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  • LIISA O’NEILL: Welcome, and thanks for joining us on energy.gov for the latest edition of

  • Energy Matters. I’m Liisa O'Neill, a new media specialist here at the Department of

  • Energy. Today I’m joined by Richard Kauffman, senior adviser to the secretary of energy.

  • Kauffman recently joined the department from the private sector where he served as the

  • CEO of Good Energies, a global investor in renewable energy and energy-efficiency technologies.

  • Were here today to talk about both the challenges and opportunities of renewable

  • energy innovation and deployment.

  • Thank you for being with us today, Mr. Kauffman. If you could start with just talking a little

  • bit about your background and what drew you to the Department of Energy from the private

  • sector.

  • RICHARD KAUFFMAN: Well, it’s great to be here. Thanks a lot, and thank you all for

  • tuning in. I look forward to answering a lot of questions. So the first question, Liisa,

  • I guess, is about me. So I guess my interest in renewable energy dates back to really a

  • long time ago. It was my first year in college. And that was the year of the first energy

  • crisis. And I had just gotten my first car and I thought: This is it. I’m never going

  • to be able to drive my car because there isn’t any more gasoline, because if people remember,

  • that’s when everybody was waiting in long lines for gas.

  • And so actually it’s almost now 40 years later, and we haven’t really made that much

  • progress in the adoption of renewable energy, at least in the United States. We import more

  • oil than we did then by a significant margin. And so whenand then most recently I was,

  • as you observed, the CEO of Good Energies. And that was an opportunity to really see

  • through being an investor in renewable energy what the obstacles were. And so when Secretary

  • Chu called me up and asked me if I would be his adviser on issues of financing and deployment

  • of renewable energy, I thought, well, this is really a great opportunity to serve and

  • to work on some of the issues that I think are the big obstacles.

  • MS. O’NEILL: Great. So are you ready for our first question?

  • MR. KAUFFMAN: I’m ready for your first question.

  • MS. O’NEILL: (Chuckles.) All right.

  • MR. KAUFFMAN: And by the way, if people have very technical questions or if I’m not being

  • technical enough, or too technical, you know, kind of let me know.

  • MS. O'NEILL: All right. Steve (sp), via email, asks: We have unmatched university, national

  • and private research laboratories, yet everything from color TV to biotechnology seems to be

  • exploited by other countries. New energy technologies represent a tremendous research, manufacturing

  • and deployment job resource. What are we doing to keep it American?

  • MR. KAUFFMAN: Well, it’s a – Steve, that’s a great question. And I think it’s a – it’s

  • a very interesting time – a critical time, actually, in the renewable energy business,

  • because everybody talks about it kind of being in the future. But actually the future is

  • really, really close because the costs for renewable energy have really come down quite

  • dramatically.

  • So in the last couple of years the cost of solar energy has come down 70 percent. The

  • cost of wind has come down 40 percent. And so people talk about grid parity, which is

  • the cost of renewables relative to conventional sources of energy. That’s really within

  • sight; in other words, renewables will be competitive with conventional sources of energy

  • really in a very few years.

  • And so it means that the market globally is beginning to grow very rapidly and it’s

  • growing for a bunch of reasons. First, a lot of the generation capacity in Europe and the

  • United States was built after World War II and it’s come to the end of its useful life.

  • So it needs to be all replaced. And then emerging markets represent a very substantial demand

  • for energy.

  • If you look at a picture of the Earth at night, half the world is dark, which means they don’t

  • have any electricity. So just in the same way that if you think about what happened

  • in the telephone business, where a lot of emerging markets never built wire line technology

  • went right to mobile phonesthe same thing is going to likely happen with renewable

  • energy, which is another kind of distributed solution. So the size of the prize is very

  • substantial.

  • And so it means that a number of other countries see this as a very critical industry and theyre

  • doing quite a lot to support the industry. And the United States, as Steve points out,

  • has fantastic innovation; but we can’t seem to get things quite right in terms of the

  • other elements ofthat’s going to make us a real winner in the race. And I think

  • in Steve’s question, I think he’s gothe’s got it kind of right: that

  • you needin order for us to be able to get the jobs and be able to fully take advantage

  • of this opportunity to really seize the prize, weve got to get all the legs of the stool

  • right.

  • So we probably have the innovation stool really pretty right, but we don’t have the market

  • development right, and we can talk more about that. But we need toyou need to develop

  • markets.

  • We don’t have the financing right because withcost of financing in the United States

  • is very high. And soand then this whole question of manufacturingyou need all

  • those things in place because there are feedback loops, for example, between manufacturing

  • and the market. That’s what makes competitors really, really goodis that if they know

  • what’s going on in the market and can feedback in to the innovation engine and kind of vice-versa.

  • And so if you think about, again, in the telecom industry, the fantastic, domestic market we

  • have has helped create all this innovation. There’s – you think about Apple and all

  • the things that Apple has done, it’s because there is this fantastic, domestic market which

  • in turn feeds back to generate more innovation.

