Live from Aspen: How Can We Finance Our Energy Future?

At the first session of the Energy Revolution program track, two central themes emerged: The need for policy changes to encourage greater investment in energy sectors, and the importance of shale gas.

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To paraphrase Jane Austen: It is a truth universally acknowledged, that an energy source with a promising future must be in want of financing.
 
This was the thrust of Robert Gruendel's opening comments for the first Energy Revolution session at the 2013 Aspen Ideas Festival, which tackled the question "How Do We Finance Energy Projects for the Future?"
 
Gruendel, partner at DLA Piper and Global Chair of the law firm's energy practice, reminded the audience that energy is a more complicated topic than it might appear on the surface because nothing is universally applicable to energy projects; there is no one-size-fits-all template, since the sector has so many different subsets and every project is unique.
 
Across all of these subsets however, there is one shared necessity: the need for capital. With that truth in mind, Gruendel invited each panelist to offer a five-minute précis on what he or she is seeing in the energy markets today.
 
Two central themes emerged from the conversation: the need for policy changes to allow and encourage greater investment in energy sectors (especially in renewables), and the incredible importance of shale gas in our changing energy landscape.
 
Hydropower Faces Two Key Barriers
The first to speak was Kristina M. Johnson, former under secretary at the U.S. Department of Energy who now serves as founder and CEO of Enduring Hydro, which invests in, develops, and modernizes hydroelectric facilities.
 
Johnson explained that as under secretary of energy, she and her team determined that if the U.S. were to invest $1 trillion (about $40 billion a year, or about half of what we spent building the interstate highway system) we could hit our 2035 climate goals. It turns out that one reason she left government was to try to bring in private capital to help achieve climate goals. Hydropower attracted her in part because, quite remarkably, only three percent of dams in the U.S. are used for electricity.
 
One big barrier for finding investors for hydropower, Johnson said, is that it ties up capital in an eight-year permitting process; to make hydropower more attractive, we need to cut the permitting process down to two years. (If a project doesn't look viable after two years, Johnson says, it's probably best to walk away anyway).Another barrier to financing: 80 percent of dam sites in the country are under the control of the U.S. Army Corps of Engineers, and Johnson feels it would be best to privatize those sites. 

When it comes to hydropower, "do those two things, and financing would be easy," Johnson says.
 
But there's a third barrier as well. An International Energy Agency report released today shows that, worldwide, fossil fuels receive six times the amount of subsidies as renewables.
 
Shale Gas Drives Investment in Regulated Markets
Next to weigh in was James E. Rogers, chairman, president, and CEO of Duke Energy, the largest electric-power holding company in the U.S.
 
Rogers explained that in the 19 states that have competitive energy markets, no new capacity is being built--with the exception of renewable assets in those states that have standards they're required to meet. By contrast, in regulated markets, Duke is completing a $9 billion modernization plan that involves closing down 90 coal units and fundamentally transforming the energy generation mix. 

"We are modernizing to take advantage of the shale gas revolution," Rogers explained, saying that shale gas has led to a significant reduction in emissions. According to Rogers, CO2 emissions in the U.S. today are back to 1992 levels, even though the economy is 50 percent bigger today and we have 50 million more people now than in 1992.
 
Rogers spoke passionately about the huge impact of shale gas, and how this revolution is a story of American innovation driven not by major companies but by independents--in particular, George Mitchell, who pioneered the combination of horizontal drilling and hydraulic fracturing that made it economically viable to extract natural gas from shale rock formations.
 
Energy Offers Significant Investment Opportunities
The final panelist was Christopher M. Hyzy, managing director and chief investment officer at U.S. Trust.
 
According to Hyzy, while the energy sector has a lot of hurdles (many of which will need to be addressed by policy changes), energy is still the biggest opportunity for investment over the next ten to twenty years.
 
Pursuant to comments already made by Johnson about the privatization of hydropower, Hyzy agreed that in many instances the private sector is going to have to take over, which he sees as a good thing. And echoing Rogers' comments about the energy transformation triggered by shale gas, Hyzy said that just three or four years ago, those not in energy space had no idea that we could be energy independent within a decade, but that now it's quickly becoming a reality.
 
Rogers jumped in to comment on the meaning of energy independence, which to him simply means we are exporting more BTUs than we are importing.
 
Key Financing Needs: Renewables and Infrastructure
Gruendel asked the panel to speak more specifically to the specific challenges of financing renewable energy projects.
 
Rogers said that for wind power, financing is pretty straightforward and there's plenty of money. However, what he finds really interesting right now is rooftop solar and distributed generation because it starts to change the value of distribution, which has always been thought of as an impregnable monopoly. As of yet, nobody has found the "secret sauce" to financing distributed generation.
 
Johnson reiterated that the primary challenge with hydro is the duration of time that investment capital is tied up. Furthermore, the size of hydro projects is too big for some investors and too small for others--so you have to turn to bank financing, where hydro is viewed as an unfamiliar, risky investment. Enduring Hydro has had some isolated success achieving ROI in the high teens and twenties, she reported, and now the challenge is taking that to scale. 

When Gruendel asked about the prospects for bundling or aggregation, Johnson said that people who get these assets don't tend to trade them. Johnson also pointed out that what people haven't done yet is get together and integrate renewables (wind, solar, hydro), and that energy policies have yet to recognize potential integration.
 
Hyzy said that an important growth area in the venture capital world is batteries and other storage devices for renewable energy. He also pointed out that investment opportunities aren't necessarily in commodities, but in the infrastructure around commodities--such as boring and engineering companies that are building port system and storage tanks--and that we need policy change to support faster infrastructure development.
 
As the panel concluded, the discussion came around once again to the huge importance of shale gas, with Hyzy saying, "Shale is the largest artery in the heart of the energy equation."
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