ENERGY MATTERS: Commercialization

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LIISA O’NEILL: Welcome, and thanks for joining us on energy.gov for the latest edition of Energy Matters. I’m Liisa O'Neill, a new media specialist here at the Department of Energy. Today I’m joined by Richard Kauffman, senior adviser to the secretary of energy. Kauffman recently joined the department from the private sector where he served as the CEO of Good Energies, a global investor in renewable energy and energy-efficiency technologies. We’re here today to talk about both the challenges and opportunities of renewable energy innovation and deployment. Thank you for being with us today, Mr. Kauffman. If you could start with just talking a little bit about your background and what drew you to the Department of Energy from the private sector. RICHARD KAUFFMAN: Well, it’s great to be here.

Thanks a lot, and thank you all for tuning in. I look forward to answering a lot of questions. So the first question, Liisa, I guess, is about me. So I guess my interest in renewable energy dates back to really a long time ago. It was my first year in college. And that was the year of the first energy crisis. And I had just gotten my first car and I thought: This is it. I’m never going to be able to drive my car because there isn’t any more gasoline, because if people remember, that’s when everybody was waiting in long lines for gas. And so actually it’s almost now 40 years later, and we haven’t really made that much progress in the adoption of renewable energy, at least in the United States. We import more oil than we did then by a significant margin. And so when – and then most recently I was, as you observed, the CEO of Good Energies. And that was an opportunity to really see through being an investor in renewable energy what the obstacles were. And so when Secretary Chu called me up and asked me if I would be his adviser on issues of financing and deployment of renewable energy, I thought, well, this is really a great opportunity to serve and to work on some of the issues that I think are the big obstacles. MS.

O’NEILL: Great. So are you ready for our first question? MR. KAUFFMAN: I’m ready for your first question. MS. O’NEILL: (Chuckles.) All right. MR. KAUFFMAN: And by the way, if people have very technical questions or if I’m not being technical enough, or too technical, you know, kind of let me know. MS. O'NEILL: All right. Steve (sp), via email, asks: We have unmatched university, national and private research laboratories, yet everything from color TV to biotechnology seems to be exploited by other countries. New energy technologies represent a tremendous research, manufacturing and deployment job resource. What are we doing to keep it American? MR. KAUFFMAN: Well, it’s a – Steve, that’s a great question. And I think it’s a – it’s a very interesting time – a critical time, actually, in the renewable energy business, because everybody talks about it kind of being in the future.

But actually the future is really, really close because the costs for renewable energy have really come down quite dramatically. So in the last couple of years the cost of solar energy has come down 70 percent. The cost of wind has come down 40 percent. And so people talk about grid parity, which is the cost of renewables relative to conventional sources of energy. That’s really within sight; in other words, renewables will be competitive with conventional sources of energy really in a very few years. And so it means that the market globally is beginning to grow very rapidly and it’s growing for a bunch of reasons. First, a lot of the generation capacity in Europe and the United States was built after World War II and it’s come to the end of its useful life. So it needs to be all replaced. And then emerging markets represent a very substantial demand for energy.

If you look at a picture of the Earth at night, half the world is dark, which means they don’t have any electricity. So just in the same way that if you think about what happened in the telephone business, where a lot of emerging markets never built wire line technology – went right to mobile phones – the same thing is going to likely happen with renewable energy, which is another kind of distributed solution. So the size of the prize is very substantial. And so it means that a number of other countries see this as a very critical industry and they’re doing quite a lot to support the industry. And the United States, as Steve points out, has fantastic innovation; but we can’t seem to get things quite right in terms of the other elements of – that’s going to make us a real winner in the race. And I think – in Steve’s question, I think he’s got – he’s got it kind of right: that you need – in order for us to be able to get the jobs and be able to fully take advantage of this opportunity to really seize the prize, we’ve got to get all the legs of the stool right.

So we probably have the innovation stool really pretty right, but we don’t have the market development right, and we can talk more about that. But we need to – you need to develop markets. We don’t have the financing right because with – cost of financing in the United States is very high. And so – and then this whole question of manufacturing – you need all those things in place because there are feedback loops, for example, between manufacturing and the market. That’s what makes competitors really, really good – is that if they know what’s going on in the market and can feedback in to the innovation engine and kind of vice-versa. And so if you think about, again, in the telecom industry, the fantastic, domestic market we have has helped create all this innovation.

