greatest need in developed economies.  The real challenges are in creating regulatory roadmaps that allow for a graceful evolution of utilities from managers of assets that deliver electricity to managers of services that oversee electricity delivery and much more.  This will be one of the topics of discussion at this week’s webinar hosted by The Energy Collective on May 1.  Get more information about the event and register to attend by clicking here.  We need ongoing discussions about how to change our existing business models to accommodate DER.  Without an evolution of business models, we could be left contemplating which devices in our homes and businesses get highest priority for electricity delivered from a grid that lacks resiliency and results in reduced reliability.


A Different Kind of Green for Earth Day

On April 22, 1970, 20 million Americans demonstrated for a clean and sustainable environment.  In October 1973, Americans experienced the first oil embargo, and for the first time thought about the real costs of our reliance on oil for energy.  On the 40th anniversary of Earth Day, we know how the Smart Grid helps achieve environmental, economic, and energy surety.  However, let’s focus on a different sort of green – money.

Financial innovations for Smart Grid investments have not kept pace with technologies or even regulatory policies, which move slower than a pre-global warming glacier.  But there’s reason to be optimistic that one unlevel playing field could become leveled, and therefore provide renewable energy generation and energy storage projects with the same access to low-cost capital currently enjoyed by the fossil fuel industries.  The innovation?  The Master Limited Partnerships Parity Act.  It is currently under consideration by the House Ways and Means Committee, the first step to getting to a full vote from both the House and Senate in 2013.

A Master Limited Partnership or MLP is a publicly traded partnership for an energy asset.  First launched in 1981, today’s MLPs are traded on public stock exchanges, offering average Main Street investors as well as institutional investors the necessary structures to buy and sell shares in gas/oil/coal extraction and pipeline projects.  There are two primary benefits of MLPs – they operate on a pass-through tax structure, which lowers the cost of capital.  Note:  A pass-through means that the MLP does not pay tax, just the shareholders (typically called unit holders).  Second, they allow companies to build and operate energy-producing assets and offer a sufficient rate of return that is appealing to investors.

If something similar were available for renewable energy and energy storage projects, it would give motivated investors opportunities to be green with their money and make a steady income return on their investments.  For example, an innovative financing structure from Solar Mosaic leverages crowd-funding to enable average investors in selected states to participate in solar project investments for as little as $25.  Their last round of funding for three projects was fully funded in 24 hours.  Investors were thrilled to chip in a total of just over $300K to make anticipated profits on solar generation projects.  MLPs are a more formalized version that could be a game changer for utilities and corporations seeking sources of capital for renewables and energy storage projects.

REITs (Real Estate Investment Trusts) operate under similar structures (in fact, most converted from MLPs), and there’s plenty of discussion encouraging us to think about renewable energy projects like real estate instead of a sale of goods or commodity transaction.  Sales of goods like energy are transacted as Power Purchase Agreements or PPAs, which can be complicated contracts that add performance contingencies, clauses, and caveats that also add risks to projects organized this way.

In 2012, traditional MLPs attracted $23B for projects, for a total of about $325B in market capital.  In 2008, Congress expanded the definitions of MLP projects to include ethanol, biodiesel, and other alternative fuels projects.  Imagine what a similar pool of money could do for investments in clean generation from solar, wind, and geothermal as well as energy storage.  This sort of capital dwarfs the $4B spent on the Smart Grid in the American Recovery and Reinvestment Act (ARRA) or stimulus fund of 2009.  It creates local jobs, reduces carbon emissions, and helps states achieve their RPS objectives.  You can help make all of these worthy goals happen.  For starters, read more about the MLP Parity Act and see if your Congressional representatives are listed there as sponsoring this legislation.  If they aren’t listed, ask them to get on board.  It’s one incredibly important green step that can have significant positive ramifications for decades to come.


