e2 carbon trust - cleantech innovation draft 6-30 cleantech... · 2015-01-29 · 5 the role of the...

32
1 Accelerating Cleantech Innovation and Emissions Reductions Through the California Carbon Trust DRAFT Principal Author: Jamie Hall Goldman School of Public Policy University of California, Berkeley Contributing Author: Bob Epstein, Environmental Entrepreneurs

Upload: others

Post on 10-Mar-2020

2 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

1

Accelerating Cleantech Innovation and Emissions Reductions Through the California Carbon Trust

DRAFT

Principal Author: Jamie Hall

Goldman School of Public Policy University of California, Berkeley

Contributing Author:

Bob Epstein, Environmental Entrepreneurs

Page 2: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

2

The authors would like to thank the following people for the information and guidance they provided in the development of this report. While the authors made an attempt to take into account all relevant opinions and viewpoints, the judgments and conclusions in this report are not necessarily endorsed by all contributors.

Dan Adler (CalCEF) Andrew Altevogt (CalEPA) Adrienne Alvord (Amyris Biotechnologies) Ricardo Bayon (EKO Asset Management Partners) Will Coleman (Mohr Davidow Ventures) John Cheney (MMA Renewable Ventures) Jeff Cohen (California Air Resources Board) Craig Cornelius (Hudson Clean Energy Partners) Greg Curhan (Merriman Curhan Ford) Diane Doucette (E2) Bob Epstein (E2, New Resource Bank) Dirk Forrister (Natsource) TJ Glauthier (TJG Energy Associates) Robert Grady (Carlyle Group) Tom Jacoby (Tymphany) Pramod Kulkarni (California Energy Commission) Josh Margolis (CantorCO2e) Jan McFarland (California State Treasurer’s Office) Tim Newell (Broadview Investments) Ken Newcombe (Goldman Sachs) Ellen Pao (Kleiner Perkins Caulfield & Byers) Michael Paparian (California State Treasurer’s Office) Jim Peacock (Carbon Trust – UK) Jill Sideman (CH2M Hill) Dag Syrrist (Vision Capital) Daniel Tobin (U.S. DOE Loan Guarantee Program) Jennifer Urdan (Cambridge Associates) Gary Vollen (Stanford Group) David Vincent (Carbon Trust – UK)

Page 3: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

3

Table of Contents

Executive Summary……………………………………………………………………... 4

I. Introduction……………………………………………………………………………… 7

II. Market Failures, Barriers, and Gaps in the Cleantech Innovation Process…………. 11

Laboratory Stage Research and Development………………………………………... 11

Early Stage Development and Technology Demonstration………………………….. 13

Late Stage Commercialization, Demonstration and Deployment…………………… 14

Summary of Key Problem Areas and Benefits of Intervention……………………….. 17

III. Policy Goals and Criteria for Program Design………………………………………... 18

IV. Public Financing Options……………………………………………………………… 19

Financing Recommendations………………………………………………………….. 22

V. Structural Considerations………………………………………………………………. 23

Structural Recommendations………………………………………………………….. 27

Appendix A…………………………………………………………………………………… 28

Endnotes……………………………………………………………………………………… 31

Page 4: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

4

Executive Summary Achieving the ambitious climate policy goals set out by California’s AB 32 will require significantly greater investment in research, development, and demonstration (RD&D), as well as accelerated deployment of new and existing low carbon technologies (cleantech). California cannot assume that the market alone will provide the large scale technological innovation needed to meet these targets. The innovation process is complicated by market failures, barriers, and gaps that require public sector intervention. This report draws from the input of numerous cleantech investors, entrepreneurs and policymakers to provide insight on the barriers to cleantech development and deployment, and the role that public financing can play in overcoming those barriers. The Problem Technology RD&D generates significant economic and environmental benefits that are not captured by cleantech entrepreneurs and investors. As a result, the private sector under-invests in innovation because the financial returns do not justify the risk and investment. Near-term planning horizons and short run earnings emphases further restrict costly, long term investments in RD&D. The problems are more severe at certain stages of technology development and are compounded in some cases by additional barriers to cleantech investment. Investors and policymakers have identified four key problem areas in the innovation process:

• Funding for basic research and development: Basic research and development (R&D) is extremely risky and characterized by long payback periods and limited returns for investors. As a result, private sector investment in cleantech R&D has fallen in recent years. Experts have calculated that a 5-10 fold increase in energy R&D spending from 2005 levels is needed to stabilize CO2 at double the pre-industrial levels.

• Early stage equity financing for certain project types: Although venture capital investment in cleantech is on the rise, the average deal size is increasing and venture investors are focusing on later stages of development and commercialization. As a result, it is difficult for some small, early stage technologies to attract capital. Energy efficiency, demand response, and novel technologies without a clear financial and regulatory path to market face the greatest barriers at this stage.

• Financing and customer acceptance for unproven technologies: New, unproven technologies create unique problems for both cleantech companies and potential customers. “First mover” penalties, including novel risks, uncertainties, and high costs, make it difficult for cleantech companies to secure financing for new technologies. These same risks and uncertainties can hinder early customer acceptance, as customers are hesitant to adopt a new technology until it has been demonstrated in a commercial setting.

• Late stage financing for large scale, first-of-a-kind projects: First mover penalties also create financing hurdles for large scale electricity generation and production projects. These projects are generally too big for venture investors, who might be willing to take on the risk, and are too risky for commercial lenders and private equity investors. This scale issue, somewhat unique to the cleantech field, leaves many companies stranded and unable to construct their first commercial scale facility.

Page 5: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

5

The Role of the California Carbon Trust The public sector has an important role to play in addressing the barriers to cleantech development and deployment. These problems call for a balanced portfolio of policies. A strong and declining cap coupled with policy tools such as performance standards, state purchasing, and tax credits, are needed to create demand for cleaner technologies. These policies alone are not enough to fill financing gaps, however, as there will still be market failures that lead to underinvestment in basic R&D, early stage technologies, and commercial technology demonstrations. Innovative public financing is needed to fill these gaps. The Economic and Technology Advancement Advisory Committee, formed as part of AB 32, recently released a report calling for the formation of a California Carbon Trust to address these and other issues. The Trust would be funded by revenues generated from an auction of some portion of the emissions allowances under a state emissions cap. A well-designed California Carbon Trust could use these auction revenues to:

• Accelerate the development and commercialization of new technologies • Encourage the flow of private capital into valuable but neglected areas of cleantech • Fund university R&D that leads to technological advances, jobs and economic growth • Attract business to California by creating favorable conditions for cleantech investment • Act as an intermediary between the private sector and state regulatory agencies

The primary purpose of the Trust would be to improve access to capital throughout the innovation process via a number of different public financing mechanisms. The need for public intervention will vary with changes in credit markets, energy prices, and other important markets. It is therefore important that the Trust be nimble, flexible, and attuned to developing trends. The Trust could also play a valuable policy and informational role by continuously identifying market gaps and acting as a bridge between policymakers and investors. A Flexible Approach to Public Financing A Trust designed to address financing barriers in the cleantech field will have to be flexible, as the most effective public sector interventions will vary significantly by project. For basic R&D, the Trust should provide research grants to California universities through a competitive peer review process. This is a traditional role for government and the investment in in-state research will generate substantial environmental and economic benefits. Grants and publicly funded equity investments are needed to address the early stage gap and bring valuable but overlooked technologies to market. Capital demands at this stage are still relatively modest, and the Trust could generate substantial public benefits through smart investments. Another advantage of focusing on early stage investments is the ability to target specific technology areas that are particularly important from a policy standpoint, but having trouble attracting capital from investors with short time horizons and pure profit motivations. Technology demonstrations and first project finance call for different solutions. While there is some disagreement as to whether or not the government should be involved at this late stage, these first-of-a-kind projects entail substantial public benefits that do not factor into investment decisions. These benefits include accelerated emissions reductions, movement up the learning curve, and proof of commercial feasibility (which mitigates financing issues for subsequent projects). The Trust could play a valuable role in bringing new technologies to market by funding commercial demonstration

Page 6: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

6

projects. It could also encourage the adoption of new technologies by mitigating the risks for customers through warranties or other insurance mechanisms. For large scale project finance, the Trust could invest directly in projects alongside private sector partners, or it could provide loan guarantees or other insurance mechanisms. A Declining Fund Managed by a Small, Independent Entity Although the Trust may earn a return on some of its investments, it should be designed as a declining fund that is not required to earn a specified return on investment. This will allow the Trust to focus exclusively on achieving AB 32 policy goals by bringing high risk, high value technologies to market. The fund should be managed by an independent, nonprofit entity, rather than a new or existing state agency. This independence should insulate the Trust from political considerations and allow it to operate more quickly and efficiently. It will also make the Trust a more effective bridge between the private sector and state regulatory agencies. Accountability can be maintained through transparent, pre-set project selection processes and public sector oversight. The Trust should have a small permanent staff of policy and technology experts, and should leverage outside investment expertise as needed. This structure should minimize overhead costs and take advantage of the unique skills and experiences of stakeholders in academia and in the private sector. A Valuable Piece of the Climate Policy Puzzle California will need a balanced portfolio of policies to achieve the ambitious climate policy goals set out by AB 32. Many of these policies will aim to increase investment in low carbon technologies by increasing demand and reducing costs. It is very important to consider the Trust alongside these new and existing complementary policies. The Trust must be designed such that it does not dissuade private investment or otherwise conflict with the long term goals of related climate and technology policies. If these issues are properly addressed and the Trust is well-designed, it could play an important role in addressing important market failures and accelerating emissions reductions.

