The Key to Creating Jobs: The Capital on the Sidelines

During President Obama’s speech this week at Carnegie Mellon University, he signaled emphatically that he would go after the votes to pass a clean energy bill this year, assuring that while “the votes may not be there right now… I intend to find them in the coming months… and we will get it done.”This is exactly the sort of presidential resolve that’s needed. The president went on to say,

[T]he only way the transition to clean energy will succeed is if the private sector is fully invested in this future – if capital comes off the sidelines and the ingenuity of our entrepreneurs is unleashed. And the only way to do that is by finally putting a price on carbon pollution.

He got it exactly right – investors are waiting to see what Congress decides. And once we do set a price for carbon pollution, a huge amount of money will be back in play to invest in clean energy.

This infusion of capital is critical to job creation. Every study that is done to assess job creation potential of the new energy economy builds off assumptions about how much capital will be devoted to energy efficiency, renewables, and the like. For example, the June 2009 University of Massachusetts report “The Economic Benefits of Investing in Clean Energy” assumed that the provisions of the House-passed American Clean Energy Leadership Act (ACELA), building on stimulus funds already committed, would bring $150 billion in new investment per year for the next decade – creating 2.5 million jobs. If that capital came 100% from the oil and gas sector, the net job creation (net of jobs lost in oil and gas) would be 1.7 million jobs.

While I believe some of that capital will come from diverting money from oil and gas, not all of it will. And, given unemployment numbers, there is quite a bit of capital sitting on the sidelines.

But don’t just take it from me, listen to a venture capitalist. In his testimony before the House Select Committee on Energy Independence and Global Warming, delivered April 2008, Mission Point venture capitalist Dan Abbasi noted:

We testified before Congress that we and other leading investment firms have mobilized billions of dollars from blue-chip investors with a mandate to invest in the decarbonization of our economy. And we stand ready to do much more if Congress passes a law to set some long overdue rules of the road.

A long-term stable price signal for carbon is imperative to encourage innovation and to promote investment. It needs to be long enough to reward investors for locking up their capital in asset-intensive, long lead-time energy projects and taking on the associated technical, construction and market risks. Moreover, only a long-term carbon price will motivate investment in the supply chain companies that must scale up and thrive if we’re to drive down the price of low-carbon energy.

While we’re finding some attractive investments today, candidly we are also holding back a lot of “dry powder” — or uninvested capital – and the economic downturn is only partly to blame. The biggest factor is continued uncertainty over whether Congress will pass a bill capping carbon. Renewable loan guarantees, grants and tax credits from the stimulus package are helping us to finance the supply of low-carbon solutions, but without a cap we won’t see the market demand needed to fully pull those solutions through.

In Europe, after the passage of their Emissions Trading System, the ETS, James Graham, Director of the Commercial Division for Camco International, noted that “If you look at the pricing for credits from renewable energy projects before and after the creation of the EU ETS, the pricing was much higher afterwards. Higher prices means more projects are happening. More capital is being allocated to investing in renewables because of enhanced returns from the addition of a carbon revenue stream to such projects.”

According to Clean Tech Venture Network, California saw a 20% compound annual growth rate in clean technology investments in 2002 after passage of a Renewable Portfolio Standard, but that jumped to 98% compound annual growth rate when AB 32 (putting a price on carbon) was introduced and passed 18 months later. (Clean Tech Venture Network data)

Last month, columnist David Brooks discovered capital sitting on the sidelines as well. If the American Power Act (the Senate version of comprehensive energy and climate legislation passes with a price on carbon) passed, utility executives noted just 4 weeks ago that they would move capital off the sidelines:

“Regarding wind energy investment at our NextEra Energy Resources subsidiary, we think we might invest about $1.5 billion to $2 billion more per year. Regarding solar, we think NextEra Energy Resources might invest $500 million or more per year outside of Florida and that our Florida Power & Light subsidiary might invest about $1 billion a year inside Florida.” — Lew Hay, chief executive of the power provider FPL Group.

“[NRG] could double the number of clean energy projects, from 17 to 36; it could triple the megawatts of clean generating capacity it is planning to add; it could produce three times as much nuclear power and 40 times as much coal with carbon capture and sequestration. — David Crane, the CEO of NRG Energy.

“The Renewable Portfolio Standard should be considered a short-term technique to “jump-start” a new industry but seen as a temporary incentive.  In contrast, monetizing carbon and placing a cap on carbon signals a major shift in the industry framework and provides a long-term market signal that is very different than the RPS approach,” according to BJ Stanbery, founder, Chairman and Chief Strategy Officer of HelioVolt, a Texas-based manufacturer of thin film solar.

Getting this capital off the sidelines and into clean energy projects is a clear path to job creation. But it’s not just about getting capital off the sidelines, it’s about keeping capital here in the U.S. Who can forget Jeff Immelt saying at a Wall Street Journal event in 2008 that “If the U.S. doesn’t buy my wind turbines, I’ll go to Turkey.” In this economy, we can hardly afford to have the next generation of energy projects shipped overseas. The U.S. can and should be a leader in clean energy, and with the right investment, we can make it happen.

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