by Daryl Roberts

A potentially paradigm-shifting technology has been under development at an R&D firm in NJ called Brilliant Light Power.   For people monitoring the situation, the question currently is about the status of commercialization.   It is not a publicly held firm, but is in mid-stages of private equity capitalization in the range of $100-120M.

I recently read a book  titled “Randall Mills and the Search for Hydrino Energy“, offering a detailed and compelling history of the development of this novel renewable energy technology, authored by an insider, an intern who stayed on to work there for several years (published in 2016, with company data as of end of 2015).  In order to provide some context, this article will summarize the concept, breakthrough achievements, compare its levelized costs to other generation technologies, offer a brief review of validation efforts, and touch on personnel and capitalization.   I will try to be faithful to information presented in the book and website materials, and will try identify my own cautious opinions in context.

Concept

The technology was developed by Randall Mills, whose special talents manifested while still a graduate student in physics at Harvard, when he made a discovery in 1989 while exploring a foundational question in physics about why an orbiting electron did not radiate away its energy.   Quantum mechanics diverged from classical mechanics without ever answering this question.  Mills emerged with a revised classical theory that included the proposition that hydrogen’s ground state can in fact be lower than previously thought, that it can have fractional ground states.

According to Mills’ theory, hydrogen can react with a catalyst in a 2-step process, in which first a small amount of energy is transferred by a process called resonant inductive coupling, in integer increments of 27.2 eV.  When this photon is accepted by the catalyst from the atomic hydrogen, the hydrogen electron then becomes unstable and will decay into a lower, fractional orbital, closer to the nucleus.  This 2^nd step releases a larger increment of energy than would be predicted by any other known chemical reactions,   200x higher than burning hydrogen.  The ending species of hydrogen was dubbed a “hydrino”.

Validation

Mills documents extensive experimental confirmation, which to date has identified hydrino states of 1/2, 1/3, 1/4, down to 1/10 (orbital shell distance below 1.0 ground state).  The theory calculates possible hydrinos with a theoretical limit of 1/137, constrained by relativistic speeds for the electron travel.

The book documents Mills’ 25-year journey of verification, both with collaborators and validation by a growing number of independent investigators who report finding confirmation in a wide range of experimental configurations.  Mills was prolific in publishing his findings in the face of persistent resistance from establishment figures, in progressively more prestigious journals. The reference section of the book documents 96 journal articles with Mills as primary author(as of late 2015, now over 100), 52 journal articles with non-BLP primary authors, and 31 other technical reports regarding hydrino research by various universities, national labs and corporations.

Early lab set ups involved low temperature electrolytic cells, but Mills eventually found that the phenomenon could be triggered and measured more successfully in high temperature plasma conditions.  Subsequently, tests were constructed using various types of instrumentation, & validated by leading experimentalists in this field, experts in thermal measurement.    A summary of the full extent of the verification data discussed in the book and website materials is beyond the scope of this article.   But it’s worth including one slide which shows a list of 29 types of confirming evidence that has been compiled to date, including 7 or  8 types of spectroscopy and 4 or 5 types of calorimetry.

On the website, most of the Validation Reports are compiled under the technology tab and also under the News/ What’s New tab.  The focus seems to be weighted most heavily on confirming that the energy is generated by the hydrino reaction process.   Business presentations pdf’s, PowerPoints & videos of conference are in the News / Archive tab.   The validation page reports 4 independent studies in 2020, 3 in 2019, 5 in 2016, and an additional 17 earlier reports.

Energy Gain

The specific excess heat generated is not documented uniformly within a single reference system.  As I searched to compile these results, I found various expressions of “gain” cited in PowerPoint slides reporting outcomes from a range of experiments, as follows:

• “energy gain of 200-500x”
• “Optical energy output of 30x input”
• In a table identifying specific experiments showing a gain column, with 3 cases with highest values showing 399x, 279x & 213x
• “peak power 20MW, time-avg power 4.6MW, optical emission energy 250x applied energy”
• “input power 6.68 kW, output 1,260 kW” 1260/6.68 = 188x
• in terms of power density, as “20MW in microliters”, and elsewhere “billions of watts per liter”
• the 2020 validation studies report finding that hydrino plasma produced excess power of 275kW, 340kW, 200kW & 300kW respectively.
• 2019 report power levels of 1000kW & 100kW.
• 2016 studies report 514kW of optical power & 1.3MW peak power; 689kW with 28x gain; thermal power levels of 440kW; & 1.5MW continuous power from 8.6kW input (1500/8.6 = 174x)

It would benefit the company to clarify and reconcile these value, especially when differing by orders of magnitude, ie., in ranges of 10x vs 100x.  This would help to make clear the specific the relationship between these output values and the resulting dramatic reductions in cost of energy production per kW, which are discussed further below.

SunCell

The experimental configurations evolved from demonstrating the effect in single shot events, to systems that could sustain continuous reactions and maintain a stable plasma.  These early events in which a target material was bombarded by a catalyst along with a high current, low voltage electrical discharge to create the plasma conditions, resulted in an excess of energy so hot that even electrodes made of tungsten were vaporized.

The next steps involved engineering design to develop a commercial prototype, and optimization of supporting systems.   The most challenging practical problem was designing an electrode that could withstand the high temperatures.  This was solved by making the electrode entirely liquid, an arcing molten metallic silver electrode with a continuous feed, into which the catalyst was mixed, which enabled a continuous plasma reaction.   The reaction took place in a small containment vessel, with the two feeder systems, one for the liquid silver, the other for moving the atomic oxygen and hydrogen in and hydrinos out.  The plasma is maintained at 400⁰C and generated very high energy photonic radiation in the Extreme Ultra Violet frequency range (EUV), producing excess heat and molecular signatures confirming Hydrino profiles.   Supporting systems were engineered for hydrolysis of the water, for induction pumping the silver, for heat transfer systems, and for electrical offtake.

The system was branded the “SunCell”.

The reaction produces no emissions other than the reduced hydrinos, which are 64x smaller volume than ordinary hydrogen.   Current design captures the hydrino gas in a charcoal trap or a milled halide hydroxide crystalline matrix to which the hydrinos can bind.  If exhausted into the air, it is inert, non-toxic, lighter than helium and would rise to the upper atmosphere.

The power from the plasma can be utilized either directly as heat with heat exchangers or can be converted to electricity by means of two distinct offtake technology configurations, that were developed and patented:

• Concentrating Photovoltaics (CPV) – the EUV can be converted by stepping down the frequency to the visible spectrum by means of “blackbody radiation”. The containment shell is made of refractory materials to optimize this conversion to optical energy which can then be captured with concentrating photovoltaic cells arrayed around the blackbody. The containment sphere is in essence like the filament of a light bulb, capturing multiple suns 24 hours a day, without intermittency.

• MagnetoHydroDynamic (MHD) – the plasma heats an expanding gas seeded with conducting silver nanoparticles is passed through a transverse magnetic field, converting kinetic energy to electricity.

The more detailed engineering diagram of the SunCell PV design gives a better sense of the relatively compact scale of the device, in this instance only about 3ft high from the base platform.

The device has very high power densities, can produce continuous power at 20MW/ liter.   Below is a working demonstrator prototype in 2016.

To illustrate the comparative power density of the SunCell compared to other stationary concentrating solar applications, they show this slide:Costs

Costs are low because the capital costs to construct the devices are low, one estimate was $60/kW, which is less than 2% of capital costs for solar.  Other operating costs are negligible, for maintenance & fuel, because other than the hydrogen fuel, which is derived from water, all the other materials, recycle within the device, and with few if any moving parts, and so can be expected to have life cycles of 20 years or more.   The resulting energy costs are estimated at $.01/kWh, substantially lower than any other source.In business presentations from 2016, BLP made an attempt to provide more conservative comparisons using the Levelized Cost of Energy tables provided annually from asset manager Lazard considered to be the most reliable & comprehensive surveys are available.  Using the most recent report published 11/7/19, BKP places their LCOE in this context, projecting costs at approximately 50% below the cost of solar & 30% less than Gas Combined Cycle. 

With such low operating & capital costs, the revenue model is based on a flat per diem energy lease transaction rather than a metered price per kWh.  Revenue is modeled based on a “breakthrough rate” below $.05/kWh, which is an arbitrary price sufficiently below market prices of competing sources, but with an enormous built in margin.   Most of the pricing would be based on off-grid provisioning, rather than through the wholesale market auctions through ISOs and other grid operators.  Hence, the capex & operating costs would represent approximately only 2-5%, with net earnings above 90%.

Costs will improve at scale, as the largest costs are for the CPV components.  At production rates of 10GW annually, the estimated costs of the CPV cells are $32 per kW at concentration of 2000 Suns. A cost analysis for parts for a production model of the 2000 suns version show the PV cell assembly constitutes 60%, or $15,000 out of the total of $25,000.  But at higher temperature plasmas, at 10,000 Suns concentration, optimizing output efficiencies, CPV costs drop to less than $6 per kW, or $2800, down to 23%.

Status of Commercialization

If the experimental validation data is accepted, and the resulting production cost calculations are supportable, the pressing question is:  what is the status of commercialization? Why are we not seeing some of these devices appearing in the market yet?  What is holding up the show?  The book doesn’t get into this issue, although the author has communicated his intent to update with a 2^nd edition that explains how this next phase has evolved since 2016.

The website unfortunately does not provide an easily accessible section featuring a sequential history of the  commercialization status, either in a front page or a top line item in a dropdown menu, or a side bar or a featured story.   However, digging deeper, comparing earlier & later website materials, the narrative can be reconstructed.   The two main sources are Business Plan pdfs, & Demonstration Days, found under different tabs.

Business Plan pdf’s:

Earlier commercialization plans indicate the first target market will be industrial thermal energy users.  The SunCell operates 3x more efficiently & 2.5x lower costs if the end product is process heat only, and the electric conversion phase of the system is not included.  BLP envisioned the rollout timeline as shown below, as of 6/14/19. In Phase 1, after industrial users, commercial & residential thermal users are targeted next.  Heat for high GHG generators, steel & concrete are targeted later presumably because those industries are more resistant to change.
Phase 2 targets electricity markets, initially with the SunCell Photovoltaic design scaled to 10kW – 150kW.  The next target would be scaled to 250kW – 2MW, to address Distributed Energy Resources (DERs) for industrial, commercial and multi-tenant residential buildings, providing micro-grid power that can be “islanded” from grid connection, simplifying system designs to eliminate the need for battery storage systems, and eliminating the utility connection costs & queueing time delays.  SunCells can operate continuously, but can also be taken off line without curtailment or the need to redirect current to storage.  They can be simply shutting down with smart controls to smooth peaking and manage very short ramping & re-start times.   Multiple SunCells can be networked with low voltage private grid interconnections, minimizing the need to even interface with the public grid, reducing complications associated with utility permitting.  Further, the potential for micro-grid configurations in rural applications could offer solutions to the wildfire risks in California.

Phase 3 addresses transportation applications in a subsequent phase, for trains, large-scale marine (transport ships that currently burn high emission bunker oil), buses & trucks, and ultimately passenger vehicles and electric aviation.  The MHD version can be scaled down for light vehicles to a size much smaller than either internal combustion engines or EV batteries.

Demonstration Days, found under the News/Archive tab, includes 6 videos of roadshow presentations, with slides, from 1/28/14 – 10/26/16, and 4 additional presentations actually called “Roadshows” (although it is not clear that any of the roadshows are intended to be investor pitches).

Information most relevant to the status of commercialization were a) presentations by two contracted engineering firms, and b) reference in one of the last Demo Day pdfs to a new set of contractors.

• Columbia Tech which is a mid-sized management firm in Boston, not a GE or Siemens, but does $200M/yr revenues, has 500 employees, was selected by BLP to manage transitional processes moving from the development engineering being done at BLP to the production engineering which may be further farmed out. They presented slides indicating where it thinks BLP is in the process.

This is a nice schematic infographic, but there was little in the content of the presenter’s material that disclosed that CT had actually started doing any work, or that there was an expected date for BLP to begin handing off tasks for CT to execute on its path to production development.   Later in that same Demo Day, the in-house marketing director showed his own similar schematic, which added some detail but no new information about actual developments.

• Masimo (formerly Spire, a PV manufacturer) contracted to develop a custom CPV system. However, Masimo also has disappeared, no further reference to either progress on their assigned contract, or that they are even still an industrial partner.  Instead, in some later pdf slides, there is indication in some indication that BLP has reconsidered using non-concentrating PV, that they have been making a closer cost benefit analysis.

In the last roadshow pdf 9/12/17, slides #42 – #47 indicated new progress:

• TMI Climate Solutions (subsidiary of MiTek, a Berkshire-Hathaway company) appears to have been engaged to develop designs for boilers to offtake heat for thermal applications;
• Re Columbia Tech, they announce: “SunCell Commercialization engineering is mature enough to be outsourced to CT. Equipment is being fabricated, procured, shipped”.  It seems to be associated with updated injector design solutions.   Despite this promising indication, there was no further updates about CT after this report. 
• PV development progress: indicates changes in design parameters, & perhaps a change from Masimo to SpectroLab (a Boeing company) to complete the development of the triple junction concentrator cells.

6/14/19 is the most recent update in a Business Presentation pdf.  However, the material merely refined prior messaging, with some updates of prototyping and engineering solutions of SunCell system components, some new validation experiments conducted by independent scientists, and another review of 17 out of the 29 methods for verification of the Hydrino explanation.   However, there were no further updates from ColumbiaTech, Spectrolab or Masimo, TMI Climate Solutions, or any other development partner about component status or overall system fabrication design status.

Advisory Board:   Most have relevant experience in renewable energy development, seem to be well chosen to facilitate the development goals, and some have very high level backgrounds, such as James Woolsey, former Director of the CIA.   This is at least a hopeful indicator that people with both management talent and influence consider the technology to have potential, & whose presence would tend to exert pressure for development progress.

$100 -120m of investment capital is mentioned in scattered references, all of which is from private equity offerings, but investors are NOT disclosed anywhere in the website.  In another reference, there was an indication that some of the other investors were utilities, including a rural electric coop in NM, which may have participated by placing pre-orders rather than taking equity.

The Wikipedia page, which is very one-sided & antagonistic, states:   “…Investors include PacifiCorp, Conectiv, retired executives from Morgan Stanley^[12] and several former BLP board members:

1. Shelby Brewer who was the top nuclear official for the Reagan Administration and CEO of ABB-Combustion Engineering Nuclear Power^[17][18] ,
2. Michael H. Jordan(1936 – 2010), CEO of PepsiCo , Westinghouse Electric Corporation, CBS Corporation and Electronic Data Systems.^[17]”.

Conclusion

With so much potential for triggering transformation with a technology that leaps forward in efficiency & costs and significantly reduces GHG emissions both in fabrication and operation, one can only hope that Brilliant Light Power will be able to accelerate their commercial development process, and upgrade their website to be able to make updates more transparent and accessible.

The post Brilliant Light Power – Commercialization Status appeared first on Alternative Energy Stocks.

An article posted by ClimateLiabilityNews.org  Hearing Glosses Over Carbon Tax Proposal’s Liability Waiver  explains the ‘grand bargain’ being set forth in a proposal from the Climate Leadership Council. A Carbon Tax & Dividend plan is now being supported by big corporations, polluters and fossil fuel companies, which would seem to be a miraculous change in sentiment.  But the fine print discloses that the deal includes a liability waiver exempting fossil fuels companies from federal & state climate tort lawsuits.   The carbon tax is on the low end for “social cost of carbon” calculations, at $40/ton, so as a value proposition, it’s not as big of a concession as the benefit they are seeking in the tort immunization – they would get a huge relief in exchange for a pittance.  As if that weren’t enough, it also asks for a rollback of most greenhouse gas regulations, what it calls “regulatory simplification.”   So this proposal is grossly skewed in favor of fossil fuels.

Although most U.S. taxpayers would benefit from monthly dividend payments, none of the proceeds would help cities and states pay for the astronomical costs of climate mitigation and adaptation. 

Kathrin Sears, supervisor for Marin County considers the permanent legal immunity provision a fossil fuel-funded Trojan Horse.  Marin along with San Mateo county & city of Imperial Beach, CA sued 37 companies in 2017 seeking compensation for climate damages.   “Letting oil, gas, and coal companies off the hook means taxpayers from Marin to Miami will have to pay tens of billions of dollars in order to protect our communities from the climate change-related costs and damages those companies knowingly caused,” Sears said.