Page 7: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

7

I. INTRODUCTION AND POLICY CONTEXT AB 32, the California Global Warming Solutions Act of 2006, requires the state to reduce total greenhouse gas (GHG) emissions to 25% below business as usual levels by 2020. Governor Schwarzenegger’s 2005 Executive order calls for even sharper GHG emissions reductions, setting a target of an 80% reduction by 2050. While reductions are needed across all sectors of the economy, the majority of the state’s emissions come from technology-driven sectors: transportation, electric power, and industry (see Figure 1). Increasing and accelerating the development and deployment of low carbon technologies is vitally important for reducing emissions in these sectors and reaching the state’s targets. Investment in technology research, development, and demonstration (RD&D) also has the potential to generate significant economic benefits for the state in the form of improved efficiency, reduced pollution, and green-collar job creation. However, California cannot assume that the market alone will provide the technological innovation needed to meet AB 32’s goals within the specified timeframes. Though cleantech investment is on the rise, the innovation process is complicated by market failures, barriers, and gaps that impede the development and deployment of new technologies. The Problem: Market Failures and Other Barriers Complicate AB 32 Implementation Technological innovation generates “spillover” economic and environmental benefits that greatly exceed the financial returns captured by cleantech entrepreneurs and investors. While these public benefits are desirable, the inability for firms to capture innovation profits leads to underinvestment in RD&D from a public policy perspective. Additional barriers to cleantech investment exist at many stages of the process. The large scale and long lead time of many generation projects makes them unattractive relative to investments in other industries with smaller time horizons and capital demands. For cleantech efficiency improvements that need to be integrated into existing processes, locating willing customers and mitigating the risks to their business can be very difficult. Finally, the transaction costs for small scale projects and those that require integration can be significant relative to the project size and can deter investment as a result. The public sector has an important role to play in addressing these problems and accelerating the development and deployment of low carbon technologies. While complementary policies can create demand, a new mechanism is needed to fill financing gaps and bring new technologies to market. The Economic and Technology Advancement Advisory Committee (ETAAC) created by AB 32 recently released a report calling for the formation of a California Carbon Trust to address this and other issues. The Trust would be funded by revenues from an auction of emissions allowances under a state emissions cap.

Source: California Economic and Technology Advancement Advisory Committee Report

Figure 1: Carbon Emissions by Sector

Page 8: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

8

Allowance Auction Revenues Provide an Opportunity to Further AB 32 Policy Goals The auction of GHG emissions allowances would generate significant revenues for California. Even under conservative assumptions, total auction revenues should exceed $500 million in the first year (see Table 1). This number can be expected to grow in subsequent years with rising allowance prices and a projected increase in the percentage of allowances sold at auction. These revenues could provide the state with an enormous opportunity for accelerating emissions reductions and achieving the state’s related climate policy objectives. If and when an emissions cap is implemented at the federal level, California’s yearly auction revenues will be severely reduced or eliminated completely as auction revenues will flow to the federal government rather than to the state. However, the Warner-Lieberman bill contains a provision allowing states to keep a percentage of this revenue stream. Long term predictions are therefore hard to make, but auction revenues will be significant, particularly in the absence of a federal system. There will be many competing uses for these revenues. ETAAC suggests using auction revenues for investment in emissions reductions projects, support for cleantech RD&D, and targeted investment in projects with Environmental Justice co-benefits. The auction revenues should be used to generate the greatest possible AB 32 benefits, and will therefore most likely be split among many different programs and activities. ETAAC also suggests that, if auction revenues exceed the level where they can be efficiently applied to abate carbon and other GHG emissions, these revenues can be used to reduce distorting taxation or payments to ratepayers.1 Some portion of the auction revenues could be used to accelerate cleantech innovation through the California Carbon Trust. The public sector should not intervene where markets are providing sufficient investment from a policy perspective, but public investment can make a difference where market failures are slowing or impeding the development and deployment of low carbon technologies. Note that accelerating cleantech innovation is one of many possible uses for auction revenues, and the yearly funding for the Trust would therefore be substantially less than the total yearly auction revenue numbers in Table 1. A well-designed California Carbon Trust could accelerate the development and commercialization of new technologies and encourage the flow of private capital into valuable but neglected areas of cleantech. Innovative public financing would drive employment and economic growth, and attract business to California by creating favorable conditions for cleantech investment. The Trust would also play a valuable role as an intermediary between the private sector and state regulatory agencies. As a part of this role, the Trust could continually work with investors and policymakers to identify and address changing market gaps and barriers. The primary function of the Trust would be to improve access to capital throughout the innovation process. In the early stages of R&D, where government has traditionally played an important role, the Trust could act as a source of funding for California universities and research centers. In the later stages, where the role of government has been smaller and more controversial, the Trust could

Table 1: Expected Allowance Auction Revenues in Year 1* Percentage of Allowances Auctioned

Price per ton 20% 35% 50% $10 $576 mil $1,008 mil $1,440 mil

$17.50 $1,008 mil $1,764 mil $2,520 mil$25 $1,440 mil $2,520 mil $3,600 mil

* Assumes baseline emissions of 480MMT, with 60% under the cap

Page 9: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

9

accelerate the deployment of low carbon technologies by providing added incentives for the market to invest in new technologies sooner than it otherwise would. These projects are not poor investments in the long term, but are ignored by private investors in favor of investments in proven technologies and projects with more favorable short term risk-reward profiles. In some cases, the Trust could fill financing gaps by accepting lower returns, longer payback periods, higher risks, and higher transactions costs than other investors will agree to. In other cases, the Trust could provide warranties or other insurance mechanisms to mitigate customer and lender concerns about technology risk in first-of-a-kind projects. This should speed the commercialization of valuable technologies and increase the flow of private capital into neglected areas of cleantech. Complementary Policies The goals set out by AB 32 require a balanced portfolio of policies. Encouraging and accelerating technological innovation requires both “demand-pull” policies, which increase the payoff of innovation and “technology-push” policies, which reduce the cost of innovation. On the demand side, a declining emissions cap, performance standards, tax incentives, renewable portfolio standards, and government purchasing can encourage private investment by creating demand for low carbon technologies. On the supply side, government R&D funding, tax credits, and demonstration projects can help speed the development and deployment of technologies. Long term clarity and consistency with regard to regulations and incentives is very important, as regulatory risk and uncertainty can make cleantech investments unattractive relative to investment in other sectors. Additional problems can also arise when new technologies do not fit cleanly into existing regulatory structures. AB 32 will also require innovative policies governing land use, smart growth, agricultural practices, and forestry. Policies intended to drive renewable energy development, energy efficiency, and emissions reductions are being created at all levels of government. Consideration of the interactions between these policies is a challenging but vitally important task. There may be valuable opportunities for synergies, and there are likely to be conflicts. No climate initiative should be designed without a thorough examination of related policies and likely consequences. If, for example, the rules governing tax incentives are designed such that project developers using public Trust financing are precluded from taking advantage of these incentives, then direct Trust financing would actually dissuade private investment. These types of conflicts must be identified and addressed in advance. Report Overview This report outlines the role that the Trust could play in addressing market barriers and bringing new low carbon technologies to market faster. Section II details the rationale for public sector intervention, focusing on four major financing problems in the innovation process. Section III discusses the policy goals and criteria for the design of a California Carbon Trust. Section IV reviews the public financing options and makes recommendations regarding the appropriate mechanisms for different situations. Section V addresses organizational and operational issues such as project selection, management, and governance. The conclusions and recommendations contained in this report draw on expert input from over 25 cleantech investors, entrepreneurs and policymakers, obtained through interviews, meetings, email, and a large roundtable discussion. Expert input is summarized in Appendix A. Some information is also drawn from industry reports and academic expertise on innovation, investment, and challenges for the cleantech sector.

Page 10: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

10

What is Cleantech?2 The cleantech industry encompasses a broad range of products and services, from alternative energy generation to wastewater treatment to more resource-efficient industrial processes. Although some of these industries are very different, all share a common thread: they use new, innovative technology to create products and services that compete favorably on price and performance while reducing humankind’s impact on the environment. The eleven cleantech categories, as defined by the Cleantech Venture Network, are:

• Energy Generation • Energy Storage • Energy Infrastructure • Energy Efficiency • Transportation • Water and Wastewater • Air and Environment • Materials • Manufacturing and Industrial • Agriculture • Recycling and Waste

Given the primary focus of AB 32 on climate change mitigation, the Trust would focus on technologies that reduce greenhouse gas emissions. Some of these technologies might also lessen other aspects of our environmental impact, but climate benefits would be the first priority. This would mean that Trust financing would generally be biased toward energy generation, storage, and infrastructure, as well as transportation and efficiency improvements in appliances and processes.