There’s – you think about Apple and all the things that Apple has done, it’s because there is this fantastic, domestic market which in turn feeds back to generate more innovation. MS. O'NEILL: Great. Thank you. So we’ve also had a couple questions regarding the 1603 program. David Colt (ph), via Facebook, asks: What can the DOE do to extend 1603 or something like it to open investments to those without tax equity? Likewise, Tom (sp) from Georgia asks, via email, is there any chance to have the 30 percent federal grant extended? MR. KAUFFMAN: OK. Well, this is where it may get too technical for some or maybe not technical enough for others, but – so I’ll need some coaching from people that are tuning in as to whether I’ve got it right or wrong. So I think both these questions are really quite similar and it really goes to the nature of how the United States gives support to renewable energy, which is in the form of tax support both in terms of tax credits as well as – tax credits for investment, something called the Investment Tax Credit, as well as in the form of production tax credits.

And this is not really unusual. This is the way the United States gives support to other industries, including the oil and gas industry and certain parts of the health care industry. So it’s not – this is not – this part is not unusual. The part that’s challenging for the renewable energy industry is that many projects are developed – the wind – think about a wind or solar park if you’ve ever seen one of those. Those are projects that are developed by – not big companies that have a lot of taxable income, but by entrepreneurs that go and find a farmer and ask the farmer if they’re interested in selling development rights to build a wind farm. And so what happens is that the developer collects a series of contracts, collects the – has the development rights and then gets various environmental permits and eventually has to get a contract for the power that would be produced from the wind site. All at this point is just a bunch of pieces of paper. And based upon these different pieces of paper, the project developer gets financing to actually build the project. And that kind of way of getting financing is called project finance.

And so the problem with that structure is that there’s not much taxable income at the project level. And so to give the project developer a tax credit, when there’s no taxable income, doesn’t really give that person any value. So the developer has to find somebody else as a partner – what’s called a tax equity partner – that has taxable income that will participate in the project. And it’s really essentially a debt instrument. The tax equity provider provides financing in exchange for a fixed payment and the tax equity partner gets the tax benefits. And so the 1603 program – I get it – sorry – one other point. So the challenge with tax equity is that the biggest provides of tax equity in the past were – or have been financial institutions. So the biggest providers, for example, of tax equity were AIG, Wachovia and I’ve forgotten the third one.

(Laughter.) Oh, Lehman Brothers; how could I forget? So banks obviously don’t have much taxable income at this point since they have a lot of losses. So the tax equity market is pretty limited and it’s pretty expensive for developers. So the 1603 program was part of the recovery act, gave developers the option of – for the investment tax credit – of getting a cash grant from U.S. Treasury. And that meant that they did not need to go to the tax equity market. So it has been a tremendously successful program because it’s helped many projects be developed that otherwise would not have been developed. And unfortunately, that program – the 1603 program – is set to expire at the end of December of this year. And in fact, kind of the – the kind of grim news for the sector is that a number of the federal programs that have been in place to support renewables are either expiring or close to expiring or have expired.

So the – there was a 1705 program for providing loan guarantees. That expired at the end of September, just, you know, this last month. Then we have the 1603 program expiring. And then you’ve got the production tax credit for wind expiring. And there are others that I’m not even going to talk about that are also on the verge of ending. So we’re – the industry really faces significant challenges. MS. O'NEILL: Thank you. So we – just via Twitter – have a question about your Huffington Post blog yesterday on clean energy markets. MR. KAUFFMAN: Yeah? MS. O'NEILL: We spend 8 to 10 times more on deployment than R&D already. Why do you say that we should focus more on deployment? Isn’t the main challenge of clean energy that it’s too expensive and technologically imperfect? MR.

KAUFFMAN: OK. Well, I appreciate that question. I think there is the wide perception that renewable energy is not reliable or still too expensive. And I think that –certainly from a reliability standpoint, you know – proven technology of wind and solar is extremely reliable now. So the cost question is a – is a kind of complicated one because the first point is, of course, there is no cost of carbon for conventional sources of energy. And so the administration feels very much that there ought to be eventually a cost of carbon. And that would change the cost comparison quite considerably. And the second issue in terms of the cost point is that it’s not completely a level playing field in terms of renewable energy and conventional sources of energy because there are many historical subsidies that conventional source of energy has received. So in any case, it’s not a completely level playing field. But nonetheless, as I said at the beginning, those costs are coming down, for renewable energy, quite considerably so that this grid parity idea is not very far ahead.

