[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
GREEN CAPITAL: SEEDING INNOVATION AND THE FUTURE ECONOMY
=======================================================================
HEARING
before the
SELECT COMMITTEE ON
ENERGY INDEPENDENCE
AND GLOBAL WARMING
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
APRIL 16, 2008
__________
Serial No. 110-33
Printed for the use of the Select Committee on
Energy Independence and Global Warming
globalwarming.house.gov
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SELECT COMMITTEE ON ENERGY INDEPENDENCE
AND GLOBAL WARMING
EDWARD J. MARKEY, Massachusetts, Chairman
EARL BLUMENAUER, Oregon F. JAMES SENSENBRENNER, Jr.,
JAY INSLEE, Washington Wisconsin, Ranking Member
JOHN B. LARSON, Connecticut JOHN B. SHADEGG, Arizona
HILDA L. SOLIS, California GREG WALDEN, Oregon
STEPHANIE HERSETH SANDLIN, CANDICE S. MILLER, Michigan
South Dakota JOHN SULLIVAN, Oklahoma
EMANUEL CLEAVER, Missouri MARSHA BLACKBURN, Tennessee
JOHN J. HALL, New York
JERRY McNERNEY, California
------
Professional Staff
Gerard Waldron, Staff Director
Aliya Brodsky, Chief Clerk
Thomas Weimer, Minority Staff Director
Jonathan Phillips, Professional Staff
C O N T E N T S
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Page
Hon. Edward J. Markey, a Representative in Congress from the
Commonwealth of Massachusetts, opening statement............... 1
Prepared Statement........................................... 3
Hon. F. James Sensenbrenner, Jr., a Representative in Congress
from the State of Wisconsin, opening statement................. 5
Hon. Earl Blumenauer, a Representative in Congress from the State
of Oregon, opening statement................................... 6
Hon. Jay Inslee, a Representative in Congress from the State of
Washington, opening statement.................................. 7
Hon. Emanuel Cleaver II, a Representative in Congress from the
State of Missouri, opening statement........................... 7
Prepared Statement........................................... 8
Hon. John Hall, a Representative in Congress from the State of
New York, opening statement.................................... 9
Witnesses
Mr. David Prend, Co-founder and Managing General Partner,
RockPort Capital Partners...................................... 10
Prepared Statement........................................... 13
Answers to Submitted Questions............................... 60
Mr. Dan Braun, Director, Global Environmental Finance, Stark
Investments.................................................... 19
Prepared Statement........................................... 21
Answers to Submitted Questions............................... 79
Mr. Daniel R. Abbasi, Director, MissionPoint Capital Partners.... 25
Prepared Statement........................................... 26
Answers to Submitted Questions............................... 85
GREEN CAPITAL: SEEDING INNOVATION AND THE FUTURE ECONOMY
----------
WEDNESDAY, APRIL 16, 2008
House of Representatives,
Select Committee on Energy Independence
and Global Warming,
Washington, DC.
The Committee met, pursuant to call, at 2 p.m., in room
210, Cannon House Office Building, Hon. Edward Markey (chairman
of the Committee) presiding.
Present: Representatives Markey, Sensenbrenner, Blumenauer,
Inslee, Cleaver, and Hall.
The Chairman. This hearing is called to order. Today, as
President Bush gets ready to tell America that he has come
around on global warming and that he supports freezing U.S.
global warming pollution 17 years into the future, we welcome a
group that does have the vision and ambition to seriously
address this problem.
These individuals probe the technological trenches of
Silicon Valley and other innovation hot spots to find the
solutions that will solve the energy and climate crisis. They
pull the strings of capitalism, enabling ambitious young
geniuses to turn today's dreams into tomorrow's technological
realities.
Venture capitalists play a key role in innovation. The $26
billion in U.S. venture capital investment in 2006 represented
less than one percent of U.S. GDP, but the $2.3 trillion in
revenues these firms generated made up 18 percent of U.S. GDP.
Venture capital-based companies employed over nine percent of
the U.S. private sector workforce. And job growth in these
companies is occurring at nearly three times the rate of the
rest of the private sector.
The corporate behemoths that dominate the business pages
are mostly mature companies. They face fierce competition that
often forces them to outsource manufacturing in order to stay
competitive, but low-wage developing countries cannot compete
with an innovative economy.
We should salute the American entrepreneurs that for
decades have pushed the American economy to the technological
edge, where wages and growth are high. The challenge today is
to channel these creative energies to help solve our global
warming problems and to help put the economy back on track.
Governments can take two approaches to solving great
technical challenges, like reducing global warming pollution.
They can prescribe the answer; for example, by massively
subsidizing nuclear power generation, as President Bush
supports, or they can set a target and leverage the creative
genius of the innovators of the world to find the answers.
The first is to cling to the technological past. It also
means compliance at the highest possible cost. That approach is
akin to investing in a candle-maker because Thomas Edison's
light bulb will never catch on. It is like doubling down on
mainframes because you don't believe many people will want
computers at their desks.
We don't know what all the answers will be to the global
warming problem, but investing taxpayers' dollars on
yesterday's technologies will ensure that the world's
innovators will have to look outside the United States to find
the markets they need to develop tomorrow's innovations. And
that will not be good for us. This is something that we cannot
afford. And this hearing will help us to find a path that will
take us down a different road.
That completes the opening statement of the Chair. I now
turn to recognize the ranking member, the gentleman from the
State of Wisconsin, Mr. Sensenbrenner.