CLC published a statement on 1/17/19 in the Wall Street Journal advocating for a carbon tax & dividend policy signed by more than 3,500 economists, which in itself is an indisputably impressive display of consensus.  The statement did not directly cite the CLC’s Baker-Schultz Plan. CLC founder Ted Halstead, has characterized the Baker-Schultz plan as “bipartisan”.   That may possibly be true if an exhaustive review were conducted of the partisan positions of all these economists, which was not included, but if evaluated against the partisan positions of the Founders, that is clearly not the case, the Founding members are not bipartisan in any real sense.

Founding members of the Climate Leadership Council include oil giants Exxon, BP, Shell, and Total, P&G, J&J, PepsiCo, Excelon.  It names numerous republican and conservative luminaries including:  former Fed chairmen Ben Bernanke & Janet Yellen, five former cabinet members , Steven Chu,  Christine Todd Whitman, and Larry Summers, George Schultz & James Baker; former NYC Mayor Michael Bloomberg, former chairman of Reagan’s National Economic Council, Martin Feldstein, Harvard economics professor Greg Mankiw, Steven Hawking, & CEO of the largest hedge fund, Ray Dalio.

You could perhaps say that Steven Chu, Steven Hawking, and Larry Summers were representative non- republicans supporting CLC’s claim of bipartisanship, but I suspect Chu & Hawking as scientists were just happy to be part of something that seems positive & perhaps don’t really appreciate the liability part of the equation, so they are really more “non-partisan” than democrat.  However, the same could not be said for Larry Summers who is much more akin to a republican than a Dem.  He has a long history of working for elite interests, in how he advised Obama as Treasury Secretary & on the Economic Counsel, and as President of Harvard, not divesting from fossil fuels either for the Endowments or in refusing donations from fossil fuel companies.   Everyone else on the CLC list are all dyed-in-the wool FF advocates, couldn’t fairly be described as having any real interest in environmentalist concerns.

However, most surprising was inclusion in this CLC list of Founders of the environmental organization The Nature Conservancy.   I would have thought with a name like that, there would be an appreciation for enormity of the IMF’s enumeration of implicit subsidies from externalities totaling $5tr PER YEAR which has appeared in more than just an obscure NGO report, but also in the popular press Fossil Fuel Subsidies Cost U.S. More than Defense Budget: IMF Report – Rolling Stone.   Litigation is one path to validate these expert assessments of aggregated costs that have been avoided, externalized by fossil fuel enterprises, and hence can be seen as subsidies, and as the basis for damage claims in these litigated climate tort cases.  This is why if they ever result in an award, they will be much bigger than the tobacco settlements, and will result in a ripple effect through the universe of fossil fuel asset valuations.  This would empower the ESG shareholder activists fighting with Exxon over climate disclosures, which, if they appraised the value of their assets in the ground for a value AFTER the financial earthquake of such a tort damage award.   Their asset values would be at risk for a precipitous decline, which is the very risk disclosure that Exxon is refusing to make.  They would prefer to continue to cultivate illegitimate doubt by sponsoring climate denialist experts, and by supporting diversionary carbon tax proposals.

Does Nature Conservancy understand this, that establishing values for damage claims through litigation will validate the IMF’s method that includes health costs & climate catastrophe costs, & property damage from rising sea level & fires?  Surely they understand that preventing the success of this demonstration will be obviated if blanket liability waivers are legislated.  Surely they understand that the only way for a long-term wind down of a fossil fuel based economy is to 1) devalue the assets in the ground, 2) reduce demand by shifting to renewable supply, & that 3) imposing litigated damages is the leverage that will catalyze these changes.  Right?

Indeed they do, which makes sense once you see who is on their Board, and realize that this entity is a fossil fuel captive.  https://www.nature.org/en-us/about-us/who-we-are/our-people/

Board of Directors:

• Larry Fink is CEO. They got the guy who runs the largest asset management company in the known universe, Blackrock, which as $5Tr in Assets Under Management.  On the one hand, Larry Fink has expressed publicly in his famous Letter the need to broaden corporate responsibility away from rank corporatist shareholder supremacism, & use language about considering other stakeholders, which for most would mean customers, labor & environment, sounding very progressive, on the same page as Elizabeth Warren’s Accountable Capitalism.   But Larry noticeably omits consideration of the Commons as having status as a “stakeholder”, focusing on the workers, generational wealth transfers, etc.  Sitting on the Nature Conservancy board AND agreeing to accept FF liability waivers means that whatever dilute expressions of environmental concern he has ever made from his perch atop that $5tr AUM, is mere greenwash tokenism.
• Bill Frist, former republican senate majority leader….I don’t think could be trusted to be taking a stand against FFs. If medical costs were considered a damage item, he really has never been an advocate for enhancing & widening public medical coverage.  Rather, his legislative legacy was just a typical conservative obsessive focus on anti-abortion legislation, and a mission to narrow public benefits, and continue their commitment to structuring upward wealth transfers.
• Joseph Gleberman comes from Pritzker, a private equity firm with zero environmental investments, and the site discloses only “various oil & gas interests, various lumber & farming interests”….tobacco….really not likely to have high ESG ratings.   Why is he even on this board? Same answer, or maybe he’s the expert in appreciating the threat, from his front row seat in the tobacco litigation.
• Shona Brown, from Google….aggressive environmentally themselves, but not really advocates for eliminating externalities, more about gaming them.
• Harry Hagey former CEO of Dodge & Cox, a mutual fund, nothing particularly environmental here.
• Andrew Liveris, former CEO of Dow Chemical….. this doesn’t even need any research to see that this is obvious evidence that TNC intended to include foxes in this chickenhouse
• Jack M, CEO of Alibaba – who knows if he cares about anything, he’s just a big Asian investor
• Douglas Petno, CEO commercial banking JPMorgan…..the greenest thing JP Morgan is doing is bundling solar backed securities….definitely not in the business of taking a stand for imposing liability for externalities. JPM is more about tokenism & opportunism than carbon transition.
• Vincent Ryan, CEO of Schooner Capital – says his expertise is in alternative energy industries, but looking at Schooner’s portfolio, there wasn’t one single company that had anything to do with alternative energy, so that’s misleading.  Bloomberg says he served at ChangingWorlds which is an arts org;  he founded Iron Mountain, which is a data storage firm; director of Cablevision. There is a brief reference to an ambiguous title:  National Hydro and Arch Mobile Comm, for which there are no google returns… stokes the imagination to wonder how a hydro firm & a telecom could be under one roof.   His claim to have expertise in alt energy is completely unsubstantiated, maybe he reads a lot, like me.
• Moses Tsang, CEO of AP Capital Holdings – references one fund under private equity that includes “clean energy”, along with electronics, tech, food/bev.  So clean energy is incidental.
• Yin Wu, China Capital group – Bloomberg does say it is invested in new energy & environmental protection, along with info tech, fintech, bio-med, media.  So maybe an environmentalist, barely
• Meg Whitman. I do not see how she could claim to be an environmentalist, nothing in her history supports that.  She has been in tech, in electoral flaps, is now in private equity, & is CEO of Quibi, as startup mobile media company.  She is not on this board because of her environmentalism but because of her lack of it.

Buried in this throng of non-environmentalists are a few token representatives who have devoted more than a couple minutes to the issues:

• Thomas Tierney, Bridgespan Group – consulting for non-profits….but its spawn of Bain Capital – quacks vaguely about impact investing, vague goal of “social change”….at least mentions public health, but looks like it may just be a pretense for PE to dump tax deductible donations….so this belongs back up in the 1st group.
• Mark Tercek –  http://marktercek.com/says he’s the CEO of TNC, wonder if Larry Fink knows…..maybe Fink is the titular head & Tercek the operational head.  He was at Goldman Sachs for 24 yrs., was tapped to develop the firm’s environmental strategy and to lead its Environmental Markets Group.  Cuomo appointed him to serve on the 2100 Commission after Superstorm Sandy to plan more resilient infrastructure.  He sits on many other boards.
• Frances Ulmer, US Arctic Research Commission
• Sally Jewell, former Sec of Interior under Obama
• Nancy Knowlton, Chair Marine Science, Smithsonian Museum Nat. History
• Craig McCaw, CEO Eagle River, a firm that manages a portfolio of hydro plants.

So the ratio is 5:13 of actual environmentalists to life-long dedicated corporatists with either zero or antipathy to environmental concerns. Wonder how the voting went when the issue of liability waivers came up.

The mission statement sounds good:  they focus on “Nature Based Solutions (NBS)”, meaning reforestation, grasslands, wetlands, sustainable land management, land trusts –  all good, congruent with a progressive agenda that would include desert greening, halophytes crops, sea grasses & mangroves, farming soils regeneration, etc.   But the other prong of their policy advocacy is pairing this with carbon offsets, which has so far been anything but revolutionary, a “transition” mechanism leading into carbon taxes, which is another transition mechanism.   It is a tactic that advocates of more progressive carbon tax policies with a higher social cost of carbon, have had to accept as a negotiated, political alternative, for decades now.  Which is not to say carbon offset programs, like RGGI for example, have not had some success and effectiveness, but they cannot be said to have closed the emissions gap appreciably, in part because adoption has been limited, again because of the effectiveness of fossil fuel lobbying in opposition.  TNC has posted a huge repository of downloadable papers https://www.nature.org/en-us/what-we-do/our-insights/reports/   (their domain name is deceptively close to Nature.com, the prestigious science journal).  One such paper makes a solid case for nature based solutions, and undoubtedly many of the other papers also have merit.  NBS will be an important part of the overall solution.

The CLC’s economic attack dog is Gregory Mankiw who argues in favor of a carbon tax based on Pigou consumption tax model, & tries to downplay the IMF’s $5tr subsidy accounting.  But nattering for shifting costs of a carbon tax to consumers obscures the point of the IMF’s radical analysis, which is to make visible the scale & invisibility of this subsidy, to confront the fact that the planetary system itself is making this invisible economic assumption manifest as a thermal behemoth.

The CLC’s approach is very business friendly.  But there are two kinds of “business friendly” that should be distinguished.   One is the path that supports a more libertarian “free market” & corporatist dominance perspective, which is a massive disinformation project since the very scale of both explicit and implicit subsidies constitutes evidence that these “market” adherents are beneficiaries of a market unfairly skewed to their advantage.

The other is the kind of advocacy seen from Rocky Mountain Institute & its affiliates, which has contended for decades that aggressive conservation & transition to renewables should be pursued because a) failure to do so has a big downside to profitability, & b) that renewable entrepreneurship has a huge upside potential, will be a boon, not a burden.   RMI’s posture is different than the much more dilute advocacy from Nature Conservancy, which is oriented to protecting existing capital & enterprise structures from the burdens of re-internalized externalities and the potential for huge stranding of fossil fuel assets.  RMI may not overtly advocate like the Nation or Jacobin for nationalization, but neither would I expect to see RMI advocate against climate liability litigation, in favor of liability waivers.   That last step, supporting waivers, constitutes an admission by TNC that they are a FF captive, despite posing a very convincing presence as an environmental activist organization from their mission statement & published papers.

What is the alternative to CLC’s approach?  Several excellent pieces comparing carbon proposals place it into context.  David Roberts has posted excellent overviews about pricing the social cost of carbon in a 2012 piece in Grist making the case that a low priced carbon tax is essentially a conservative project, that to be effective, the price must be significantly higher than $50/ton, and as updated in his 2018 piece in Vox where he notes that some researchers believe that the true social cost of carbon may be much higher than today’s estimates, as high as $250/ton in the US according to a study at Cambridge University.   Even an aggressive social cost of carbon policy, although a step in the right direction, would barely scratch the surface of these subsidies in aggregate.

It has been argued that a policy bias favoring these implied fossil fuel subsidies skews the entire spectrum of asset yields.  An OECD study Role of Pension Funds in Financing Green Growth Initiatives (2011) contended that renewable projects are mispriced due to adequately pricing carbon externalities, which depresses the relative returns, resulting in lower yields for renewable assets.

To the extent the OECD premise is correct, that the yield environment is distorted by implicit subsidies for fossil fuels (coal, nat gas, & for nuclear) in the form of structurally embedded externalities, a reasonable conclusion is that policies which re-externalize these costs could contribute to enhancing the competitiveness of yield from renewables.  This would do more to affect the global economy and capital flows than a carbon tax ever could.   I covered this in a Roadmap for a Green New Deal article from last year.    Green bond yields would likely outcompete yields for FF-related bond issuances if the defacto “put” benefit derived from these externalized costs were challenged.  Then the discussion would not be restrictively framed 2-dimensionally as Mankiw would have it, to just slicing up the pie of carbon tax revenues.

Leveling the playing field is laudable, but if the very baseline economy itself is effectively owned by fossil fuel interests, by dollar-denominated fossil fuel assets, and the industry in turn politically “owns” all the regulatory bodies that could ostensibly have the publicly-conferred power to stand against their dominance, how else could this begin to happen?   Except perhaps in the courts?

The other possibility would entail re-framing the social contract at the same level of abstraction that is necessary to argue that concentrated wealth is really just a concession that could be taken back, or that slaves as assets could be granted the liberty to run free.  That is how deep this rut in our thinking is.  And it took arguably 100 years after the civil war, past the Hayes bargain eviscerating Reconstruction, 80 years of Jim Crow, all the way to FDR in WWII & Johnson’s Civil Rights Act in ’64, to shift perspectives on a slave economy.  We don’t have 100 years to alter the social contract that allows big corporate interests to dictate fossil fuel pollution policy.

The truly revolutionary path would be nationalization, most disruptive, most aggressively modeled on an environmental FDR new deal industrialization plan.  So far, the two best articles I’ve seen elaborating this are:   The Policy Weapon Climate Activists Need (Nation) & A Plan to Nationalize Fossil-Fuel Companies (Jacobin).  As high level idealistic abstraction,  nationalization is up there with Universal Basic Income, a green industrialization & social justice plan, re-empowering labor unions, putting Anti-Trust & corporate fraud prosecutions on steroids, & imposing a mandatory disclosure requirement for beneficial ownership to recover the $32Tr laundered away in nested shell corporations.

Climate liability litigation is going to be the place where these damage claims are entertained.  A home base for this information is Climate Liability News  and David Roberts again weighs in with one of the most comprehensive surveys  of current climate litigation.  Eight US cities, five counties, and one state are suing some of the world’s largest fossil fuel companies for selling products that contribute to global warming while misleading the public about their harms. In parallel, 21 young people are trying to suspend fossil fuel development as part of their high-profile climate rights case, Juliana v. United States, against the government. (The case is currently awaiting a hearing at the Ninth US Circuit Court of Appeals.)   Lawsuits by the cities of San Francisco and Oakland are pursuing a legal theory of public nuisance.  They were consolidated by District Court Judge Alsup who then  dismissed the claim  saying “the problem deserves a solution on a more vast scale than can be supplied by a district judge or jury in a public nuisance case,” & suggested that the harms of fossil fuels might have to be balanced against the benefits they yield to civilization.   Alsup also requested a tutorial on climate change science & the defendants — BP, Chevron, Exxon Mobil, Shell, and ConocoPhillips — agreed that humanity is causing changes to the global climate and did not dispute the science. Another theory being pursued is a civil rights claim, arguing that the US government knowingly undertook policies that contributed to climate change, by leasing public lands, & providing supportive public policy.

If one of these cases finally hit, it would have a bigger impact than the tobacco settlement.   Because the damage claims would be larger if relying on the IMF data for health costs from FF pollution, & data from catastrophic insurance payments are offered as credible basis, as the actuarial foundation for establishing that the scope of the public damages.  Would an award be based on negligence or would it also include a punitive award based on demonstration of an intentional mass tort? Would the evidence of corporate lobbying to obtain preferential policy treatment be allowed in as evidence of an intentional act?   Is the intentional concealment campaign by all the oil majors, Exxon, Shell, BP, etc, that has been widely publicized by investigative journalists at InsideClimateNews.org, sufficiently egregious to justify a punitive multiplier to the negligence claims?  Is it a defense to say that public accepted their campaign misinformation, that the legislature collaborated with their misinformation campaign by agreeing to perpetuate permissive policies?  That a campaign of deception & bribery cannot be challenged because it is so pervasive that it constitutes a defacto American business as usual? That it is Too Big to Fail?

