June 29, 2011
By Paul Rogers| May 31, 2011 | Issue 84
Stanford Lawyer http://stanfordlawyer.law.stanford.edu/2011/05/getting-to-green/
When Dan Reicher was 21 years old, he and three friends from Dartmouth College set out on an audacious adventure. They kayaked the entire 1,888-mile length of the Rio Grande River, paddling from Colorado to the Gulf of Mexico.
“There were long stretches where we had to drag our kayaks through mud,” Reicher remembers. “We were shot at. The border patrol kept showing up. It was really challenging. But it was an amazing trip.”
Now Reicher ’83, professor of the practice of law, has set off on an even bigger challenge: finding solutions to the huge policy and financial hurdles that are slowing the growth of clean energy in the United States and globally.
In November, Reicher was named head of the newly created Steyer-Taylor Center for Energy Policy and Finance, a joint project of Stanford Law School and Stanford Graduate School of Business. The center’s mission is to explore and advance new approaches to policy and finance to help accelerate the development and deployment of clean energy, focusing on everything from solar to wind and geothermal to energy efficiency, advanced fossil, and nuclear technologies.
Reicher thinks that the new center is ideally located at Stanford, right in the middle of Silicon Valley, with students and scholars—as well as business and policy professionals—looking at all aspects of the clean energy challenge.
“This whole area of clean energy presses so many buttons for students today,” says Reicher. “It’s compelling from the standpoint of doing good for the world. It’s tangible—things we see in our daily lives, from the cars we drive to the homes where we live. Big money is at stake. There are serious national security issues. There is an environmental justice aspect. And in terms of information technology, the whole ‘ET meets IT’ issue, there may be a new Google in all of this.”
Reicher would know. His most recent job was director of climate change and energy initiatives at Google. Before that, he served as assistant secretary of energy in the Clinton administration and as a member of President Obama’s energy transition team. His work in the private sector is extensive as well. He was president of New Energy Capital, a private equity firm backed by the California State Teacher’s Retirement System and VantagePoint Venture Partners, and also worked as executive vice president of Northern Power Systems, a venture capital-backed renewable energy company. Earlier in his career, Reicher focused on nuclear issues as a staff member on President Carter’s Commission on the Accident at Three Mile Island, an attorney at the Natural Resources Defense Council, and an assistant attorney general with the Massachusetts Attorney General’s Office.
Heather Redman ’90 is fired up about coal. Not the old coal that made London famous for its deadly “Great Smog” in 1952—but new coal, the elusive “clean coal” or, more accurately, coal with carbon capture.
Redman is a principal and senior vice president of Summit Power Group, the company developing the Texas Clean Energy Project (TCEP), a commercial “polygen” plant utilizing coal with carbon capture. Redman says that the project, the first-of-its-kind, is bringing together several commercially proven technologies, but in a new way—capturing 90 percent of the carbon dioxide (CO2 estimated to be approximately 3 million tons per year) and then using it to recover oil in the West Texas Permian Basin. She says the final air quality permit was granted by Texas in December and construction is scheduled to begin in late 2011.
“I love wind and solar, and we do a lot of it. But in terms of what might change the world—what will provide a model for clean energy production for China and the rest of the developing world—I think it’s coal coupled with carbon capture,” says Redman.
In the United States, coal still provides about 45 percent of the electricity consumed. China produces even more of its electricity with coal—more than the United States, Europe, and Japan combined, making it the world’s largest emitter of gases that are warming the planet. China has also been quicker to invest in clean coal, and the government is subsidizing the new technologies heavily. Germany, Japan, and other countries are also charging ahead—while the United States grapples with regulatory and financial hurdles.
Redman’s project, TCEP, was one of the lucky ones: It received a $450 million award in 2010 from the U.S. Department of Energy’s Clean Coal Power Initiative, making it the largest clean coal investment the U.S. government has made.
“It requires more than a village to get this kind of project off the ground—you need a multinational corporation or two and the federal government,” says Redman, adding that Summit teamed up with Siemens, Fluor Corporation, and Selas Fluid Processing Corporation—bringing technology developments from each to the new project. While the stars aligned for TCEP, it has taken seven years to get to the permit stage.