[The prepared statement of Mr. Markey follows:]
[GRAPHIC] [TIFF OMITTED] 61638A.001
[GRAPHIC] [TIFF OMITTED] 61638A.002
Mr. Sensenbrenner. Thank you very much, Mr. Chairman.
There is no disagreement about whether jobs created by
investments in renewable energy are good. Of course, these
types of investments will help the economy. And I am glad to
see that venture capitalists and other private financiers are
taking an interest in alternative energy, but these investments
will help the economy most if they are created through free
market decisions.
Costs of renewable energy are going down. And more
communities will make investments in these types of
technologies because they offer many benefits.
In some places, renewable energy is a great option for
electricity production. In other places, renewable energies
aren't as effective. And I am concerned that mandates will
create unnecessary expenses that will only slow the economy.
One need look no further than Congress' ethanol
requirements to see the effects these energy mandates can have
on the economy. Just yesterday the New York Times reported that
Congress' mandate for a fivefold increase in biofuels, namely
ethanol, was helping drive food prices so high that they are
causing unrest and even riots in some places. And gasoline is
still as expensive as ever.
I agree with what we will hear from today's witnesses that
tax credits can help spur the investment in new technology,
which I believe is a key principle for any climate change
policy. And I support extending these credits and, in the case
of the R&D credit, making it permanent.
While our witnesses today will tout the benefits of
renewable energy, they will also claim that without government
mandates and regulations, renewable energy will not see
significant share in the marketplace. Venture capitalists are
famous for the risks they take, but that doesn't sound too
risky to me.
I am skeptical of both the need for regulation and mandates
and the idea that renewable energy won't expand without
government assistance. I am especially skeptical of the idea
that a mandatory cap and trade system is needed to bring about
this sea change in energy production.
There are at least four reports analyzing the economic
effects of the leading cap and trade bill in the Senate. And
all forecast fewer jobs and slower economic growth in the
future, all at a time when the economy is slowing down.
While it is true that alternative energy will create some
jobs, the burden the cap and trade regulation will put on this
economy will sap away many more. The EPA's model showed that by
2030, cap and trade could cost the U.S. economy nearly a
trillion dollars in GDP. That should give any legislator great
pause before deciding to support cap and trade, but it seems
like some in Congress want to rush the U.S. economy into this
flawed system.
One of our witnesses today, Mr. Daniel Braun, who also
happens to be my constituent, warns lawmakers that a cap and
trade system must be ready before it is rolled out. While I
disagree with Dan about the need for a cap and trade system, he
seems to have his own concerns about the speed in which
Congress is rushing into this process. I do agree with Dan
about the need to make the tax credits permanent, and I welcome
him here today to testify.
Another concern that I have with cap and trade is that it
fails to produce tangible, measurable results to the
environment. Europe rushed together a cap and trade system.
And, despite that, emissions are still rising there.
While the U.S., without a mandatory cap and trade system,
saw a one percent drop in emissions last year, Europe's
emissions rose 1.1 percent. Since the U.S. is not seeking to
emulate these results, I can't see why we would want to adopt
the same system.
I believe alternative energy technology can help us make
great strides in confronting climate change. And I support
advancing these technologies but not through heavy-handed
government mandates that will cause far more economic pain
without delivering any environmental gain.
I thank the Chair and yield back the balance of my time.
The Chairman. Thank the gentleman. The time has expired.
The Chair recognizes the gentleman from Oregon, Mr.
Blumenauer.
Mr. Blumenauer. Thank you, Mr. Chairman.
I apologize in advance. I am going back and forth from the
markup. I think you are also. But I am keenly interested, and I
have had a chance to review the testimony. I am going to take
in as much as I can.
This is one of the most important aspects of our work on
climate change. Our witnesses here today can help provide some
guidance about how public policy can help influence the
billions of individual decisions that we all make every day as
consumers, government agencies about where we shop, how we
move, where we live, what we buy.
And being able to target, harness market forces to move in
the right direction, to make it easier and less expensive to do
the right thing and perhaps a little less expensive for things
that damage the environment I think is very important.
With all due respect to my good friend Mr. Sensenbrenner,
we are not rushing into this. We have an opportunity to build
on the experience that we had with other markets that we have
established in terms of dealing with acid rain.
We can look at our friends in Europe. And, in fact, Mr.
Chairman, with your leadership, we have had a number of them
here before us to testify to what they would do different if
they were involved in it.
In 280 days, we are going to become a country that is no
longer on the outside of this. We are going to be dealing with
a carbon-constrained economy, no matter who is elected
president. He or she is committed to a cap and trade or
something of that nature.
We have an opportunity, as we have done with our energy
bills, to realign the massive subsidies that are buried right
now in the tax code and government policy. There isn't an
invisible hand now, but listening to our witnesses, I think we
can find ways to make that hand work better. And I look forward
to the testimony and working with them to realign these
policies.
The Chairman. The gentleman's time has expired.
The Chair recognizes the gentleman from Washington State,
Mr. Inslee.
Mr. Inslee. Thank you. Thank you. Thanks to the witnesses
for being here.
You know, in about 12 minutes, we are going to hear a can't
do policy from the White House. In about six or eight minutes,
we are going to hear I think a can do strategy from our three
witnesses in our ability to really unleash the creative talents
of Americans when you marry it up with the investment capital
that is really waiting for the signals it needs to simply say
that these new technologies need to have somewhere close to a
level playing field.
And right now because of some short-sightedness over the
last several years in D.C., we have given all of the advantages
to the old technologies by allowing them to put their
pollutants into the atmosphere in unlimited amounts at zero
cost. And we would never allow anyone to back up their garbage
truck and dump it in the city park in unlimited amounts for
free when a clean technology is available. That is what we are
doing right now. We need to remedy that situation.
