Finance and Funding Strategies

The Challenges

There are several well-documented problems facing the clean energy space that prevent full-scale commercialization of existing and promising new technologies.

• Energy is a commodity- consumers cannot distinguish between a “clean” or “dirty” electron when they turn on a lamp.
• Conventional technologies, and the grid that supports them, have evolved with public support for more than a century- through publicly regulated monopolies.
• Climate mitigation and pollution control are public goods- private companies cannot reap all the rewards of investing in new technologies.

For these reasons, existing clean energy technologies are more expensive than conventional power. New clean energy technologies face an even more daunting challenge.

Commercialization Valley of Death

A huge amount of capital is needed to build risky, first-of-a-kind clean energy projects- the so called "Valley of Death." The private sector through conventional financing is often unwilling to take on this first mover risk, leaving promising technologies stalled.

Venture capital hasn’t filled the gap. Early-stage venture investors typically do not fund technology companies for the long term. And they do not invest the large dollar commitments that are required to move a highly capital-intensive technology to commercial-scale production. Energy projects require much more capital than technology sectors like software or broadband.

The result is, while large volumes of capital have been mobilized in support of expanded clean energy deployment, investment has gone predominantly to fully-commercialized and proven technologies. Public sector funds or policies are needed to bridge the Valley of Death and mitigate emerging technology risk.

CEG's Solutions

At Clean Energy Group we have been developing solutions to clean energy funding and finance challenges for more than a decade. 

To build markets for existing and new clean energy technologies, we analyze and help to create innovative public financing mechanisms through our management of the Clean Energy States Alliance and the UNEP Sustainable Energy Finance Alliance- coalitions of dedicated public funds. Our work with these funds has included analysis and design of revolving loans, renewable portfolios standards, production credits, public guarantees, and public venture capital among others.

Our recent work in finance has focused on new mechanisms to bridge the Valley of Death and rapidly commercialize cutting edge clean energy technologies. 

• Efficacy Insurance is an interesting tool that could protect against a technology that does not perform as its developer had projected. Efficacy insurance has been used to insure untested technologies in the past, like locomotive steam engines in the 1850s, and nuclear power projects more recently. The policy pays out to bring an underperforming piece of equipment up to its original specification, or pays for it to be upgraded or replaced.  The private insurance industry could offer an efficacy insurance product backstopped by government reinsurance.
• Emerging Technology Reverse Auction Mechanism (ET-RAM). Technology risk mitigation is only part of the solution. A guaranteed demand is also needed to bring new clean energy technologies into the market. ET-RAM is a possible solution CEG has proposed that would require utilities to procure a certain amount of power from emerging technologies. The project developer would bid in to the utility the lowest price that would be needed to get the product to the marketplace; the state would mandate that the utility procure power at that negotiated price. The state need not set the price; the developers and utility would negotiate the rate. This would then set reasonable and stable long-term power purchase prices, as well as additional strategies to encourage capital formation behind emerging technologies. No such system is in place today in the U.S.

The Role of Utilities

State-regulated utilities typically finance existing and new power generation plants in the United States. They are the greatest source of investment capital for new clean energy technologies. Their capital investment numbers are staggering. From 2000 to 2008, total capital expenditures by investor- owned utilities totaled about $475 billion and in 2008 revenues from these utilities were about $298 billion.

This is investment directed not by customer preferences but by state governments in the form of utility commissions. Many state-level utility focused solutions have been put in place including renewable portfolio standards, on-balance financing, and feed-in tariffs. However, these policies pull mostly conventional, commercially-financeable technologies into the marketplace – such as wind and solar PV.  We need a new model for utility- scale planning and procurement for the next generation of clean energy technologies such as energy storage, advanced solar, offshore wind as well as and marine and tidal energy.