Page 11: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

11

II. MARKET FAILURES, BARRIERS, AND GAPS IN THE CLEANTECH

INNOVATION PROCESS Technological innovation is a lengthy process with many stages, actors, and potential problems. Specific needs and problems vary significantly across technologies and individual projects. The Carbon Trust, with its focus on long term policy goals, can address these barriers and contribute to the state’s climate policy goals. The innovation process, along with financing sources, risks, and gaps, is outlined in Figure 2 below. Note that the process is somewhat more complicated and less linear than the high-level overview figure suggests. More detailed descriptions of the innovation stages, specific problems, and benefits of intervention follow. Figure 2: Risks, Funds, and Barriers in the Innovation Process

Laboratory Stage Research and Development While widespread deployment of existing low carbon technologies is necessary, meeting the 2020 and 2050 emissions targets will require significant technological advances in energy generation, infrastructure, industrial and end-user technologies, and transportation. The development of these new technologies begins with basic research and development in university and industrial settings. Nationwide funding for this crucial first stage of cleantech investment, which comes from both industry and government sources, is generally not regarded as being sufficient to meet policy goals. Laboratory Stage Barriers From a public policy viewpoint, the private sector under-invests in early stage R&D. This problem can be traced to two well-documented market failures. First, the negative environmental effects of conventional technologies and energy sources, including greenhouse gas emissions and air pollution, represent costs to the public that are not reflected in market prices. Climate regulations such as a cap and trade system are designed to address this problem by assigning a value to these public costs, but no market-based system can fully address all of these negative externalities. The second market failure stems from the fact that firms cannot capture the full rewards from their R&D investment because much of this “spills over” to other parties in the form of knowledge.3 Overall private sector

Page 12: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

12

investment in energy R&D has been declining in recent years, while public sector investment has remained stagnant since dropping from a peak in the late 1970s and early 1980s (see figure 3).

Figure 3: Private and Public Sector Energy R&D Investment 4

The public sector traditionally plays an important role in funding early stage R&D and encouraging the development of socially beneficial technologies. However, current levels of investment in early stage R&D are not sufficient for the development of these technologies. A recent GAO report found that current R&D levels are probably not “sufficient to deploy alternative energy sources in the next 25 years that will reverse our growing dependence on imported oil or the adverse environmental effects of using conventional fossil energy.”5 Experts have calculated that a 5-10 fold increase in energy R&D spending from 2005 levels is needed to stabilize CO2 at double the pre-industrial levels.6 Possible Solutions The California Carbon Trust could provide additional funding for university R&D in California. Targeted R&D investment would lead to technological advances as well as environmental and economic benefits such as reduced greenhouse gas emissions, improved air quality, reduced electricity bills, more efficient electricity processes, and the creation of “green collar” jobs. An increased focus on market needs and realities in the R&D funding process would help to ensure that limited public funds are being spent on technologies that are likely to fill market needs and achieve market penetration.7 The use of Trust funds for early R&D should be considered alongside the recently announced California Institute for Climate Solutions (CICS).8 Consideration of the CPUC’s CICS proceedings and the ongoing development of the CICS should both prevent redundancy and provide valuable lessons learned regarding R&D program design. Economic Benefits of University R&D in California A 2003 report from ICF Consulting found that the UC system is a key source of innovation and entrepreneurs.9 • Through UC R&D, California will realize productivity gains estimated at $5.2 billion during

2002-11, supporting the creation of more than 104,000 jobs. • UC is a national leader in number of patents developed. From FY 1998-99 through 2000-01, UC

campuses reported more than 2,600 inventions created with university resources. • Over 160 companies have been founded through technology licensing agreements with UC.

Page 13: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

13

Early Stage Development and Technology Demonstration As technologies move out of the lab and toward the market, shifting from public to private sector funding, they enter one of the problematic stages that are frequently referred to as the financing “valley of death.” This pre-commercialization period involves development of the business model and demonstration of the technology at the pilot scale. Technology risk remains an issue, but new risks and questions related to business plans, market needs, and management teams also present potential problems. Despite these risks, promising technologies with solid business plans and management teams will usually be able to attract investment. The dramatic increase of venture capital into this space together with “demand-pull” policies designed to create markets for clean technologies should help companies in this stage attract financing from industry, seed, angel, and venture investors. Some entrepreneurs, however, experience difficulty attracting early stage investment. The problem is most severe for neglected technology areas, such as energy efficiency and demand response, and for novel technologies with no clear path to market. Early Stage Barriers In some cases, public support for pre-commercial technology development and demonstration may be necessary and productive. Venture investors are managing and deploying more capital, which means the venture capital industry is making larger, later stage investments. The average cleantech deal size in Q4 2007 was $15 million, nearly twice the average size in 2006, and two-thirds of all cleantech venture investments were in later stages.10 Generally speaking, early stage investors are moving away from very early seed stage investments. There are exceptions to this, as seed and angel investors focus on this early stage, but general industry trends and the reality of relative transaction and opportunity costs are making it harder for small, early stage companies to attract investment.11 Companies and technologies seeking small scale investments are often overlooked in favor of larger scale investments because of their relatively high transactions costs. As a result, there is an equity gap for small scale projects that are essentially “under the radar” of private sector investors.12 Some technology areas, such as energy efficiency and demand response, will have trouble attracting capital because they generally do not produce large enough returns. New and unknown technology areas may also be ignored by private investors. In some cases, this problem might stem from imperfect information about new and unfamiliar technologies. For technologies with longer lead times, the need to generate returns within a given timeframe could act as a barrier to investment. Technologies with business plans that rely on unfamiliar revenue streams such as electricity savings or carbon credit values may lead investors to seek out other, more familiar projects. There will also be many technologies that stall at this stage because of problems with their business plans or management teams. There may be a role for the public sector to play in “incubating” these businesses and helping to develop their business plans and teams, but simply providing capital to a company with poor commercial prospects is not the answer. Possible Solutions Innovative public financing mechanisms could help companies overcome early stage financial and regulatory barriers. Investor priorities do not always match up well with policy goals: while investors are primarily concerned with management teams, unmet market potential, and profitability, climate policy requires a focus on emissions reduction potential and viability in the market. The Trust could therefore focus on small and early stage projects that are overlooked by private investors, and on specific technology areas that may need greater investment for policy reasons. Demonstration grants and equity investments, leveraged with private capital, are examples of possible solutions. The Trust

Page 14: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

14

could also provide expertise to small companies experiencing difficulty navigating the market and regulatory environment. Bringing these new technologies from lab to market would have significant economic and environmental benefits. Innovative Public Financing for Early Stage Technologies A number of public funds and programs exist in the US and abroad to help bridge early stage financing gaps and bring new technologies to market. Examples are below. • UK Carbon Trust VC Fund: Carbon Trust Investments is a leading cleantech investor in the

UK. Typical investments are in the £250k - £3m range, and all investments are made on fully commercial terms. The Carbon Trust differentiates itself by being “an informed investor focusing on clean energy technologies bringing financial and technical experience with respect to climate change, mitigation policies, carbon abatement and technologies that address these challenges; and focusing on both carbon emissions reductions and financial returns.”13

• Massachusetts Sustainable Energy Economic Development (SEED) Initiative: The

SEED Initiative provides capital on more favorable terms to seed-stage firms engaged in product development. SEED offers loans of $50,000-$500,000 with a low interest rate. The loan is unsecured and does not require interest payments during the 5-year note term. It is convertible to equity at a 25% discount during a later financing round. The convertible loan is meant to encourage companies to focus on product development and fundraising from private sources.14

• Sustainable Development Technology Canada – SD Tech Fund: SDTC is a not-for-profit

foundation that finances and supports the development and demonstration of clean technologies. The $550 million SD Tech fund invests in cleantech development and demonstration with no requirement for repayment of funds.15

Late Stage Commercialization, Demonstration and Deployment The construction of commercial scale demonstration plants and first production facilities is one of the last hurdles that new technologies have to clear before they can be deployed at scale. For most technologies in other industries, venture investors provide the initial funds for this stage, with lenders and private equity firms providing the financing for widespread deployment after the technology has been proven in a commercial setting at scale. However, cleantech investments entail a number of unique challenges, particularly for first-of-a-kind projects. Late Stage Barriers Financial problems at this stage fall in two categories: financing commercial demonstration of new technologies, and financing first-of-a-kind generation and production facilities. Permitting can also create significant problems at these stages, as can transmission and other infrastructure issues. Commercial Demonstrations and Early Customer Acceptance For efficiency improvements and new technologies that must be integrated into existing systems and processes, the issue is more complicated as it involves “first mover penalties” for both entrepreneur and customer. These first mover issues include novel risks, uncertainties, and high costs unique to first-of-a-kind projects. Industrial plant managers, for example, do not want to risk their plants operations for the possibility of energy savings through unproven technologies. Similarly, customers

