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Innovation versus Financialization in Renewable Energy. Matt Hopkins and William Lazonick University of Massachusetts Lowell The Academic Industry Research Network (AIRNET). Ford Foundation Conference on Finance, Business Models, And Sustainable Prosperity December 6 and 7, 2012. - PowerPoint PPT Presentation

Text of Matt Hopkins and William Lazonick University of Massachusetts Lowell

  • Matt Hopkins and William LazonickUniversity of Massachusetts Lowell The Academic Industry Research Network (AIRNET)Ford Foundation Conference on Finance, Business Models,And Sustainable ProsperityDecember 6 and 7, 2012Innovation versus Financialization in Renewable Energy

  • Total Carbon Dioxide Emissions from the Consumption of Energy (Million Metric Tons), Selected Countries, 1980-2009Source: Total Carbon Dioxide Emissions from the Consumption of Energy (Million Metric Tons) Energy Information Administration. International Energy Statistics Data. Accessed 13 Apr 2011. The Cause of Climate Change is the Emission of Greenhouse Gases (GHG), and CO2 Emissions are the Major GHG of the World

  • Total Primary Energy Supply, World and OECD, 1973 and 2009Source: Key World Energy Statistics 2011. International Energy Agency. According to the IEA Other includes geothermal, solar, wind, tide / wave / ocean energy, electricity, and heat. There were 34 members of the OECD in 2010, and 24 in 1973. 34 Members exist currently. According to the IEA Total Primary Energy Supply (TPES) is made up of production + imports exports international marine bunkers international aviation bunkers stock changes. For the world total, international marine bunkers and international aviation bunkers are not subtracted from TPES.The World (Still) Runs on Fossil Fuels

  • Clean Technology is expected to address three issues: the need for GHG reduction, Energy Independence, and Job CreationGHG reduction in response to the threat of climate change, energy independence in response to Fossil Energy dominated economies (Including coal power, U.S. is also the top consumer of petroleum, Top 4 producer), and . . .In the wake of the recent global economic crisis, a means to spur economic growth$194 billion in 2009 funding worldwide, lead by the U.S. ($67 billion) and China ($47 billion). Given the Mission Requirements Policy Makers must focus on three core activities, which are R&D, Manufacturing, and Deployment of Clean TechnologyClean Technology Development as a Response to Multiple Missions

  • Clean technology spans many different economic sectors, such as transportation, energy, energy efficiency, energy storage, and smart grid. What does all of the above mean?Making these investments requires attention to the Theory of the Innovative Enterprise which provides an explanation as to how policy makers and business enterprises can overcome uncertainties as they seek to generate disruptive energy technologiesThe Expectation that Innovation will occur as a result of public and business investments requires that each will provide and sustain the patient capital required to develop the technologies, firms, and markets that make up clean technology sectors and which are full of uncertainty and riskWhat are the commitments of the U.S. government and Business Community, and what have been some of the outcomes?

    Clean Technology Development as a Response to Multiple Missions

  • The Headlines Suggest that Clean Tech Development is Not Easy

  • Clean Technology Innovation requires Patient Capital because it requires huge capital investments made over long periods of time in the face of uncertainty which include:Costs of developing new technologiesLarge-scale plants and sites for commercializing new technologiesThe need to gain large market shares in order to drive down unit costsTechnological uncertainty: can/will superior technologies be developed before we can generate returns?Market uncertainty: what is the extent of the market that will be available, especially given legacy grids and legacy technology?Competitive uncertainty: will other firms (or nations) develop higher quality, lower cost products faster, better, cheaper than we can? Clean Tech Needs Patient Capital

  • Source: Authors' calculations, Energy Information Administration, International Energy Statistics. Accessed 8 Nov 2012.. Yellow highlighted countries have top 10 representation in both solar and wind power. *Solar is based on the EIA's solar, tide, and wave data, in billions of kWhs generated). Nation output is output as a percent of total output in that category. There is virtually no tidal or wave energy power being produced on the planet at this time, so the figures are meaningful for showing leadership in solar power.A Few Nations Generate the Majority of Global Wind and Solar EnergyTop 10 Wind and Solar Electric Power Producers, 2010*