Redman describes a development path that is rife with pitfalls. “These projects are huge. They are complicated. They are expensive to develop and expensive to build. And a multiplicity of things can go wrong at any point.”
The highest hurdles that Redman and others like her must clear are at the intersection of finance and policy.
“One of the biggest challenges we face is the willingness of utilities to buy power from our projects,” she says. “Everything else hinges on that. That’s how we get financing to build. We need to show there is a market, with reasonable rates, to get through project financing.” She explains that non-dispatchable resources such as solar and wind are less attractive to utilities than coal and gas plants. Solar and wind are more expensive in the current market and they can have dips in energy supply.
“We need government intervention to level the playing field,” Redman says.
The gap between public opinion and political action in America is as wide as ever when it comes to clean energy. Polls show broad public support for reducing America’s dependence on fossil fuels and foreign oil.
But the legal and political barriers to greening the nation’s power grid are enormous. Though every president since Richard Nixon has embraced renewable energy, the United States still generates just 3 percent of its electricity from solar, wind, biomass, and geothermal energy. Add hydroelectric power and the total reaches 10 percent. By comparison, coal provides 45 percent, natural gas 23 percent, and nuclear power 20 percent of U.S. electricity.
As the debate between political parties drags on, the temperature continues to rise. The 10 hottest years since modern temperature records were first kept (1880) all have occurred since 1998. But as the planet warms, glaciers melt, and sea levels rise, efforts to pass legislation capping carbon emissions have stalled in Washington, D.C., over opposition from coal-state representatives and powerful business groups like the U.S. Chamber of Commerce who worry it will raise energy prices.
Meanwhile the federal government is in gridlock—seemingly unable or unwilling to seriously advance key policy measures such as carbon limits or a national clean energy standard. The Obama administration has significantly increased federal investment in energy research and projects—particularly with loan guarantees and money from the stimulus package. But when compared with some countries, the sum is still paltry. And support from these programs may tail off as the nation’s deficit takes center stage.
Yet, despite the challenges, there is optimism. People with years of experience in the field say green energy’s time has come.
“This is a renaissance time for clean tech,” says Ira Ehrenpreis, JD/MBA ’95, general partner at Technology Partners, a venture capital firm based in Palo Alto.
Ehrenpreis is something of a clean tech investment guru, leading his firm’s clean tech practice as well as chairing the Clean-Tech Investor Summit, one of the seminal events in the sector, and serving as an advisor to the Department of Energy.
“We’ve seen more innovation in the last few years than we have in decades. Entrepreneurs who at one point in time were interested only in IT and life science startups, now want to make clean tech the next chapter in their personal and professional lives.”
Philip Deutch ’91 was one of the first investors in this field. He left legal practice in 1997 to join a finance firm. His first day on the job, an energy technology executive came in for a meeting and because Deutch was the new guy the company was assigned to him. At the time not many people in the VC community knew what energy technology was or where it was going.
“Energy was not hot in 1997. No one then would have imagined it would explode the way it has,” says Deutch, who is now the managing partner at NGP Energy Technology Partners, a venture fund based in Washington, D.C. Since those early days, the sector has grown tremendously—expanding to meet explosive demand in developing countries such as China and India, as well as in developed countries including the United States, and innovating at a fast clip along with computer and software technologies.
In 2003 Deutch led a group of investors to take over Evergreen Solar. At the time, it was one of the largest solar producers, he says, with an 8-megawatts capacity. But solar technology has come a long way since then.
“There was just an announcement that two solar thermal plants will be built in California, each with a capacity of more than 400 megawatts. It’s an astonishing change in capacity. The technology and innovation are transforming this sector, just in the last few years, and making it more competitive,” he says.
According to news reports, the project has been offered federal loan guarantees of up to $2.1 billion, the largest investment by the government for a solar plant.