Page 15: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

15

may hesitate to purchase plug-in hybrid vehicles until the batteries have been demonstrated over time in real operating conditions. Finding a willing customer and compensating them for the risks they are taking adds significantly to the transactions costs of what are often relatively small projects. Until proven, these technologies have difficulty qualifying for traditional financing and for rebate programs. The public sector has a role to play here in investing in demonstrations with significant public benefits. Once proven, these technologies can be deployed using private capital. First-of-a-Kind Generation and Production Facilities The capital demands for first-of-a-kind cleantech projects – particularly in generation and biofuels production – can be unusually large. In the words of one cleantech venture capital investor, “the economics of energy financing has another zero at the end of it.”16 This creates a financing gap, as cleantech investment breaks the mold of traditional technology financing. This late stage of commercialization generally occurs after companies have already received early rounds of venture financing but venture investors are often unwilling to invest in these projects at scale because the capital investments are too large. Project developers must therefore turn to debt, private equity, and project finance, but these forms of financing are generally reserved for proven technologies rather than first-of-a-kind projects. The accelerated pace of development for many cleantech companies creates an additional issue in that financing is often being raised before the technology risks have been sufficiently addressed.17 Lack of information about both innovative technologies and new companies increases investor concerns. For the private sector financier, the risks of first project finance outweigh the rewards. Some sort of innovative public finance is needed to fill this gap, either through risk management or the provision of patient risk capital. Possible Solutions Traditionally, government has played an important role in providing funding for basic R&D, but has left later stages of development, demonstration, and deployment to the private sector. Some investors and policymakers see basic research as the only appropriate use of public R&D funds, noting that government should invest only in fundamental research, and not pick specific technology “winners” through late stage investments. However, demonstration and first project finance present a unique problem that the private sector is generally not equipped to handle. For the first project, the risks outweigh the expected returns. These projects entail substantial public benefits, however, that “spillover” to the public and are not fully captured by private investors. These benefits include accelerated GHG reductions, movement up the learning curve, and proof of commercial feasibility that serves to de-risk the technology and reduce financing costs for subsequent projects. Not all of these benefits factor into investment decisions. This creates a dilemma that requires public intervention. The appropriate form of public financing will vary across projects. The basic issue is that the rewards do not justify the risks. The Trust could therefore play a role in increasing the returns, decreasing the risks, or both.

Page 16: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

16

Innovative Public Financing for Technology Demonstrations and First-of-a-Kind Projects There are a number of proposed and existing funds and programs that focus on financing for late stage technology demonstrations and first-of-a-kind projects. Examples are below. • U.S. Department of Energy Loan Guarantee Program: The recently created DOE Loan

Guarantee program targets eligible projects that "avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases" and "employ new or significantly improved technologies as compared to technologies in service in the U.S. at the time the guarantee is issued.” Projects tend to be large ($100 million and up) because of the high transaction costs.18

• Sustainable Development Technology Canada – NextGen Biofuels Fund: The $500

million NextGen Biofuels fund is targeting biofuels projects with high capital demands that are too risky for debt finance and cannot attract adequate returns for equity finance. Investments have 10-year repayment terms.19

• California Demonstrations for Industrial Energy Technologies (DIET): This proposed

program, outlined in the ETAAC report, would provide demonstration funds on a cost-shared basis to industry and project developers. The program would be run by an independent, semi-autonomous organization and managed by a board of directors with public sector accountability.20,21

Page 17: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

17

Summary of Key Problem Areas and Benefits of Intervention Financing gaps and barriers occur at all stages of the cleantech development process. Investors, entrepreneurs and policymakers have identified four different financing problems across the innovation chain (see Table 2 below for more detail the barriers and possible solutions): • Insufficient funding for basic research and development • Early stage capital and regulatory barriers for small or unfamiliar technologies • Difficulties in financing and arranging commercial demonstrations new technologies • Lack of capital for financing large-scale, first-of-a-kind generation and production facilities. These complex problems call for comprehensive solutions. Policies are needed to create demand, provide clarity and certainty in the regulatory environment, and address market failures in the financing of new technologies. The proposed California Carbon Trust could use allowance auction revenues to address this last category, help the state meet AB 32 goals, and generate significant environmental and economic benefits. A well-designed Trust could: • Accelerate the development and commercialization of new technologies • Encourage the flow of private capital into valuable but neglected areas of cleantech • Fund University R&D that leads to technological advances, jobs and economic growth • Attract business to California by creating favorable conditions for cleantech investment • Act as an intermediary between the private sector and state regulatory agencies Table 2: Key Market Barriers and Needs Financing Gap Market Failures and Barriers Needs Insufficient private sector investment in basic R&D

• Social benefits not captured in investor returns

• High risks,long payback periods

• Policies to create demand for clean technologies

• Increased public investment Early stage knowledge and equity gap for small or unfamiliar projects

• Social benefits not captured in investor returns

• Relatively high transaction costs • Investors do not like long

investment time horizons that are common in cleantech

• Market/regulatory environment a barrier for small companies and unfamiliar technologies

• Policies to create demand for clean technologies

• Investors willing to absorb high transaction costs

• Equity investments with longer time horizons

• Public sector/investor expertise and willingness to guide companies through the process

Financing and early customer acceptance problems for commercial demonstration

• Social benefits not captured in investor returns

• High transaction costs • First mover penalties for tech

entrepreneurs and consumers

• Policies to create demand for clean technologies

• Investors willing to absorb high transaction costs

• Risk mitigation and /or increased return on investment

Lack of risk capital for large scale, first-of-a-kind generation and production facilities

• Social benefits not captured in investor returns

• First mover penalties for tech entrepreneurs

• Lack of risk capital for large investments

• Policies to create demand for clean technologies

• Risk mitigation and /or increased private investment returns to overcome first mover penalties

Page 18: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

18

III. POLICY GOALS AND CRITERIA FOR PROGRAM DESIGN In deciding how to structure the Trust, policymakers should consider the goal of public sector intervention from an AB 32 perspective, as well as the specific needs of public and private sector managers. The goal is to bring new low carbon technologies to market in order to reduce carbon emissions. With this in mind, the Trust should: (1) maximize public benefits in the form of GHG reductions and in-state economic development, (2) target specific market failures, barriers, and gaps, (3) effectively address the needs of the cleantech community, (4) not discourage private sector reductions and investment, (5) remain technology neutral to the extent possible, and (6) ensure clarity, transparency and accountability. Maximize AB 32 Benefits The Trust should be structured to maximize emissions reductions and achieve AB 32 policy goals. This means that, while projects should be selected on the basis of their contribution to policy goals, the Trust should only invest in projects that have long term financial value and commercial viability. Furthermore, the Trust should bias its funding toward projects in California so as to maximize in-state economic benefits. Target Specific Market Failures, Barriers, and Gaps The Trust must be structured in a way that targets specific financing gaps and market failures. Clear focus, eligibility criteria and project selection processes are essential. The Trust should not get involved where private markets can bring the necessary technologies to market in a timely manner, as doing so could create an unnecessary and counter productive dependency on public funds. Address the Needs of the Cleantech Community The rules and structure of the Trust must address the needs of the cleantech companies who are trying to bring technologies to market. Capital and risk management needs will vary across projects, sponsors, industries, and sectors. It is crucial the Trust be sufficiently flexible to target the specific needs of a given project. Furthermore, the Trust must work at the speed that the market demands and should not require unusual or unreasonable disclosure of confidential information. Do Not Discourage Private Sector Reductions and Investment Careful design and consideration of related policies, stakeholder motivations, and consequences is necessary to prevent the Trust from discouraging private sector reductions and investment. If, for example, direct public sector investment would disqualify a project from certain tax advantages or carbon credit benefits, then the Trust would actually act as a barrier to private investment. Policymakers should carefully examine the interactions between the Trust and other policies designed to stimulate investment in cleantech. Remain Technology Neutral Critics of governmental intervention in technology development and deployment have pointed out that the government should not choose specific technological trajectories and that the public sector has a poor track record in this area. While it is appropriate to pick broad categories when soliciting proposals, the Trust should remain technology neutral to the extent possible. This could mean choosing projects through a competitive process with a level playing field, or partnering with an

