Finance, Energy & the Environment: Changing Markets & Opportunities

MM:  Info is not in the graphic of green or green brand statement.  Look at company's 10K to see how much money co is making on green tech.  

Magnitude of problem: you need to see companies making money to stimulate investment.  When there's an eco incentive and people can make money, that's the scenario where you can have positive change.  A lot rests on government policies and subsidies.

DA:  We divide our universe into 4 areas: 

Renewable tech: no carbon category, although carbon in production process of course

Low carbon: opportunities to optimize to manage and optimize carbon liability of fossil fuel power plants (Co: AAT)

We've invested in about 8 companies.  We looked at easily 30x that.  Looking for strong team, substituting knowledge for capital, with great growth trajectory.

Specialty finance: the barrier is often not tech, but finance.  First cost problem, lifecycle energy costs often lower but there are long paybacks.  So we have a finance company.

Environmental finance: emergence of carbon trading, which is rapidly coming on in us.  Biz with GE and ?? -- that is doing this today.  There is actually a strong market now among big corporate buyers to assoc selves with this.

MK: PC, you're a dean in this field.  You built a great co. and then started a brand new one, why?

PC: When I left CalPine, looked around to see what I could do in changing market.  Selected as a wedge tech, one that has been proven.  Need success in marketplace without looking to gov't incentives or special rewards.  Needed to be economic from day one.  Found a good tech -- proven for small gas turbines around the world, several hundred, we're upping the size to the large utility scale gas turbines.

MK:  Dan mentioned carbon trading.  What's you're view?

CP: If we want a true marketplace, have to get people to pay for what they use.  In case of ghgs, it's for using the carbon sinks.  We'd like to make it just auction it off, and then if someone wants to trade it fine, but they ought to own what they sell.

In Europe, people are allowed to sell stuff they don't own.

Current bills: most would for next 35 yrs give permits to issue carbon to companies based on historic carbon levels.  Bribing the ones who emit the most -- we think that's not effective or fair. And rest of world won't accept bargain in which US and Europe act like we own the sky, b/c the rest of the world doesn't think we do.

MK: MM, please define carbon trading.  

MM: Economics and markets work well when there's value assoc with it.  But with carbon, no price.  So need to think what will work economically and politically.  Some would argue that tax is effective and fair.  But also cap and trade: set finite volume and let people get certain amt of credits, which they have to pay for.

Admin -- very challenging.  Different types of behaviors where people are gaming the system a bit.  If you want to game the system, raise your baseline before the baseline emissions are set.

Key point:  inherent problem is that it has to be paid for.  From policy point of view, with carbon pricing come typically higher power prices, arguably regressive tax on poorer people.  Also, not a great way to deal with carbon from a coal-fired pov.

W/acid rain, there was the tech.  W/coal, you have to shift away, and that might be more expensive.

MK:  Sierra Club is active blocking new coal plants in this co.  Even as Europe announce plans to build new coal plants, and china/India rely heavily on coal. Michael, you're the coal expert: tell us what to do.

MM:  Sierra Club has indeed been very effective in blocking plants.  But put self in other shoes: increasing power needs.  You have coal, nuke, hydro on one hand, gas and renewables on other.  There's an argument that we'll have nuke renaissance, but that's ten yrs off.  No more places to build hydro.

A lot of people don't want goal, but it's accounting for 50% of our baseline power generation.

PC:  We've been working with people in KS and CO in particular.  Where the utilities need baseload power. Western Kansas -- governor has vetoed coal-fired power plants, utilities want to know what to do.

Nuke in my view not an answer that will make an impact in US market for decades.  We haven't built plants for long time, don't know what they'll cost, first builder risks tremendous.

So if you rule out nuke and coal...Kansas has a great deal of wind power.  Wind-generated electricity is co2 free, but only blows about 40% of the time.  "Simplified combined cycle power plants" -- gas plants that can be integrated with wind.  When wind dies, gas picks up the load.  Shuts off when wind picks up.  Available today, with financing available today.

Longer term: gas turbines that will burn low btu gas from agrowaste, other wastes.

DA: Yes. Hybridization is important.  Need to be creative in putting pieces together, say solar to boost efficiency of coal plants -- effectively reduce the GHG output of that coal plant.  

Energy literacy: I testified on Hill last week, tried to fit in carbon cap and storage info.  People think it's truly futuristic tech, but it isn't -- our ability to separate CO2 from these gas streams is happening.  US is actually leader in compressing CO2 and pumping into ground, in West Texas, to facilitate oil recovery.  Point is, we know how to do it, we need to get cost of separation process down, but it's an indispensable tech for us to launch, and very soon.

Legal and regulatory scheme has to emerge around leakage, but what's the current leakage of a coal plant: 100%!!

MK:  CP, what's your take on coal and nuclear.