“For the first time in mankind’s history, a solar power facility will be built at a scale and output capacity equal to the very largest coal-fired and nuclear power plants operating in the world today,” Uwe Schmidt, the chief executive of Solar Trust of America, the firm building the solar plant in the Mojave Desert, told Reuters.
Government support for the project was essential to its success and will be to future American initiatives, says Deutch.
“It’s unrealistic to expect to see tremendous growth without government subsidies,” he says. “And the current administration’s investment has been historic—increasing from about $1 billion at the beginning of the second Bush administration to something in the area of $50 billion in this administration between loans and grants. It’s stunning, but we need more.”
Even with strong government support, Deutch adds, “the long-term success in the clean tech sector will be driven by the private sector.”
Despite some success, a key problem for U.S. clean energy projects is financing. “Change is going to be driven by business here,” says Thomas Steyer (MBA ’83).
“I don’t think people have figured that out. But it’s true. It’s not going to be driven by environmentalists. It’s not going to be driven by intellectuals. It is going to be driven by business people.”
Steyer and his wife, Kat Taylor, JD/MBA ’86, donated $7 million to establish the new energy center that Reicher is now building. A member of the Stanford University Board of Trustees, Steyer is the founder of Farallon Capital Management in San Francisco and managing director of Hellman & Friedman LLC, a San Francisco-based private equity firm. Both Steyer and Taylor are founding directors of One PacificCoast Bank and its foundation, established to lend to low-income communities. Taylor is also active in the sustainable food movement, particularly through the TomKat Ranch Educational Foundation. A previous gift from Taylor and Steyer in 2009 created the TomKat Center for Sustainable Energy at Stanford.
“We’ve always been focused on energy and sustainable energy, but the TomKat center was really focused on scientific and engineering research,” Steyer says. “We’ve never thought that was the whole picture. There are also policy issues and finance issues that are incredibly important. We talked about it for a long time with [Dean] Larry Kramer, who was absolutely instrumental in getting this done.” And he gained strong support from GSB Dean Garth Saloner, when Reicher raised the potential for a joint center.
Steyer gained statewide attention last year after he donated $5 million and served as co-chairman of the “No on Proposition 23” campaign, which successfully convinced California voters to defeat an attempt (funded by Texas-based oil companies) to block California’s global warming laws. His co-chair was former U.S. Secretary of State and Hoover Institution fellow George Shultz.
Not only does America need a price on carbon through a cap-and-trade law to help boost renewable energy projects, Steyer says, it needs to help solve the dilemma known among clean energy entrepreneurs as “the Valley of Death.” That’s the perilous stretch companies encounter after they secure early financing from venture capitalists or the federal government to develop a promising new technology—anything from more efficient solar panels to a process turning algae into automobile fuel to a technology to capture and store carbon emissions from coal.
Often, after raising tens of millions of dollars, companies founder when they can’t raise hundreds of millions more to take their energy technology from the pilot stage to full commercial deployment—most importantly getting the first couple of full-scale plants built and operating so more traditional investors will back additional facilities.
“This is not a software program that you write and can replicate infinitely,” Steyer says. “If you want to build a huge array of solar panels in the desert that means guys in the desert building stuff. There is a physical element to it. If you want to retrofit an office building, you need electricians and construction workers moving things. There’s a lot of money associated with it. It’s not the same financial picture where you put up a little venture money and it can just absolutely mushroom.”
Reicher says the new center will study and address a number of policy and finance problems—problems that are currently holding American innovation back in clean tech. One of them is the Valley of Death. Another is the lack of a national standard for clean energy. More than 20 states have already passed laws that require a set percentage of a state’s electricity to come from renewable sources, from energy efficiency, or from advanced fossil or nuclear technologies. The goal is to provide certainty of demand to investors. In 2009 the U.S. House of Representatives adopted a national renewable energy standard but the idea died in the Senate. More recently the new Republican-led House has resisted a national renewable energy standard, saying it could raise prices and that some parts of the country don’t have as many solar or wind resources as others. At the same time, the White House has been pushing for a broader clean energy standard.
Across the country, some large projects have been slowed by lawsuits from environmentalists over endangered species and other issues. Even without land-use battles, few investors are willing to risk hundreds of millions of dollars on one project, particularly one based on new technology.