And I think listening to our witnesses who are good enough
to meet with us this morning with another group here, we are
going to learn that there is enormous potential investment
available with the right signals that can really skin this cat.
And I appreciate it.
I want to point out two Washington figures: Steve McBee,
who is a leader in helping the U.S. economy, sitting back here;
another great investor, Max Vekich from Cosmopolis Washington
at one time, in any event.
Thank you. I look forward to your testimony.
The Chairman. The gentleman's time has expired. The Chair
recognizes the gentleman from Missouri, Mr. Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman. Thank you for being
here, members of the panel.
I am in preparation of a meeting with the civic leaders in
the metropolitan area of Kansas City, Missouri. And the subject
of that meeting will be the subject of this hearing. And so I
am very anxiously awaiting your testimony.
The potential for green industry to benefit our country is
unlimited, especially when you consider the hemorrhaging nature
of our economy today. If the studies are correct and that green
industry can create a half a million new jobs in the next two
years, then this is where we ought to place a substantial
portion of our capital.
And as venture capital firms, such as those represented by
those of you here today, invest in new and promising companies
connected to the green industry, the benefit could be
invaluable to Congress. And so I look forward to dialoguing
with you further.
I hate this disruption that is going to occur, but I will
return. Thank you, Mr. Chairman. I yield back the balance of my
time.
[The prepared statement of Mr. Cleaver follows:]
[GRAPHIC] [TIFF OMITTED] 61638A.003
The Chairman. Thank you, Congressman Cleaver.
And we recognize the Congressman from New York, Mr. Hall.
Mr. Hall. Thank you, Mr. Chairman. I will keep it short.
The students at Arlington High School in Arlington, New
York, Dutchess County, just came up with an idea to put solar
panels on the roof of the new wing of their high school, which
is being built, took the initiative to go to NYSERDA to get
state funding and then came to our office and asked for help.
Rather than waiting for the uncertainty of appropriation, I
was able to find, my staff was able to find private grant
funding for it. And we presented them with a check for $108,000
to complete their budget for that.
Now, that is leadership coming from the next generation.
And not only is that going on, but we have in district, in
Orange County a private firm that is processing municipal solid
waste from an entire town, which previously was being
landfilled and now has taken it through this process, producing
ethanol, gas that could be burned to spin a turbine and put the
power into the grid, hydrogen that could be used from the gas
because 48 percent of the gas they product is hydrogen so that
they can charge fuel cells. And everything is being recycled
and nothing is being put into the ground. And the total impact
in terms of greenhouse gases from their process is 75 percent
less than if they landfilled the same MSW.
In Wappingers Creek where it enters the Hudson River, there
is a small low-head hydro private facility that is generating a
flat two and a half megawatts of base power from hydroelectric.
It is just happening by itself. And the more investment there
is available to try to spur it and to make it possible to
people with the imagination and the will I think the faster it
will come on board. So I am excited about it.
I am excited to hear your testimony. I yield back, Mr.
Chairman.
The Chairman. Thank you, sir.
The time for opening statements of the members has been
completed. Unfortunately, while those statements were being
made, four roll calls were called on the floor of the House,
which will also include a recommittal motion, which means an
additional ten minutes.
So I think it would be wise for us to adjourn for
approximately a half an hour so that we could return to this
hearing. We apologize to our witnesses, but this is just the
nature of the Congress. So we apologize. The Committee stands
in recess.
[Brief recess.]
The Chairman. If we can reconvene? Thanks for joining us.
We have three great witnesses today. I had the pleasure of
getting to talk to them earlier this morning. First, David
Prend is the Managing General Partner of RockPort Capital.
David joined Salomon Brothers in 1990. He was promoted to
Managing Director and headed the Global Energy Investment
Banking Group in 1998. He co-founded RockPort Partners, a
merchant bank specializing in energy and environmental sectors.
In 2001, he founded RockPort Capital Partners, which is a
venture fund. And today he is also testifying on behalf of the
National Venture Capital Association, which we appreciate their
great work.
We also have Daniel Abbasi, who leads MissionPoint's
regulatory and public policy research group. He is responsible
for originating and structuring energy and environmental
finance transactions. He was an appointee to the U.S.
Environmental Protection Agency. He served as senior adviser to
the Office of Policy. And he co-chaired the Strategy for U.S.
Environmental Technology Initiative and helped to produce our
first U.S. Climate Action Plan.
He is the author of a great book, which starts with the
quote ``We are faced with the first urgency of now.'' And that
even is coming up in presidential debates. So people are
listening to you. I hope you will tell us the name of your
book.
Dan Braun then joins us. He is the Director of Global
Environmental Finance of Stark Investments. And we appreciate
him clearing his calendar on short notice to join us. He is
currently co-managing an investment portfolio, which is
centered on the theme of global environmental finance and
climate change. We are looking forward to at least five minutes
of good thoughts.
Mr. Prend, if you could start.
Mr. Prend. Sure. Thank you, Mr. Chairman, members of the
Committee.
STATEMENT OF DAVID PREND, CO-FOUNDER AND MANAGING GENERAL
PARTNER, ROCKPORT CAPITAL PARTNERS, ON BEHALF OF THE NATIONAL
VENTURE CAPITAL ASSOCIATION, ACCOMPANIED BY DANIEL R. ABBASI,
DIRECTOR, MISSIONPOINT CAPITAL PARTNERS; AND DAN BRAUN,
DIRECTOR, GLOBAL ENVIRONMENTAL FINANCE
STATEMENT OF DAVID PREND
Mr. Prend. RockPort Capital Partners is a venture capital
firm based in Boston and Menlo Park. Our funds comprise one of
the largest pools of dedicated capital in the fast-growing
sector of venture capital called clean tech. We manage about
$400 million, and that amount is about to double.
