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.

We’re 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 when – and 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 phones – the 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 they’re

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 of – that’s going to make us a real winner in the race. And I think

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

you need – in 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, we’ve 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 to – you need to develop

markets.

We don’t have the financing right because with – cost of financing in the United States

is very high. And so – and then this whole question of manufacturing – you 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 good – is 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 we’ve 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, but – so 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 as – tax 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 not – this is not – this part is not unusual.

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

developed – the wind – think about a wind or solar park if you’ve ever seen one of

those. Those are projects that are developed by – not big companies that have a lot of

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

they’re 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 partner – what’s called a tax equity partner – that 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 it – sorry – one other point. So the challenge with

tax equity is that the biggest provides of tax equity in the past were – or 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 of – for

the investment tax credit – of 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 program – the 1603 program – is set to expire

at the end of December of this year.

And in fact, kind of the – the 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 the – there 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 you’ve 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 we’re – the industry really faces significant challenges.

MS. O'NEILL: Thank you. So we – just via Twitter – have 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 that –certainly

from a reliability standpoint, you know – proven 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 we’ve – one

of the reasons why I think we’ve had challenges in the United States in the last almost 40

years is that we – by trying to put – by not having quite the right balance between

innovation and deployment is we’ve 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 we’ll deploy.

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

that – for 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 we’ve 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 the – being able to achieve cost competitiveness without the benefits of scale.

And so the – what we’ve seen in other countries – and one of the reasons, for

example, why wind and solar have dropped so much in cost – is the fact that this – the

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 probably – you 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 chips’ performance

improve so predictably is because computers sell into a market. So – and 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 there – in

your computer – would have the performance characteristics it had today if the markets

had ever – had been constrained. And that’s kind of the point that I’m making.