Reinsurers are monitoring all this, and if there were to be a singular moment of success, the risk exposure for re-internalizing all these health claims and property claims would far exceed the capacity of existing liability insurance coverage.  There would likely be denials of coverage because the risks would not have been underwritten prior to the legal award, so all the liability risks would have to be re-priced, which would add a huge operating expense, but there would likely also be a substantial amount of exposure simply left uncovered, with no recourse for indemnification.  There would be similarities to what has happened in the nuclear power industry, which is allowed to operate with coverage limits far below the actual losses that would be incurred by a major nuclear catastrophe.  Without these kind of concessions and legal immunities, the nuclear power industry would not likely have developed to the extent that it has.  Even if a blanket liability waiver is not obtained, the model offered by the nuclear industry shows that much the same effect can be achieved, in socializing risks, by simply placing caps on liability.  Rather than take the litigation risks to zero, they would be taken down to $.10 on the dollar.  Interestingly, the costs for D&O liability coverage is rising as the exposure to executives for climate related decisions.  This is a positive sign, that there is less sympathy for the idea that these decision makers are not necessarily “too big to jail”.

An influence campaign for Mitch McConnell to bury the conversation with a liability waiver for fossil fuels in exchange for a republican advocated carbon tax & dividend program would be a “bread & circuses” conciliation.  It would have an even bigger adverse environmental effect than the Cheney/Halliburton waiver (allowing for concealment of fracking chemicals) had on precipitating the boom in gas fracking.  It would accelerate, not suppress, taking FF’s out of the ground.  If we can stipulate that this point is obvious, then Nature Conservancy is being willfully ignorant, but more likely complicit.

Other litigation being pursued by state Attorneys General in NY, MA & CA.  They allege that it is fraud upon the shareholders in failing to fully disclose the risks of a potential write down of the value of the reserves in the ground, due to either a policy-driven imposition of a carbon “budget”, or a market driven fade in demand, or a combination.  That failure in disclosure of a risk to the value of the shares constitutes a securities fraud that is referable to the SEC.  It is, in effect, an ESG-focused enforcement, on disclosure alone, but does not include reference to the deliberate propaganda fraud.  But if these cases were to be won, and some kind of preliminary damage claim established, the next level of litigation, which would be against the intentional propaganda fraud, would have a better likelihood of success.  Most of the oil majors are having protracted legal battles with activist shareholder groups over these disclosure issues.

That is why the FF majors are advocating for relief, offering a pittance of a carbon tax as a weak show of “good faith” after decades of bad faith leading to multiple wars & now a threat of global climate catastrophe.  They want a blanket waiver from litigation, to head off a potential blizzard of further litigation, which could escalate rapidly, if there were a few adverse outcomes.  If there were a few multi-billion dollar damage awards, there would initially be a modest impact on their earnings reports, but the next round of litigation could more credibly be forecast to scale to a tipping point.  A “run on the bank” would froth up, in the form of a rush of class action cases to capture the remaining profitability before they founder altogether.  Momentum of capitulation would escalate, as the worst-case scenario of stranded assets on a colossal scale would begin to materialize.   The previously remote possibility nationalization would begin to emerge appear eminently more reasonable.   A substantial drop in share price of the largest 500 FF companies (including transnationals with sufficient market contacts to establish jurisdiction), would open the door to nationalization, framed either as a bargain or as a bail out.   This would be the only scenario in which an orderly build down of the FF industry and a scale up of renewable energy, with the scope of a Green New Deal industrialization plan, could foreseeably occur.   As long as the broad FF industry exists in the current framework, as private property assets rather than treated as a public asset, there will continue to be resistance to concerted climate action at the pace necessary.

The attitude is on display in the propaganda on the website of the largest industry association American Petroleum Institute, on the utter disinterest by Russian state fossil fuel firms like Rosneft, and even the relatively forward-looking Shell with its forecasts that it will still be winding down its fossil fuel operations in 2070.

Bottom line, policy on a liability waiver is the choke point, the Battle of Thermopylae, for the future of energy.  The fossil fuel industry is pulling all its available propaganda and influence levers to get the kind of immunity it desperately needs.   But the environmentalist litigants have facts and public sentiment behind them, and need one major success in the courts to trigger a cascade of consequences that would open up a far more hopeful pathway for planetary survival.

The post Nature Conservancy Endorses Fossil Fuel Funded Trojan Horse appeared first on Alternative Energy Stocks.

One potentially huge contributor to decarbonization of the economy could come from dramatic efficiency gains obtainable from digitally improving the power quality of electricity, as it is being generated, transmitted & being consumed.   The enabling technology is emerging from developments in computing that is associated with the Internet of Things (IOT).

DOE estimates indicate that approximately 38.2 quads of electricity are produced, from all sources, but that 25.3 quads, or 66.2% is deemed “Rejected Energy”, so only 33.8% of generated electricity is actually being used.  Within that 66% a distinction is recognized between “Losses” & “Waste”:

• Loss is non-recoverable, I²R losses that would occur unavoidably in a theoretically ideal electrical network.
• Waste is recoverable, because it is due to unsynchronized power & non intelligent distribution of electricity, which is potentially correctable.

The DOE does not quantify the proportions, but independently it has been estimated that as much as 50% of the Rejected Energy may be recoverable, so 50% of the 66%, perhaps 30-35% of the total generated, may be accessible to mitigation by waste-reducing technology.  This constitutes a market of billions of dollars in potential savings which is being addressed by a huge Power Quality market competing to provide products & methodologies to mitigate waste due to distortions and inefficiencies.  Despite these advancements and the scale of the industry offering solutions, data that would quantify the amount of waste actually mitigated is hard to find, perhaps because measurement and verification methods are inadequate, non-digital.

Suffice to say, a fully optimized Grid with zero waste that was able to add another 30-35% to the available 33%, would nearly double the capacity of available electricity.  This might have the effect  of flattening demand forecasts, or even render some existing capacity redundant.  And if adoption of optimization solutions was rapid enough, sufficiently large curtailment could result in financial stranding of surplus generating assets, which in turn could impact the public conversation about use of fossil fuels for power generation, accelerate wind down of coal plants and increase awards to battery peaking over gas peakers.

The main focus of Digitial Electrification is reduction in the thermal waste produced by inefficiencies in power quality due to various distortions in the shape of the sinusoidal wave form.

What Digital Electrification is NOT

Digital Electrification is distinguishable from the “Digitization & Digitalization” broadly associated with “demand response” capabilities, and the many products and sub-disciplines instrumental to the goal of transitioning to a “smart grid”.  The breadth of this far-reaching industry is captured in this infographic by ABB & Zpryme, showing 3 stages, dozens of goals in process, and a long list of topics & acronyms, the most familiar perhaps include:

1. Smart meters (AMI – advanced metering infrastructure) to automate end user peak demand reductions, reduce inefficiencies and pass along cost savings.
2. Demand Response Management Systems (DRMS), to coordinate load shifting
3. Distributed Response Management Systems (DERMS), support integration of Distributed Energy Resources (DERs) & integration of intermittent generation from renewables, solar, wind & storage to support energy arbitrage, aggregation of batteries on site & in vehicles (V2G) into Virtual Power Plants (VPPs), and implement “non-wires alternatives” (NWAs).
4. Supervisory Control & Data Acquisition (SCADA), big data management of circuit balancing,
5. Outage Management Systems (OMS)

Digital Electrification is based on Software Defined Electricity (SDE)   

3DFS is a small start up in North Carolina dedicated to development of SDE, which last received national level press coverage in a profile published in 2016 by Vox.   Chris Doerfler, CEO of 3DFS, contends that waste due to poor power quality is fixable with 3DFS technology.

SDE is actually a term in use by other firms, such as vendors CUI & VPS, which essentially offer high end demand side management, reducing consumption by controlling equipment assets with equipment and sensors distributed throughout the equipment, managed through APIs, and can achieve some efficiencies in usage through peak shaving.

3DFS is different from these companies because its technology manages the way electricity moves through a power grid, not where it moves. 3DFS instead is installed non-intrusively in parallel directly to the electrical network panel, and is able to monitor & correct the flow of electricity itself, recognizing any non-sinusoidal waveform, line impedance or reactive power from unbalanced phases, that is producing waste heat. 

Electricity is currently not precisely measured, rather, existing technologies use estimations calculated using  Root Mean Square (RMS).  RMS values are averages of electrical parameters based on less than 1% of real values.  Most “smart” meters are inexpensive & low fidelity because they do not have digital processors.  RMS sampling acquire 6000 values every second, 100 data points per sinewave at 60hz, or roughly one data point every .17 milliseconds which leaves as much as 99% unsampled.  This data quality is not high enough to be usable for correcting distortions.  Based only on this imprecise data, existing technologies typically compensate using transformers, capacitors and power switching technology.  But in order to correct electricity more efficiently, continuous subcycle information is needed.

3DFS data acquisition oversamples the electricity, acquiring 26 separate electrical parameters (current, voltage, phase angle, power factor, harmonics, reactive power) at MHz frequencies and 24 bit resolution, 8192 times per cycle.  This provides an exact digital replica of the analog signal within a few nanoseconds, with no errors, no rounding, and zero noise, rendering RMS values obsolete, because it acquires the data  nearly 50,000 times faster  than any technology that relies on RMS values.

Software-Defined Electricity is an application of Task Oriented Optimal Computing (“T2C”) which is “model-based” computing that creates a layer of metadata from a feedback loop on the operation of the controller.  T2C is embedded onto simple ARM processors (Advanced RISC Machines).  These ARM processors are capable of handling high volume data, by using a) high end FPGAs (Field Programmable Gate Arrays) and        b) Reduced Instruction Set Computing (RISC).

Terabytes of data are generated, but as the data feeds into load disaggregation models and is processed by analytic & predictive algorithms, 99% of the foundational layer of operational data used in the controller is constantly erased and written over every few microseconds without ever being transmitted outside the device, providing the ultimate form of data security. The 1% fraction of data that is not erased is used to maintain the working model of the device operation and to display reporting information.  And although operating with supercomputer capacity, it has very low power requirements, only 120 watts.

Doerfler credits these data processing developments to the creative efforts of two scientists on staff, Vladislav Oleynik and Gennadiy Albul.  The model based matrix computing concepts are not patentable IP, since already in the public domain, but proprietary applications are protected as trade secrets.  3DFS also controls an innovation in material science for proprietary ultra-high frequency sensors.

Power Quality Rating (PQR)

This real time layer of electricity informatics for modeling both the supply side power and the load side demand, can be represented in a single metric – the Power Quality Rating, which in turn provides the basis for the correction technology.   Traditional power quality metrics focus mostly on harmonics and power factor. However, an imbalance across phases can induce neutral currents on the load side and cause eddy currents in the upstream transformer on the utility side, both of which also contribute to direct losses, and should be factored into power quality calculations.   The 3DFS version of Power Quality Rating combines power factor, harmonics & phase balance, and hence is able to more accurately analyze how much electrical energy waste is occurring in the moment.

Power Quality Correction

The 3DFS Power Controller models power quality in nanoseconds, and calculates the precise microsecond to either inject or extract microamps to optimize the circuit components restore the waveform close to ideal, effectively achieving “noise canceling”.

The Power Controller contains a parallel device, the Flash Energy Storage System (FESS), which contains  capacitive and inductive components that are directly controlled by the TOOC computing.  This supplies the real time capacitance and inductance needs with microamp charges and discharges at the microsecond level, which corrects the distortions in each aspect, power factor, harmonics & phase imbalance, resulting in digitally synchronized electricity,  automatic impedance matching for the entire panel.   It also calculates the overall electrical load balance of the entire network and adjusts accordingly, eliminating upstream neutral and ground currents.

3DFS has engineered the system into several products for targeted applications, the main product is called VectorQ², designed to be attached in parallel non-intrusively to any power network, from a small commercial building or microgrid to a massive utility load circuit.

When the VectorQ² is installed, it profiles each downstream load attached to the panel down to the level of each individual circuit board component, and continues to improve the resolution of that profile over time because of artificial intelligence algorithms, as it recognizes in each component the variances that exist even within manufacturing tolerances.  This real-time visibility into each device enables not only improved load performances, but can also detect changes from faults or degradation, reducing maintenance costs.  It can also identify when a device may have been hacked & can correct the problem, offering cybersecurity protection as a bonus.

Operational effects can be monitored as shown in this walk through of the system dashboard, which identifies the derangement of the current wave forms, the phase angles, harmonics, and the PQR, before & after correction.

If an electrical network starting with a PQR of 28%, meaning it is only utilizing 28% of the electrical power and wasting the remaining 72% to heat or vibration, were to add a 3DFS Controller, the network would achieve a PQR of 94%, reducing losses to only 6%.    Similarly, if a 3DFS controller were paired with a generator with a starting PQR of 31% & losses of 69%, it would operate after operate with a PQR of 97%, dramatically increasing the output of the generator by reducing the heat waste to 3%,  with fuel savings of up to 25%.

Data Centers

Data centers are big power consumers that make substantial investments to mitigate risks associated with poor power quality, so they are an ideal test case to conduct a Proof of Concept commercial application.   One such assessment was conducted by Freudenberg IT (FIT), a global company with $5B in revenues, with a US HQ in NC that hosts critical software services for Fortune 500 clients.  The results were described by Michael Heuberger (CEO of the US division) as “almost unbelievable”, observing immediate 20% reductions in power consumption and 20F drop in server temperature, as the PQR went from less than 30% up to 96%.  He projected substantial savings in power usage of 20-30%, reduced air conditioning costs, and ability to use smaller copper cables.  But even more significant savings would come from avoiding data losses due to power network disturbances from start up of generators and air conditioners, and servers rebooting, less downtime & lower labor costs for maintenance, and less expense for mitigation of cybersecurity risks. The VectorQ² system sized to meet the needs of FIT was $100K in 2016, with a 7yr payback, but prices have been dropping.    Doerfler enumerated benefits that would factor into Return on Investment for data centers.

Demand Charges

Utilities add penalties on users with spikes in utilization.  When one phase is high, the demand charge imposes a 3x penalty on the highest phase being metered.  By rectifying phase imbalances, equalizing all 3 phases so that loads are not excessively drawn against one phase, demand charges can be substantially reduced, and the resulting savings can be significant over time.  Further, there are load spikes upon motor start ups without protection.

Microgrids

One of the purposes of microgrids is to be able to manage power self-sufficiently, with generators, solar panels, microhydro, & batteries, and to have ability to operate “behind the meter” disconnected or “islanded” from the grid, but still have access when necessary, for backup power supply and to be able to export surplus power back into the grid.   At the critical moment of reconnection, the utilities require that the power quality of the microgrid meet stringent conditions because of the risk of systemic disturbances in power quality when grid connection is established.  Consequently, microgrid developers design in redundancies in corrective mechanisms, capacitor banks, voltage regulators, and tend to overbuild.  However, with the VectorQ² system in place, the interconnection dynamics result in perfectly seamless integration, which means that microgrid managers can save costs by reducing these redundancies in oversizing.  Another risk when phases are imbalanced that can affect microgrids especially, is that current can spill into the neutral wires, which increases fire risk, and risks to workers touching unexpectedly activated wires.  So microgrid networks with 3DFS power correction will reduce or eliminate that risk for fire, worker injury and associated increased liability risks.   As the 3DFS technology is increasingly recognized as solving these problems for microgrids, use of microgrids will step up in the sectors they are already being utilized, hospitals, campuses, nautical electrical systems for the Navy, and other sectors will begin to open up.

Utility scale Solar distributed generation

Another major grid-edge application is to improve the functioning of inverters used in solar power, to convert DC power from the panels into AC power, that can be synced to the grid that meet specs for low levels of harmonic distortion.  Currently PV inverters are achieving 98% efficiencies, and the goal to improve to 99% is driven as much by the desire to reduce cooling requirements as the goal of higher power yield.  The 3DFS solution not only can achieve those improvements, as with microgirds, it substantially normalizes the power quality to be able to sync to the grid with near zero perturbations, far more efficiently than currently available technology.  Additionally, the more precise control of power factor with the 3DFS controller rather than with capacitor banks, expands the available time that a solar system can export power to the grid.

Most importantly, since grid interconnection is perhaps the single most daunting hurdle to accelerating utility scale solar market penetration to achieve displacement of fossil fuels power generation, the 3DFS technology solution could be the key to eliminating a principal barrier to integrating renewables at the pace needed to meet climate challenges.

SAM Controllers for end use devices

End use equipment, including pumps for air compressors, water wells, irrigation & sewage, bilge,  conveyors, liquid sensors, and any other systems using Programmable Logic Controllers (PLC), can be converted by embedding 3DFS digital controllers with all the same data acquisition Task Oriented Optimal Computing & correction capabilities of the VectorQ² unit.   Air compressors, for example, in addition to efficiency gains from power quality correction, can benefit by improving function during startup when the motor is loaded, causing the current draw to be much higher, & when draining condensate from the expansion tank and releasing too much air, causing the tank to get repressurized more frequently.  SAM Controllers will always soft start the motor unloaded, allowing it to warm up before loading it with the pump, which significantly reduces the amount of current required to startup.  Additionally, the Compressor Controller constantly calculates the precise amount of condensate being created during compression & drains the condensate using the exact amount of air required, reducing the number of times the pump must repressurize the expansion tank.  These two intelligent operations will result in substantial savings, both in energy consumption and maintenance costs.   The ultimate vision is to get the technology small enough to fit on a chip. Each electronic device would have an SDE chip (like its wifi chip) that perfectly synchronizes electricity for its circuit board — a kind of “Intel Inside” for power quality.