As was said, I am pleased to be here also on behalf of the
National Venture Capital Association, which represents
approximately 480 venture capital firms in the United States
and is committed to advancing those public policies that are
conducive to entrepreneurship and innovation and U.S.
competitiveness.
Over our history, RockPort Capital has invested in about 40
companies spanning a wide range of innovations, including
renewable energy, such as solar and wind; next generation
transportation technologies, such as hybrid and fully electric
vehicles; smart grid technologies that enable more efficient
use of the existing electric generation capacity; clean air and
water technologies; and energy conservation and green building
technologies.
I would like to start by saying that I think the outlook
for continued growth and investment in the renewable energy
sector is excellent. And it is driven by a number of factors,
most important being the promise of exciting returns based on
the innovation in this space.
We are today in clean tech where the IT industry was about
35 years ago and where the biotech industry was about 20 years
ago. And we are dealing in a much larger total market than
either of those two markets.
The key issue today is what the federal government and, in
particular, Congress can do to help cultivate the environment
for this innovation. From what I know about the market demand
and the technologies and, most importantly, the road maps of a
number of these technologies, this is going to happen,
regardless of how intelligent the energy policy we have from
the United States.
So I think the challenge for the government is to come up
with intelligent policies that foster a good transition to
minimize the pain that this economy is going to face in this
transition from old energy to new energy.
These technologies make sense. Other countries are
aggressively pursuing them with policies that foster
innovation. And there are a number of examples where other
countries have taken the lead away from the United States
already due to more enlightened policies.
So that is what we are really dealing with here in our
humble view. It is not whether this is going to happen. It is
where the U.S. is going to stand when this is all done.
For the purposes of my oral testimony, I would like to just
focus on a few of the policies, suggestions that I have
provided in the written testimony. The first is the long-term
extension of the renewable energy investment tax credits and
production tax credits.
We applaud the House for passing a very robust energy tax
package. Ideally from the investment community, we would love
to see these extensions over a long period of time, but I think
we recognize the difficulty in longer-term credits from a
budget point of view. However, I am here to urge you strongly
to reach a compromise on the two bills and get a bill signed
into law without delay.
I can cite several examples from my own portfolio companies
where young, fragile companies that are doing good things for
the economy and creating jobs in this economy are having to
already--and, fortunately, small companies are good at being
nimble--having to turn on a dime and move from sales in the
United States to sales in places like Spain and Korea because
of the uncertainty about the ITC.
Another important area is the national renewable energy
standard, which I would recommend in the range of 20 percent,
combined with decoupling of utility revenues to disconnect the
utilities' incentive to get profits from increasing kilowatt
hour sales. What we would really like to see is energy
efficiency and not penalize the companies for this saving
energy.
Third, transportation I think is very important. Rather
than favoring just biofuels I think encouraging a results-
oriented approach, we, in particular, have four investments in
the areas of electric drive train and hybrid vehicles.
Even with the very meager subsidies that there are right
now for those technologies, those technologies make a lot of
sense from a marketplace, even without some intelligent
incentives. If nothing else, just the CAFE standards helps to
level the playing field among technologies, rather than
favoring one type of transportation technology over another.
Fourth, I would like to highlight R&D spending. I serve on
the Advisory Board of NREL, the National Renewable Energy Lab.
And, in fact, two of our most promising companies use
technologies that were not developed at NREL, but the expertise
that was resident at NREL was substantially helpful in actually
getting these technologies to the place where they are at
market. One of them is in the market today and doing very, very
well. The other one is about to launch an exciting new product
in the solar space that I think is going to revolutionize the
solar industry.
The Chairman earlier noted the tremendous impact that
venture has on job growth and the economy. And I think the
energy industry today is a new market opportunity, where
innovation has the opportunity to create even more jobs and
more exciting opportunities for people than these previous
examples of success in the venture capital community.
Every single clean tech company that we invest in today
holds a promise of bringing a much-needed innovation. When that
happens, there are many winners. Our investors are definitely
winners; entrepreneurs; and more importantly, the American
public, who will benefit from new jobs, new companies, and a
cleaner environment. For a venture capitalist, it is definitely
the intersection of the best of all worlds. We can do well by
doing good.
Thank you very much for the opportunity to testify. And I
look forward to answering your questions.
[The prepared statement of David Prend follows:]
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Mr. Inslee [presiding]. Thank you, Mr. Prend. And, just so
you know, everything you said the Chair totally agrees with
you. So that is bonus you will get. That is why you had
additional time.
Mr. Braun.
Mr. Braun. Thank you, Mr. Chairman and members of the
Committee.
STATEMENT OF DAN BRAUN
Mr. Braun. It is truly a great honor to be here today to
discuss federal policy measures that will enhance investment in
clean energy technology.
Before I begin my testimony, I would like to just take a
moment to acknowledge Ranking Member Sensenbrenner. As he
mentioned earlier in this conversation, he is my hometown
congressman. I want to thank him for service to the Wisconsin
5th.
Mr. Inslee. He did some great job for the country in India.
You should compliment him. We went there, met the Dalai Lama.
And he made some very eloquent comments about Tibetan religious
freedom.
Mr. Braun. Excellent. A little bit about Stark Investments.
