By Racquel Palmese
Last year, for the first time, the world invested more money in clean energy than it did in fossil fuels. Also, for the first time, technology innovation, financial markets and government policies are converging to create a robust clean energy economy. It will take innovative funding mechanisms to support clean technology innovators and ensure projects reach commercial scale.
This is a time of experimenting and learning – there has to be room for failure and for building a knowledge base. California “is the global epicenter for that kind of investment,” says Dan Adler, president of the California Clean Energy Fund (CalCEF), a nonprofit evergreen fund of funds. In an interview with Green Technology he discusses how to grow markets for a sustainable future and the crucial role that government plays in this transition.
Dan Adler will be a keynote speaker at the Green California Summit on April 26 at the Sacramento Convention Center.
You describe CalCEF as a "fund of funds.” What is its mission?
We are set up as a nonprofit evergreen fund of funds, investing in other funds that do specific things to address the clean energy challenge. As opposed to investing directly into technologies, we find funds that are being created to address a particular problem, and we contribute to their success. More recently, we've begun creating funds that will invest in the very early stages of technology development, or we'll try to treat a particular problem in scale finance for renewable energy.
The notion of a fund of funds is that it's one step removed from direct technology or company investing. It gives us the ability to invest in a more diverse portfolio of clean energy technologies. What's further unique about CalCEF is that we are a nonprofit - we take any returns from our investments and redeploy them entirely into our mission. We don't have any profits to distribute to individuals and we don't have shareholders. CalCEF is a public interest organization that is broadly concerned with creating new finance mechanisms and financial innovations to help clean technologies achieve scale.
Would you describe what a fund is as opposed to another type of investment vehicle?
Most investments that happen in the development of a new project or the creation of a new company would be through a fund. A fund is a collection of individuals who say, “we think we know what we're doing, we think that we understand this technology category. If we can raise money from financial institutions, like a pension fund or high net worth individuals or a corporation that has a strategic interest in the form of technology in question, we'll pool that money together and then go and look for interesting ideas to sponsor.”
The venture capital model is what's created a lot of the most innovative companies in America. Certainly the strongest locus of it in the world is in Silicon Valley. As a fund, you would go for X millions of dollars, invest in 10, 20 or 30 different companies. Some of them will succeed; some of them will fail. If you're successful, on balance, you'll make more money than you lose. You can return that money plus profits to your original investors, which are called limited partners. The same basic model works whether you're building a power plant or inventing a new widget. The idea is to pool capital from a group of corporations or individuals and then invest from that over a certain number of years.
What was the evolution of CalCEF?
We first came into existence in the middle part of the last decade. We were interested in supporting innovation at the earliest stages. The feeling from our collective advisory group, including the board and staff, was that there wasn't enough capital invested in fundamental breakthroughs at the earliest stages of their development. Lab-stage innovations that could be potentially transformative were suffering from a lack of support from the private investment world.
We partnered with three venture capital firms that were starting to get very serious about opportunities and challenges in energy. We gave them a little bit of cash and a lot of guidance about the differences between policy-influenced markets and technology markets where government plays much less of a role. So, initially we partnered with these three funds with between $200 million and $400 million or more in capital.
Several years later, we started the industry's first seed stage technology investment fund to focus more on stuff that hadn't really emerged from the laboratory yet and didn't have a business plan. We were finding that as more and more VCs started chasing these innovations, they had to write bigger and bigger checks, just by nature of the way venture capital works. They have to write large checks to get their money deployed. That was leaving some potential breakthroughs wanting yet again. So we created a standalone fund called the CalCEF Angel Fund to try and address that challenge.
In 2010, we co-sponsored the creation of a project finance vehicle, as opposed to technology development that's actually dedicated to deploying technologies, with a specific focus on what's called the tax equity challenge for renewables. The principle means the federal government uses to support clean energy deployment is through tax credits, and since a lot of these project developers don't have a balance sheet or even any earnings, they don't have a tax liability. They have to find a corporate or financial partner that can take advantage of these tax credits and get those partners to give them cash in exchange for offsets to their federal tax bill. That's created a major bottleneck in the deployment of renewables.
We’re trying to create a model whereby we can pool the tax appetite and tax liability of smaller banks, regional technology companies, and create a fund of tax equity investors to try and bridge what is basically a two-to-one shortfall in the demand for this tax equity and the supply currently in the marketplace.
What’s next for CalCEF?
What's next is looking more closely at scale finance challenges. How do we get what works to a point where it meaningfully contributes to things like California’s AB32 goals or Renewable Portfolio Standard (RPS) goals. Ideally, it will result in some sort of economic security that your average investor can participate in and take a part of, making a virtuous partnership between the political support that individuals have to give to the clean energy transition and an opportunity for them to meaningfully take part in the economic opportunity that results from it.
Can average investors participate in these funds?