Software Defined Battery Management System

By digitizing the electricity, oversampling & disaggregation of that data, SDE can build a working chemical model for each battery “so accurate, we can see dendrites growing and can react with corrective action in microseconds.” SDE can efficiently charge and discharge batteries at ideal maximums and minimums, which increases the number of charge cycles by 2-3x.   It can digitally withdraw a battery from service and run restorative charging/discharging cycles and automatically reinsert without service disruption.

Utility scale applications

The elephant in the room is the question of how much it would cost to implement for utility scale grid applications, for primary turbine generating facilities, and for balancing long distance transmission lines, at major substation transformers and large user transformers.   3DFS literature indicates that SDE can benefit transformers, reducing losses for stepping power up or down to less than 2%.   It indicates that the technology can be adapted all the way up the supply chain, to service secondary substations and power plants, and is scalable from 120V up to 25kV.

The visionary goal in the premise of this article, that as much as 50% of the energy wasted to power quality inefficiencies could be avoided, will require that the solution be adopted at all stages of the value chain, at generating facilities, along all nodes of the transmission system, and in end use networks and devices.  Commercial utility scale generators, no matter what the fuel source, will need to acquire & install these units, as either voluntary or mandated capex.  Market driven acceptance will dominate if the anticipated cost savings become well documented.  If the power savings is widely confirmed but cost recovery remains unappetizing, then regulated utilities would need to be compelled by their governing utility commissions to integrate these units at all substations, etc.  Licensing fabrication of end use applications with 3DFS units embedded would also accelerate penetration.  It will take years of promoting the benefits of this technology to expect to witness a complete transition, with all the forecasted benefits.

The ultimate goal is for electricity derived from fossil fuels to have a feasible exit from our energy portfolio.   With the assumptions scaled, the conserved energy from SDE corrected electricity would actually eclipse all other renewables in volume of power produced in the U.S. within 20 years.  It would represent the single largest defacto “source” of renewable energy, as avoided generation from conservation, or to use a phrase by Amory Lovins, founder of the Rocky Mountain Institute – power from “negawatts”.  

Two other major trends could recognize synergies from 3DFS Digital Electrification:

1. Decentralization of grid architecture, which is needed to unleash the proliferation of more distributed generation, microgrids, & other “grid edge” technology, at a much quicker rate of adoption.  Technical solutions have been articulated to fix the current bottleneck of structural disincentives for utilities, as outlined in Democratizing the Grid, which references a study published in IEEE & an article by David Roberts at Vox.  The current crisis is an opportunity (per  Goodrich Sonsini), and is being seized as seen in bill passed in WA.
2. Upgrading long distance transmission to High-voltage Direct Current to enable long range transmission of renewables from remote territory to urban centers, which will also reduce transmission losses, as discussed in Future of electricity transmission is HVDC,

Negawatts crypto

A couple of economists from Columbia University proposed a Network Capital theory of currency as a protocol, with currency value being predicated on network participation.  They evolved the concept into a cryptocurrency called SolarCoin based on Proof of Stake that is given away to solar developers.  It is actively traded under ticker SLR.   Although market cap is small and trading volume very thin, it nevertheless has grown by substantial percentages within the two years since inception.  The value proposition to solar project developers is a) that it costs them nothing and they will accumulate annual grants based on kWh of power generated for the duration the system is in operation; and b) as the network expands, the value also increases, in what is expected to be an actual balance sheet asset, adding market value to the operating asset for subsequent disposition or refinancing.

A variant that might be proposed to apply to conserved power rather than generated power, a crypto that could perhaps be called NegawattsCoin (NGW), and attach it as a grant to every purchaser of a 3DFS product, whether stand alone VectorQ² or embedded SAM controllers, tied to power saved.   The idea is in conceptual stages, but could conceivably add an inducement to adoption.

Conclusion

It appears that this technology is well beyond the point of technical validation, there have been numerous proof of concept 3^rd party trials, and there is a very significant field application test being conducted by a lab specializing in microgrid sector system analysis, which will be producing a comprehensive report that is expected to confirm dramatic enhancement of interconnect integration.   The challenge for this company is to evolve a path of expansion as quickly as is feasible without getting ahead of itself, and to distinguish its technology from competitors that may have some similar developments, such as GridBridge.  It needs to build alliances for distribution networks, licensing partnerships, apply & be awarded contracts for public RFPs, and find the answer to the riddle of acceptance by public utilities, and rural electric coops, and weigh the benefits of merging with larger entities with more resources.   Potentially its best markets in the near term will be microgrid EPC design engineering firms and community solar developers.  The possibilities are endless but the urgency to make a difference could not be overstated.

The post Digital Electrification: Less Waste, More Capacity appeared first on Alternative Energy Stocks.

The Envision Solar (EVSI) was reviewed in depth in a previous article last September in the context of its avoidance of high demand charges for electric vehicle DC fast chargers.

Envision Solar has completed its Nasdaq listing as reported in the news release on the Nasdaq site & Accesswire.   The company issued 2,000,000 shares and expects to receive gross proceeds of $12.0 million before deducting offering expenses.

Prior to the new listing, average pricing for the stock on the OTC market was disclosed to be $.23/share. Applying the 1:50 reverse split, the post-split equivalent stock value would have been $11.50. However, the offering price is $6/share, a 52.8% reduction in value for existing shareholders. Trading opened at $5.50, and it has continued to drift down to $5.20. Price charts on sites like Yahoo, GoogleFinance, WSJ or SeekingAlpha renormalize the new price back in time, showing a long term downtrend, and a drop after the split, rather than a pop from $.23 to $5.50.

Up-listing from the OTC exchange where it was trading at $.16/share, up to the larger exchange with a share price that is not a penny stock will make the stock more accessible to investors and may increase its liquidity. But in order to see a push up in its valuation, it will need to continue to grow and attract investor interest. Although EnvisionSolar has experienced a 336% increase in revenue year-over-year, with several high profile contracts signed with Johnson&Johnson (JNJ), NY City and Google (GOOG), its 2018 net loss was $3,598,780, which works out to a loss of $0.69/share with the post-listing, post-reverse split share count of 5.2 million shares.  Most other financial ratios are also negative, and there is no analyst coverage yet, so it will likely remain a relatively high-risk equity for some time going forward, but the healthy cash balance from its listing at least gives it some runway before it has to raise money again.

Its target market are users that are remote from utility power supplies, or applications involving emergency responses that need temporary supply that can be delivered and removed quickly. The company’s outlines its goals & history in a recently issued report:  EVSI Corporate Presentation Q1 2019.

The post EnvisionSolar Now On Nasdaq appeared first on Alternative Energy Stocks.

A conference hosted in NYC in early April, 2019 ESG5 SUMMIT showcased the issues of current concern to institutional asset managers.  ESG as a term is a rebranding of SRI (socially responsible investing) and CSR (corporate social responsibility) now under broad headings of Environment Social & Governance, to reflect that it is more than just an investing style, but is concerned with risk management and value creation.   ESG strategies are being pursued by a range of participants, including public and private pension funds, mutual funds and ETFs, family offices and sovereign wealth funds, and advisors and advocacy groups.

The goals are to allocate funds that encourage corporate practices that positively promote environmental stewardship, diversity, human rights, and consumer protection, and steer funds away from corporations with socially harmful business models.   In connection with the Paris climate summit, a group of investment funds with $26 trillion AUM, pledged to pressure the worst 100 companies responsible for 65% of all emissions.  That effort has expanded to become the G20’s Taskforce on Climate-related Financial Disclosure (TCFD) which now includes over 500 firms with market caps of $7.9Tr, including 150 financial institutions managing assets over $100 trillion, including 20 of 30 systemically important banks and 8 of 10 of the largest asset managers.

To support these efforts, metrics, ratings & other resources have been developed for determining materiality, ie., whether the investment can make a material impact, and whether it can generate alpha and can compete with conventional investments. The most prominent data analytics are provided by the Sustainability Accounting Standards Board (SASB), UN Principles for Responsible Investing (PRI),  Sustainalytics & MSCI.  Other entities that have developed their own systems for assessment and reporting, include: CSRHub, Ceres, Edison Electric Institute (EEI), Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP),  Climate Disclosure Standards Board, UN Sustainable Development Goals, Oxfam, World Resources Institute, SSI, & Sustainable Investment Forum (USSIF). 

SASB developed an extensive sustainability framework of environmental & social capital necessary to create long-term value, and a Materiality Map to provide guidance on use of SASB standards in making disclosures, and for conducting materiality assessments of issues that are likely to affect financial condition or operating performance.   For purposes of scoring and ranking, each industry has its own unique sustainability profile, and assessment of the ESG factors as shown below must be adapted for relevance.

A big data approach is necessary to manage the large disclosure datasets from many categories to build key indexes, improve ratings, assess material outcomes and compare alpha outcomes by strategy.  A data-centric quantitative approach starts with                  1) self-reported data from 600-10,000 companies using over 900 indicators, from primary providers including Bloomberg, Thomson, & Factset.                                                      2) This information is filtered into professional ESG opinions using fewer indicators, 16-250, as provided by services such as MSCI, Sustainalytics, ISS, & Vigeo in a smaller company universe of 1500-8000.                                                                                                3) The last step is aggregating these into consensus opinions and narrowing the indicator sets to 12 sub-categories to simplify ESG decisions, as provided by CSRHub.

Concrete outcomes from ESG practices are measured primarily in terms of “materiality” in the sense of effecting changes, solving problems in the real world, but also secondarily in terms of generating alpha, producing financial gains by the corporations or investors.

Addressing the 2^nd issue first, one study, presented by the panelist from CSRHub, analyzed six generic ideas for using ESG approaches to generate alpha:

• Long / short strategies, buying positively rated and selling negatively rated firms.
• Buying category leaders
• Rely on recommendations from high value consensus opinion sources, ie., Sustainalytics & MSCI
• Select highly rated firms that also report frequently
• Stick with a large cap blue chip with good ESG ratings
• Focus on firms with good materiality metrics.

In each approach, empirical factors were found that mitigated the effectiveness of the strategy:

• The ESG ratings of the best & worst rated companies were found to be mean-reverting, the ratings value of the top 20% drop the most, the bottom 20% improve the most. “ESG trend momentum” persisting for more than 6 months occurs for fewer than 5% of companies.
• The “leaders” do not persist, those highest ranked drop substantially by their 5^th year
• Sustainalytics & MSCI scorings don’t match up
• High ESG disclosure scores on the Bloomberg platform correlate only weakly, 25%, with highly rated consensus scoring compiled by CSRHub.
• There seems to be no correlation between a CSRHub rating and market cap or revenue.
• Material metrics are just not well enough covered by analysts, rarely fill in even 50% of ESG indicators in their analyses.

This study suggested that obtaining alpha with ESG-related strategies is difficult to achieve.  This would tend to corroborate a widely accepted assumption that ESG investing plans reduce returns on capital & shareholder value.  However, a Harvard report contends that empirical results show that “companies committed to ESG are finding competitive advantages in product, labor, and capital markets, and portfolios that have integrated “material” ESG metrics have provided average returns to their investors that are superior to those of conventional portfolios, while exhibiting lower risk.”

An example of the 1st strategy, which appears to be succeeding, is an Energy Transition Long-Short strategy offered by advisory service Fossil Free Index, which holds long positions in clean energy, advanced transportation, and smart grid companies, and short positions on reserve-owning fossil fuel companies, and is currently outperforming the S&P.

Gender diversity was also cited as benefiting profitability.  The Thirty Percent Coalition promotes gender diversity on corporate boards and institutional investor boards, and contends there are clear, identifiable results that diversity lead to better performance and governance.   Several participants with affiliations to institutional funds expressed confidence that performance improvements corresponded with improvements in gender diversity on their boards.

ESG ratings are being made available to retail investors as well.   Yahoo Finance includes a tab for Sustainability, that includes scoring for a Total, and separate Environment, Social & Governance for performance, ranked in a percentile against other peer companies, with graphics, and a scoring for controversy level.  It also includes a list indicating involvement in 14 adverse areas:  alcoholic beverages, adult entertainment, gambling, tobacco, animal testing, fur, controversial weapons, small arms, catholic values, GMO, military contracting, pesticides, thermal coal, palm oil.  Fidelity is offering similar tools on its platform as well.

Index & ETF products have proliferated:  MSCI (iShares/Blackrock) has 4 categories with 17 ESG & climate indices, Thomson Reuters has 4,  CleanEdge has 4, FTSE4Good has 7, S&P/DowJones offers a large family of sustainability indices,  ETF.com lists 78 socially responsible ETFs with $7.4B AUM.  ETFdb.com offers a deep resource, with 35 ESG themes, 77 metrics and a screener which identifies 23 assets with ESG scoring in 90^th percentile.   The volume of assets invested in ESG funds are up nearly 60% from the prior year, as reported in the WSG.  ESG funds are being marketed by Wall Street as a “bankable trend,” as private equity & hedge funds report participating in these offerings.   However, it is still early in the overall trend, less than 2.5% of 401(k) plans offer ESG funds as an investment option.

The effectiveness of actively managed ESG portfolios as compared to passive index funds is debated.  However, one strategy in which active management seems to be effective involves ESG “activist” investment.  ESG advisor firms search for underperforming publicly traded firms with low ESG ratings, then begin with a consulting engagement, which then transitions into negotiating an equity position as a long-term value investor, in order to effect a turnaround by implementing ESG policies & practices, to achieve improved productivity & financial outcomes.  Two such firms pursuing this approach were present, Barington Capital Group, & Impactive Capital and reported on their process and positive outcomes.

Returning to the primary issue of materiality, does ESG investing, and implementation of ESG practices, make a material difference in the real world?  How effective is voluntary ESG participation as compared to material effects resulting from compliance with statutory requirements?  One panelist, William Jannace, adjunct professor at Fordham Law school, observed that sustainability policies for corporations are driven by a) an internal reputational desire to contribute, & b) external demand from customers or RFP conditions, but c) contended that more significant outcomes are driven by compliance with regulatory imposition.

At worst ESG participation as a cultural artifact that may be criticized as “greenwash”, bandwagon promotion with no substantial behaviors, and at best can drive only incremental improvements, unable on its own to drive solutions to the largest systemic problems.  Two such examples were considered:

Illicit financial flows (IFF): from kleptocratic capital flight & laundering, human trafficking of migrants & sex slaves, & from black market drugs & arms, facilitated by use of complex entity structuring & tax venue shopping, has been estimated between $21Tr – $32Tr, according to a Tax Justice Network study of data from the BIS, IMF, and several private sector analysts including Gabriel Zucman.   Would the financial services industry on a voluntary basis from a commitment to ethical principles and motivated by the desire to appear supportive of initiatives against human trafficking refuse to handle financial flows found to be associated with such criminal activity?  Clearly a naïve expectation.  Without the compulsion to comply with Anti-money Laundering (AML) statutes, under threat of federal prosecution, the progress achieved to date likely would not have occurred.  But the recalcitrance of the US to legislate & enforce aggressively has led some experts to now rank the United States as the world’s biggest financial secrecy haven.   Corporate social & governance commitments are not trivial, but should be recognized as a social catalyst for coalescing sentiment for triggering cultural shifts.  ESG would be synergistic with legislative reform, where the heavy lifting really occurs.

Climate Change:  expedited reductions in GHG emissions is clearly on everyone’s ESG list but voluntary adoption is not capable of scaling to the same extent as a mandated industrial policy, such as outlined in the Green New Deal, and would likely be unrealized without regulatory enforcement by the EPA and other agencies.   Further, concern for a “carbon bubble” of potentially stranded assets of fossil fuel reserves that cannot be burned, has been recognized in various high-level risk assessments, including the IMF, World Bank & HSBC.  The most alarming analysis came from Mark Carney, governor of the Bank of England, who calculated that one-third of global wealth is invested in oil, gas, coal, and other “carbon-heavy” companies.   Citigroup’s ’17 GPS report concurs with an estimate that the “total value of stranded assets could be over $100 trillion”, which is 5x the size of losses associated with the ‘08 housing bubble.*   A devaluation of those assets could crater the entire global economy, at minimum would adversely affect countless institutional funds.