Page 19: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

19

experienced firm that has the technical knowledge and analytical ability to identify the most promising projects in a given category.22 Ensure Clarity, Transparency, and Accountability The project screening and selection process for any publicly funded technology advancement program must be clear and transparent. This can be accomplished through the careful creation clear eligibility criteria, requirements, and processes. The Trust should also be structured in a way that ensures of accountability and responsibility for funding decisions is necessary. IV. PUBLIC FINANCING OPTIONS Innovative public financing mechanisms can create the conditions necessary for low carbon technology development and deployment by reducing risk and providing access to capital where it is lacking. The proposed California Carbon Trust could use allowance auction revenues, leveraged with private capital, for this purpose. Public financing options fall in five general categories: grants, equity, mezzanine capital, loans, and risk management mechanisms. Each may be appropriate in different situations. Underlying any financial mechanism would be a strategy to continuously track GHG reductions and identify the gaps between where reductions are needed and where the market is investing. The proposed California Carbon Trust would be uniquely positioned to both understand and address the financing gaps. Through the use of external advisors, partnerships with investors, or internal analysis, the Trust could continually assess market needs to provide valuable information for policymakers and direction for Trust investment. Further research is needed on the best way to accomplish this goal. Grants The Trust could give grants for promising technologies that lack access to capital. Grants could be appropriate for basic laboratory stage research, as well as early stage development and demonstration, when capital demands are still relatively modest. Because they do not need to be repaid, grants can be especially useful for cash-poor businesses that have not yet started generating revenues. A properly designed program could address financing gaps and serve the cleantech community while remaining relatively transparent and technology neutral. Grants are not an appropriate solution for first project finance, where the capital demands are large. A grant program that focused on financing large scale demonstrations and first-of-a-kind projects would be prohibitively expensive. Overhead costs for assembling a team of experts for project selection and due diligence would also be significant. There are a number of examples around the world of grant programs focusing on early demonstrations, including Sustainable Development Technology Canada (outlined in section II above) and the recently abolished Advanced Technology Program at the federal level in the U.S. 23

Page 20: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

20

Successful grant programs such as these tend to have strict project selection criteria, extensive review processes, and peer review of all proposals. Equity The Trust could also act as an equity investor, taking partial ownership of either a company or a specific project. This would be especially valuable for smaller early stage projects overlooked by private sector investors. The Trust could also target valuable but neglected areas of cleantech, such as water efficiency technologies. The California Clean Energy Fund (CalCEF) and the CalCEF Angel Fund are able to partially address these needs in California but additional capital is needed and the Trust could play a valuable role. While equity investments can be useful in filling early stage equity gaps, they are not well-suited to large, later stage project financings. Given the lingering technology risk, returns would have to be quite high to justify an equity investment. It is unlikely that most late stage project financings would produce sufficient returns. Furthermore, the dilution of wealth and loss of control in the late stages of commercialization are undesirable for entrepreneurs and early stage investors. Generally speaking, equity is too expensive for large and risky late stage investments. Public equity funds with a focus on renewable energy and clean technologies exist throughout Europe and in many US states, including Connecticut (Connecticut Clean Energy Fund), Massachusetts, (Green Energy Fund), and Pennsylvania (Sustainable Development Fund). These funds generally focus on early, pre-commercial investments. In each of these states, the equity investments are made by independent entities or public-private partnerships that are insulated from political considerations and interference. Mezzanine Capital This category of financing can be structured in many different ways, but mezzanine capital generally sits somewhere between the high risk, high upside equity investments pursued by venture capitalists and the lower risk, fixed returns investments preferred by lenders. Mezzanine debt often includes an equity stake in the company, either in the form of warrants (which allow for purchase of stock at a later date at a pre-set price) or a debt conversion feature similar to that of a convertible bond. Mezzanine equity is generally issued as preferred stock shares, with the option to later be bought out. This form of financing is more expensive than traditional debt financing, but cheaper than straight equity financing. The flexibility afforded by warrants, conversion between debt and equity, and specific terms and conditions allow for a structure that can be tailored to meet investor and company needs. This is particularly true when the capital is provided at least in part by a public sector entity that is focused on bridging financing gaps rather than generating short term returns. Furthermore, the potential to leverage private capital is significant.24 The Trust could potentially provide various forms of mezzanine capital for first-of-a-kind projects. One option would be to provide a loan that would convert to equity at a later stage if the project is successful. The conversion to equity would increase the potential returns for the Trust, thereby offsetting some of the risk. In the earlier stages of technology development, when revenues are still a long way off and entrepreneurs are trying to minimize their debt-equity ratios in order to attract investment, grants

Page 21: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

21

and straight equity investments will often be preferable from a project developer’s point of view. Still, there may be cases where mezzanine mechanisms are useful for providing early stage financing. There are a few examples of mezzanine finance funds in the cleantech field. Funds in this area aim to attract private capital by increasing returns or decreasing risks for private investors. The French FIDEME is a public-private mezzanine fund that is aimed at bridging the debt-equity gap by providing subordinated debt that effectively provides a first loss guarantee to other investors.25 The proposed European Global Energy Efficiency and Renewable Energy Fund would also adopt a mezzanine structure.26 Loans The Trust could provide loans to companies and projects that cannot get debt funding from private lenders. In the early stages of technology development, technology risk and lack of immediate revenue-generation potential can restrict access to loans from commercial lenders. The Trust could provide loans to companies at this stage to cover demonstration and development costs. Because early stage companies will not usually be generating revenues, the Trust may need to provide “soft” loans with terms that are more favorable than commercial loans. Examples include forgivable loans, deferred debt service, and low interest rates. 27 Convertible loans are another option, but they would fall under the mezzanine finance category. In later stages, the Trust could provide debt financing for commercial demonstrations that cannot get private sector loans because of technology risk. Given the risk of default, publicly funded loans are less appropriate for capital intensive project finance. Existing entities generally limit publicly funded loans to small and medium sized loans in the $5 to $20 million range.28 Providing larger loans would quickly deplete the Trust’s funds. Several entities in the US and abroad provide debt financing to cleantech companies that cannot get loans from commercial lenders. These often take the form of “soft loans” with favorable conditions for cleantech entrepreneurs. In some cases, these loans convert to equity if the project is successful, so as to increase returns for the public financing entity and offset some of the risk. Other creative options for increasing the Trust’s potential upside include shared savings provisions for efficiency improvements and shared rights to the carbon credits generated through the investment. Risk Management Mechanisms Rather than actually providing funds, the Trust could improve access to private capital by mitigating some of the risks inherent in cleantech project investments. Because the risks differ by project, the Trust’s role in risk mitigation would vary. In some cases, the Trust would be insuring against risks faced by new technology customers. This should mitigate early customer acceptance problems that can act as a barrier to commercialization. For example, the Trust could warranty the first several thousand batteries for plug-in hybrid vehicles. After they have been successfully demonstrated, the need for a warranty would disappear. Similarly, the Trust could provide business interruption insurance for a plant manager who is unwilling to try a more efficient new motor that has never been demonstrated in a commercial setting. For the plant manager, the potential efficiency gains are far outweighed by the potential costs of a temporary shutdown in the event that the new motor cannot be successfully integrated. Business interruption insurance would address these concerns. For large project finance, the Trust could provide loan guarantees. This would provide a form of insurance for commercial lenders who would not otherwise be willing to make loans to companies with new technologies.

Page 22: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

22

Public sector loan guarantee mechanisms exist in the US and abroad. At the federal level, the US Department of Energy recently created a large-scale loan guarantee program. FOGIME in France also offers guarantees. Loan guarantee programs tend to target large projects because they are expensive and administratively complex, and the larger projects are more able to absorb the high transaction costs. Examples of more specialized insurance schemes are harder to find. It would be difficult to properly price and administer a business interruption insurance program. Warranties for specific technologies, such as new batteries, would be more straightforward. FINANCING OPTIONS: RECOMMENDATIONS Investors and entrepreneurs stress the need for the Trust to incorporate multiple forms of financial assistance. The variety of technology and project specific barriers, risks, and gaps requires a flexible approach. The Trust should work to continually identify specific market gaps to allow for effective and efficient interventions. Further research is needed to determine how the Trust can most effectively identify and track market gaps on an ongoing basis. Table 3 below summarizes the financing options and best uses.