  • MS. O'NEILL: Great. Thank you. So weve also had a couple questions regarding the

  • 1603 program. David Colt (ph), via Facebook, asks: What can the DOE do to extend 1603 or

  • something like it to open investments to those without tax equity? Likewise, Tom (sp) from

  • Georgia asks, via email, is there any chance to have the 30 percent federal grant extended?

  • MR. KAUFFMAN: OK. Well, this is where it may get too technical for some or maybe not technical

  • enough for others, butso I’ll need some coaching from people that are tuning

  • in as to whether I’ve got it right or wrong.

  • So I think both these questions are really quite similar and it really goes to the nature

  • of how the United States gives support to renewable energy, which is in the form of

  • tax support both in terms of tax credits as well astax credits for investment, something

  • called the Investment Tax Credit, as well as in the form of production tax credits.

  • And this is not really unusual. This is the way the United States gives support to other

  • industries, including the oil and gas industry and certain parts of the health care industry.

  • So it’s notthis is notthis part is not unusual.

  • The part that’s challenging for the renewable energy industry is that many projects are

  • developedthe windthink about a wind or solar park if youve ever seen one of

  • those. Those are projects that are developed bynot big companies that have a lot of

  • taxable income, but by entrepreneurs that go and find a farmer and ask the farmer if

  • theyre interested in selling development rights to build a wind farm.

  • And so what happens is that the developer collects a series of contracts, collects the

  • has the development rights and then gets various environmental permits and eventually

  • has to get a contract for the power that would be produced from the wind site. All at this

  • point is just a bunch of pieces of paper. And based upon these different pieces of paper,

  • the project developer gets financing to actually build the project.

  • And that kind of way of getting financing is called project finance. And so the problem

  • with that structure is that there’s not much taxable income at the project level.

  • And so to give the project developer a tax credit, when there’s no taxable income,

  • doesn’t really give that person any value. So the developer has to find somebody else

  • as a partnerwhat’s called a tax equity partnerthat has taxable income that will

  • participate in the project.

  • And it’s really essentially a debt instrument. The tax equity provider provides financing

  • in exchange for a fixed payment and the tax equity partner gets the tax benefits. And

  • so the 1603 program – I get itsorryone other point. So the challenge with

  • tax equity is that the biggest provides of tax equity in the past wereor have been

  • financial institutions.

  • So the biggest providers, for example, of tax equity were AIG, Wachovia and I’ve forgotten

  • the third one. (Laughter.) Oh, Lehman Brothers; how could I forget? So banks obviously don’t

  • have much taxable income at this point since they have a lot of losses. So the tax equity

  • market is pretty limited and it’s pretty expensive for developers.

  • So the 1603 program was part of the recovery act, gave developers the option offor

  • the investment tax creditof getting a cash grant from U.S. Treasury. And that meant

  • that they did not need to go to the tax equity market. So it has been a tremendously successful

  • program because it’s helped many projects be developed that otherwise would not have

  • been developed. And unfortunately, that programthe 1603 programis set to expire

  • at the end of December of this year.

  • And in fact, kind of thethe kind of grim news for the sector is that a number of the

  • federal programs that have been in place to support renewables are either expiring or

  • close to expiring or have expired. So thethere was a 1705 program for providing

  • loan guarantees. That expired at the end of September, just, you know, this last month.

  • Then we have the 1603 program expiring. And then youve got the production tax credit

  • for wind expiring. And there are others that I’m not even going to talk about that are

  • also on the verge of ending. So werethe industry really faces significant challenges.

  • MS. O'NEILL: Thank you. So wejust via Twitterhave a question about your Huffington

  • Post blog yesterday on clean energy markets.

  • MR. KAUFFMAN: Yeah?

  • MS. O'NEILL: We spend 8 to 10 times more on deployment than R&D already. Why do you say

  • that we should focus more on deployment? Isn’t the main challenge of clean energy that it’s

  • too expensive and technologically imperfect?

  • MR. KAUFFMAN: OK. Well, I appreciate that question. I think there is the wide perception

  • that renewable energy is not reliable or still too expensive. And I think thatcertainly

  • from a reliability standpoint, you knowproven technology of wind and solar is extremely

  • reliable now.

  • So the cost question is a – is a kind of complicated one because the first point is,

  • of course, there is no cost of carbon for conventional sources of energy. And so the

  • administration feels very much that there ought to be eventually a cost of carbon. And

  • that would change the cost comparison quite considerably.

  • And the second issue in terms of the cost point is that it’s not completely a level

  • playing field in terms of renewable energy and conventional sources of energy because

  • there are many historical subsidies that conventional source of energy has received. So in any case,

  • it’s not a completely level playing field. But nonetheless, as I said at the beginning,

  • those costs are coming down, for renewable energy, quite considerably so that this grid

  • parity idea is not very far ahead.