Large sustainable asset managers such as Ceres and Trillium calling for $1Tr per year in climate change investments, are potent advocates for collective commitment, but even they recognize that transition depends on policy choices to remove the obstacles to clean energy scaling imposed on our political system by entrenched “incumbent” industries.   ESG investing is exerting significant pressure towards reduction of GHGs, but does ESG investing have enough leverage to influence more dramatic policy change?  It could lend weight to “outside the box” policy proposals, such as a proposed fossil fuel nationalization plan, which would be beyond the scope of anything that could be achieved by ESG asset management.   The infographics below illustrate the scope of the entrenchment of incumbent carbon assets, are from Influence Map which is a site that monitors fossil fuel investment, subsidies, influence activity & embedded portfolio climate risk.  Who Owns the Fossil Fuels shows the sheer scale of the fossil fuel ownership & investment chain.

Aside from rampant ambivalence, with 75% of the largest companies neutral about climate change, the fossil fuel influence apparatus is so deep that the prospect of counter-influence from ESG practices succeeding at scale seems remote, except insofar as ESG investing is coupled with ESG lobbying to also pursue major enforceable policy shifts.

Other resources at InfluenceMap provides detailed rankings of companies on the A-list of climate policy engagement, that participate both in ESG activities and participating against fossil fuel lobbying.

Although one impression is that ESG adds value almost entirely by limiting risks & excluding exposures to negative factors, in reality companies with high ESG scores have  experienced increases in operating efficiencies, & lower risks with lower costs of capital.   In early 2018, the US Dept of Labor, had issued ERISA guidance that “managers cannot sacrifice shareholder return for ESG considerations”, which imposed a conflict of interest for for institutional investors’ fiduciary duty, and for portfolio companies investors were seeking to influence toward greater implementation of ESG policies.  But because ESG factors have been increasingly shown to have positive correlations with corporate financial performance and value, ERISA reversed its earlier instructions.

In the broader corporate culture, this implied conflict of interest has been used opportunistically by CEOs, under an economic theory of “shareholder primacy” as advocated by Milton Friedman, to justify policies that benefit C-suite interests at the expense of workers and environment, aggravating wealth & income inequality. “Shareholder supremacism” is being targeted for reform under the Accountable Capitalism Act, S. 3348, which would impose obligations on the largest 1000 corporations, under newly issued charters, to consider broader stakeholder interests, include labor on the board of directors, and require 75% board approval for political expenditures, enforced by risk of revocation of charter.

ESG activism as a response to the groundswell of changing public sentiment is catalyzing some very significant outcomes, against the monumental resistance of the fossil fuel industry, on the battlefield of  shareholder resolutions.   Exxon & Chevron, both of which have stated in analyst meetings that they plan to increase extraction, have recently prevailed against resolutions that would have required the companies to disclose targets for reducing GHG emissions.  However, the SEC has sided with shareholders on two other requests, a) to create new board committees to address climate change and b) to fully disclose political contributions to tax-exempt “dark money” 501(c)(4) organizations.   Exxon & Chevron have made huge dark money contributions to Main Street Investors Coalition launched by NAM, which has executives on the board from Exxon, Shell, Devon Energy, Southern Co & a Koch subsidiary, to combat the threat of these resolutions, according to governance consultant Nell Minow at ValueEdge Advisors.

However, BP & Shell have been more responsive to shareholder resolutions that call for disclosures and for alignment of business plans with Paris goals.  Shell has joined with Climate Action 100+, an institutional investor initiative, and announced plans to reduce the carbon footprint from its energy products, which release 10x more emissions than from direct operations, and further, agreed to link the targets to executive pay.

Both ESG activism and lobbying for policy changes for ESG goals are necessary components of a strategy for change.

*[These large numbers have been disputed – even comparing to the “ownership“ diagram above showing total assets of $185Tr, if the assets at risk for being stranded are estimated at $100Tr, which correlates to the estimated one-third of wealth or economic activity, then implied total assets would be $300Tr.  Other mitigating factors would be a) that the at-risk reserves would be less if some were considered chemical feedstocks rather than fuels to be burned; & b) some critic contend equity share value is derived less from assets and is based more on free cashflow, hence would discounting reserves would not depress equity value to such an extent.]

The post ESG5 Summit brief appeared first on Alternative Energy Stocks.

I recently attended the Solar Energy Industry Association‘s (SEIA) Finance and Tax Seminar in New York. The subject matter in this event delved into issues related to tax equity finance.  Each panel session was moderated by a tax attorney or an accountant, and most of the content of the sessions consisted of technical tax law.

To place the discipline into context, one speaker noted that the tax equity renewables investing deal volume in 2018 was $2-3B for solar and $9B for wind, and the number of tax equity participants is roughly only 25-35 large corporations.  So unless there are changes to the tax code that would widen the range of entities that could benefit from tax equity investing, the pool of investors is not likely to broaden parabolically.  Total investments in the US for renewables in 2018 was estimated by Bloomberg New Energy Finance at $43B, and globally totaled $300B total for all clean energy investments, including equity raising by companies in smart grid, digital energy, energy storage and electric vehicle. Estimates from numerous NGO’s contend that the rate of investment needed to transition rapidly enough to bend the GHG temperature curves is more like $1-2Tr per year.   So the scale of tax equity investment, although substantial and growing, is estimated to be less than 20% of the build rate needed to deliver 80% renewable electricity per various transition targets proposed by various states, the Green New Deal, & others.

The keynote session was moderated by a principal from Novogradac, an accounting firm with a large renewables practice, who prefaced with a very brief overview of the mechanics of the 3 primary partnership structures commonly used in the industry:  the partnership “Flip” structure, Sale Leasebacks  & Inverted Leases.   A second session titled “Solar Finance 101” led by an attorney from Norton, Rose, Fulbright was provided specifically to elaborate on the structures.

In a Partnership Flip the General Partner (Sponsor/developer) starts by holding 1% of equity, and the Tax Equity Investor (TEI) is the Limited Partner holding 99%.  A flip in the ratio to GP 95% / LP 5% is triggered either by reaching a target yield (usually 5-7 yrs), or a date certain (6-8 years).  The target ROI for the TEI in a yield-based version is in the range of 6.5%, earned from Investment Tax Credits against prior losses & development costs, and some portion of operating cash flow.   The fixed-term version requires different terms for the investors to achieve the desired yield, and usually extends 6-8 years.  The fixed flip leaves as much cash as possible for the sponsor, and pays the TEI’s cash as a 2% preferred distribution.

In the 101 session, the main challenge was identified as:  how to get a step up in tax basis so that benefits are calculated on Fair Market Value rather than on Cost or DCF (discounted cash flow).  She cited 3 court cases that will be adjudicating:   a) the allowable standard for this valuation,  b) whether developer fees should be limited to 12-18%, and c) whether use of DCF with a low discount rate that artificially raises value should be disallowed as a disguised sale.  The test imposed by the IRS would disallow the ITC claim if the DCF is the same after the end of the PPA term, DCF should be different in the merchant period, usually expected to be 7.5% to compensate for the variability risks of merchant pricing.

“Absorption” was the other key element discussed throughout the conference, and is one of the more complex aspects of partnership taxation.   The Capital Account for each partner documents what each has contributed and is allowed to take out in tax benefits, and cannot drop below zero.   “Tax efficiency” characterizes whether the tax benefits can be fully taken by either party, or remain partially unclaimed.   If the TEI capital account is at risk for drawing down too much, such that the tax benefits would re-allocate back to the sponsor who also could not use them, then the remedy is often a Deficit Restoration Obligation (DRO), in which the sponsor indemnifies the TEI.

A 2^nd form used for tax equity financing is a Sale Leaseback, which involves an outright sale of 100% of the equity in the project by the Sponsor to the TEI, who then leases it back to the Sponsor & lease payments are a revenue stream from the Sponsor/ Leasee back to the TEI/ Leasor.  100% ownership avoids complicated partnership accounting, while preserving the TEI’s rights to the tax benefits, but still carries a risk of IRS disallowance if the TEI is treated as a lender rather than an owner.

A 3^rd form is an Inverted Lease which is used frequently in aggregations of residential rooftop PV systems.  The sponsor bundles the customer contracts, assigns them to the TEI, and leases the equipment assets to the TEI, who collects the customer revenue, & pays most of it back to the Sponsor as rent.  ITC’s are claimed by the TEI, but depreciation stays with the Sponsor, who then takes back the depreciated assets at the end of the lease term. Distribution of operating cashflow can be convoluted in all these structures, with competing claims from tax equity investors v. lenders, but several panelists seemed to reflect a consensus that this structure tends to leave comparably more of the cashflow for the developer or cash equity investors.

It is more complex conceptually, because there are two partnerships, an Operating entity & an Ownership entity, and both parties, TEI and Sponsor participate in both entities.  In the Ownership entity, the Sponsor holds a majority position, and becomes the Leasor, and the Operating entity owned by the TEI becomes the Master Tenant/ Leasee, and transfers rents back to the Leasor.  Risks of IRS challenge to the basis used to calculate tax credits can be managed by documentation that transactions have occurred at arms-length, and costs have been clearly segregated, that capital accounts remain positive, and that an appraisal solidly establishes the value.  This “basis risk” is usually borne by the developer, but is often capped at the difference between project completed value minus costs. As encapsulated by midsized funder Captona, tax equity financing has an asymmetric contingent liability, a 5% upside but a 50% downside recapture & basis risk, of IRS challenge that can result in disallowance of the tax credits, or decertification of partnership status.

Each structure has pros & cons, but they all seek to optimize and protect the tax benefits for the TEI and the cashflow for the Sponsor, and each varies in dealing with indemnifications, cash sweeps and buybacks.  Clearly, there is a fine art in selecting the optimum structure to suit the needs of the participants, and then negotiating each variable element.  But surprisingly, when asked if these agreements were prone to litigation to resolve disputes, the answer was no.  Bespoke agreements can be designed with bolt-on boilerplate options for contingent indemnifications, cash sweeps, buyback terms, and other assurances & disincentives, to avoid the need for dispute resolution, which would be adjudicated on the contract terms anyhow.  For deeper dives into resources that illustrate technical renewable finance modeling, one can go to powerpoints produced by Akin Gump (a conference sponsor), and Finance Energy Institute (Ed Bodmer).  An exhibit of a practice that utilizes all three forms of can be seen in Akin Gump’s Global Project Finance brochure.

Panelists in the keynote session, JP Morgan, US Bank, SolSystems, and GAF Solar, were asked about the scope of their transactions in 2018, their preferred structure, and their outlook.

• JPMorgan (JPM) did $3B in tax equity transactions (up from $1.5B in 2017), primarily yield-based flips, on utility scale deals of $150M per deal.
• US Bank, the 5^th largest bank in the US, did tax equity fundings of $1.3B in 2018, down from $2B in 2017, which was attributed to the reduction in corporate tax rates from 35% down to 21%, materially affecting their term sheets.
• GAF, a private equity infrastructure fund based in the Bronx with a development side that included a roofing entity with a long history. GAF bundled roofing and solar systems, for both C&I offtakers and residential aggregations, in portfolios sized 50-100MW, and then financed them with tax equity partnerships, usually structured as yield-based flips, all of which he said had been over-subscribed.  In some cases they took long duration credit positions on their own.  He explained that their terms provided tax equity investors with max of 34% of eligible basis, referencing an economic substance test that allows for 3% IRR if the capital stack is limited to 34% in tax equity.  TEI will usually then be able to utilize 99% of the depreciation, and remainder of return comes from 7% of EBITDA as unlevered cash distributed at the same time as distributions to the GP/ builder.   He commented that leverage helps utilize the tax basis.

Goldman Sachs (GS), who was also present in another panel, described their activity as “warehousing”, providing lines of credit against PPA’s from residential aggregations for purposes of subsequently assembling asset-backed securities. Credit ratings were a concern, given the need to avoid a repetition of the events of 2008 when credit worthiness of component mortgage contracts in ABS bonds were improperly evaluated by S&P, Moody’s and others.  A rep from Kroll Bond Rating Agency detailed their procedures for rating and stress testing ABS’s.  Ratings could benefit from insurance “wraps” in order to guarantee revenue, which were offered by carriers including SwissRe, Ares, IGS, ING, New Energy Capital, as described by the CEO of kWh Analytics, which also offers a suite of risk mitigation services marketed as a “Solar Revenue Put”.

In discussing community solar financing, both for tax equity and securitization, panelists were concerned with customer “stickiness” or retention, and replacement.  Panelists included two developers Nexamp & Arcadia Power, two private funders Wunder Capital & US Bank, & publicly funded NY Green Bank.

Sol Systems, who was present on several panels, is an employee-owned solar finance and development firm backed by Sempra Energy.  It raises development capital, and provides capital management for tax equity asset funds. She noted that their operating level projects were often residential or small C&I aggregations.   80% of their deals were structured as inverted leases, and routinely used leverage in the lower Operating partnership, in order to optimize the depreciation and interest deductions, which in turn helped to manage the capital account and optimize the ITC claim by the Ownership partnership making the tax equity investment.

The CEO of SolSystems, (in absentia) offered an insightful industry overview of the competitive dynamics of capital in this space.

• The market for C&I procurement has evolved from buying voluntary RECs, to compliance RECs, now to VPPAs with supply from specific projects. These transitions are driven by a sustainability sentiment in corporate boards to be able to confirm direct relationship between their procurement efforts & new builds.  The instruments for executing these relationships has evolved into a Contract for Difference, with supply hedging that can “shape & firm” pricing, such that end users see a simplified accounting that can be “sleeved” or integrated into utility bills.
• All-in costs have fallen 80% since ’08.  Costs per module have dropped to $.30/W, in part because, in part because the equipment supply chain is now so vast, but there is also more excess due to a slowing in procurement by the government of China. Further cost reductions can be forecast due to increasing cell efficiencies, up to 5% from mono-PERC & bifacial cells, & improvements in Balance of System costs, including 2% from trackers at sub-array level & 3-5% from DC optimizers,  which in aggregate will result in another 12% reduction in costs.  O&M costs will be reduced by 1500V architectures & string inverters built into both new systems & retrofits.
  • Utility scale cost will be $.95/watt, & PPA’s under $.03/kwh, based on the Lazard Levelized Cost of Energy report , a gold standard in the industry.
  • These savings will enhance yields for large solar portfolio owners like Helios, Brookfield, and Global Infrastructure Partners.
• Scale of Solar Asset Class is 109K MWs installed globally, with a huge pipeline & investor demand, & will be a $10Tr market by 2050.  Solar assets are attractive because they are a) real, b) non-correlated to equities markets,   c) dollar denominated, & d) inflation insulated.  EU & Asian countries have carrot-and-stick policies, imposing specific portfolio requirements for renewable investments while also granting reduced capital set-aside requirements.    Many sovereign wealth funds & multinational banks also now have mandates to invest in renewables.
• More new investor entrants drive down cost of capital, by their acceptance of lower returns on investment, because they are viewed as less risky. Lower capital costs as a component of overall costs, drives down LCOE & PPA prices.   To offset lower yields, investors are being compelled to take on more operational or project risk, by entering earlier in development.
  • Private equity & hedge funds finding it increasingly difficult to compete both in acquiring and holding long term project assets, & are participating in less mature assets, and are being displaced by institutional investors – insurance companies, sovereign wealth funds, pension funds. Institutional investors included AES (AES), John Hancock, NextEra (NEE), Avangrid (AGR), EDF, Orsted (ORSTED.CO) & Equinor (EQNR).  SolSystems has built a platform called Helios to help developers sell down their equity to institutional counterparties.
  • Independent power producers have a fairly high WACC, in the range of 6.5% – 7.75% unlevered after-tax for those with long-term PPAs. But they can’t compete with institutional capital, and are struggling to support early stage pipeline that is taking longer to “harvest”, and consequently IPPs are being forced to refinance credit lines.
• The biggest problem affecting all aspects of the market right now is the huge back up in interconnection queues. There are 150GW of solar projects waiting for utility interconnection approvals. Many projects may have site control & early stage permits but no offtake or even a strategy for securing a customer.  Developers are too aggressive in pursuing these early steps.   Some markets remain attractive (NY, IL, VA, PJM), and pending RPS legislation in other states is driving interest, but the development horizons are  being stretched beyond 3yrs, which means  these projects must be held much longer on balance sheets or in relatively expensive development facilities.
  • He recommends developers pull back from taking a buckshot approach, carrying the risks of holding partially developed inventory, and instead focus on the fundamentals of locational marginal pricing, congestion & policy.