“If you go to a private equity or venture fund and say ‘I want you to invest in this one company’s commercialization projects,’ it is taking a risk on that one company,” says Daniel Goldman, executive vice president and CFO of GreatPoint Energy. “What you really need to do is spread the risk around many projects. And that takes billions of dollars.”
GreatPoint developed a gasification technology to convert coal, petroleum coke, and biomass into natural gas, storing the carbon underground. It has received $150 million from top venture capital firms, Peabody Energy and others. But unlike Summit Power Group’s Texas project, GreatPoint expects to construct its first full-scale plant in China, India, or South Korea—not the U.S.
“In all of those markets, there is more financing available, natural gas prices are much higher, and there is more interest in commercializing technologies,” says Goldman. “We are working with large multinational companies in all three countries on partnership agreements.”
In other words, business is business.
“There are many areas of the world leading the clean tech innovation race, including the U.S.,” says Ehrenpreis, noting that the rest of the world has important markets for the technology and innovations developed here. “It’s a global problem we face, and therefore there’s a global opportunity for clean tech startups.”
While opportunities abound for clean tech investors, Reicher is particularly focused on ways to bolster opportunities here in the United States.
“If we don’t get our act together between our government and the private sector, other countries, like China and Germany, that are taking the long view when it comes to energy technology will be the winners of this marathon,” Reicher said in testimony before the House Subcommittee on Energy and Power last March. “A prize worth trillions of dollars and millions of jobs hangs in the balance—to say nothing of the future of our planet.”
With lower labor costs and strong government support, the Chinese are threatening to do to the U.S. clean tech industry this decade what the Japanese did to Detroit in the 1980s. China is now the world’s largest manufacturer of wind turbines and solar panels. China has 27 nuclear plants under construction. The United States has not built a new one since 1977. And the Japanese nuclear accident following a 9.0 earthquake on March 11 has added new political hurdles for any expansion of nuclear power in the United States. Meanwhile, Silicon Valley-based Applied Materials—the world’s largest supplier of equipment that makes semiconductors for computers, flat panel displays, and solar panels—recently decided to build its newest and largest research lab in China.
“On the one hand we have one of the most innovative and hard-charging Department of Energy organizations in history that has attracted some of the best talent that it has ever had,” says Ehrenpreis. “And it has implemented a successful loan guarantee program among several other key initiatives over the last few years. However, the U.S. is materially lagging a number of other countries in its support for clean tech and renewable energy.”
Critically, the country continues to lack an overarching energy plan.
“We still do not have comprehensive energy legislation or any strategic long-term plan,” says Ehrenpreis. “It’s as ridiculous as an entrepreneur seeking investment at my firm without a business plan.”
For a while now, Goldman and Reicher, who worked together previously at New Energy Capital, have been discussing ideas about creating large public-private pools of money to spread risk in developing innovative projects.
The focus would be on post-VC investment, the idea being to get these projects through the expensive commercialization phase (the Valley of Death), so that they are built—and built here.
“If you got 20 pension plans and endowments together and had each of them put $50 million into a pool and then invested that in 20 or 30 projects with new technologies, you might find 10 or 15 work out, five of them do okay but not great, and a couple are going to fail,” Goldman says. “But it’s not going to be like a VC model where just one or two are going to work out. You could manage the risk a lot better than that. You could create a very exciting portfolio that produces commercially acceptable returns for the risk profile. And that’s the key.”
As the new ideas bubble up, several Stanford Law faculty members already are seeing potential collaboration between their work and Reicher’s new center.
Barton “Buzz” Thompson Jr., JD/MBA ’76 (BA ’72), is the Perry L. McCarty Director of Stanford’s Woods Institute for the Environment. His expertise crosses issues such as food security, water supply, oceans, and climate.
“There is value to having the center located at Stanford and involving both the law school and business school, so it can work very closely with the faculty members who you want and need to get involved in this area,” says Thompson, the Robert E. Paradise Professor in Natural Resources Law. “In many cases, you have faculty in the law school and business school whose expertise can be very valuable in the energy area. Also, it makes it even easier for law and business students to be involved.”