    Non-Hydro Renewable International

    RankTop 10 WindTop 10 Solar

    Nation% of World TotalNation% of World Total

    1United States27.7Germany37.4




    5India5.8United States3.9

    6United Kingdom3.0France3.5

    7France2.9South Korea2.5


    9Italy2.7Czech Republic2.0


    Rest of World16Rest of World5



    &CPage &P

  • Nations that lead in Renewable Energy development tend to have policies supporting R&D, manufacturing, and deployment, and also policies that:Define social goals and couple them to targets/goals for RE developmentDefine environmental goals and couple them to targets for emissions reductionsRegulate and standardize interconnection of new energy resourcesSubsidize the cost of Renewable Energy technology development, manufacture, and deployment by providing and sustaining government support

    Government as a Source of Patient Capital?

  • Advanced Research Projects Agency, Energy (ARPA-E) was the only new Government Agency created from the ARRAARPA-E founded under the 2007 America Competes Act but funded by the 2009 ARRA (Steven Chu helps author NAS report inventing the agency) sole purpose is to disrupt and commercializeInitial funding of $400 million, $850 million total through 2012, with request for $350 million FY1321 billion ($2011) has supported Renewable Energy R&D between 1948-2010, out of 184 billion in U.S. R&D support overall 17 billion for Energy Efficiency, 96 billion to Nuclear, 48 billion fossil, 9 billion Electric SystemsVirtually unfunded until creation of DOE in 1978Even over last decade, Fossil and nuclear receive more3.4 billion ($2011) allocated to solar PV, and 1.2 billion wind ($2011) 1990s to todayPutting a Dollar Value on Government Support(R&D)

  • DOE Loan Guarantee Program created by 2005 Energy Policy Act, funded by 2009 ARRA to provide $35 billion through - 1703 program: U.S.-located firms producing high risk, non-commercial new technology. $10 billion for Nuclear Power projects1705 program: RE Project funding and Manufacturing support $16 billion(ATVM) Advanced Technology Vehicles Manufacturing: Finances Tesla, Fisker, Nissan, Ford, Vehicle Production Group. $8 billion1705 Program provided $1.3 billion in loan guarantees to solar manufacturers (Solyndra, 1366 Tech, SoloPower, Abound)Examples of State/alternate funding: $58 million to Evergreen from State of MA$22 million from State of Ohio to First Solar, about $60 million from Germany$32 million from State of NY to SpectrawattPutting a Dollar Value on Government Expend.(Manufacturing)

  • Putting a Dollar Value on Government Expend. (Government as a source of patient capital?)Putting a Dollar Value on Government Expend. (Deployment Support)Government Production Tax Credit (PTC) cost $7.9 billion between 1994-2010PTC contributed to $56 billion in U.S. wind project asset financing between 2001 and 2010, is set to expire this Dec 2012Investment Tax Credit (available as grant under ARRA) cost $13 billion between 2009 and mar 2012, and is expected to cost $15 billion through expiration For 2012-2016 ITC will be a 30% tax credit for solar projectsITC-as-grant contributed $2.8 billion to over 44 thousand solar projects, and $9.2 billion to 748 wind projects 1705 Program - $1.7 billion to wind, $12 billion to solar PV ProjectsStates generate demand for new RE projects with RPS law, set aside funding to promote deployment:California's $2.2 billion, and New Jersey's $400 million Solar PV fund

  • Business as a Source of Patient Capital?Business can provide patient capital:Private equity (including venture capital)Retained earningsPublic bond issuesUses of patient capital:Fund internal R&DKnowledge transfer, such as through joint venture, licensing agreements, participation in government or university research collaborationMerger & Acquisition

  • Interaction of Government and Business Finance:The presence of substantial public and business investment in innovation means that government finance will interact and are inseparable. Patient government capital encourages risky business investment:Government investment in fundamental and applied R&D creates or supports creation of solution, then encourages firm formation and growth- VC and PE appear to finance the transition made between R&D, product prototyping, and commercialization- Financial support for manufacturing encourages scale, or the translation of high fixed costs into low unit costs- Meanwhile the promise of future returns creates exit opportunity for VC and PE investors via IPO or Merger/AcquisitionMeanwhile support for a strong RE development market encourages RE developers to purchase lots of wind turbines and

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