CP: Nuclear -- the first entrepreneur who says they have own investor's money to build a nuke plant, he'll give that person a hug, think it's great.  Thinks nukes are huge distraction -- danger is that we'll throw so much money at building just a few plants that other technologies, including renewables, will suffer. Carbon sequestration, will suffer.

MK:  Why is France so successful with nuclear?

CP:  L'etat c'est moi!  People don't have any choice!  And by US standards it's not affordable.  It's heavily subsidized.  In Japan too.

Coal, more complicated.  If there were no other way to meet our energy needs, we'd be cooked.  In India, 3 million people, China 6 million, who don't have any electricity at all.  If they get it with coal forget it: Manhattan won't be here.

Fortunately we have other options.  Controlled experiment during the Regan years: all programs to support and expand alternative energy effectively shut down. Meanwhile in Calif. allowed public utilities to make money off efficiency, renewables, and decentralized power. Didn't do all we could do by far, but per capita energy consumption remained flat in California, from 1980-2005, while in rest of co. it rose 50%.  Incentives to invest in renewables and efficiency? Utilities can do it at scale and successfully and profitably.

MK:  Why did you fail to convince NY to do the same?

CP:  I'll let the New Yorkers talk about Albany.

MM:  California is indeed a success story.  The good news is there are solutions.  The bad news is, it is expensive.  Calif. rates are vastly higher than West Virginia's.  Americans have to get used to paying more for their electricity bills.

There's implicit health care cost of carbon in environment, but people have to get used to paying more up front.

CP:  Thinks that per square foot, Calif. utility bills are not higher than NY.  We need to be economically smart at the front end.  While we put price on carbon, give consumers choices so they're not so economically dependent on carbon.

V. important to eliminate gov't barriers to efficiency, at the same time we use gov't to put a price on carbon.

MK: DA, is global warming really true?  

DA:  It really is. The science is compelling, peer reviewed, and robust.  We have to grasp that we're going in absolutely the wrong direction right now.  Consequences?  Pick your issue: one recent in news is food security.  Indicative of some of the extreme weather we've seen -- extreme drought -- in addition to biofuel demand.  Just internalize that.

Focus on Arctic minimum [sea ice?] and sea level rise is kind of abstract to people -- not visceral enuf to grasp.   [Food security makes it visceral.] I think global warming should be the #1 voting issue in the 2008 campaign.

Hansen is now saying we have to get to 350ppm. 

We're lulled -- there's an interim pleasantness, by the warming.  But these are exponential dynamics.  Expo growth of these emissions coupled with ?? Show that we're going in an untenable direction.

MK: Carl, we're going to have a new admin.  Are you optimistic?

CP:  With a new president we get a new opportunity, but not a solution.  LCV survey: counted all questions asked of all candidates this year by 14 Sunday talk show hosts & other pundits -- 3500 odd questions in total.  5 had to do with energy and global warming.  42 about haircuts. 

No one's asked these candidates what they'll do.  If we don't improve the quality of American citizenship, we will not improve quality of American leadership.

But that said, the candidates are willing to talk about it, but the media won't ask.

But also, no one anticipated we'd be facing a world food crisis in May.  Thinks a dozen gov'ts will fall due to food security, incl. important US allies.

MK:  As member of media, mea culpa.  Quotes Mayor Bloomberg:  "The energy bill that was passed by a D congress last year and signed by a R president was arguably the single most damaging piece of legislation passed in some time."

DA:  Most damaging thing was biofuels provision.  His co. passed on biofuels deals that looked really good b/c we did our own lifecycle analysis.  It's policy makers making policy w/o doing their homework.

We shouldn't be growing our fuel -- there are better ways to get it.  Better way is plugin hybrids, electricity.  Electric drive train so much more efficient than internal combustion -- so even if you're drawing power purely off coal, you're taking 6-fold jump in efficiency.  We don't need to go over to the hydrogen economy -- we have this technology right now.  

Embedded provision in bill: biofuels would have a 20% improvement in lifecycle carbon emissions relative to gasoline.  Carbon debt: as we grow our food, we're cutting down forests, often tropical, carbon in soils is released.  So even if you have marginal benefit, it's going to take 60-100-more years to realize a benefit.  We're running backwards with biofuels, they're a huge mistake.

Nuke: we don't share CP's concerns.  We're 15-20% nuke today, so to throw out the window the one emissions free tech is not pragmatic.  From energy literacy standpoint: how much energy do we need to produce?  How far can efficiency take us?  I think nuke has to be part of that.

MM:  From public equity investor standpoint, if you can make money the industry will grow and you can make a big positive impact.  Alternatives: dynamic.  Wind sector had about 15GW worldwide last year. Solar, thermal and photovoltaic, growing.  Seen 5-8 potential IPOs of companies in say past 6 months, and we're going into a recession. (Meaning: that's a lot of IPOs in current economic climate.)

