Crossing the Valley of Death; Solutions to the next generation clean energy project financing gap

Executive Summary

Thanks to a massive investment surge, clean energy technologies have made extraordinary progress down their respective learning curves in recent years. Still, much work remains; the cost of generating a clean kilowatt-hour is still well above that of generating one from coal or natural gas on an unsubsidized basis, assuming no associated costs for carbon pollution. One of the biggest impediments to further progress is a persistent dearth of capital for potentially lower-cost breakthrough technologies that have advanced out of the laboratory but still require extensive and expensive field testing and trial installations before being deployed at scale. Financing exists for early stage, potentially high-risk/high-return technologies in the form of venture capital. It is available for latestage, potentially low-risk/low-return technologies in the form of project financing. But what about those technologies that fall somewhere in between?

The challenge of traversing the so-called “Valley of Death” intrigued the nonprofit Clean Energy Group (CEG). With funding from The Annenberg Foundation, CEG commissioned Bloomberg New Energy Finance (BNEF) to join in an assessment of current gaps in clean energy financing, and in soliciting recommendations to address them. In 2009, CEG and BNEF conducted more than five dozen interviews with industry players across the EU and North America, seeking their input on how to address the quandary. A myriad of ideas emerged, but three were particularly novel and are worthy of further study:

Emerging Technology Reverse Auction Mechanism. Under such a programme, a public sector body would encourage developers of projects that employ novel technologies, which are deemed to hold special promise, to “bid in” alongside others in a competitive process to win a fixed-price contract under a pre-established utility-level programme cap. Those offering to sell their electricity at lowest cost within a targeted technology grouping would be awarded publicly-supported power purchase agreements, potentially at above-market rates. Such a plan takes its inspiration from European feedin- tariffs (FITs) that offer developers fixed-price contracts and cash flow certainty. But unlike FITs, this scheme would see market participants, not policymakers, take the lead in setting prices. Such an approach is now being actively investigated by staff of the California Public Utilities Commission.

Efficacy Insurance. Clean energy projects that employ cutting-edge technologies by and large are regarded as too risky for conventional insurance coverage. But could the public and private sector play a joint role in offsetting some portion of that risk? Commercial insurers with appropriate levels of technical expertise could assess and support such selected technologies with “efficacy insurance” and receive support in turn for a portion of their risk in the form of publicly guaranteed or funded
reinsurance pools. In the US, there is precedent at the federal level in the form of the Terrorism Reinsurance Act, which backstops commercial insurers in case another 9/11-style attack causes widespread damage. At the state level, government-organized capital pools exist to backstop the risk that property insurers shoulder when underwriting policies on homes in floodplains or other at-risk locations. Policymakers and insurers could establish a similar pool with the express purpose of backstopping specific, tailored, technology risk mitigation insurance policies for projects that employ promising, new, clean energy technologies that could result in transformative cost or performance breakthroughs.

A Government-backed Commercialisation Finance Investment Entity. Such an initiative is currently being considered by the US Congress in the form of the Clean Energy Deployment Administration (CEDA). It would be seeded with federal dollars and operate in a relatively autonomous manner, perhaps leveraged via a “delegated investment authority” partnership with already engaged private sector institutions. CEDA would be expected to make investments in projects that help advance key clean energy technologies deemed to be in the national interest. It could offer straight debt and loan guarantees, take direct equity stakes, or even provide other forms of risk mitigation or re-insurance to support early stage technology deployment. Questions remain about exactly how such a programme would be structured, and care must be taken that it in no way crowds out private capital, but the concept offers genuine promise.

More details of these three possible solution elements recommended for consideration can be found in highlighted boxes in the accompanying text. While each has value, if they could be deployed simultaneously, they could increase technology demand, reduce novel technology risk, and provide greater financial resources to support new technology rollout.

Please download the full report for more detailed analysis.

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