Table 3: Financing Options, Characteristics, and Best Uses Key Characteristics Appropriate Project Types Grants • No repayment required

• No financial returns for Trust • Basic R&D • Early stage development and

demonstration Equity • High risk, high upside potential for state

• Useful to attract/leverage private capital • Relatively expensive for project developers

• Small projects overlooked by private equity investors due to transaction costs

• Valuable early stage technologies ignored by private investors for other reasons

Mezzanine Capital

• Broad, flexible category of options • Can be tailored to fit specific risks, needs,

payback periods • Useful to attract/leverage private capital

• Early stage projects needing additional capital

• Late stage financing for first-of-a-kind projects and demonstrations

Loans • Usually require immediate revenues for loan and interest payments

• Can be structured as “soft” loans with terms that are more favorable to developers

• Suitable for early stage demonstrations, if combined with warrants, royalties, etc. (mezzanine debt)

• Small scale commercial demonstrations where companies cannot get private loans

Risk Management

• Shifts risk from project developers and financiers to the state

• Warranties can aid with customer acceptance

• Large overhead, time, and transaction costs for loan guarantees and insurance

• All forms of risk management are best where perceived risks exceed actual risks

• Loan guarantees: very large projects (at least $25 million) and companies with credit ratings

• Warranties: new technologies with customer acceptance problems

• Other insurance mechanisms: commercial demonstrations with unique risks

Page 23: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

23

V. STRUCTURAL CONSIDERATIONS There are many important structural issues related to the design of a public financing mechanism such as the proposed California Carbon Trust. Lessons can be learned from related initiatives in the U.S. and abroad. An important initial consideration is whether the Trust should expect financial returns from its investments, or be designed to deplete its resources accelerating reductions under AB 32. Basic legal and organizational issues related to staffing, governance, project selection, and interaction with the private sector must also be addressed. Financial Structure and Program Duration Many government RD&D programs are designed to give grants and other financial assistance with no expectations for repayment. This allows for a focus on riskier projects, with payback in the form of “social returns.” Other public financing programs are designed to be “evergreen” meaning that they expect to recoup their investments as well as generate policy benefits. Each option has its advantages, and different situations call for different approaches. Designing a fund to be financially sustainable, or evergreen, offers a number of advantages: it introduces more discipline into the project selection process and decreases the likelihood of the government making bad investments. Political considerations are less likely to dominate the decision-making if the Trust has to earn a specified return on its investment. An evergreen fund would also help avoid the creation of corporate welfare or dependence on public funding, as cleantech companies would have to repay the Trust for any funds received. Given the political uncertainty of future revenues from allowance auctions (especially as a Federal program begins), designing the Trust as an evergreen fund would increase its ability to provide public benefits both now and in the future. Large late stage investments in particular may have to earn a return so as to avoid bankrupting the Trust after just a few projects. However, the creation of an evergreen fund could undermine the policy goals of the Trust. There is a tradeoff between financial returns and policy goals. If the Trust were required to earn a specified return on its investments, it would be more difficult for Trust managers to focus on high risk projects that lack access to private capital. Too great a focus on financial returns might cause management to avoid risks and resemble a fund similar to private equity. A declining fund that is not required to earn a specified financial return would be better able to fill financing gaps for small and risky early stage projects. Designing the Trust as an evergreen fund is not the best way to achieve AB 32 goals. This financing structure may be more appropriate for large scale, late stage investments, and the Trust could also expect modest returns on some early stage equity investments. However, a declining fund with no expectations of financial return could better address the financing gaps for basic R&D and commercial demonstrations. As a declining fund, the Trust will be dependent on yearly auction revenues which may disappear once a Federal emissions cap is implemented. By default, this puts a tentative limit on the program duration. A more explicit “sunset date” may help further clarify the role of the Trust and prevent prolonged dependence on public funds. As the cleantech market matures and private sector

Page 24: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

24

investors become more familiar with the risks, rewards, and regulations, private investors may start to fill some of the financing gaps and lessen the need for public intervention. Organizational Structure Regardless of the specific structure, the Trust will sit between business and government as an active player in private investment markets with a focus on AB 32 policy goals. In order to maximize the effectiveness of the Trust as a bridge between the private sector and stage regulatory agencies, it must leverage the strengths and mitigate the weaknesses of the relevant parties in each sector. These relative skills are outlined in Table 4, and discussed below in greater detail.

Table 4: Relative Strengths and Weaknesses of Public and Private Actors Strengths Weaknesses Public Sector

• Focus on public benefits and policy • No need for big profit or fast returns • GHG and technology expertise

• More prone to political interference • Relatively slow and bureaucratic • Salary constraints could be problematic

Private Sector

• Investment and financing expertise • Highly skilled teams already in place • Relatively fast and efficient

• Primarily motivated by profits • Looking for quick exits

Generally speaking, public sector managers are equipped to make judgments on the technological problems that need to be addressed and on the relative GHG and other public benefits of various technologies. Provided they are shielded from political considerations such as reelection pressures, they can also think in terms of long term policy goals and desirable market trajectories. Private investors have highly skilled teams with experience in assessing and investing in new technologies. The salaries for top financial talent are generally out of reach for public entities, so the Trust should be designed to leverage this private sector knowledge if possible. Basic Overarching Structure Many options exist for the legal and organizational structure of the Trust. One very good model would be an independent nonprofit entity chartered by the state. The Trust’s activities could also be contracted out to an existing entity. Another option would be to house the Trust entirely within state government, either in an existing agency or as a newly created one. There are many reasons for creating a new quasi-governmental or independent entity. Doing so would give the Trust much needed credibility with the business community by isolating it somewhat from political influences and allowing it to operate more independently. A small permanent staff would help keep overhead costs down. Legally separating the Trust from state government would help get around cumbersome and problematic regulations that govern pay structure, decision-making processes, and allocation of funds. State processes and regulations related to information disclosure and equipment ownership have been serious barriers to the success of PIER’s industrial efficiency demonstration efforts, leading to the proposal of a new program run by an independent, semi-autonomous organization (California DIET, outlined in section II above).29 Public accountability can be maintained through a governing or advisory board that includes some state officials and appointees. Independent nonprofit entities that make cleantech investments with public money exist in a number of U.S. states. The Renewable Energy Trust in Massachusetts makes clean energy

Page 25: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

25

investments with electric ratepayer money and is run by the quasi-public Massachusetts Technology Collaborative. The Connecticut Clean Energy Fund is run by an independent organization (see box). Within California, the California Clean Energy Fund and the California Climate Action Registry are examples of independent entities that are chartered by the state and have public purposes. Connecticut Innovations and the Connecticut Clean Energy Fund30,31 The Connecticut Clean Energy Fund is funded by a surcharge on electric bills and administered by Connecticut Innovations, a quasi-public authority that makes investments in early stage technologies. Connecticut Innovations has the freedom to use the funds for “grants, direct or equity investments, contracts or other actions which support research, development, manufacture, commercialization, deployment and installation of renewable energy technologies, and actions which expand the expertise of individuals, businesses and lending institutions with regard to renewable energy technologies.”32 Accountability is maintained through a Renewable Energy Investments Advisory Committee that includes a number of technology and business experts appointed by members of the legislature, as well as two state officials with energy policy experience. The Trust’s investment function could also be contracted out to an existing entity, in much the same way that national labs are contracted out to universities. Additional consideration should be given to this possibility and to potential organizations. Housing the Trust within state government would not be the most efficient or effective way to achieve AB 32 goals. The rigid regulations mentioned above would serve to slow the Trust down and restrict its ability to act efficiently, hire the needed experts, and tailor solutions to individual problems. Furthermore, a state entity would be more subject to political influence and pressures and would not be effective as a bridge between the private sector and state regulatory agencies. Experiences with the Carbon Trust in the UK and conversations with cleantech investors and entrepreneurs in California suggest that the Trust will be much more trusted and effective as an intermediary between the public and private sectors if it is independent and not housed within an existing agency. Project Selection Process and Expertise The discussion in sections II and IV suggests that the Trust will need multiple programs and approaches to address the different financing barriers and achieve AB 32 goals. The Trust entity itself should have a small permanent staff with technology, policy and market expertise. Outside expertise will be needed for project selection and structuring. The project selection process and information needs will vary depending on the specific project and type of public financing. In the case of R&D grants, peer review is necessary to ensure that public funds go to the most valuable and qualified projects. One of the key lessons learned from the CPUC’s California Institute for Climate Solutions proceedings is that grants should be awarded through a competitive process with open and impartial peer review. The CPUC proceedings also support the idea of a small permanent staff with ad-hoc review panels formed for each request for applications.33 For early stage equity investments and late stage risk transfer mechanisms, the Trust will usually have to get outside financial and technical expertise. This can be accomplished in a number of different ways. Firms may be willing to lend workers to the Trust for brief periods, as is the case with the

Page 26: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

26

Financial Accounting Standards Board (FASB). FASB is an independent body with a staff of FASB Fellows drawn from public accounting, industry, academia, and government.34 Another possibility would be for the Trust to invest alongside experienced private sector partners, leveraging their knowledge and expertise. The Trust could build a team of policy and technology experts to do an initial screen of the proposed projects, selecting those with solid technical potential and substantial public benefit for further consideration. Project developers could then solicit private sector financing with the knowledge that the Trust would be a co-investor willing to take a smaller return. Potential private sector partners would then do the financial analysis and propose deals for projects they would be interested in pursuing. If the terms provide acceptable risk and return for all parties, the Trust could enter into partnerships for specific investments. Regardless of the specific arrangement, the Trust should retain only a small permanent staff and make use of outside expertise when it is necessary. This general structure keeps overhead costs down and allows the Trust to select the right team of experts for each situation. The alternative – building a complete team with all of the necessary the technical and financial knowledge – would be both extremely difficult and prohibitively expensive. Focus and Selection Criteria The Trust’s focus and goals should be clearly stated. Consistent rules for project eligibility and selection are necessary to provide clarity for potential investors and project developers and to ensure transparency for the public. In order to remain technology neutral, these criteria should not include specific limits on eligible technologies. Rather, they should set out categories based on market needs and the state’s climate policy goals as set out in AB 32. Projects would therefore be judged on their GHG reduction potential and related economic benefits in addition to their financial viability. Important questions and considerations for project eligibility and selection include:

• Maximizing AB 32 benefits: in designing criteria to select projects with the highest public benefit, it will be necessary to weigh competing factors, including long term financial viability, GHG emissions reductions, other environmental benefits, and economic benefits. The Trust should be designed with the goals and priorities of AB 32 as a guiding principle.

