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Doing the math behind the $4 billion White House clean energy deal

"Reality is intruding," says Vice President Biden, spurring investors like Goldman Sachs and the University of California to ante up in a big way.

Never one for an understated entrance, Vice President Joe Biden opted to kick off his remarks at a first-of-its-kind White House Clean Energy Investment Summit with a joke at the expense of his target audience: investors.

"Banks only lend you money when you don’t need it," Biden said, harkening back to his own unsuccessful attempts at raising capital for a law firm before he was elected to public office.

There weren't many laughs from the crows of institutional investors, Wall Street big wigs, foundation administrators and other financial overlords assembled in Washington yesterday to mark the announcement of $4 billion in new private sector capital committed to clean energy innovation.

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But the hope expressed by Biden and financial executives from organizations like Goldman Sachs, the University of California and assorted clean tech companies is that investors really will step up at a crucial moment for the commercialization of renewable energy technologies.

"It’s a smart economic play," Biden said. "Fundamentally, it has to do with how reality has a way of intruding."

With talk of a carbon asset bubble ramping up ahead of the COP 21 United Nations climate talks to be held in December — and some businesses already taking proactive steps to put an internal price on carbon — the White House initially set out in February to secure $2 billion worth of clean energy funding commitments.  

On Tuesday, the Obama administration announced that investors had actually committed $4 billion, including: an initial $1.1 billion from five institutional investors; $500 million of financing and co-investments from Goldman Sachs and other commitments from over 250 foundations and nonprofits.

Their goal: fill the void between conceiving of a promising clean technology and selling a commercial version of that technology at a profit.

"There is something of a valley of death in the financing," said Peter Pereira Gray, managing director for the investments division of UK institutional investor the Wellcome Trust.

He explained that venture capitalists looking for high-margin, relatively short-term returns can be skittish about making early-stage bets on capital-intensive clean energy companies. That often means companies with high overhead costs can't even get to the scale when larger institutional investors may be willing to back them.

Despite those forces, there are a handful of examples of big-name clean tech startups — Nest, SolarCity, etc. — that have achieved major financial exits for their early investors. At the same time, major corporations like Apple, Google, Walmart and many others continue to build out big renewable energy portfolios, demonstrating the private sector's appetite for long-term financial certainty as renewables inch closer to cost parity with fossil fuels.

“I do think we are reaching an inflection point," said Kyung-Ah Park, head of Goldman Sachs' environmental group, at the White House summit, emphasizing the potential of "catalytic capital" from larger outside investors to grow the clean tech market.

Anteing up

After all of the talk about the potential of public-private climate solutions, the new White House deal could provide a more tangible model for how to make those collaborations happen at scale.

The strategy of mobilizing private sector investment is a departure from past reliance on taxpayer-funded investment in individual clean tech companies, like the nine-figure Department of Energy (DOE) loan program that funded Solyndra (and ended up in the black overall, despite the solar company's implosion).

Instead, the federal government has announced as part of the new deal two new accelerator programs with relatively modest $10 million and $3 million seed funds, along with a $5 million expansion of the Cyclotron Road clean tech R&D program housed at Lawrence Berkeley National Laboratory. 

The White House has also announced three new executive orders dealing with clean energy: the creation of a Clean Energy Impact Investment Center at the DOE to make information about energy and climate programs more accessible to investors and the public; a new Treasury Department guidance to facilitate clean tech investments by charitable foundations; new financing options from the U.S. Small Business Administration for private investors seeking long-term capital, including early-stage investors in capital-intensive clean energy technologies.

Some highlights of the private sector players that have made complementary commitments to the White House Clean Energy Investment Initiative so far:

Institutional investors

- A new consortium of long-term investors planning to allocate an initial $1.1 billion and $2.5 billion over five years, including: $500 million from University of California’s Office of the Chief Investment Officer; $350 million from the New Zealand Superannuation Fund; $200 million from the Alaska Permanent Fund; $100 million from TIAA-CREF and $10 million from Tamarisc.

Investment banks

- Goldman Sachs has targeted $500 million worth of financing and co-investments in clean tech companies, with focuses including smart grid infrastructure and advanced batteries.

Foundations and family offices

- The newly-formed CREO Syndicate, resulting from a merger of the CREO Network and Cleantech Syndicate, plan to invest $2 billion in clean energy and the environment over the next five years.

- Confluence Philanthropy and the CREO Syndicate announced a new joint initiative called the Climate Solutions Collaborative, which will aim to educate 300+ member asset managers and increase their investments in climate solutions by at least 20 percent above 2014 levels by 2020.

Philanthropic investors

- PRIME Coalition will launch as a nonprofit focused on facilitating charitable investment in market-based solutions to climate change.  PRIME aims to lower barriers to entry for philanthropic organizations by identifying the most promising clean energy interventions, then enlisting legal and financial support that make it easier to place capital.

Defining the ROI

While $4 billion is a big number, exactly what comes next for the Clean Energy Investment Initiative will vary group by group.

First and foremost, the public commitments — much like companies' internal sustainability goals — are non-binding and in many cases have vague "long-term" timelines.

In the meantime, fund managers have some major questions to answer when it comes measuring and realizing their return on investment.

"Can you really make money at this?" Pereira Gray said. "The horizons are exceptionally long."

Nigel Gormly, head of direct investment for the New Zealand Superannuation Fund, said part of that depends on how patient capital can be. Where larger sovereign wealth funds and pension funds are more risk averse and committed to generating faster returns, those that have time and money to spare could be getting in on the ground floor.

“The long term benefits that we believe might not be fully priced today — we’re able to weather the storms," Gormly said, adding that there's also the matter of the scope of investment required in capital-intensive R&D. "For a lot of organizations, a $100 million investment just isn’t going to be relevant.”

For Goldman Sachs, Park said that honing a narrower focus will likely present one path forward, since clean tech is a broad field spanning alternative fuels, energy efficiency analytics and actual power-generation systems, to name just a few categories.

"Not all clean technology is created equal," she said. "There’s very specific de-risking that must happen."

While advanced biofuels must still contend with volatile commodity markets, for example, another active field like distributed solar faces very different challenges surrounding the credit requirements of prospective middle-income buyers. Goldman Sachs is particularly interested in investing in grid integration and energy storage technologies.

When it comes to challenges like misaligned incentives for clean energy or a lack of standardization, Park is helpful that "catalytic capital" provided by outside investors could help grow the market.

Biden also points to broader forces at work. Despite the vitriolic climate politics on Capitol Hill, for instance, progress is starting to be made on extreme weather resilience by moving toward adjusting old provisions that infrastructure couldn't be upgraded with federal relief dollars. The vice president also emphasized the "staggering" job opportunity and economic competitiveness promised by proactive investment in clean technologies.

To close, Biden urged investors to recruit others to the Clean Energy Investment Initiative and do more to exert their political influence with lawmakers to drive home the urgency of climate and clean energy issues.

"The reality is there’s a new reality," he said. "Our energy future is in cleaner, cheaper, renewable energy. You can start a virtuous cycle here."

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