One thorny issue on which Thompson sees common ground with the new center is energy transmission—those giant steel towers that stretch for miles, carrying the nation’s electricity lifelines. Everyone needs them. No one wants them—at least not in their own neighborhoods.
“We are unlikely to have a large-scale solar facility or wind farm in the middle of Los Angeles,” says Thompson. “So you are going to have to move the electricity from the Mojave Desert, or the Northern Rockies, for example. Transmission is a central issue. A whole variety of environmental, financial, and legal issues are associated with that.”
Environmental groups often have concerns about the impact of new towers and power lines on wildlife or scenic views. And ranchers are often opposed to eminent domain, which is needed to complete power corridors but which raises difficult property rights questions. States where the lines pass may not receive any of the electricity. But what is fair compensation for them?
Another Stanford Law faculty member, Michael Wara ’06, says he’s intrigued by the idea of working on smart meters with the new center. The meters, which are digital devices that replace the old analog meters on many homes, send real-time energy use data to utilities, negating the need for meter readers. And they also send the information to homeowners, allowing them to adjust electricity use to times of the day when prices might be cheaper, such as washing clothes at night, reducing the demand on the power grid in hot summer afternoons.
But legally, who should have access to that information? Should consumers have a right to voluntarily share it with companies that perform energy audits, or companies that make high-tech appliances that can turn on and off as they react to price changes in the electricity market? Or should utilities keep it under lock and key?
“No one is completely sure how this data can be used to create value for consumers,” Wara says. “We are never going to find out if the utility keeps control over it.”
Wara, an assistant professor of law who is an expert in climate markets, says he’s also interested in working with the new center to explore the difficult legal and policy issues surrounding cap-and-trade plans proposed under California’s landmark climate change law, AB 32. In March, a San Francisco judge halted the law, based on concerns by environmental justice groups that the state had not completed sufficient studies to evaluate alternatives to emissions trading markets, such as a carbon tax.
As many legal thickets as there are surrounding the retooling of America’s energy system, financial challenges loom around every corner. The volume of investment needed to make a difference is vast. And who will pay remains an unanswered question.
One of Reicher’s favorite policy and investment ideas is being promoted by Senator Jeff Bingaman ’68 of New Mexico, chairman of the Senate Energy and Natural Resources Committee.
Bingaman is sponsoring legislation that would create a new federal entity called the Clean Energy Deployment Administration, a quasi-independent agency that could provide loans, loan guarantees, insurance, or even take a direct financial stake in some projects and earn profits. The measure passed with bipartisan support in his committee and was included in climate legislation that was adopted in the previous House of Representatives. Bingaman discussed the idea with Reicher and other experts in January when he visited the new Stanford energy center.
“The idea is to get companies through the Valley of Death and allow the government to take on some of the risk that the private sector hasn’t been willing to take on,” Bingaman says.
And what of critics who say the industry should rise and fall without government assistance?
“It’s not too big a role for the governments that our country is competing with,” says Bingaman, who first became interested in environmental issues when he studied oil and gas with Charles J. Meyers, former Stanford Law dean. “It’s obviously the kind of thing the Chinese and Germans and other leaders in clean energy development are pursuing. And if we want to be in serious competition with those countries, we are going to have to do more and have a more activist, forward-leaning government policy on these projects.”
Although the issue of climate change has become a political football in Washington, Reicher says that framing clean energy through the prism of creating U.S. jobs, competing with China, reducing foreign oil imports, and cutting electricity bills with efficient technology is bipartisan.
“There are vast amounts of money that are going to get spent on our energy infrastructure,” he says. “It’s up to us to decide how green, how competitive, how secure it all is. We’re spending the money anyway, so let’s do it in a way that gives us the greatest environmental, economic, and security benefits.” SL
Paul Rogers is the natural resources and environment writer at the San Jose Mercury News and managing editor of QUEST a weekly science and environment show on KQED, the NPR and PBS affiliate in San Francisco.