We have got more than 20 years of experience. And over that
time, we have grown to become one of the largest alternative
investment firms in the industry, currently managing
approximately $14 billion.
In my role as portfolio manager, my job is to allocate
financial capital in alternative energy technology, among other
investments. My focus is to explore the financial implications
of living in a carbon-constrained world. Over the last several
years, the Stark team has allocated capital to alternative
energy investments in both public and private markets.
I would like to focus my testimony today on four major
issues. And I will get through this quickly so we can get to
questions. First is the connection between federal energy
legislation and capital market engagement. Second, I will be
addressing the need for an unencumbered price signal for
carbon. Third, I will deal with market uncertainty. And,
finally, I will touch upon some of the lessons learned from the
European Union emission trading scheme.
First, the recently signed energy bill and future
legislative efforts by this body to regulate greenhouse gas
emissions will directly affect capital market allocation. With
regard to potential CO2 emissions reduction program,
all eyes are on Washington. The Congress has been working
pragmatically to pass climate change legislation. It is also
significant that today President Bush just finished presenting
his ideas on dealing with these types of issues.
Institutional investors, like myself, are watching this
activity closely because we will only be able to engage if
there is a clear legislative mandate, a point that we discussed
earlier today. Second, if Congress is interested in the full
engagement of the capital markets, the most powerful action
this body can take is to set a hard physical limit, or cap, on
CO2 emissions and mandate a long-dated tax credit
and loan guaranty portfolio for clean energy solutions in
addition to cap and trade. It needs to be a combination of
short-term and long-term solutions.
The most important aspect of a capital market solution is
the idea of an unencumbered price signal. Cap and trade markets
with artificial price conditions, safety valves, off-ramp
conditions will ultimately distort the price signal for
greenhouse gas emissions and make it difficult for investors to
engage completely.
Using the basics of supply and demand, we know that a
market clearing price will lead to the best use of financial or
technological resources. Any artificial price condition
disrupts that very simple balance.
Third, I would like to address the issue of market
uncertainty. I have listened to policy-makers and stakeholders
talk about market-based solutions. And having encountered both
fact and fiction, one common theme is that volatility is a bad
thing. In fact, some degree of volatility is characteristic of
a properly functioning market. The price of a financial asset
or liability is very important information to institutional
investors.
We also heard from skeptics that there is free money to be
made by financial players investing in alternative energy under
a cap and trade system. I can only wish that was the case. On
the contrary, private sector investors will apply financial
resources to investments that will use a return as a function
of risk. In simple terms, new technologies are extremely risky
investments. We run a great risk of being wrong.
Finally, I would like to discuss lessons learned from the
first phase of the EU-ETS. The over-allocation of credits in
the learn while doing first phase of the program caused
financially trading credits to expire with negligible value.
To those that use that argument to say that cap and trade
does not work, I would suggest, to the contrary, the market
considers all available information to arrive at a price. It is
worth noting that the second phase of the EU-ETS has seen
relatively stable prices because there was not this issue of
over-allocation of credits.
In conclusion, a necessary element involved here is the
trust that capital markets will work. The commoditization of
carbon dioxide emissions is not without precedent. We now trade
greenhouse gas emissions that resulted from the 1990 amendments
to the Clean Air Act. If done correctly, investors will fully
engage in creating the solution set. The mandate of the capital
market is to assume the risk of developing and commercializing
nextgen alternative energy technologies so taxpayers don't have
to.
As we move beyond politics and money, we will see that this
is a partnership between capital markets and Washington that is
capable of achieving sustainability, energy security, and a
low-carbon global economy.
I respectfully submit my testimony to the public record,
look forward to answering questions, or providing further
comment. Thank you, Mr. Chairman.
[The prepared statement of Dan Braun follows:]
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[GRAPHIC] [TIFF OMITTED] 61638A.013
Mr. Inslee. Thank you, Mr. Braun.
Mr. Abbasi.
STATEMENT OF DANIEL ABBASI
Mr. Abbasi. Good afternoon, Mr. Chairman and members of the
Committee. My name is Dan Abbasi. And I am a Senior Director
with MissionPoint Capital Partners, which is an investment firm
in Norwalk, Connecticut that is exclusively focused on
financing the transition to a low-carbon economy.
The Committee requested our perspective as clean energy
investors on the outlook for the renewable energy industry and
what policies, including what carbon regime, would best promote
deployment and innovation.
So I appreciate the opportunity to summarize my testimony
to the Select Committee at this important moment in national
policy-making on these issues and would ask that my written
testimony be submitted for the record.
Mr. Inslee. So ordered.
[The prepared statement of Daniel Abbasi follows:]
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Mr. Abbasi. MissionPoint Capital was founded and is chaired
by Mark Schwartz, former Chairman of Goldman Sachs (Asia) and
CEO of Soros Fund Management. Our team has deep energy and
environment domain expertise based on senior roles in finance,
technology, policy, and operations at such firms as General
Electric, ABB, SwissRe, United States Environmental Protection
Agency, Key Span, and FMC.
Our carbon-centered investment thesis is really grounded in
two convictions: first, that unabated climate change is the
greatest foreseeable risk facing humanity today; and, second,
that mitigating it constitutes one of the greatest investment
and job creation opportunities in history.
Evidence indicates that climate change is accelerating,
even to the point of routinely astonishing field scientists.
And MissionPoint aims to respond by accelerating in turn the
formation and deployment of capital to reduce emissions in the
window that remains open to us to avoid the most severe impacts
of climate change.