• Focus: categories could be narrow to drive innovation in a particular area or industry, or they could be broad to capture the lowest cost reductions. A focus on infrastructure projects that will accelerate deployment of other technologies could increase the Trust’s impact.

• In-state economic benefits: funding could be limited to California to keep economic co-benefits in-state (as is the case with the CICS), or it could be left open to encourage the lowest cost technologies to reduce emissions.

• Complementing private sector investment: to the extent possible, the eligibility requirements should ensure that the Trust is enabling projects that would not otherwise attract investment, rather than simply displacing private sector funding.

• Transaction costs: while more information is always better from a project selection process, an overly burdensome or costly process will ultimately act as a barrier to investment. In designing project selection criteria and considering information demands, it is important to consider this tradeoff.

Page 27: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

27

STRUCTURAL CONSIDERATIONS: GENERAL RECOMMENDATIONS Issues related to legal and organizational structure, focus, and project selection present many challenging but important questions. Initial thoughts and recommendations on these issues, based on input from cleantech investors, entrepreneurs, and policymakers, are below. • The Trust should be designed as a declining fund that depletes its resources accelerating

innovation and emissions reductions under AB 32. The Trust will be more effective in achieving policy goals if it is not required to earn a specified return on investment.

• Policymakers should consider a limited duration for the Trust. Many of the investors involved in the preparation of this report suggested that the Trust might only be needed for a limited period of time, as the private sector develops the financing and risk management structures necessary to take advantage of cleantech investment opportunities.

• The Trust should be set up as an independent nonprofit entity with public sector oversight. This independence should insulate the Trust from political considerations and allow it to operate more quickly and efficiently. It will also make the Trust a more effective bridge between the private sector and state regulatory agencies.

• The Trust should have a small permanent staff and should get outside expertise as needed. Third party peer review panels could provide input on grant proposals. Private sector companies may be willing to “loan” employees to the Trust for short periods, as these employees would gain insight into the policy arena. Investment partnerships with private sector firms for specific projects could also provide an opportunity for leveraging private sector expertise.

• Project selection processes will vary by project type. Third party peer review is important for grant-making decisions. Thorough review is also needed for any equity or mezzanine investments, and for decisions on providing warranties or loan guarantees.

• Further research is needed regarding the best use of auction revenues for cleantech development and deployment. An early step should be to determine how much money can be effectively and efficiently spent. It is also important to develop a way to ensure that the funds are used to bring about reductions that go beyond business as usual. Additional research is also needed to identify priority focus areas, assess the potential impacts of geographic restrictions on Trust funding, and further explore the role the Trust might play in continually identifying technology and market barriers and gaps.

* * * * *

California will need a balanced portfolio of policies to achieve the ambitious climate policy goals set out by AB 32. Many of these policies will aim to increase investment in low carbon technologies by increasing demand and reducing costs. However, market failures and barriers will remain in a few key stages in the innovation process, including basic R&D, early stage development, and initial deployment of new technologies. The proposed California Carbon Trust could address these barriers and accelerate emissions reductions through innovative public financing. A well-designed Trust would also play a valuable role as a bridge between the private sector and state policymakers. As an independent entity focused on accelerating cleantech innovation, the Trust would generate substantial environmental and economic benefits for California businesses and residents.

Page 28: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

28

Appendix A – Comments Summary The tables on the following three pages summarize the comments of cleantech investors, entrepreneurs, and policymakers on various aspects of cleantech finance and the California Carbon Trust. These comments are pulled from interview notes, emails, and notes taken at a roundtable dinner discussion held in San Francisco in April 2008.

Financing Gaps and Barriers

Laboratory Stage R&D Early Stage Equity Gap First Project Venture Investors

• Significant gap because venture comes in later. Very little going into energy R&D.

• Traditional capital will fill gap once there have been successes. Public funds could accelerate.

• Traditional capital will fill gap once there have been successes. Public funds could accelerate.

• Commercial scale demonstration hard to fund – too big for VCs, too risky for project finance, private equity

Investment Bank / Private Equity Investors

• Gap exists, especially in energy. Private sector investment levels too low

• Long time horizon for cleantech projects restricts investment: 7-10 years vs. 3-5 for other industries.

• First project is biggest gap. No one will put up large sums if there is tech risk, even with 20-30% returns.

• Biggest gap because of risk-reward mismatch.

Carbon / Environmental Finance Investors

• Important gap, and good use of gov’t funding

• No shortage of capital – just need to get regulations right to encourage private investment

• Real problem is regulatory uncertainty, not a lack of capital. Need longer term certainty on carbon rules. What happens after 2012?

• Political risk is a problem for carbon finance Cleantech Companies

• Need more investment in university research – very valuable

• Gap exists at early stage for small projects • Good ideas will get funded, but government

intervention could accelerate

• First project is biggest gap. Many stranded projects because returns are too low given technology risk.

• Regulatory risk is huge, especially for new technologies • VCs are not set up to make large capital commitments to get

investments into commercial production – creates gap • Projects have long lifetimes, small margins. Investors do not

want small returns over long periods Policy and Governmental

• Energy sector notorious for low levels of R&D

• Early stage, pre-business plan gap is significant • As deal sizes increase, becomes harder to attract

capital • $8-9 million is typical for an “A” round, but many

projects cannot use this much money productively • Navigating market, regulatory issues is another

problem for small companies • Little private investment in small, early stage

cleantech

• Risk/reward profile is a problem for first project. Project financiers are used to more certainty of cashflow.

• Debt-equity gap exists at this stage – too little upside for VCs, too much risk for debt

• Smaller projects have problems with customer acceptance and financing – need to coax industrial plant managers into trying new technologies. Even large corporations (GE, etc) that can afford first projects do not fund because of rules regarding risk and return for internal projects.

Page 29: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

29

Solutions and Possible Roles for the Trust

Solutions for Lab Stage Gap Solutions for Early Stage Gap Solutions for First Project Gap Venture Investors

• R&D grants • Earlier private sector input on

market needs • State research collaboratives

• Incubators could help technologies get past this stage.

• Mezzanine debt/equity structure best suited to 1st project problem • Trust could be first in, last out – act as a sort of loan guarantee,

guaranteeing SOME return to private investors • Loan guarantees are simple, attractive way to leverage private $ • Loan guarantee a good way to reduce cost of financing for first-of-a-kind

projects. Government does not have a good track record with actually making investments.

Investment Bank / Private Equity Investors

• Government grants for basic R&D are necessary and valuable. Need for more.

• Public sector could provide more patient capital to deal with long time horizons

• Provide flexible seed capital

• Need to encourage private investment by increasing returns or insuring against some of the risk.

• Mitigate risk - $500 million could insure $5 billion • Flexible mezzanine or project finance. Flexibility is key. Ask private sector

what it needs, tailor to specific needs Carbon / Environmental Finance Investors

• Government should give grants for laboratory stage research

• Investment not a good role for government – just need to create the right regulatory environment to encourage private capital

• Financial additionality is an issue: you cannot get carbon credits if you use public money. Pubic financing can therefore displace private investment

• Structuring as insurance could potentially get around financial additionality • Government could act as carbon credit purchaser of last resort to deal w/

regulatory/political risk, provide certainty about carbon credit revenues • Investment is not a good govt role – just need to get regulations right

Cleantech Companies

• Grants for University research are very valuable

• Good ideas will get funding, but government could speed the process up

• Need warranty to take away tech risk. Insurance industry won’t touch this. • Costs are prohibitive for DOE style loan guarantee program unless you

need $100 million or more

Policy and Governmental

• Open R&D grants have great public benefits

• Gov’t R&D programs not viewed favorably

• Equity investments in small companies

• Help for entrepreneurs having trouble with early market, regulatory barriers

• Equity investments, leveraging private capital. Exit area once capital flows in

• Some are hesitant about government insuring technologies • Combination of debt and mezzanine financing could be appropriate. But

uncertainty calls for more equity. Risk structure more similar to venture • Convertible debt is a good option • Loan guarantee can leverage private capital, but overhead costs would be

very high – same due diligence as actually making a loan • Equity investment preferable to loan guarantee at state level – lower risk,

lower overhead requirements • Need Separate programs for large standalone projects & other new tech

Page 30: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

30

Structural and Organizational Issues Financial returns Organizational Structure & Project Selection Thoughts on Focus, Concept Overall Venture Investors

• Evergreen fund preferable for discipline, impact over time

• Isolate from political pressures to allow risk taking without career risk for Trust managers

• Consider outsourcing/contracting like labs • Firms may be willing to lend people to Trust for

1-2 years (see Financial Accounting Standards Board model for example)

• Be sure to leverage private funds – curtail perceived risk to attract private capital

• Fund could sunset when market matures – maybe 5 years. Set performance targets

• Trust could play valuable role transferring info from govt to business (see CalCEF)

• Could have narrow focus to drive innovation in specific areas

Investment Bank / Private Equity Investors

• Should not have to earn a return – will be too complicated & Trust won’t take on risk.