So I think that the point that I was trying to make in the post is that we’ve – one of the reasons why I think we’ve had challenges in the United States in the last almost 40 years is that we – by trying to put – by not having quite the right balance between innovation and deployment is we’ve set up a model where we say because renewable energy is really expensive, let’s innovate, innovate, innovate until renewable energy gets at equivalent cost as conventional sources of energy, and then we’ll deploy. And so I think there are a couple of problems with that model. The first, as I said, is that – for an inventor. The first problem, as I said, is that the playing field isn’t completely level. So the innovator has to overcome that first problem, which is that market prices for conventional energy are, in a sense, tilted against renewable energy, OK. But we’ve already talked about that. But the second part, I think, is an even bigger obstacle which is the conventional energy industry is obviously a very mature industry and it’s a production industry where there are real scale advantages in manufacturing.

And so it’s very tough for an inventor to come up with a device that’s not only going to overcome the first obstacle, but has to overcome the – being able to achieve cost competitiveness without the benefits of scale. And so the – what we’ve seen in other countries – and one of the reasons, for example, why wind and solar have dropped so much in cost – is the fact that this – the industry has gotten bigger and it’s had the benefits of scale economics. And so I think that – I think – I think we will find, and have already found, that the bigger the markets, the more innovation we draw in. And maybe just the last point to make that really, really clear: If you think about your – you know, you got a PC in front of you. There’s a chip in that PC that’s gotten better and better. You know, the famous Moore’s Law that people talk about.

Well, Moore’s Law is not a fundamental law of physics. My boss is a Nobel Prize winner in physics, so I could probably – you know, Secretary Chu probably – I get – I’ll probably get into trouble with him on this point. (Laughter.) But it’s not a law of physics, I don’t believe. But the reason that chips’ performance improve so predictably is because computers sell into a market. So – and the challenge – and so you have to ask yourself, without the market that has existed for computers and other electronic devices, do we honestly think that the chip that’s in there – in your computer – would have the performance characteristics it had today if the markets had ever – had been constrained. And that’s kind of the point that I’m making. MS. O'NEILL: Hence why we have iPads and tablets today – (chuckles) – that we can carry around.

MR. KAUFFMAN: And of course – and of course the challenge – and I think this is another point – is that – is that the difference, and the difference is really significant, is that computers and all the electronic devices were selling into new markets which didn’t really exist. And the challenge for renewable energy is, it’s selling into a mature market of electricity and a commodity market. An electron produced from coal or from nuclear or solar and wind are chemically the same. And so it’s – and so the challenge – one of the challenges that renewable energy faces is that it has to, at least in the United States and in other developed markets, it has to replace existing – and existing sources of energy, because the market’s not growing very rapidly, as opposed to selling something like a device that’s – or service that’s related to an open-ended opportunity that the IT revolution has provided.

MS. O'NEILL: Great. So our next question comes from Facebook from Irene Lopez (ph). Why is the West of the United States moving along nicely in renewables and the East is just crawling along? MR. KAUFFMAN: (Chuckles.) Well, I would say that it’s not exactly the case that the – that the East is crawling along. There are several states in the East that have quite active renewable programs. So it really goes to the – to the – to the issue that – and it’s a – both a challenge and an opportunity that much of electricity regulation and – is determined at a state level. And so it’s really – a lot of this is kind of up to the states to decide. So there are nearly 30 states that have what are called renewable portfolio standards. And they have different standards of how much renewable energy they are trying to achieve. And there are other states that don’t have renewable portfolio standards. So it really comes down to – it comes down to what each state decides that it wants to do, but it makes – it’s another challenge for renewable energy, because it means that it’s very – I talked about it before, the benefits of scale, advantages of scale.

So if you take solar energy as just one example, nearly half the cost of solar energy – and it also, by the way, goes back to the point about the investment in technology versus deployment. Well, nearly half the cost of solar is the cost of installation and the balance-of-system stuff. And so you can really imagine that if there was a single global – excuse me, a single U.S. market for solar, how much rapidly you would be able to take out some of these other costs just from the benefits of scale. And so the fact that there’s a patchwork of local regulations means it’s very tough for – and in many cases, smaller companies to be able to gain scale advantages. MS. O’NEILL: On the topic of solar, Stefan (sp) via email asks, why not provide incentives to ramp up home solar leasing, or more importantly, lease-to-buy? MR. KAUFFMAN: Yes, OK. So of course, it’s been a very good model in several places in the United States to have a leasing model.

And the reason why that’s such a great idea is because the cost of a solar system is a big up-front cost. Now, the benefit, you achieve for many years. And so you pay your electric bill every month, and so it certainly makes a lot of sense to think about – instead of paying your electric bill, to pay a lease or a monthly bill, rather than having to come up with the money yourself. So it’s perfectly understandable why that’s been a very successful model. So the challenge with the leasing model comes back to that point about tax equity, because what makes the leasing model work – when you get behind and look at the plumbing – is there’s somebody that has to take the tax benefits. And so you need a tax equity partner. And so that’s the constraint on the model – is not that there aren’t – not that there aren’t companies that want to – service providers that want to be able to provide the solar lease.