At MissionPoint we are investing hundreds of millions of
dollars in private companies that can generate clean energy and
carbon emissions and taking an active role in building those
companies. Examples include solar development and technology
companies, including one called SunEdison; a wind operations
and maintenance services company called UpWind; a specialty
finances company called Hannon Armstrong, which is overcoming
financing obstacles to energy enhancements, including in the
federal government; a carbon offset development and finance
company called Greenhouse Gas Services, which we have launched
with General Electric and AES; a carbon trading infrastructure
company, a company called Advanced Aerofoil Technologies, which
manufactures advanced turbine components to increase efficiency
at natural gas plants and also offers software that optimizes
operation of gas and coal plants reducing fuel use as well as
emissions.
So we believe that mitigating carbon is primarily a
commercialization and adoption problem, not an innovation
problem, meaning that the technologies in many cases are
already in existence and simply need to be pulled through into
widespread usage. This belief leads us to focus less on new
venture investing that we do venture investing when we find
exceptionally transformative opportunities and innovations but
really more on growth stage companies.
So fundamentally we believe that the energy sector is in
the midst of a profound transformation. The two primary
criteria we used to demand of our energy were that it be cheap
and reliable. And now today we have added, really, two more,
which are secure and clean.
So optimizing that four-dimensional equation really does
change things. It requires us to bring new levels of
entrepreneurship to the energy sector than it has really ever
seen before.
Renewable energy is thriving with 20 to 40 percent year
over year compound growth rates because it answers well to the
two new criteria, secure and clean, and is getting much more
competitive on the first two: cheap and reliable. It is
becoming more affordable as it scales.
The declining cost curves are a robust trend. We are seeing
potential for grid parity, for solar, unsubsidized solar, as
soon as 2015. Renewables are also achieving high reliability
with added experience and operating hours.
So key point number one from us is really that our outlook
for growth investment in job creation in the strategic industry
is bullish based on direct hands-on experience with our
portfolio companies as well as on high industry growth rates
and on the strategic value of the industry on the dimensions I
have mentioned.
I would expect that the job creation potential here would
be particularly welcome given the economic conditions in our
country today and would just add there that the renewable
industry is particularly job-intensive. For example, one
megawatt of solar produces according to some studies on the
order of seven to ten times the number of person-hours of
employment as one megawatt of conventional power.
Key point number two--and here I am underscoring what the
prior panelists have said--is that our ability to continue to
invest in realizing this bullish forecast and accelerating the
growth of this industry really does depend on a comprehensive
and stable set of supportive policies, including a long-term
extension of the investment and production tax credits that
remain in limbo today and, at long last, putting a price on
carbon as a rule of the road, which we believe will just be
enormously catalytic.
So first on the investment tax credit and the production
tax credit, the boom-bust cycle of expiration of these credits
has historically driven a clear drop-off in renewable power
installations. Those of us in the industry spend time
estimating, underwriting, and trying to share the extension
risk around these credits, pondering the imponderables of
whether and when Congress may act.
And the compromised one-year extension cycles really don't
give enough time to get a wind project placed into service, let
alone something like a geothermal project. So we can't
underwrite business plans in these situations.
Once it is operating, the ten-year horizon of the
production credit is not always sufficient to provide the
needed return on these capital-intensive projects. So, really,
Congress does need to send a stronger, more stable, and long-
term signal to the investment community. The durations really
should be matched to the long project life cycles as well as
the long project cash flow durations.
So it is pretty straightforward. Uncertainty in the
financial world translates to higher costs of capital, which
translates to project is delayed or canceled. And by one
estimation, the current expiration risk is putting at risk
42,000 megawatts of new construction.
One of our portfolio companies, SunEdison, is an example of
a company whose innovative deployment model for solar power has
counted on the ITC in these early years but that is rapidly
scaling the industry down its cost curve by deploying solar
systems on Wal-Marts, Kohls, other big box retailers and other
commercial entities.
So we hope you can navigate the pay-go face-off between the
oil and gas and renewable industries and get this done soon.
The face-off is somewhat ironic to us because it really
underscores that both industries are, in fact, subsidized.
And also the way that we think about the climate change
narrative is that it is really not between these industries. In
fact, we believe we are going to have to continue to invest in
the fossil fuel sector but do so in a way that aggressively
manages the carbon liability in the decades ahead that they
will be with us.
The low-carbon playing field, both the policy and
investing, is much bigger than renewables. The way to stimulate
this is to make sure that the stable policy framework is built
on a foundation of carbon pricing. We believe this should be
through a cap and trade system.
Putting a price on carbon will reward investments in
companies like Advanced Aerofoil Technologies, which reduce
emissions to fossil fuel power plants. And, you know, we would
acknowledge that these kinds of investments are not as iconic
or photogenic as the large and centralized carbon flows that we
see in these large fossil fuel assets and reducing them, but it
is very important that we address them.
Mr. Inslee. Mr. Abbasi.
Mr. Abbasi. Yes?
Mr. Inslee. I want to make sure we get to some questions.
Mr. Abbasi. Yes.
Mr. Inslee. So maybe you could wrap up.
Mr. Abbasi. Yes, I will wrap up.
So, in conclusion, we also believe that the carbon capture
and storage industry is strategic in this, but it is,
relatively speaking, a pure play investment and does require a
price on carbon. And we would encourage you to do that.
The U.S. is right now the runaway leader in moving and
compressing and injecting carbon dioxide. It is a critical
technology. And we would like to see the price on carbon
facilitate that.
Concluding, just our quick design points are we would
prefer cap and trade over carbon tax. We would prefer a
stringent emissions target with a prompt start by 2010, a
periodic reassessment provision that is based on objective
indicators and an upstream point of regulation. We also have
some contributions, some ideas about the carbon border levy and
will look to discussing those in the questions.