• Could recoup SOME investment, but not all

• Need transparency, involvement of private sector in project selection process

• Focus on large infrastructure • Focus on outer years, beyond regulation • Flexibility to tailor funding source, type to

specific problem is most important Carbon / Environmental Finance Investors

• Trust should NOT be evergreen. Tie funding to social return on investment.

• Trust needs to be independent, outside of government. See CCAR and Climate Trust.

• Consider European Bank for Reconstruction and Development model: run as a fund of funds with competition and some outsourcing of work

• Focus on large infrastructure and transformational technologies. Carbon value is not enough to make these feasible.

• Trust should sunset after market matures • Focus on distributed sources such as

recharging stations for PHEVs Cleantech Companies

• Consider “quasi-evergreen” fund that earns some return on successful projects but without any expectations

• Fund should not require specified returns

• Should factor in contribution to California economic growth: CA projects should get priority

• Focus on infrastructure, “market making” • Fund should sunset after attracting private $

Policy and Governmental

• Evergreen fund would be “a mistake.” DOE, other experience shows that concern about royalties, equity act as barriers.

• Could operate on fully commercial terms and decrease role as private capital comes in.

• Should be small and nimble like NSF. Small permanent staff plus short term outside expertise.

• Private sector is better at allocation of capital. Need to have non-gov’t people making decisions

• NEED clear rules, formal screen • Need rotating oversight board or commission • Have to make sure fund is secure from borrowing

• Focus on early market risk. For example, warranty first 50,000 batterys for PHEVs

• Valuable to accelerate innovation. Ex: could have brough GreatPoint Energy to market 2-3 years earlier by mitigating risk.

• Focus on early stage equity gap, navigating market in early stages.

Page 31: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

31

ENDNOTES 1 Recommendations of the Economic and Technology Advancement Advisory Committee (ETAAC). Report to the California Air Resources Board. (2008). http://www.arb.ca.gov/cc/etaac/ETAACFinalReport2-11-08.pdf. 2 Recommendations of the Economic and Technology Advancement Advisory Committee (ETAAC). Report to the California Air Resources Board. (2008). http://www.arb.ca.gov/cc/etaac/ETAACFinalReport2-11-08.pdf. 3 Nemet, G. “Policy and innovation in low-carbon energy technologies.” Energy and Resources Group. Berkeley, CA, University of California. PhD Dissertation. (2007). 4 Nemet, G. and Kammen, D. “U.S. Energy Research and Development: Declining Investment, Increasing Need, and the Feasibility of Expansion,” Energy Policy. (2007). http://rael.berkeley.edu/files/2007/NemeKamm_EP07.pdf. 5 Nemet, G. “Policy and innovation in low-carbon energy technologies.” Energy and Resources Group. Berkeley, CA, University of California. PhD Dissertation. (2007). 6 Kammen, D. and Nemet, G. “Reversing the Incredible Shrinking Energy R&D Budget,” Issues in Science and Technology, (Fall 2005). http://rael.berkeley.edu/files/2005/Kammen-Nemet-ShrinkingRD-2005.pdf 7 Murphy, L. and Edwards, P. “Bridging the Valley of Death: Transitioning From Public to Private Sector Financing.” National Renewable Energy Laboratory. (May 2003). http://www.cleanenergystates.org/CaseStudies/NREL-Bridging_the_Valley_of_Death.pdf 8 See press release for more information: http://docs.cpuc.ca.gov/PUBLISHED/NEWS_RELEASE/81168.htm 9 “California’s Future: It Starts Here.” (Impact Report for the University of California). ICF Consulting. (2003). http://www.universityofcalifornia.edu/itstartshere/report/fullreport.pdf 10 Q4 2007 Cleantech Investment Monitor, Vol. 6, Issue 4. Cleantech Group LLC. (2007). 11 Testimony of Michael Borrus, Founding General Partner, X/Seed Capital before the U.S. Congress, House of Representatives, Committee on Science and Technology, Subcommittee on Technology and Innovation. (February 15, 2007). http://democrats.science.house.gov/Media/File/Commdocs/hearings/2007/tech/15feb/borrus_testimony.pdf 12 “Public Finance Mechanisms to Catalyze Sustainable Energy Sector Growth.” United Nations Environment Program Sustainable Energy Finance Initiative. (2005). http://sefi.unep.org/fileadmin/media/sefi/docs/publications/SEFI_Public_Finance_Report.pdf; Personal communication with investors. 13 Carbon Trust Venture Capital. http://www.carbontrust.co.uk/investments/venturecapital/. 14 Sustainable Energy Economic Development (SEED) Initiative. http://masstech.org/SEED/index.asp 15 Sustainable Development Technology Canada. http://www.sdtc.ca/en/about/index.htm. 16 “Financing, Partnership, Policy and Growth: Insights from the Cleantech Symposium.” (Cleantech Matters Report). Ernst & Young. (Winter 2008). http://www.ey.com/Global/assets.nsf/International/Cleantech_Matters_Winter_2008/$file/Cleantech_Matters_III_Winter_2008.pdf. 17 “Financing, Partnership, Policy and Growth: Insights from the Cleantech Symposium.” (Cleantech Matters Report). Ernst & Young. (Winter 2008). http://www.ey.com/Global/assets.nsf/International/Cleantech_Matters_Winter_2008/$file/Cleantech_Matters_III_Winter_2008.pdf; Personal communication with cleantech investors. 18 U.S. Department of Energy Loan Guarantee Program. http://www.lgprogram.energy.gov/; personal communication with Dan Tobin, Senior Investment Officer, U.S. Department of Energy Loan Guarantee Program. 19 Sustainable Development Technology Canada – About our Funds. http://www.sdtc.ca/en/funding/index.htm 20 Recommendations of the Economic and Technology Advancement Advisory Committee (ETAAC). Report to the California Air Resources Board. (2008). http://www.arb.ca.gov/cc/etaac/ETAACFinalReport2-11-08.pdf. 21 Personal communication with Pramod Kulkarni, California Public Interest Energy Research (PIER) 22 Norberg-Bohm, V., ed., “The Role of Government in Energy Technology Innovation: Insights for Government Policy in the Energy Sector.” http://belfercenter.ksg.harvard.edu/files/rolegovt.pdf 23 Sustainable Development Technology Canada – SD Tech fund. http://www.sdtc.ca/en/funding/SD_Tech_Fund/index.htm; Advanced Technology Program. (http://www.atp.nist.gov/atp/overview.htm) 24 “Public Finance Mechanisms to Catalyze Sustainable Energy Sector Growth.” United Nations Environment Program Sustainable Energy Finance Initiative. (2005). http://sefi.unep.org/fileadmin/media/sefi/docs/publications/SEFI_Public_Finance_Report.pdf. 25 For more detail, see www.fideme.fr.

Page 32: E2 Carbon Trust - Cleantech Innovation DRAFT 6-30 Cleantech... · 2015-01-29 · 5 The Role of the California Carbon Trust The public sector has an important role to play in addressing

32

26 “Impact Assessment of the Mobilising Public and Private Finance Towards Global Access to Climate-Friendly, Affordable and Secutre Energy Services: The Global Energy Efficiency and Renewable Energy Fund.” European Commission. (2006). http://ec.europa.eu/environment/jrec/pdf/ia_2006_en.pdf. 27“Public Finance Mechanisms to Catalyze Sustainable Energy Sector Growth.” United Nations Environment Program Sustainable Energy Finance Initiative. (2005). http://sefi.unep.org/fileadmin/media/sefi/docs/publications/SEFI_Public_Finance_Report.pdf. 28 “Public Finance Mechanisms to Catalyze Sustainable Energy Sector Growth.” United Nations Environment Program Sustainable Energy Finance Initiative. (2005). http://sefi.unep.org/fileadmin/media/sefi/docs/publications/SEFI_Public_Finance_Report.pdf. 29 “Promoting New Industrial Energy Efficiency Technologies Through Bold Initiatives.” CPUC Workshop Presentation, June 11, 2007. Pramod Kulkarni, Public Interest Energy Research Program. 30 Connecticut Clean Energy Fund. http://www.ctcleanenergy.com/about/about.php; 31 Connecticut Innovations: http://www.ctinnovations.com/ 32 Connecticut General Statutes Section 16-245n. http://search.cga.state.ct.us/surs/chap283.htm#Sec16-245n.htm 33 California Public Utilities Commission Opinion Establishing California Institute of Climate Solutions. (2008). http://docs.cpuc.ca.gov/PUBLISHED/AGENDA_DECISION/81119.htm#P305_73982 34 Financial Accounting Standards Board. http://www.fasb.org/