  • So I think that the point that I was trying to make in the post is that weveone

  • of the reasons why I think weve had challenges in the United States in the last almost 40

  • years is that weby trying to putby not having quite the right balance between

  • innovation and deployment is weve set up a model where we say because renewable energy

  • is really expensive, let’s innovate, innovate, innovate until renewable energy gets at equivalent

  • cost as conventional sources of energy, and then well deploy.

  • And so I think there are a couple of problems with that model. The first, as I said, is

  • thatfor an inventor. The first problem, as I said, is that the playing field isn’t

  • completely level. So the innovator has to overcome that first problem, which is that

  • market prices for conventional energy are, in a sense, tilted against renewable energy,

  • OK. But weve already talked about that.

  • But the second part, I think, is an even bigger obstacle which is the conventional energy

  • industry is obviously a very mature industry and it’s a production industry where there

  • are real scale advantages in manufacturing. And so it’s very tough for an inventor to

  • come up with a device that’s not only going to overcome the first obstacle, but has to

  • overcome thebeing able to achieve cost competitiveness without the benefits of scale.

  • And so thewhat weve seen in other countriesand one of the reasons, for

  • example, why wind and solar have dropped so much in costis the fact that thisthe

  • industry has gotten bigger and it’s had the benefits of scale economics. And so I

  • think that – I think – I think we will find, and have already found, that the bigger

  • the markets, the more innovation we draw in.

  • And maybe just the last point to make that really, really clear: If you think about your

  • you know, you got a PC in front of you. There’s a chip in that PC that’s gotten

  • better and better. You know, the famous Moore’s Law that people talk about. Well, Moore’s

  • Law is not a fundamental law of physics. My boss is a Nobel Prize winner in physics, so

  • I could probablyyou know, Secretary Chu probably – I get – I’ll probably get

  • into trouble with him on this point. (Laughter.)

  • But it’s not a law of physics, I don’t believe. But the reason that chipsperformance

  • improve so predictably is because computers sell into a market. Soand the challenge

  • and so you have to ask yourself, without the market that has existed for computers

  • and other electronic devices, do we honestly think that the chip that’s in therein

  • your computerwould have the performance characteristics it had today if the markets

  • had everhad been constrained. And that’s kind of the point that I’m making.

  • MS. O'NEILL: Hence why we have iPads and tablets today – (chuckles) – that we can carry

  • around.

  • MR. KAUFFMAN: And of courseand of course the challengeand I think this is another

  • pointis thatis that the difference, and the difference is really significant,

  • is that computers and all the electronic devices were selling into new markets which didn’t

  • really exist. And the challenge for renewable energy is, it’s selling into a mature market

  • of electricity and a commodity market.

  • An electron produced from coal or from nuclear or solar and wind are chemically the same.

  • And so it’s – and so the challengeone of the challenges that renewable energy faces

  • is that it has to, at least in the United States and in other developed markets, it

  • has to replace existingand existing sources of energy, because the market’s not growing

  • very rapidly, as opposed to selling something like a device that’s – or service that’s

  • related to an open-ended opportunity that the IT revolution has provided.

  • MS. O'NEILL: Great. So our next question comes from Facebook from Irene Lopez (ph). Why is

  • the West of the United States moving along nicely in renewables and the East is just

  • crawling along?

  • MR. KAUFFMAN: (Chuckles.) Well, I would say that it’s not exactly the case that the

  • that the East is crawling along. There are several states in the East that have quite

  • active renewable programs. So it really goes to theto theto the issue thatand

  • it’s a – both a challenge and an opportunity that much of electricity regulation andis

  • determined at a state level.

  • And so it’s really – a lot of this is kind of up to the states to decide. So there

  • are nearly 30 states that have what are called renewable portfolio standards. And they have

  • different standards of how much renewable energy they are trying to achieve. And there

  • are other states that don’t have renewable portfolio standards.

  • So it really comes down toit comes down to what each state decides that it wants to

  • do, but it makesit’s another challenge for renewable energy, because it means that

  • it’s very – I talked about it before, the benefits of scale, advantages of scale.

  • So if you take solar energy as just one example, nearly half the cost of solar energyand

  • it also, by the way, goes back to the point about the investment in technology versus

  • deployment.

  • Well, nearly half the cost of solar is the cost of installation and the balance-of-system

  • stuff. And so you can really imagine that if there was a single globalexcuse me,

  • a single U.S. market for solar, how much rapidly you would be able to take out some of these

  • other costs just from the benefits of scale. And so the fact that there’s a patchwork

  • of local regulations means it’s very tough forand in many cases, smaller companies

  • to be able to gain scale advantages.

  • MS. O’NEILL: On the topic of solar, Stefan (sp) via email asks, why not provide incentives

  • to ramp up home solar leasing, or more importantly, lease-to-buy?

  • MR. KAUFFMAN: Yes, OK. So of course, it’s been a very good model in several places in

  • the United States to have a leasing model. And the reason why that’s such a great idea

  • is because the cost of a solar system is a big up-front cost. Now, the benefit, you achieve

  • for many years. And so you pay your electric bill every month, and so it certainly makes

  • a lot of sense to think aboutinstead of paying your electric bill, to pay a lease