Thank you very much.
Mr. Inslee. Thank you. And Mr. Abbasi has some other great
ideas in his book, Americans and Climate Change, that he has
authored, which is on the Chair's nightstand. So I appreciate
that.
Mr. Abbasi. Thank you.
Mr. Inslee. I would like to start with Mr. Blumenauer. I
had a chance to question you this morning. Mr. Blumenauer,
would you like to start?
Mr. Blumenauer. Thank you, Mr. Chairman. And I appreciate
that our witnesses have more information here than they have a
chance to do. And I appreciate your courtesy because I am in a
markup in Ways and Means across the way.
I guess I am concerned about putting three things on the
table and because there won't be time, really, to elaborate on
them now. It is something that I would like to follow through
with you folks on.
One, I haven't heard you mention the opportunities to
adjust how we regulate electricity and other utility rates. As
you know, some utilities around the world are looking at having
part of the rate of return contingent on carbon performance and
other indicators. I have got a hometown utility that pioneered
decoupling so that the gas utility wasn't penalized for
conservation.
But I am interested if you could help us with thoughts,
ideas about how we might use innovative regulatory schemes to
incent utilities, to allocate costs in the right way, and that
it might provide an incentive for the adoption of new forward-
thinking and advanced energy technologies that we embed that in
the rate regulatory system so it happens automatically and they
are awarded more appropriately allocated costs. And it is a
conversation I would pursue with any of you individually.
The second concern I have--and Mr. Abbasi referenced it--in
the Ways and Means Committee, we have tried to shift subsidies
from a mature oil industry that has proven that they can make
lots of money selling the world's most profitable commodity,
expensive commodity, to shift it in other areas, the extent to
which we could have your help fine-tuning ways that other
subsidies might be reallocated so that the tax code is more
even-handed.
The third area that we would be keenly interested in
thoughts and observations is how the federal government could
lead by example. I appreciate what you say in terms of being
thoughtful about the regulatory scheme. You know, we are trying
to embed the production tax credit in the next stimulus package
because we are going to lose jobs if we don't do that.
But the federal government as the largest landlord,
landowner, and employer, and consumer of energy has an
opportunity to practice the best practices by our own, the
products that we buy, the standards that we set, and would be
keenly interested in your thoughts and observations about how
we might be able to use the vast power of the federal
government itself, the Department of Defense General Services
Administration, to achieve that.
I have got a couple of more minutes here that I would turn
over to you folks for any thoughts or observations on it. But
my staff and I would love to follow up with you in greater
detail on those three points as you see fit if somebody wants
to jump in.
Mr. Prend. Sure. I will take the first one: regulating
electricity. I think that that is a very good point. I applaud
the utility in your home district. Decoupling is definitely
something that I think gets at one of the big problems in
energy industry right now, which is that there is this huge
amount of invested infrastructure that any new technology and
new business has to get over before it can thrive. And I would
point out that a lot of that infrastructure was originally
funded by a lot of government incentives.
I think there are a number of ways to go about that. I
think the trick, as you pointed out, is coming up with another
way to make it profitable for the utilities to save energy, not
just manufacture more energy.
And one of the things that one of our portfolio companies
has done, a company called Converge that went public last year,
was to look at the existing regulatory framework and say, ``How
can we outsource'' what they call negawatts, which is saving
power in times when there is a peak demand? And the regulatory
bodies were able to incorporate that kind of a thing into the
framework.
Investment is another question. And I think there does need
to be some sort of regulatory framework that allows investments
to be recouped on some sort of reasonable rate of return for
energy-saving projects that might be invested in by the
utilities.
I think from our perspective, the challenge is the public
utility commissions of each state are very protective of their
turf. And it seems to us that it has been hard for the federal
government to get into that arena. To the extent that the
federal government can get into that arena, I think it would be
a real positive because this patchwork that we have with
different states with different investment incentives does make
it harder for a small company that doesn't have the resources
of an Exxon or a Duke Power to be able to figure out that whole
landscape.
Mr. Blumenauer. Thank you. Thank you for that courtesy.
Mr. Abbasi, did you have comments?
Mr. Abbasi. Two quick examples, and then I will defer to
Dan. One is the energy-saving performance contracts. This is an
existing contractual vehicle that has been in existence since
1978, I believe. One of our portfolio companies, Hannon
Armstrong, has been a leader in securitizing the cash flows
from those.
We have not understood why, but this year the Defense
Department has really not been using that authority to the
extent that they have in the past. It is looking like somewhere
in the neighborhood of 20 percent of the prior usage.
And this comes at a time when the actual energy efficiency
standards have been strengthened through EPAct 2005 and the
January 2007 executive order issued by the president looking
for 3 percent year over year reductions in energy intensity,
reaching 30 percent by 2015.
So there is an existing vehicle. And what these contracts
do is they allow the government to not appropriate the up-front
funding for the energy efficiency investment and then to reap
that, the benefit of those. So it is an energy saving share
that is facilitated through this third party finance. To date
it has been quite successful over the years, 400 projects, 5.2
billion in savings, somewhat smaller on the net basis but a
very substantial savings.
So we are somewhat perplexed by why that isn't being used
to its fullest extent. And I guess we would encourage you to
the extent there are formal or informal things you could do to
prompt them to use that and would be happy to work with you to
facilitate that.
A second very quick one is I understand the Defense
Department has requested that contracting authority for power
purchase agreements be extended from the current limit, which
is 10 years, up to 20 years, which is much more in line with
what a typical renewable power developer needs to have in order
to finance their project.