The hurdles to accelerating decarbonization of electricity are not availability of capital, or lack of enterprising initiative, but a bottleneck at interconnection.  The solutions to that problem must be resolved by reconfiguring structural impediments imposed by utilities and utility commissions.  Technological advances are driving LCOE to fall faster than grid adaptations, and even with declining yields, capital markets demand for renewable assets are outpacing WACC for development.  But for the drag of a centralized grid, the components are in place to accelerate implementation of a GND-level vision for renewable electricity.

The post Solar Energy Industry Association (SEIA) Tax Equity Conference Brief appeared first on Alternative Energy Stocks.

by Daryl Roberts

In a previous article I investigated the question of whether private sector capital was being stimulated sufficiently enough to build out renewable infrastructure on pace to reach climate goals.  I found that on the upper end, giant institutional funds were only mobilizing a tiny fraction of their total Assets Under Management, due to regulatory constraints and uncompetitive yields.  On the lower end, smaller scale funding seemed to be growing, with facilitation from intermediaries, fintech aggregation services, and increased access at lower levels to complicated derisking strategies.

But I now find reporting that capital is over-mobilized, that solar may be in a “finance bubble” – at least temporarily, for the mid-range funds.  Too much money is chasing too few infrastructure development projects, at least with regard to the largest utility scale projects and corporate procurement, which have the most appeal to large asset holders seeking stable PPA’s.   Richard Matsui, CEO at kWh Analytics comments in this article that aggressive investors with lower costs of capital are able to accept deals with lower returns, on the premise that solar is long term & hence a stable investment.  This means that investment funds are overpaying for assets, which in turn raises the risk profile.

Shorter PPA’s are becoming more common, which results in relying more on profit from  post-PPA “residual value” of merchant pricing.  The whole point of doing longer term PPA’s is to mitigate the risk of gambling on forecasts for wholesale prices 20 yrs out, but instead, investments are modeling returns using wider, riskier spreads assumptions between high-to-low merchant prices.

Simpler 2-way grid structure will accommodate more Projects

The bottleneck however may in fact be that the limited availability of infrastructure development assets is a symptom of grid architecture itself, as explored in detail in this extended piece by David Roberts:  Clean energy technologies threaten to overwhelm the grid. Here’s how it can adapt .

This wholistic reconception of grid architecture proposes a shift away from one-way power flows from centralized power plants toward a decentralized structure that can accommodate massive proliferation of smaller scale Distributed Energy Resources (DERs) situated locally, closer to the end users, at the edge of the grid.

Under the current regulatory regime utilities are often hostile toward DERs, because they threaten existing and future investments.  So the utilities show exactly as much support for DERs as is mandated by legislators, and no more.  Alternatively they seek approvals from regulators to impose fees on DERs, that cripple their competitiveness, which disincentivizes adding renewable generation to the mix, at a time when more are needed, if we ever hope to reach climate mitigation goals.

The author walks the reader through an accessible explanation of the complex landscape of grid architecture, and then describes the two primary options for future grid expansion.  The main contention is that a bottom-up paradigm would “unlock the full potential of clean energy technologies to decarbonize the electricity sector, and meet new demand coming from electrification of transportation & buildings”.

• The current structure is a 2-level hierarchy: central power plants supply power through Transmission-Distribution (TD) Interfaces, into Local Distribution Areas (LDAs).

About 65% of utilities have been restructured, splitting off generation and leaving the utilities as distribution service entities only.  They purchase power from separate generating facilities, which sell power at auction into a wholesale markets, administered by a TSO under FERC rules, and then they maintain the distribution network.

• TSOs (Transmission System Operators) are the 1^st level transmission systems – either an ISO (Independent System Operator) or RTO (Regional Transmission Organization). Their networks cross state lines and hence are under Federal jurisdiction, through FERC.
• DSOs (Distribution System Operators) are the 2^nd level distribution networks – utilities that do not cross state lines, and are under state jurisdiction by state public utility commissions (PUCs).

Power exported to the grid by DERs conflicts with the 1-way flow design of the primary TSO architecture.  Currently DERs have limited access to sell into the wholesale markets.   Local generation from DERs & Virtual Power Plants (VPPs) aggregations from DERs & microgrids, storage, & demand response systems, affect this TSO/DSO structure by increasing complexity and the need for flexibility.  Mismatches between supply & demand due to intermittency, demand congestion & DER excesses that produce the “duck curve” require sophisticated technology to manage “shape risks”, and trigger peak shaving solutions.   The TSO architecture wrestles with not just engineering integrations but with putting a fair value on not just the power generated by DERs but also for ancillary grid services, including voltage, capacity & frequency regulation, synthetic inertia, and enhanced resiliency.

The generalized schematic is depicted in the article as a 2-level architecture showing

• downward flow from the TSO, through the Interface, into of the Local Distribution Area (LDA) with blue lines – managed by the DSO,
• and red lines showing energy flowing back from the DERs and microgrids at grid edge, back into the central TSO wholesale markets, but not through the Interface.

The two primary alternatives for updated grid designs for handling the proliferation of DERS are mapped out in an industry study – “A Tale of Two Visions: Designing a Decentralized Transactive Electric System,” published in 2016 in IEEE Power and Energy Magazine by Kristov (CAISO), De Martini (CalTech), and Taft (Pacific NW Nat Lab grid architecture center):

• Grand Central model, in which TSO’s would increasingly manage 2-way transactions involved in dispatching DER generation, & DSO’s would continue to maintain distribution, without involvement in the transactions from grid edge. But this risks “tier bypassing” conflicts in instructions from both the TSO & the DSO, as well as compliance requirements with both FERC & state regulatory policies.  The 2^nd problem is the sheer complexity & computational bulk with visibility & information down to the lowest level of end-use and new rules & enforcement mechanisms, as the TSO’s will soon have to handle an increase in participants, growing as DERs proliferate from a few dozen currently to thousands.
• LDO model (Layered Decentralized Optimization) shifts the management to the DSO level, & would limit the interaction between the TSO & the DSO to a single interface point. Supply & demand would be balanced within the Local Distribution Area, and net remaining supply or demand would be aggregated into a single bid to the TSO, as either a buy or sell offer.   DSOs would be assigned new responsibilities for reliability as well.

Perhaps the biggest advantage of this “LDO” architecture is scalability, in its ability to handle proliferation of DERS, both horizontally across many types & participants, but also vertically (or fractally) with further replication of this “decomposition” downward through several layers of DERs, & microgrids, each with their own subsidiary DER networks, etc. Each layer is responsible for itself and interacts with the level above it through a single point of contact.   It would also decompose responsibility for electrical power downward to local level controls, with the lowest level at the smart controller, coordinating behind the meter resources, maximizing self-reliance, before requesting power from the next tier up. Central power supply becomes the last resort, not the first.

Depicted graphically the LDO architecture is shown as the last illustration in the article, showing a simplified hierarchy, with more orderly energy flows from bottom up & top down.

The LDO structure short-circuits the debate between advocates for big grid with their fears of grid defection by empowering self-sufficient local grids without a downside to the TSO’s.  Cities and regions would be full partners in optimizing resilience and decarbonizing energy, as they address their unique needs (EV charging, building electrification codes, unique vulnerabilities, etc) with locally integrated DER resources.

Innovation would be unleashed, because each DER or aggregation, each layer, would have financial incentive to optimize its own resources and maximize its own self-sufficiency — to consume as little as possible and produce as much power as necessary. That would create enormous demand-side pull for DER innovation in ICT-managed demand response, peak shaving & storage.  Because DERs are smaller and more connected, iteration & learning time would be shorter, and capital barriers would be lower.

This last point is relevant to the asset bubble in the capital markets for renewable investments.  This anticipated increase in clean energy projects would rise to meet the increasing availability of capital chasing renewable projects.   They would be smaller, hence there would need to be more aggregations to meet the investment goals of larger funds.   There is a growing number of intermediary fintech platforms providing aggregation services between developers and offtakers, and between projects and capital (to be enumerated under another title).

Other Benefits of Decentralization

Several other benefits of decentralizing grid structure would likely follow, or perhaps contribute to the incentives to pursue this big shift:

a) Interconnection is currently also one of the primary barriers to development. Decentralizing would not only remove disincentives for TSO’s to expedite interconnection approvals & executions, but more localized authority would relieve the backed up queues and staffing shortages.   Reductions in installed costs for solar would be substantially reduced if reforms for simplifying permitting emulated the reforms implemented in Australia, which in turn would likely increase adoption.

b) Fire risks associated with O&M risks for high tension wires with associated of fire hazard would potentially be reduced. The recent bankruptcy filing by PG&E after findings of liability for more than  thousands of fires has focused attention on deficient inspection & maintenance practices.  Decentralization could a) shifting these responsibilities to the DSO level, and b) by reducing the need to draw from central TSO supply, potentially minimize the need for more large high tension lines.  PG&E declared in US District Court that it would cost $75B to perform inspections & vegetation removal for its 100,000 miles of lines….$750,000 per mile.   This seems extravagant, and although average costs for maintenance may perhaps be too low, surely there is a value for maintenance that would fall somewhere in between a high of $750,000 and an insufficiently low average, that would still represent a monetizable value to the a decentralized grid.

c) Resiliency is a key feature in selling microgrids, and off grid, behind the meter generating & storage. Additional potentials for capital investment may emerge as resiliency itself is more adequately valued. A NYSERDA report by Justin Gundlach entitled  “Microgrids and Resilience to Climate-Driven Impacts on Public Health”  contends that microgrids can protect public health, but there is currently no established value stream for resilience.  He calls for policymakers to identify & measure the benefits & costs of resilience.  NYSERDA has developed such a provisional tool, but this needs to be evaluated for national adoption by federal agencies, such as the National Academies of Sciences, or experts convened by the DOE.  This value could then be monetized along with ancillary services, as value streams that can attract capital.

d) Peaking requirements would likely be lower in such a decentralized environment with proliferating grid edge DERs, and the potential for renewable storage to replace the need for gas peaking plants would likely be adopted more aggressively. NY state is conducting a full inventory of peakers to identify the dirtiest that can be retired, and new proposed gas peakers are being closely compared to battery alternatives.

Scaling into replacement can be achieved by disaggregating a peak demand shape into duration layers of 2hr increments that can be met with a “duration portfolio” of storage. NREL found that gas peaker plants run less than 10% of the year, rarely for more than 4hrs at time.  A battery system with 4-hour capacity would be far more cost effective and lower carbon profile than operating (or building) a gas fired peaker.  The need for new peakers could be virtually eliminated, even if existing fleet of gas peakers remained on standby until retired.

A “Clean Peak Standard” (CPS) has been proposed, that follows the framework of the Renewable Portfolio Standard (RPS) which requires retail electric suppliers to provide a minimum percentage of sales from clean peak resources.    The concept was discussed at a conference hosted by Bloomberg New Energy Finance, with contributors from 8minutenergy Renewables, Invenergy, Fluence, NREL, Wood Mackenzie and Lon Huber, director at Navigant who is credited with originating the concept, and is consulting with state PUC’s where such plans are under consideration, in MA, NY & AZ.

                                                  Credit: Fluence, NREL

This vision of restructuring grid architecture holds the promise of catalyzing the level of capital reallocation needed in order to meet climate goals, from the current levels of climate & transition investment of $300B/yr to the Clean $1 Trillion  targeted by Ceres, IEA, OECD, CPI, Grantham, Paris, RMI, NewClimateEconomy, IMF, IRENA, G20, etc.

What will it take for this transition to be realized? The market is already making strides, as seen in the growth of microgrids, and the creative approach to proposing replacement of peakers with storage technology.  But the most significant changes will require far reaching legislation, starting at the state level, with PUC regulators and legislative committee action, and with action on federal agency proposals, from FERC, DOE and congressional committees.  Conceivably as a political process, there could be some unexpected synergies between stakeholders including TSO’s interested in divesting some of their current responsibilities, capital interests focused on seeking a broader range of asset offerings, and climate activists.

The post Democratizing the Grid appeared first on Alternative Energy Stocks.

Renewable energy finance has many different kinds of participants, as revealed recently at the Solar & Storage Finance conference hosted in NYC.  [A longer companion piece details the specifics firms & individuals].   Listening to the live actors from the financial side of the renewable power industry moved the issues off the page, to a more concrete experience of their specific concerns, including the extent to which their distinct missions were siloed, how they are competitive, and how they synergize.

The presentations were organized to highlight these differences.  Several panel discussions were set back-to-back the contrast between lenders vs tax equity investors, both in terms of their goals, but also the technical language of their issues.  Tax equity people were far more involved in the legal contractual issues related to the org charts defining the relations between the parties, parsing out the effects of the partnership flips, or the effects on deal potential if back-levered debt is used, resulting in reduced exposure and profitability for tax equity.  One of their greatest concerns was with the risk of an IRS decision to nullify the transaction as qualifying for the tax credits.

Debt players seemed to be more focused on the underlying economic viability of the project itself, approaching the proposition from the standpoint of risk underwriting for the operational elements such as the PPA & offtaker credit risk, the developer quality, locational issues, etc.  There seemed to even be a sentiment by lenders to minimize the need for tax equity altogether, to support the developer’s profitability, explore options for matching the length of PPA term to loan term, and avoid refinancing & restructuring costs.

Another example was the difference between the portfolio managers interested in holding long-term assets vs. the project managers seeking to off-load completed developments to free up capital resources.   Portfolio managers presented on several panels about “investor appetites”, securitization and secondary markets.   Large investors are looking to acquire assets at any point along the timeline, in some cases very early, in other cases, as buyers in a secondary market for completed facilities already in operation.  They model a value based on the cash flow projected from the offtakers, which the developers have packaged into a bid as low as possible.  The concern is to translate the language of yields from the language of project finance.  The project developers are working with the Levelized Cost of Energy (LCOE) behind the face of their bid, juggling to make the project capable of covering cost of capital & producing a net profit for themselves.   Transactions structured as a purchase will entail price discovery by either negotiation or occurring in context of an auction.   These transactions definitely benefit from the use of various kinds of intermediary services, to discover counterparties, negotiate price and other mediations.

Both parties have to factor in the full spectrum of risks, and each side may use various risk mitigation mechanisms, including insurance, surety performance bonds, revenue swaps.  Costs to the developer for these mitigation guarantees are offset by reductions in costs for debt financing.  The parties may even be able to collaborate on determining the level of risk mitigation to incur.

There were three representatives present working in risk mitigation, each of which were very interesting.  The first was from Exxergy, who made vivid the risks associated with O&M contracts due to pervasiveness of equipment failure, inspection failures upon completion, maintenance failure, which can result in downtime, & in turn can effect not just profitability but survivability of a project.  Exxergy has been evolving a broad system to evaluate operating risks, to certify & rank the risks at each stage of a development process.  This which would not only make great strides in standardizing the underwriting of a project’s bankability, but in turn, could materially contribute to streamlining & accelerating development & market penetration.

The 2^nd was a surety agent who advocated for the benefits of using surety to protect against contract failure, not just for performance on construction or O&M contracts but also for offtake payment performance, and several other applications, to protect against business interruption risks.

The 3^rd was a “fintech” firm kWh Analytics which is at the forefront of innovating integrated risk mitigation services, combining a suite of insurance coverages, with a revenue swap version of a PPA, and weather derivatives.

Institutional investors as a type of portfolio manager (including insurance companies, pension funds, REITs, wealth funds, etc), were present on several panels describing their need for low risk, low return assets.  Renewables can fit their parameters with stable revenues from 20-year PPAs issued by highly qualified offtakers.  They seemed to favor aggregations over large individual projects, but overall, their renewable holdings constituted a very small percentage of the total assets under management, as a component in their “alt asset” categories.  Nothing was mentioned about the possibilities for altering regulatory constraints upon institutional investors to catalyze greater participation in renewables.

Across the spectrum of participants, there was a consensus of caution about investing in storage projects, in part because revenue models are unsettled & complex. Some storage revenue comes from the wholesale market run by ISOs, regulated at a federal level by FERC, and some revenue comes from retail markets regulated by state PUC’s.  Solutions to this were briefly touched upon, including a proposed subsidy under the State storage Roadmap plan to offset soft-costs, a mechanism to ensure storage is sold in 10-20yr contract increments, a state run central procurement agency for storage, and support for specific market applications, ie, for schools to offset seasonal shifts, and replacement of peaker plants.

Surprisingly little expression of visionary goals was heard related to climate change or the urgent need to accelerate decarbonization, or meeting commitments to UN or Paris agreements.   Perhaps these ideals were assumed among a fraternity of professionals manifestly committed to renewable energy.  The most overt statements were offered by the representatives from NYSERDA, NY City’s Sustainability Office, and several non-profit entities.