We're working on it, and the industry is waking up to this potential. We started looking at scale financing, post-innovation finance, a couple of years ago, and there's a lot of industry activity around it now. We're trying to continue to lead the industry conversation and tap into these massive pools. There are things like the public stock markets, where individuals can invest in real estate but they can't invest in clean energy power plants, or you can buy a government bond but you can't buy a bond that's dedicated to supporting the development of wind farms. There are a lot of good reasons to focus on this aspect of the way finance works, and we think that this year we'll be able to make some significant progress in that arena.
CalCEF has invested in over 40 young companies. Would you describe some of them?
They include companies you've heard of, like Tesla Motors and BrightSource, which is a Northern California clean energy company, down to some younger, smaller companies that are just getting started. Frankly, some of them won't succeed, some of them have already failed – that's just the nature of this business, you have to experiment.
We're very transparent as to where all the money goes. Part of what we're trying to pioneer is that notion of clarity in the finance part of this business. A lot of it right now is a big mystery, and many investors like it that way. There's a public portion of our website that lists the companies we invest in.
You have mentioned new financing models that CalCEF is experimenting with or developing. What are some of these new models?
We're working on project financing that will better utilize federal tax credits. We're looking at models that would include securities that exist currently and are liquid and available to your average investor. Structures like real estate investment trusts, or green bonds - those are two models that we’re trying to bring more fully to bear on clean energy infrastructure. We're also looking at ways that you can drive more low cost capital into energy efficiency upgrades.
A lot of the marketplace that needs more energy efficiency can't afford it. For example, the cost to raise money [to retrofit] a small commercial building is very high. There are questions from the banks about whether the company will even be around five years from now, and they won't lend at anything like a competitive rate. That makes a lot of energy efficiency upgrades too expensive. So we're hoping that we can pioneer some ways, like the “green bank” concept, to provide low cost capital to a broad range of smaller efficiency projects in an aggregated way.
Government has a crucial role in the transition to a clean tech economy. What is that relationship and how can government best support this transition?
That's hotly debated at every level of government. The old model was for government to just sort of throw money at it. Pick a range of technologies, give them some cash and ask them to come back in a year and check their progress. Governments are getting a little smarter about that with a combination of targeted grant making, things like loan guarantees that help emerging technologies take on debt with a little bit of a government backstop to that debt. It's a combination of cash and tax-like incentives, like tax credits.
More importantly, it's the shaping of the marketplace. When a government like California steps in and says, “for the next 20 or 40 years, we're going to systematically transform our energy system by these mechanisms - clean electricity, energy efficiency, clean fuels, smart building, smart transportation - and every year we're going to get better and better at it.” When they say “this is the schedule and we're going to stick to it,” that sends a lasting signal to private investors that it's safe, or relatively safe, to make some capital commitments under those conditions.
If the government says we're going to do it this way this year and that way next year, that's chilling to the marketplace. Private money is never going to be willing to take a risk unless there's government certainty. Smart market design includes mandatory utility purchase of renewable electricity, or mandatory clean fuels purchasing from the government fleet itself. These are all ways that the government can set up the market and let the private sector compete inside of it.
Are there any other specific opportunities to support clean tech innovation that government should be looking at right now?
There are a lot of different things that governments are doing, starting with setting a system-wide cap on greenhouse gas emissions. Cap and trade is a good way to determine where society needs to get, i.e. a certain amount of reductions in greenhouse gas emissions and then allowing the private sector to trade certificates, trade compliance obligations, underneath that cap and figure out the most innovative way to proceed. The global cap, or economy-wide cap, on greenhouse gases is a market conditioning function that California has recently engaged in.
Underneath that, you have sector-specific initiatives like California's RPS program, setting the mandatory progression of cleaning up the electricity sector on a percentage basis every year. California has very aggressive annual targets for efficiency improvements in the built environment. We're putting billions of dollars into that effort through the utilities. We have the beginnings of a low carbon fuel standard that the Air Resources Board is developing and implementing, which is basically like the RPS. The fuel sector has to get cleaner on an incremental basis every year in terms of greenhouse gas performance.
I'd say those are the principal three examples right now, but there are things like zoning ordinances, smart growth, green building standards that reduce the amount of energy and waste in construction. Those are all policy-driven market transformations, and if you make them stick for five or ten years, that will draw in a lot more private money than a two or three-year little dalliance with the concept.
Are these functions primarily at the state level? Do federal or local governments play a part in this matrix?
I think it's the more the merrier. The larger the system, the more economically efficient it's going to be, the more opportunity there will be. So we would certainly prefer to see a federal strategy. But absent that, state activity, particularly in the environmental arena, has driven environmental policy in the US more or less since the beginning of the republic. California is big enough an economy to practically be a nation-state.
You see 30 states with RPS’s for the electricity sectors, so in a way we do have a national strategy, it's just made up of the composite approaches of individual states that are deciding to lead on their own and not wait for the federal government.
