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Wall Street is on the hot seat these days and no wonder. Between record high bonuses and their staunch opposition to proposed consumer financial protections, Wall Street institutions appear blithely indifferent to the economic turmoil on Main Street.
Banks and other financial institutions could refurbish their tarnished reputations by using their smarts to innovate new financial products that actually help average Americans while addressing some of the nation's greatest challenges: unemployment, economic competitiveness, national security and climate change.
That may sound like a tall order, but the clean energy solutions to the climate challenge not only reduce pollution, they create jobs, promote American innovation and technology, and boost energy independence.
To get moving on those clean energy solutions today, we must first close the climate investment gap -- and that will require financial innovation. Technology is not our main stumbling block. We have proven carbon-reducing technologies, but bringing them to the scale required necessitates vast amounts of private capital. Take energy efficiency, the veritable low hanging fruit and our best near term solution to the climate challenge.
A recent study by the McKinsey Institute found that leaving no stone unturned on the energy efficiency front could cut the United States' projected energy use by nearly one-quarter in 2020, and save $1.2 trillion while we're at it.
Even better, investing in that level of energy efficiency would create hundreds of thousands of jobs for workers needed to perform retrofits ranging from sealing the nation's leaky attics to replacing energy-guzzling industrial equipment in factories.
But here's the rub. Energy efficiency improvements involve upfront cash outlays, and even though the returns are guaranteed, it's tough to get that capital outlay.
Many states have energy efficiency programs that provide cash rebates to homeowners and businesses for energy efficiency improvements, but those programs get tapped out quickly each year. The jobs bill includes money for a nationwide energy efficiency rebate program, which could help, but is not a sustainable solution in this deficit-conscious era.
Pennsylvania has a different solution. It runs a unique market-based lending model called Keystone Home Energy Loan Program (HELP), which provides homeowners with low cost loans for Energy Star rated and high efficiency heating, air conditioning, insulation, and windows and doors. Unlike the vast majority of energy-efficiency programs, HELP is capitalized primarily by investments made by the State Treasurer, exercising his authority to seek prudent opportunities to invest funds.
Over four years the program has enabled more than 4,800 homeowners to cut their costs and energy use by providing $24 million in energy efficiency financing. Keystone Help is a superb program, but its ability to reach Pennsylvania's more than five million households is clearly constrained by a lack of financing mechanisms.
Price carbon, don't create another subprime debacle
Ms. Lubber is absolutely correct in the last paragraph: we need to price carbon to make the markets to scale up clean energy. She is absolutely wrong before that. Her policies will if carried out in scale recreate the subprime crisis, and energy policy needs huge scale to be meaningful. Banks have blown themselves up twice in my lifetime following government mandates to an excess (the third world debt crisis of the 1980s and the subprime mortgage finance crisis of 2007-2008). They blew themselves up without government help a couple other times as well.
Below are two criteria (out of about a dozen) that I advise cleantech entrepreneurs to follow that are relevant to here:
Be Cheap, Be Better or Be Gone—Have a Compelling Price or Performance Advantage
The technology must be cost-competitive with traditional black (dirty) energy at forecast long-term prices without tax credits or government incentives. For oil and liquid transportation fuels, use the same forecast long-term planning price used by the major oil companies. They know this business better than anyone does, and they are motivated to get it right. Unlike environmentalists, politicians or bureaucrats, they pay a price for getting the price wrong. Using that benchmark price moderates excess enthusiasm during price spikes and excess pessimism during gluts.
Avoid Government Handouts
You can take government handouts, but never, never rely on any special government support (tax credits, loans, renewable energy mandates, etc.). Force yourself to ride without trainer wheels. The winners will.
Government support is frequently as deadly as addictive drugs and can be withdrawn with a change of government or the poplar mood. The public eventually figures out the true cost. If you do not know why California’s 1980s vintage Standard Offer 4 contracts are relevant, find out or find another endeavor.
Take whatever government largesse is given to you (you will be paying more in taxes to fund it anyway), but do so on your terms. Impose the following self discipline on yourself: (i) confirm that it comes without constraints and restrictions that will prevent your business form becoming a success, (ii) never base your business planning on it, (iii) never change any material business practice to take the benefit, (iv) since mistakes can be felonies in this field, get the paper work right (hire cheap but competent staff, but check the quality of their work), and (v) hire Beltway hacks to deal with the government--they know how to speak that other worldly bureaucratese language and are adapted to the Orwellian doublethink).
Even with these constraints, there is a downside. Government incentives create bubbles by over allocating economic resources to the favored sector. When those bubbles burst, as they all do eventually, investors lose substantial sums. Bubbles are merely good ideas carried to an excess. The politicians and press conveniently forget government’s role and focus on the inevitable excesses of the private sector, using them to place blame exclusively on business. Since business is a convenient scapegoat, the politicians avoid their just share of the blame.
Consider the recent real estate and mortgage finance bubble. The politicians passed laws requiring banks to make loans to low income would be homeowners. They created entire institutions, and then passed additional laws to make it easier to make those loans and encouraged banks to do so. The loose loan practices then extended to all income and home price levels. The politicians rejected the criticisms of the excesses and were in denial on the embedded risks until after the bubble collapsed. Many bankers engaged in abusive and fraudulent lending practices, but even those who were honest lost money and were condemned anyway. What makes you sure the energy boom-to-bust cycle will not develop along a similar course?
Rich Sun, CFA
Founder & Owner, Sun & Co.
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