Rather it was a conference of technocrats, giving a glimpse of the nuts & bolts decision-making discussions one might expect to hear in their respective boardrooms.   Conspicuously absent was any discussion of how finance would factor into reorganization of grid architecture.  Grid integration is a major hurdle to renewables penetration, not only technically but also because of disincentives for large utilities, which show only as much support for DERs as is mandated and no more.  A significant restructuring of grid architecture would potentially change those incentive relationships & open up a rapid non-linear proliferation of DERs that would include renewables and storage, and offer more opportunities for financing.

The post Conference Brief – Solar & Storage Finance appeared first on Alternative Energy Stocks.

I attended the Solar & Storage Finance conference hosted in NYC in late October 2018.  Presenters included a mix of capital providers & asset managers, private non-profit entities & public agencies, legal, accounting & consulting firms, intermediaries, firms providing risk analysis, ratings & mitigation, & various vendors of energy storage and IT-related services.  The tone of the discussions was noteworthy for its near total absence of ideological comments about environmental urgency.   Rather, it was a meeting of finance technicians and technocrats focused on the nuts & bolts of accomplishing those ends, with the merits and relevance of mission assumed.

The conference issues were organized with public agency comments at the beginning about policy targets and accomplishments.  This set the stage for discussion panels to address the interests and appetites of Large Buyers, including both offtaker utilities and capital market asset buyers (institutional infrastructure portfolio managers as well as real estate asset holders).  This was followed by opportunities to showcase the concerns of tax equity investors and debt providers.   Interspersed were presentations and panels regarding risk mitigation, storage technologies, and storage financing concerns for both public & private sectors.  

Public Policy and Agency goals

The agency sector was represented by 3 public institutions, NYSERDA,  NY Power Authority (NYPA), & the NYC  Office of Sustainability & Resiliency;  2 utilities, ConEd (ED), and E.On (EOAN.DE),  and 5 private non-profits, ACORE, Solar Finance Council, Urban Land Institute, and NY-BEST (battery energy storage consortium).

NYSERDA’s CEO Alicia Barton as the keynote speaker affirmed a strong commitment to the State Renewable Energy Vision (REV) as the grand policy framework for transitioning from a “business as usual” carbon economy, citing a long series of goals and achievements.  The NY-Sun initiative was given a budget of $1B which is being administered by NYSERDA The NY Green Bank also has $1B in funding, of which $522.3 M has been deployed.  She noted that there were 4400 community solar projects in the pipeline, and 22 large scale projects that were announced this year.  1500 new storage projects were targeted by 2025 under the Storage Roadmap.

The Public Service Commission (PSC) has filed to allocate $350M in incentives, of which $40M will be placed through NY-Sun for solar+storage projects.  These incentives are projected to produce $2B in value from grid optimization.   She addressed questions about the sentiment from the development community that the PSC’s net metering successor tariff program, VDER, has quashed development by capitulating to utility concerns and shaving compensation for distributed generation, reducing incentives for private sector capital.  She responded that PSC white papers published 7/26/18 & 7/31/18 addressed these concerns, which she acknowledged were plaguing the public dialogue, but she expressed her feeling that the VDER plan is the right approach.   She closed by directing attention to the fact that electric generation constituted approximately only 25% of GHG emissions, that policy & development would need to address buildings and transportation.

The representative from NYC’s Sustainability Office Susanne Desroche, recited its development profile:  7GW of renewable generation installed in the 5 boroughs, 154MW solar & 67MW storage installed in NYC, goal of another 100MW by 2024, 40MW in the pipeline, for solar & storage.  She reported plans to replace 85% of peaker plants with 1000MW of storage by 2030.  Automated permitting is a major initiative in process.

FDNY is evaluating concerns about fire risk for indoor siting of batteries, but some outdoor sites for battery storage are being installed.  Targets for 2050 include 60% building electrification and 50 DC fast chargers, with 5 DCFC’s planned for 2019. When asked about plans for the MTA to accelerate its acquisition of electric buses and build out of bus charging infrastructure, she declined to comment on MTA timelines.   NYPA however noted that its EVolve NY  plan has committed $250M through 2025 for EV charging infrastructure including 200 DC Fast Chargers (150kW) along traffic corridors, airport charging hubs and EV model communities.

NYPA further commented that historically, it had accumulated 25% of the entire state’s generating portfolio, but was shifting its focus to distributed generation.

VDER – Value of Distributed Energy

Stephen Wemple from ConEd articulated the premise of VDER, the successor tariff to Net Energy Metering (NEM), identifying the main categories of the “Value Stack”.

The LBMP is indexed to the wholesale ISO market price, whereas the LSRV is value for avoided line development.   The Environmental value is priced on either REC prices  (as determined by NYSERDA) or the social cost of carbon (as determined by RGGI).  An extended analysis was referenced in NYSolarMap analysis, which included excel modeling presentations by several large solar developers.

Daniel Spitzer, attorney from Hodgson Russ, presented a critical assessment of agency policies, in particular noting contradictions between declared goals and actual pacing in implementing the VDER framework for compensation for both solar and for storage development.  He noted that NY will not be able to achieve its goals of 50% renewables by 2030 (REV, RPS or NY-BEST Roadmap,) without faster adoption of storage.  $200M allocated at NY Green Bank for storage is not being committed quickly enough (which is at odds with NYSERDA’s statement that $450M had been deployed).    He noted that recent legislation in CA leading the promotion and adoption of storage, citing one bill that imposes a requirement that microgrids use batteries or other storage rather than nat gas generators, recommending NY should follow that course, which would catalyze more renewable microgrid development.  A 2^nd CA bill directs utilities to implement 500MW of storage.   He also advocated called for more aggressive efforts for restraint on interconnection costs than provided in the solar+storage Map, noting that the PSC has taken steps to update the SIR (Standard Interconnection Requirements).

Storage Applications

Storage deployments in NY have trickled in as compared to the surge in renewable generation.  In part this is because grid integration of storage technology is still in an early stage, with 94% of 25.2GW of US storage capacity in pumped hydro, and all the tech innovation constituting only 6% of storage capacity.

Massive efforts will be needed to expand both capacity & grid integration.

The primary purpose of energy storage is energy arbitrage, ie., purchasing energy to charge batteries when prices are low due to surplus and discharging to sell when prices are high due to demand congestion, with the effect of providing load smoothing, at several levels within the grid architecture.

In addition to the compensation storage should receive for its contribution to the Value of Distributed Resources, it should also see revenue for these ancillary services.  Storage   provides “ancillary services” to the grid that are currently un- or under-compensated, including frequency regulation, voltage support, reserve capacity, load following & ramping.

The PSC is considering a “value stack” approach for storage as well as generation, to disaggregate the value streams and compensate each separately.   RMI identified 13 services that storage can provide, to 3 stakeholder groups.

Determining the cashflow for a solar+storage project from VDER rules involves a complicated comparison between structuring and pricing regimes, which can create confusion when presenting a proposal for financing. Because storage can potentially participate in both state-regulated retail markets and FERC-regulated wholesale markets,  storage pricing models have to ensure not only adequate compensation but must also avoid double compensation for any segregated value stream.

Spitzer advocated for expansion of incentives & subsidies in the VDER compensation model, in addition to the Transition benefits currently supporting VDER pricing.  He also made reference to a supplemental subsidy for storage, a “market acceleration bridge incentive” (MAI), a proposal within the Roadmap that calls for $350M to be drawn from the State’s Clean Energy Fund.  Solutions to this were briefly touched upon, including a proposed subsidy under the State storage Roadmap plan to offset soft-costs, a mechanism to ensure storage is sold in 10-20yr contract increments, a state run central procurement agency for storage, and support for specific market applications, ie, for schools to offset seasonal shifts, and replacement of peaker plants.

Institutional investors

Institutional investors are potentially the largest source of capital but currently the smallest by total assets under management, so it is an industry priority to find the means to unlock access to those large pools of funds that require very low risk assets & can tolerate relatively low returns.  Institutional entities represented in the panels, included 2 insurance companies, 2 banks, 1 investment bank, 3 commercial REITs, several institutionally funded alternative funds, & several entities engaged in securitization of projects into Asset Backed Securities (ABS) that are placed with institutional investors, including 2 securities brokers, an asset manager & a major developer with a deep balance sheet. Public policy is a factor in incentivizing private sector involvement, as to federal tax incentives, state structural goals such as Renewable Portfolio Standards, property tax, carbon credits, support for valuation of storage assets, and portfolio guidelines limiting category and percentage of alt assets.

The rep for insurance company John Hancock sat on a panel discussing investor appetites for PV & storage with fund managers from Wafra Alternative Investments, C2 Energy Capital  & Clean Capital.

Only 40 deals were with institutional participants, constituting .5% of transactions, in part because, as one panel member observed, there are easier ways to bet on 15-year assets than investing in power contracts, due to numerous uncertainties, in costs, O&M risks, performance both during the contracted period and after the end of the PPA, in the merchant period.   Clean Capital has partnered with John Hancock (subsidiary of Manulife (MFC)), and with Blackrock on large portfolio acquisitions.

Tax Equity

The reps for AON Insurance (AON) and Royal Bank of Canada (RY) participated in a panel discussion about tax equity investments.  Jonathan Silver of Tax Equity Advisors noted that pension funds, cash equity funds and insurance funds are increasing their participation in general, but also other non-institutional corporations are taking large positions in renewables via tax equity.   Gary Blitz of AON focused his comments on coverage indemnifying narrow risks for tax equity partners against reversal judgments in IRS challenges, stating that insurance revenue for this line is up 2x yoy since ’17, similar to the services offered by the Surety carriers. Tax credit recapture risk can be triggered by foreclosure, which can mean that lenders concerned with loan default risk have interests at odds with tax equity investors.

RBC stated that they place funds from 80 institutional investors into their syndications of low income housing, who have been increasing their participation in renewable assets primarily to increase diversification, but since the tax reform are finding fewer tax equity opportunities.    Tax advisor and syndications expert Joel Cohn of CohnReznick Capital noted that tax flips use GAAP rules primarily but also require use of “Hypothetical Linked Book Value” (HLBV) accounting rules.  Other complicated factors discussed included Base Erosion Anti-abuse Tax (BEAT) rules, 5% Safe Harbor rules, and Opportunity Zone rules for pre-tax deferrals out to 2026.    This discussion ended noting that it is generally simpler to employ back-leverage structures to avoid the default risk, and in some cases avoid transacting with tax partners.

Another panel that included M&T Bank (MTB), Investec Holdings (South African fund) & FTI consulting (which also operates a mid-market investment bank) continued discussion of the relative merits of back-levered debt, in which a project sponsor finances its equity contribution with   Back-leverage is increasingly prevalent, in part because lenders prefer less dependence on tax equity, like to see more profit distribution to Sponsors, and because tax equity participants are ramping down on long tail risk.   Revenue stacking models were discussed, that involve layering on capacity and ancillary services, to the extent that projects include front-of-the-meter storage.   The head of Investec for No. America commented that simpler revenue models were favored.  He pointed an earlier era in tech financing when cash flow for startups were subsidized by relationship banks backed up by entities with deep balance sheets that were able to carry the risks and negative cash flows until the developing firms were able to build “economic velocity”, suggesting something similar will need to happen with renewables.

Securitization was addressed by a panel moderated by Mike Mendelsohn from the Solar Finance Council,  which offers a bond securitization rating portal, & includes on its advisory board kWh Analytics and CleanCapital.  Panelists included a rep from asset manager Guggenheim Partners ($209B AUM) and  brokerage firm Cantor Fitzgerald, Ron Borod from asset manager Ram Island Strategies, & Thomas Plageman from Vivint Solar Capital Markets (VSLR), a major developer with a deep balance sheet that has one of the largest financings listed by the NY Green Bank.   Vivint reported it had completed $466M in ABS deals & 2 debt deals on the 144a market both levered and back levered, some that included a 2^nd layer of tax equity.  Their ABS securities were rated BBB on Quantum, with interest rates at L+ 1.75 rather than L+2.25, advance rate of 73-85%, and buyers were insurance companies taking 18yr dated PPA’s.  Critical mass for these portfolios were 25-30,000 customers, which equated to $100M-$200M in asset scale.   Ram Island noted its lease PPA portfolios were almost all residential, noted that the minimum levels of critical mass to be able to do the statistical underwriting was threshold of 15-20MW.  It preferred using back-leverage to avoid IRS challenges of ITC basis, and to avoid the competition contractually for cashflow between debt holders and equity holders.   Guggenheim also indicated a preference for debt rather than the complexities of managing inter-creditor relationships, and the upfront costs for legal & rating agencies in setting up ABS’s.   He agreed critical mass to achieve the statistical granularity for rating purposes was $100M, preferably composed of similar asset class, with investment grade C&I offtaker.  Storage, interestingly, was considered by all three to be a benefit to the project cashflow stability and the ABS, as a hedge for changes in net metering rules.

Real Estate

The real estate asset holders funding renewable developments appeared on their own panel, moderated by the non-profit Urban Land Institute.  Panelists included Vornado Realty Trust (VNO), a publicly traded REIT with marquis high rise properties, largest owner of LEED-certified property in the US, DWS Group, (formerly Deutschbank) with a $50B real estate portfolio, & L&M Development Partners a non-profit builder of low income housing held as long term assets.  They all described solar+storage projects sponsored to provide energy to their properties.  Their primary interests were long term energy cost containment, resiliency and participation in sustainability goals.  DWS noted that decision makers on the DWS board as well as their institutional investors were in some cases interested in a narrative that added an impression that the project was providing a social benefit, perhaps reflecting an increasing involvement with ESG (environmental, social & governance) factors in the composition of their portfolios.   She pointed to a case involving solar facility installed on a warehouse roof on Long Island with a remote net metering contract to supply a high rise with a small footprint in Manhattan.

Jim Spano, of Radiant REIT, presented a related mission, to provide debt funding that matched the project life cycle to the loan term.  He made the contention that there were excessive administrative and financing costs incurred at multiple refinancings that had to occur with the typical project development timeline.  1^st stage refinance is aligned with the 5yr period until tax equity participants can exit, at tenors of 5-7 years, and often shorter term amortization results in negative cash flows, & discounting of positive cash flows projected well into the 3^rd phase refinance, which adversely impacts costs of capital.  Longer term financing entering earlier in the process, not only can reduce transaction fees & offer lower rates by matching the PPA term to the term of debt, but also can shift the debt equity ratio to 70-80% debt & reduce equity participation, reduce the debt service coverage ratio to 1.1 – 1.3, & can factor credit for SRECS into cashflows.

Risk Mitigation

Having recently published an examination of risk mitigation in renewable energy finance, I was interested to note that the conference led off with these issues.   Early in the program, there were presentations and panel participation from four firms addressing risk mitigation, Unique Surety, Exxergy, S&P, & kWh Analytics.

Bob Goldstein from Unique Surety described the role surety bonds play in providing performance guarantees for both general & key sub-contractors.  Surety bonds are mandated by law for public construction projects, and are often required in private enterprise projects.  Risk mitigation provided by surety bonds will enhance the ability of the project to obtain financing & underwriters to approve funding, and consequently are requested by both developers and by investors & financiers in their term sheets.  He made a clear distinction that surety is not expressly a credit enhancement, but rather is a contract performance guarantee, which has the effect of enhancing credit and reducing cost of capital.

Surety products are a 3-party contract distinguishable from conventional 2-party insurance, but parties often are under a common misconception that contractual default coverage is included under the property & casualty coverage, & omit surety in an effort to reduce soft costs.  Premiums are often less than 1% of total exposure, & can result in a net improvement in cost of capital.

Surety can be used not just to benefit sponsors against EPC contract risks, but can also can offer cross coverage “wraps” between counter-parties, against a) failure of the asset operator/ independent power producer to deliver power, and b) concurrently against non-performance by off-takers to make payments.  It can provide c) benefits to tax equity investors to cover the risk of challenge & recapture by the IRS of Investment Tax Credits.  Strongly emphasized was the ability of surety to d) cover risks of business continuity due to non-performance of the Operations & Maintenance contractor, where a myriad of risks exist.

Thomas Sauer of Exxergy, a German consulting firm, also focused on the vulnerabilities in O&M contracts.   He questioned whether the “race to the bottom” was healthy for Levelized Cost of Energy (LCOE) of renewable energy to achieve parity with fossil fuel LCOE.  The dramatic decline in pricing PPA’s in the in the PV market, which roughly approximates the LCOE, may be undervaluing assets, when very few PV sector players have healthy balance sheets, and as a Bloomberg study has shown, only 2 out of 11 PV manufacturers had Altman Z-scores above a 1.8 threshold for financial health.  Adding to that weakness, operating performance risks can further reduce financial performance, potentially jeopardizing optimistic LCOE projections.