It’s really on the financing side, and principally within the financing side it relates to the shortage of tax equity. MS. O’NEILL: All right. The next question comes from Twitter, dlazanski (sp). What do you think are the biggest communications challenges we face in deploying renewable energy? MR. KAUFFMAN: OK, well, I think there are a few. We’ve touched on a couple of them. I mean, I think first is the perception of reliability. I think for those people that have driven to – from Los Angeles to Palm Springs, they’ve seen a lot of windmills over the years, and I think many a time when they drove, the windmills weren’t operating. And so I think there’s a perception that the technology just isn’t really that good. And I just want to re-emphasize that – again, to the point – because there has been a significant increase in deployment, maybe less so in the United States, but more outside the United States, the equipment is much more reliable. So that’s the, I think, first communication issue.

The second communication problem is that renewable energy is very expensive. And I think we’ve touched on that before. The costs are somewhat higher than conventional sources of energy, but are – but are coming down quite rapidly, and in some markets, I think, are virtually at grid parity. So that’s the second communications problem. I think the third communications problem is that, well, yeah, this is great, kind of, as a – maybe as a hobby, but could it really – could it really achieve meaningful penetration in terms of the whole electricity demand that we have? And I guess I’d make a couple points. I think the first point I’d make is that in Germany, within a relatively short period of time, nearly 20 percent of electricity in Germany comes from renewable sources. So it can really make up a very substantial portion of total electricity generation. And even in the United States, while renewable energy represents a very, very small percentage of the amount of energy that we produce, when you think about incremental capacity, wind, for example, has been more than 25 percent of the incremental capacity that electricity – electricity additions to the United States.

So I think those are probably, probably, you know, the main communications challenges. MS. O’NEILL: Another question via Twitter: irn/usanews asks, should the federal government have the ability to require citizens to use certain types of energy sources? MR. KAUFFMAN: I don’t think – that’s not – I don’t think I want to answer that question. I don’t think that – that’s not something that we’re discussing, no. MS. O’NEILL: OK. So another question from Steve via email. Per McLuhan (sp), how do we get the – MR. KAUFFMAN: I’m sorry, just ask me that question again. I want to be sure that I – MS. O’NEILL: OK. (Chuckles.) MR. KAUFFMAN: Just say it again, because this is – none of this is rehearsed, by the way. MS. O’NEILL: Should the federal government have the ability to require citizens to use certain types of energy sources? MR. KAUFFMAN: Require citizens? MS. O’NEILL: Right.

MR. KAUFFMAN: No. MS. O’NEILL: No? MR. KAUFFMAN: No. MS. O’NEILL: We need a diversified portfolio, yeah. MR. KAUFFMAN: No, we need a diversified – but to require citizens, no. MS. O’NEILL: OK. And the next question: Per McLuhan, how do we get the entrenched old technologies – coal, oil, et cetera – out of the way to enable us to exploit the benefits of new, clean technologies? MR. KAUFFMAN: Well, Lisa, you just said – I want to be clear that while, obviously, I’m quite interested in renewable energy, none of us, I think, that are at the Department of Energy think that we’re going to be – that 100 percent of our energy needs can be – come from renewable energy. So we’re going to have conventional sources of energy for quite a long period of time, and there are some fantastic innovations that are taking place. So I just want to make that first point clear. I think the second point that I would make is, maybe, reiterating what I said before, which is that the energy sector in the United States, and in most developed countries, is one of the oldest sectors and really, a very mature sector.

And so there’s both all the infrastructure, the scale of economic advantages in production, and the regulatory and tax and a bunch of other stuff that surrounds the industry that – and none of that, of course, was ever designed to permit or to encourage renewable energy. That’s particularly true, for example, in the electric utility industry, which is – which is a regulated industry. And so that’s a real challenge, to try to grow an industry in the context of incumbents. And so we just need to be mindful of the existing incentives that exist in conventional energy, and try to see if there are some things that we can do to level the playing field. MS. O’NEILL: Great. So our next question comes from Rick (sp) via email. Can you comment on how smart grid technologies and communications might change the landscape of power generation and distribution outside of the traditional infrastructure, whereas we would see many more players entering renewable energy production and not hampered by the distribution control of PG&E, et cetera? MR.