If you were to ask me if we can have a solution to global warming without global policies, I'd have to tell you no. But this is going to be such a process of experimentation and learning and failure that we need to start gathering intelligence at whatever level we can muster it, and then blow it up, aggregate it into the best national approach that we can come up with on the basis of that learning. And then from there take it up to the highest levels - treaties linking nations under best practices for greenhouse gas reduction.
It seems that you’re working right at the intersection of politics and reality. How do you inspire people who question the need to move against climate change?
We do all the time. The main thing that's different this time, compared to the environmental movements of the last several decades, is that there's no doubt that the technology has improved to provide reliable, affordable clean energy. It's getting cheaper all the time, and it's more and more ubiquitous. Last year the world invested more money in clean energy globally than it did in the fossil and dirty alternatives for the first time. So the external change that is undeniable is the improvement in the technology. This basically says we can do it technically.
Then you get to the question of can we do it economically? And that's a combination of the cost of the technologies, which as I've said are coming down, and the way in which you finance the deployment of those technologies, which is where we really need to think creatively as a society, i.e. the “green bank”, or what we call the ownership society, which is giving everybody a chance to equate their savings in these infrastructure categories and own a piece of the sustainable energy future. That would be tremendously motivating to both the political dialog, but also to the continuous reinvestment of new capital into infrastructure assets.
Then, when you start being able to address both the technical and economic questions, a lot of the rhetoric around climate change denial becomes less potent. It is a scary thing to have to contemplate the industrial transformation that we are being forced to undertake. It's unlike anything the world has ever seen. We've never been faced with an external constraint on our ability to achieve economic growth using natural resources. It's just never existed before. So that tends to put people back on their heels and say it's too hard, therefore I'm inclined to believe anybody that tells me I don't have to do it, even though in my heart of hearts I can see what's going on in the world around me.
Once we start being able to demonstrate technically that it's possible and it's achievable financially, it's a little less of a leap of courage to say well, the natural world requires this, my responsibility as an ethical human being requires that I take the challenge seriously, and people I trust are telling me it's possible, so we're going to go forward.
Is CalCEF investing in other states, or is California your primary focus?
CalCEF has its technology investments all over the world. We're looking at wherever the smartest ideas are emanating from and we want to support those. On a policy level, we tend to be quite active here in California just by our history and proximity. We are also connected by a group called the American Council on Renewable Energy to what's going on at the federal level, and then through the membership of ACORE, which is about 600 companies, we’re connected to activity in renewables in any state in the country.
We're actually looking at best practices both in the business sector and in utility regulation, because despite what a lot of California officials want to tell you, there's a lot of smart stuff happening in the rest of the country as well. Then we track economically and politically what's going on globally, and to the extent that we have anything useful to offer to the rest of the world in terms of California’s experience, we're happy to share it. The world needs the United States to be in a leadership position, so that's where we're putting our efforts.
Why is California a good place for the kind of investment work that you're doing?
It's the best place. What it really comes down to at the end of the day is that the people who live in California believe in the need to do this and believe that it's possible. As a state, we're not afraid of the future. We've seen important industries arise here based on creativity and courage in the past. We've got tremendously intellectually capable people and a lot of earth-loving financiers. Silicon Valley was the birthplace of venture capital. So that underlies the state's commitment to continuously pushing forward.
We saw that when a group of Texas oil companies tried to beat back AB32 with a ballot measure and it was resoundingly defeated by folks in the midst of a serious recession. It was incredibly affirmative for everybody in this field. At the leadership level with elected and appointed officials, they're continuously striving to move the marketplace forward but with the right kind of balanced policy, and we've got every reason to think that the economic returns that we're clearly seeing are going to continue to accrue to the state in the form of new jobs, new innovations and, also, a much cleaner environment.
How can innovators and entrepreneurs find the funding they need to explore and develop their products?
To begin looking for funding, most regions in the state now have networks of clean energy entrepreneurs, be it Sacramento or the San Francisco Bay area, San Diego or Los Angeles. They are self-organized, non-governmental organizations that are good resources for emerging companies, young ideas and entrepreneurs. From there it's fairly easy to get connected to the venture capital community, to private equity investors that are in the business of supporting new ideas. This is the global epicenter for that kind of investment.
There is also a fair amount of public money in the form of [California] Energy Commission and Public Utilities Commission grants, some of which are being revamped to reflect the needs of the AB32 program into the future. That's a very valuable stream of publicy funded research and development money that really arose in the absence of a federal funding strategy.
But that being said, under the Obama administration, we're seeing a real rebirth in federal investment in technology innovation. It's important to keep your eyes on what the Department of Energy is funding as well.
I think the most important thing for a young company that's starting out is to find a network of like minded other ventures, for moral support as well as anything else. The networking benefits can be pretty significant.