He cited a Fruanhofer Insitute study showing the extent of performance risks, that 30% of inspected operating PV plants (out of total 1.5GWp) show module defects & installation errors not recognized upon inspection, as well as failures to identify malperformance in monitoring operations.  A 2^nd study conducted by Exxergy compiled an analysis of 3600 insurance claims, finding that loss spreads substantially exceeded underwriting expectations, ranging by as much as 2 orders of magnitude.

To address this problem Exxergy is cooperating with IECRE, (the IEC System for Certification Standards for Renewable Energy, established in 2014) to develop a standardized rating system correlating the associated financial phases, not only to improve LCOE projections, but to be able to rank projects according to O&M performance risk, in order to streamline bankability, risk assessment & mitigation.    The IEC (International Electrotechnical Commission), is an international agency with 133 member nations and 20,000 experts.

The IECRE / Exxergy system will separately certify each phase of the plant lifecycle,

• at inception phase, annual certification, & asset transfer,
• across three scales: utility, commercial and industrial (C&I), and residenti
• The ratings would cover the baseline (meaning component manufacturing, EPC, and O&M), the supervision of the project realization phase, and final technical project inspection aspects,

All these factors would be compiled & ranked, resulting in a project rating.

The IECRE / Exxergy system will separately certify each phase of the plant lifecycle,

• at inception phase, annual certification, & asset transfer,
• across three scales: utility, commercial and industrial (C&I), and residential
• The ratings would cover the
  • baseline (meaning component manufacturing, EPC, and O&M),
  • project realization phase, and
  • final technical project inspection aspects,

All these factors would be compiled & ranked, resulting in a project rating.

Risk mitigation strategies, to be effective, need a rating scheme to complement the certifications, a scoring matrix that can provide weighted factor outputs and a final score.  The ultimate goal would be to match these outputs to risk equivalents of bond ratings.

The long arc of Exxergy’s enterprise serves the broader vision of attracting long-term debt financing from institutional investors (pension funds, insurance companies, infrastructure funds, private family funds, sovereign wealth funds), with lower targets for returns and longer investment horizons that better match with 15-25 year project lifecycles.  The ratings scheme supported by the standards scheme can potentially enable better access to sources for lower cost investment grade capital, and which have the largest pools of capital potentially available for renewable development.

Matt Chou from kWh Analytics & Michael Ferguson director of Sustainable Finance at S&P Global Ratings sat together in on a 4-person panel about secondary markets for renewable project investments.   kWh Anlytics offers a suite of risk mitigation products marketed as a “Solar Revenue Put” that guarantees 95% of forecasted energy production (with P50 probability) under an all-risk insurance policy that covers losses due to weather risk, equipment failure & construction defects.  It also offers risk management software, manages its Solar Lendscape deal flow data base and provides intermediary services between projects and capital.  But the discussion touched only briefly on the role of risk mitigation in secondary market transactions, when Chou commented that yield could be enhanced with risk mitigation by 30-50 basis point on levered after-tax IRR on a 25-35 year horizon for returns structured to achieve low single digits.  He noted that these low-risk investment grade returns were not dependent upon PPA’s coming in at the absolute low of $18/ mWh, as witnessed in several such refinancings his firm had done with Swiss Re (SREN.VX), which is rated AA-1.    Another panelist, Jerry Polacek from Tortoise Capital Advisors, commented that there were more secondary deals with foreign capital, which can incur an additional 100-150 basis points of expense to hedge foreign currency risk.

Ferguson noted, when asked if valuations are affected by technical project ratings provided by S&P,  offered an ambiguous response, saying that ratings were considered a necessary part of due diligence but were perhaps not decisive.  He said that, on the one hand, despite returns being lower in ’18, valuations in fact were high, assets were over-valued, yet paradoxically also commented that prices were lower in ’18 due to the effects of both the US tariff and the reduced feed-in-tariffs in China. This was never clarified.   He commented that most projects perform as rated, with not many surprises, and contrary to the findings of Exxergy, that physical O&M was less of an issue than complications arising from finance & development management.

Both agreed that the deal flow for PV on the secondary market was greater than 2GW for ‘17, expected more in ’18.   Both concurred that a preponderance of secondary buyers were entering at the time of Notice to Proceed (NTP).  Deal drivers were less about securing the federal Investment Tax Credits, than in responding to the state level Renewable Portfolio Standards.   There were more transactions involving aggregated portfolios of contracts, rather than single asset transactions.  Secondary transactions involving storage assets were relatively rare, in part because the valuation process for storage is more complex than for solar, and because financial investors are less interested than strategic infrastructure or public investors.  It was noted that storage designed to offset demand charges, as in the case of DC fast charger infrastructure, is not yet economic.

Other storage topics discussed either in presentations or in networking discussions, included technology issues, financing challenges, and emerging policy discussions for grid integration and pricing.

• Viking Cold Solutions gave a presentation of its thermal storage innovation that uses a sodium based material with enhanced phase change properties, no mechanical parts, that can be installed in customer refrigeration facilities, cooled by running the compressors during off peak power pricing, and reducing compressor operation during peak periods by as much as 90%.

It is effectively a behind-the-meter solution for peak shaving to reduce both demand charges and volumetric usage.  Together with enhanced operating efficiencies for the primary cooling equipment by reduced usage and narrower temperature range tolerances, overall reductions in energy costs up to 35%, are common, resulting very short payback periods.  Thermal energy storage operates at 1/10^th the costs compared to conventional lithium ion storage chemistries, and 4x the life cycle duration.

• STEM presented an AI-driven service in CA that creates virtual power plants, VPPs, by networking users with complex demand response capability to manage dispatchable power.
• Spano Partners, primarily a solar developer with projects mostly located in NJ, has been building partner relationships for a VPP project in Germany. Surplus renewable production results in a duck curve that pushes pricing negative.  Current solutions involve wheeling power to Poland, but the VPP plan would build out a large distributed battery network to arbitrage energy pricing.  C&I location partners would be offered free equipment, held by 3^rd party leaseholders or  utilities, and revenues would be shared among the stakeholders.
• Ascend Analytics, a consulting firm in Boulder, CO focused on storage applications, presented a detailed technical analysis of ISO congestion patterns associated with persistent price spikes, finding that high volatility nodes offer the best opportunities for developing added value storage capacity.  Their revenue model also included multiple revenue layers from ancillary services.
• Delaware River Solar is a large regional PV developer in western NY focusing on 2-5MW Community Solar projects, that offered information in the networking sessions. Although it currently has only 1 operating project, it has an additional 44 projects in its pipeline, with strong support from local Industrial Development Associations in several counties.
• Centella Energias, a renewable systems developer based in Mexico shared ambitious plans in networking sessions for manufacture & deployment of storage being undertaken in Mexico.

Hearing the array of speakers and interacting with the other attendees gave a granular insight into the everyday concerns of the people in this industry, and a deeper sense of the direction and momentum and penetration of the renewables market in implementing the broader goals of decarbonizing the economy.

Surprisingly little expression of visionary goals was heard related to climate change or the urgent need to accelerate decarbonization, or meeting commitments to UN or Paris agreements.   Perhaps these ideals were assumed among a fraternity of professionals manifestly committed to renewable energy.  The most overt statements were offered by the representatives from NYSERDA, NY City’s Sustainability Office, and several non-profit entities.

Rather it was a conference of technocrats, giving a glimpse of the nuts & bolts decision-making discussions one might expect to hear in their respective boardrooms.   Conspicuously absent was any discussion of how finance would factor into reorganization of grid architecture.  Grid integration is a major hurdle to renewables penetration, not only technically but also because of disincentives for large utilities, which show only as much support for DERs as is mandated and no more.  A significant restructuring of grid architecture would potentially change those incentive relationships & open up a rapid non-linear proliferation of DERs that would include renewables and storage, and offer more opportunities for financing.

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Investment in renewable energy is rising, but clearly needs to grow faster to meet the goals for an expedited transition away from carbon infrastructure if we are to avoid dangerous climate change, given that now even the Trump administration forecasts a 7°C increase by 2100, which would be catastrophic.

The Paris Agreement determined that in order to keep warming below 2°C, the global economy would need to be restricted to a 600 gigaton carbon “budget”, and completely decarbonize by 2040.

Emissions must be cut by 70% in the Paris-congruent Remap case, and 90% of those cuts in energy-related CO2 emissions can come from renewable energy

However, only 4 out of 38 energy sectors, are on track with Paris targets according to the IEA monitoring tool published in May ’18.  IRENA’s Global Energy Transition Roadmap to 2050 reported in April ’18 that the share of renewables would need to scale up rapidly to reach 65% contribution to Total Final Energy Consumption (TFEC) in order to meet the Paris targets, 260% faster than currently being implemented.

New Climate Economy made the case that $90 trillion of Paris-congruent infrastructure investment by 2030 would yield a direct economic gain of $26 trillion more than business as usual. The UN’s Business & Sustainable Development Commission estimated $12tr in revenue & cost savings by 2030.   Rocky Mountain Institute, in its Reinventing Fire, projects $5tr in increased economic benefits from transition away from a high carbon economy.

Whether the outlook is $26tr, $12tr, or $5tr, a consensus is converging to support the expectation that a transition to low carbon will produce substantial net gains, not economic hardship & hazard.

Jeremy Grantham estimates that global renewable energy Capex would needed to increase from current levels of $300B to $2.1 trillion per annum by 2050, which is approximately 6% increase annually.

IEA estimated in 2010 that an additional $36 trillion in clean energy investment would be needed through 2050, averaging $1 trillion per year more than business as usual.

Ceres agrees with IEA and considers that the “Clean $1 Trillion” needed is eminently feasible, across an array of asset classes in multiple sectors.  Ceres, a non-profit organization that leads a national coalition of investors, environmental organizations and other public interest groups, coordinates the Investor Network on Climate Risk (INCR), a network of 130 institutional investors representing $17 trillion in assets committed to addressing the risks and seizing the opportunities resulting from climate change and other sustainability challenges.

These reports demonstrate a general consensus that a rapid shift in investment in climate related infrastructure is necessary, but that unfortunately, sufficient investment is not being made, whether due to insufficient stimulation from statutory & regulatory policy, financial incentives or by NGO organized disclosure programs.

Where could action be taken to trigger large scale flows of capital into climate-related infrastructure and renewable generation?  Four possible routes can be considered:

• Institutional funds – regulatory changes that could reduce barriers to entry
• Fossil fuels related subsidies that skew the yield environment
• Triggerable capital pools controlled by high net worth individuals, which may be influenced by pressure from NGO carbon disclosure pledges, corporate governance & sustainability practices
• Offshore funds that could be diverted to infrastructure by international cooperative enforcement and tax policies.

Institutional funds

Climate Policy Initiative also estimated that  $1 trillion per annum investment will be needed to scale up from current investment totals in “climate finance” of around $380B (for reference, the total fossil fuel investment in 2016, was $825B).  They find that although currently the participation of institutional funds is nominal, they are potentially one of the largest source of private sector capital.

An earlier 2013 CPI study enumerated a total of $86 trillion in assets under management at institutions in OECD countries (as of 2010).   Current levels of investment are less than $17B, or .02%.  However, the potential scale of assets that could be available for renewable investments, even after applying various constraints, due to liquidity & diversification requirements and limitations on use of tax credits by tax-exempt funds, was approximately $700B in corporate securities, and $260B in direct project investment.   With further proposed policy changes that could mitigate some of the constraints, and promote risk pooling, the resulting availability could be as high as $562B, or .65%, an increase of 3300% more than is being invested now.

Pension funds and other institutional entities primarily hold investments in renewables indirectly through diversified infrastructure and natural resource funds.  But increasingly, funds are making direct investments in operating assets and even direct investment in construction lending for projects, in part as a hedge to eroding returns from portfolio holdings of old carbon economy equities & bonds.   As CalPers noted, there is fierce competition among institutional investors for access to top-yielding investments in the alternative energy space.   However, CALPERS and CALSTRS are now being compelled to disclose climate-related financial risk and alter their portfolios to include more low carbon economy holdings.  Carbon Tracker, an NGO promoting carbon disclosure, as well as other entities promoting divestment, are adding pressure for shifts in investment policies.

Increasingly, there is a boom in “ethical investment”, in ESG (environmental, social, governance) and fossil free ETFs and indices – MSCI lists 7 ESG indices, Thomson Reuters has 4, S&PDowJones offers a large family of sustainability indices, FTSE4Good has 7, ETF.com lists 78 socially responsible ETFs with $7.4B AUM, and ETFdb.com lists ETFs under 35 ESG themes, 10 of which are environmental.  An interesting example is the advisory service FFI offering an Energy Transition Long-Short strategy benchmarked to their Fossil Free Index, which holds long positions in clean energy, advanced transportation, and smart grid companies, and short positions on reserve-owning fossil fuel companies, and is currently outperforming the S&P.

Fossil subsidies

As noted in an OECD study Role of Pension Funds in Financing Green Growth Initiatives (2011), renewable projects are mispriced due to policy bias favoring fossil fuel subsidies, that fails to adequately price carbon externalities, which depresses the relative returns, resulting in lower yields for renewable assets. In 2009 IAE estimated  that subsidies for renewables vs. fossil fuels were $57B vs. $312B, focusing primarily on “explicit” subsidies.  The IMF concluded in How Large Are Global Energy Subsidies? (2015), that by including “implicit”  externalities, specifically health care costs and climate change effects, subsidies for carbon industries are actually as high as $5 Tr per year globally. Other studies find additional  embedded subsidies, that include military defense of oil resource, sunk infrastructure costs, & opportunity costs, including costs of the Iraq war, adding $81B per year.  Tax rates paid by US oil companies to foreign governments dropped from 70% to 45% after the ’91 gulf War, reflecting a “return on military protection”.  An aggressive social cost of carbon policy, although a step in the right direction, would barely scratch the surface of these subsidies in aggregate.

To the extent the OECD premise is correct, that the yield environment is distorted by subsidies for fossil fuels (coal, nat gas), nuclear generation and structurally embedded implicit externalities, a reasonable conclusion could be made that policies constraining fossil fuel subsidies could contribute to enhancing the competitiveness of yield from renewables, and in turn, unlock private sector institutional investment.

Triggerable Capital

Another argument:  $31.5 trillion in wealth, 11.2% of the world’s total $280 trillion, is held by .003% of the population, the upper 1% owns 82% of all wealth, inequality is skew is an all time high.  How much of this $31 trillion would the rich have to contribute in order to trigger the $8 trillion per year in sustainable global infrastructure?  Only a tiny fraction because of their control of “triggerable capital” pools.  At the One Planet climate summit in Paris Dec ’17, investment funds managing $26 trillion pledged to pressure the worst 100 companies responsible for 65% of all emissions.  G20’s Taskforce on Climate related Financial Disclosure (TCFD) now includes over 500 firms with market caps of $7.9Tr, including 150 financial institutions managing assets over $100 trillion, including 20 of 30 systemically important banks and 8 of 10 of the largest asset managers.

Offshore Tax Havens

Another huge source of potential capital that could be tapped are funds in offshore tax haven accounts, which by some estimates are as high as $32 trillion.  In a recently published academic study The Exorbitant tax Privilege co-authored by Gabriel Zucman (known for The Hidden Wealth of Nations), the authors make the case that $8 trillion has accumulated as foreign debt, which would normally result in an outflow from the US, but due to abnormally low tax rates for U.S. multinationals, money keeps flowing into US assets.   A more concerted effort, including reform of US & UK Beneficial Ownership registries, & coordination of tax treaties to prevent transfer pricing strategies currently considered legal, funds in the trillions could potentially be made available to renewable infrastructure investment.

In conclusion, there is widening array of sources for asset financed project development, and institutional capital is waiting in the wings for policy changes that will moderate some of the constraints and recalibrate the current bias favoring yield from carbon investments toward a bias favoring renewable investments. The yield environment would shift dramatically, leveraging private sector institutional support, if Federal policy were to be more aggressive in enabling renewables as a means for withdrawing demand from fossil fuel assets and the need for associated military costs, adopt a carbon fee-and-dividend plan with properly valued social costs of carbon, and pursue a broad spectrum of climate change-related policy initiatives.  Such measures would substantially tilt the balance away from implied oil subsidies, & would unlock a virtuous cycle of private sector capital across the full spectrum of climate change related investments & renewable energy development.

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