Game changers?  Next big companies have yet to go public on the stock market.  Add'l solar companies and wind will be very interesting.  Energy storage will be an interesting area, huge opportunity.  Store energy at utility scale?  Could get over baseload issue.

MK: Carl, we seem to be in a recession.  What will that do to environmental movement?

CP:  I don't know the answer; recessions are hard for all of us.  Don't think it's an important question.  

There are millions of Americans threatened by balloon mortgages; also b/c utilities rates are going up.  We currently spend maybe $4B helping low-income people pay their heating bills.  If we spent it helping them insulate their houses, they would not need help with their heating bills. 

Toronto: all leaky state buildings will be made efficient by xx, at a profit (look into this...).  We could do that -- double employment in building sector, average payback rate in 4 yrs.  Need to grab these opportunities. Whoever's elected will say in Jan, "what do we do now?"

Retrofit rates 6% on leaky buildings.

MM:  Incentives in utility industry are quite perverse.  Make more money when people are less efficient.  

DA:  Should acknowledge that recession is a risk.  We're going to need enormous leadership capacity in DC next year.  But if we don't deal with it, it's going to be much worse (mentions Stern Report -- right now will cost 1% of GDP.  If don't deal, will rise from 5% to 20%.)

Cap and trade design is important -- if credits auctioned, will provide funding for McCain-Lieberman measures.  Need to be sensitive to dislocated workers, etc.  But we have to do something.

Won't happen in an election year.  Will it happen in first year of new administration?  [Unlikely.] We've lost two years.

We've got the capital; we could get to work a lot more effectively with price caps on carbon.

CP: [Incentives incredibly important -- right now all sorts of obstructions embedded in building codes, state transportation codes, etc.]

PC:  Yes, incentives are important.  But energy industry moves very slowly.  If we invented the perfect clean tech today, it wouldn't make a significant contribution for 20 years.  So I think we have to go with the tech we currently have available, and I think yes, a recession might hurt [our progress].

DA:  [Thinks there are some promising new technologies on the near horizon.]

CP: recently in India.  Three examples of things that happened while there:

World Bank approved funding for 40MW coal fired power plant near Bombay.

Country's largest refiner stopped selling gasoline, b/c world oil prices made it a loss.

Some of the country's poorest villages were electrified by putting a solar cell on ever roof and a LED light in every home.

What you see is a country where they're copying the worst of the US, and also some exciting things are happening.

Rumor on Bombay stock exchange: India's largest energy co. ready to make $60B investment in solar.  They're not ideological about this, debating reality of climate change; just want to electrify their villages.  If we continue to pour World Bank funding into coal projects, that's what they'll do.  If we provide incentives/financing for better tech, that's what they'll do.  For them it's all about speed of electrification.

MM:  India a very volatile market.  China: we all know about the growth.  China puts about 1 coal-fired pp a WEEK.  That's a gigawatt a week of coal.  Think about the incentives: if you're a Chinese leader you want clean power, but your priority is social stability.  

The opportunity is, when you think of centralized transmission, you have to build those power lines.  You could say that's a subsidy.  Distributed generation could bypass a lot of problems.

China is putting up the size of the UK power grid, every year.

MK:  Asks each panelist for final thoughts.

DA:  We see right now the challenge as a commercialization and diffusion problem, not an innovation problem.  We look for companies that are up and running, $10 million or more in cash flow, that have hit an obstacle to penetrating the market.  Ex: Sun Edison -- biz model innovation, not new tech.  Wal-Mart is now a client -- let us borrow your roof, we'll put the solar power panels on them, maintain them, you'll have solar power and some price guarantees.  Diffusion is the key at this point, not invention.

We need the price on carbon and we need the signal, and then we'll get it out there into the market.

PC:  Partly a defensive thing, but if we allow one big coal plant to go forward, it will wipe out a lot, if not all, the solar advances we have made.  Takes a long time to go from .01% to 20% of power generation.

Nuclear: safe and no ghgs, but new infrastructure project that risks massive cost overruns.  No new plants in 20+ years; the companies that do it will be taking big risk and costs won't be known ahead of time.  So:  Optimize tech we have now.  Invest in new techs but don't count on them to solve global warming.

MM: To realize potential of clean(er) energy in this country, need opportunity for people to become incredibly wealthy.  The way that incentive is created is a) the opportunity to make a difference and b) make money doing it.  I'm cautiously optimistic.

CP:  PC is right: the energy plant is a hard problem to crack.  

We need to understand that we're going to get most of these things right eventually.  We need to get them right faster, but not that much faster.  We need to get emissions down 2% every year, instead of 1% up a year.

I think we'll pay a price for what we've already done, but we'll avoid the worst.  We're going to pay a price for our folly, but I think we can get on top of it.