KAUFFMAN: OK, well, I’m not going to – MS. O’NEILL: (Chuckles.) The comment was sort of a – MR. KAUFFMAN: I’m not going to comment on PG&E particularly, specifically. Well, I think that it’s a really interesting question, because it goes back to this point about some of the examples we’ve talked about in terms of the IT and telecom industries. So if you think about what happened in both computing and in telephony, there was a transition from a centralized system with spokes – so you had a mainframe computer and then a terminal at your desk – to distributed solutions. And so that’s true – the whole PC revolution is really about, again, it’s a distributed solution. And the same thing is obviously true with your mobile phone. So the same thing, arguably, could happen with the way we – the way we produce and consume electricity. But right now, we’re in a system where we still have, very much, central generation going out over the wires to the individual structures. And the benefit of that system is that it’s easier for the electric utilities to be able to manage generation, because you can’t store electricity for any length of time.

So during the day – if you imagine, in the summer, there’s more and more demand for electricity, so utilities have to add on more and more generation capability during the day. And so it’s much easier to be able to do that if you can – if you can see the sources of – see the coal next to the power plant, or know that there’s a pipeline of natural gas, and you can monitor and see the centralized generation. So when we talk about distributed solutions, which means stuff going out – and there’s distributed generation, so there’s solar, or there’s ability to have what’s called demand response, where appliances and stuff can be shut off when the grid needs it, so that there can be less peak demand for electricity. All that both requires a lot more intelligence in the grid, but it also is more difficult for utilities to operate. And so I think one of the challenges – and, I think, uncertainties – is in a sense, we have two competing models. And we don’t – we really don’t know yet what model is the best model economically – whether there’s a model that is the current model, which is centralized generation with the scale advantages that come from a big central power plant, or whether the distributed model is actually more economic.

Right now, the regulatory incentives favor the former, not the latter. And so I think this is something that we’re going to have to see how it develops over the next – over the next number of years. Because I think utilities face an interesting business challenge, that demand growth in the United States is slow. There’s a lot of capital expenditures that need to be expended. There’s certainly a lot of uncertainty from a regulatory standpoint. It’s hard to build a new coal power plant, is an example. And so there’s – at some point, will there be the cost of carbon? And we talked before about the states imposing different portfolio, renewable portfolio standards. And there could be a federal clean energy standard. And so I think it raises the question about – I know the question was about the smart grid, but I’ve taken it beyond that. But the smart grid is really part of this broader question about, what does the utility of the future look like? MS.

O’NEILL: Great. So we have time for just one last question, and this comes from Lauren (sp) via email. Why is the government spending taxpayer funds to benefit private corporations? Shouldn’t the private sector and markets drive innovation? MR. KAUFFMAN: Well, you know, ideally, yes. And I think the administration cares about the private sector. Look, you know, I came from the private sector. I spent my whole career in the private sector. So I think that I’m kind of, as it were – I guess I can make an electricity joke – I’m kind of wired that way. That was pretty lame. MS. O’NEILL: (Chuckles.) MR. KAUFFMAN: But I think that – I guess I’d make a couple points. I mean, the first point I’d make is that almost every really significant industry that’s developed has required a degree of government support to get going. So the oil and gas business in the United States really got a big benefit in its early days – I’m not talking about tax benefits over, you know, recent years – but there were significant grants of land to the domestic oil, gas, and coal industry.

Same thing with the railroad industry. In fact, the railroad industry helped the coal industry, so the coal industry today gets the benefit of the fact that the federal government helped build – helped provide incentives to have the transportation network of rail be built. The jet aviation industry enjoyed the benefits of the fact that the federal government helped – helped build the first jets for military purposes. So people may remember that the first commercial jetliner was the Boeing 707, and that really came out of the work that was done for the KC-135, which was a military plane that was – it provided fuel. It was a tanker. The IT world benefited from all the defense expenditures as well. So I think that – I think there’s a time to provide support for a sector, and then a time for the government to step out of the way. And that’s what we’ve seen in other industries.

And so the point about the private sector, by the way, is that one of the reasons why the government has provided opportunities to the private sector is that – government’s good at some things and not good at other things, but companies are much better at being able to take on the challenges of commercialization. MS. O’NEILL: Great, thank you. So for those questions we were unable to get to, we will be following up on energy.gov. So thank you very much for joining us today, Richard. And thank you all for your questions and participating today in the live chat. We will be posting a video replay on energy.gov, and you can check out energy.gov/commercialization to learn more about how technologies from the department’s national labs are creating jobs, businesses, industries, and impacting Americans’ lives. (END) �.

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