So this is what municipalities are doing. This is what
private sector buyers are doing, utilities, and so forth. It
would be great to have the federal government, as you said, the
largest user of energy, to also have that authority.
Mr. Inslee. Great.
Mr. Braun. And, Congressman, I would like to take the
opportunity to respond completely to all three of those points.
I realize that you are on your way to a markup meeting,
committee meeting. So I will take the next week or two and get
back to you with those responses.
I would like to touch on the third point that you
mentioned. This whole idea of how can the federal government
lead by example. The House of Representatives is a member of
the Chicago Climate Exchange. It is essentially to lower the
carbon.
Mr. Blumenauer. Right.
Mr. Braun. I think that is, frankly, admirable in terms of
leadership on this issue. This morning we were talking about
what the glide path might look like for cap and trade
legislation. Well, this is a very long-dated proposition. The
whole idea is, what can we do in the interim period, in
essence, to get some momentum behind this? And I think that was
an extraordinary measure taken by Speaker Pelosi in the House
of Representatives in the Capitol.
Mr. Blumenauer. It got a lot of flack for it, but yes, I
agree.
Mr. Braun. That is true.
Mr. Blumenauer. I agree.
Mr. Braun. That will only happen when something new is
done.
Mr. Blumenauer. No, no, no, no. I think it is terrific.
That is great.
Mr. Braun. But I think you can keep doing that type of
thing. You are basically sending a very powerful message to
every part of the economy that, look, this is coming. And we
have got to start to deal with it.
Mr. Blumenauer. Well, I appreciate your courtesy and look
forward to following up with each of you in detail on that
because these are things that are extraordinarily of interest
to me and I am convinced that in each of these areas, we can do
things that don't cost and literally don't have a budget impact
but that can send the signals that you are talking about. And I
really appreciate your examples. It is very, very helpful to
us.
Thank you, Mr.----
Mr. Inslee. Thank you.
And, Mr. Abbasi, with your permission, we will look into
this with the Pentagon to see if we are missing the boat here
recently on that. So if we can work with you in this regard?
Mr. Abbasi. Sure.
Mr. Inslee. We have a vote shortly. So I am going to ask
just a couple of quick questions. First, in as brief form as
you can, why are tax incentives not enough? Why do we need a
cap and trade or renewable electricals standard or decoupling?
Why isn't just handing out some tax credits enough?
Mr. Braun. I will handle that one first, Mr. Chairman. In
my opinion, an unencumbered price signal in a cap and trade is
a very pure price signal. A properly functioning capital market
for any commodity will deliver the lowest possible cost of
abatement.
The difficulty with a tax credit or a tax, carbon tax, is
that it is an artificial price condition. I have mentioned in
testimony that was submitted that when an artificial price
condition is introduced into a market, you begin to move away
from what can be thought of as optimal allocation of resources
towards a solution.
Now, I don't know if the price of carbon in the United
States is a dollar, $10, $100, but the only way to find out
really where the market-clearing price is is to use a cap and
trade system.
Mr. Inslee. Mr. Abbasi.
Mr. Abbasi. The point earlier about the need for us to
reach beyond just the renewable sector, really, there are
tremendous opportunities on supply-side efficiency. As I said,
in the fossil fuel sector, that is where most of the carbon is
flowing today and where the reduction opportunities are also
very significant as well as on the demand side, just tremendous
opportunities.
What we really need is a broad pricing signal to motivate
and discipline really all market participants. And by that I
mean investors, entrepreneurs, large corporations, even
consumers to respond. If you unleash the market, we know that
it is not predictable, but we do know that we will unleash
tremendous entrepreneurship in finding every last emission
reduction opportunity at the lowest cost possible. That is what
the market is good at. So what it needs is just that rule of
the road.
We really think of that as the foundation. And then these
more targeted investment tax credits and so forth for specific
sectors, like the renewable sector, are very, very important
given the stage in those technologies development. But this
over-arching platform of a carbon signal will pervade the
economy and produce tremendous opportunities.
Mr. Inslee. And I was talking to some folks in the
electrical industry the other day. And they were expressing
fear of speculation and speculators in a carbon market. And
that might be perhaps exacerbated by the run-up in gas prices
we have experienced.
Some of our concerns--and, actually, there has been some
volatility in those markets because of some questionable
trading going on or at least non-transparency in the markets.
What should we do to allay or answer those fears? And are
there things to do in this market to prevent, to make sure
there is transparency and no gamesmanship that we experienced
in Enron in this regard?
Mr. Prend. I will start with that one, Mr. Congressman. I
would----
Mr. Inslee. We have got about 60 seconds. I have got to run
and vote.
Mr. Prend. Okay. So ITC I think is the most important thing
from a small company investment point of view. I would not even
put cap and trade as the second. I think cap and trade is an
important part of an overall approach, but from a small
company's point of view, as opposed to maybe a slightly
different view from these gentleman, I think it is something
that is a part of an overall policy but is not the most
important thing.
I think the ITC is, by far, the most important because that
is something we have today. And to take it away is like
imposing a huge new tax increase on these small nascent
industries.
Mr. Inslee. Well, as we discussed, we are going to try to
get that done as quickly as possible. We have a lot of other
questions, look forward to working with you. Thanks for your
testimony. It is very valuable. We are going to share with
others. This is the can-do folks. You are the can-do people.
And we appreciate you joining us. Thanks very much.
With that, we are adjourned.
[Whereupon, at 4:16 p.m., the Committee was adjourned.]
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