Changing the Energy Value Chain – ACORE’s Pragmatic Approach

We often read the lament that the USA has no energy policy.  Of course it does.  It’s what we have today – a policy which favors fossil fuels through permanent subsidies and special financial treatments written into the federal tax code.  And perhaps it will take an act of Congress to make them stop picking the most environmentally-costly winners over all the sustainable, indigenous and clean energy sources.  But there are other ways we can change our energy direction.  One organization that takes a pragmatic, business-based approach is ACORE, the American Council on Renewable Energy.  This nonprofit association is focused on building a secure and prosperous America with clean, renewable energy.  It provides thought leadership through technology, policy, and finance lenses and fosters industry partnerships that promote adoption of renewable energy in public and private enterprises.

I recently spent time in conversation with Vice Admiral Dennis McGinn, (USN, ret.), president of ACORE since April of 2011.  Our conversation is summarized here, but you can hear more insights from Admiral McGinn in his keynote address and Fireside Chat at the Savannah International Clean Energy Conference on November 12-13.

ACORE focuses on three strategic initiatives – National Defense and Security, Power Generation and Infrastructure, and Transportation. There are cross-over themes amongst these three initiatives – such as reducing costs in labor, materials, and finance.  Of these three, reducing the investment costs of renewable projects is the greatest challenge.  For instance, oil, gas, and coal companies enjoy an important tax break known as the Master Limited Partnership (MLP).  MLPs are taxed like partnerships, but owned like stock.  It is a popular structure to organize financing with lower costs and reduced risks for investors.  But MLPs are not allowed for renewable energy projects.  The Senate and House now have bipartisan legislation that extends the MLP tax break to renewables  – S3275 and HR6437.  But unless and until this legislation passes Congress, renewables do not enjoy a level playing field in financing options.  That’s a shame, because a recent study released by the US Partnership for Renewable Finance (US PREF), an ACORE program, revealed that U.S. taxpayers can get a 10% internal rate of return on the initial government investment in solar projects via the solar investment tax credit or ITC.

Green banks are also an interesting workaround to today’s financing impediments.  These entities can focus investment solely in renewables and energy efficiency projects.  Admiral McGinn noted that renewables and energy efficiency are “partners to improve sustainability and the bottom lines for businesses, in fact, energy efficiency can be a key enabler for renewable energy.” Green banks, like the one recently instituted in Connecticut, can produce appealing returns and market certainty for institutional investors while delivering low-cost financing products aimed at small business or residential households.

ACORE also advocates for advanced biofuels and maintaining the Renewable Fuels Standard (RFS) as part of its technology and policy focus.  While the initial feedstocks spurred a food versus fuel debate, the latest array of feedstocks, particularly cellulosic, coupled with biochemical innovations in enzymes are promising developments that can help wean the USA off of fossil fuels.   There are more than 10 commercial-scale cellulosic plants under construction now that will help “provide much greater consumer choice at the gas pump and get us off the petroleum monopoly train,” noted the Admiral.

No conversation about renewables is complete without considerations of natural gas. Admiral McGinn doesn’t see natural gas and renewables as mutually exclusive. From a utility perspective, natural gas has fast firming capabilities for renewables, and a good percentage of renewables serves as an excellent long term hedge against the price instabilities of natural gas.  And price instability is key.  “Over time, with greatly increased demand,” he said, “the price of natural gas will go up.  The factors impacting price increases could be potential increases in the export of liquefied natural gas, the replacement of aging coal-fired power plants and home heating with natural gas, the buildout and maintenance of gas pipeline and storage infrastructure, and the increased costs of responsible oversight and regulation to protect water and air from increased natural gas extraction.”

ACORE is in the thick of things – helping governmental agencies like the Department of Defense, electric utilities, and institutional investors to meaningfully contribute to grid modernization and energy supply transformations through technology, policy, and finance decisions.  At a macro level, their initiatives can be hugely influential in helping integrate clean, indigenous, and sustainable renewable energy sources into the Smart Grid and our transportation infrastructure.