[Senate Hearing 110-63]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 110-63
 
                      ADVANCED ENERGY TECHNOLOGIES

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   TO

INVESTIGATE MARKET CONSTRAINTS ON LARGE INVESTMENTS IN ADVANCED ENERGY 
   TECHNOLOGIES AND INVESTIGATE WAYS TO STIMULATE ADDITIONAL PRIVATE 
       SECTOR INVESTMENT IN THE DEPLOYMENT OF THESE TECHNOLOGIES

                               __________

                             MARCH 7, 2007


                       Printed for the use of the
               Committee on Energy and Natural Resources


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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii              PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota        LARRY E. CRAIG, Idaho
RON WYDEN, Oregon                    CRAIG THOMAS, Wyoming
TIM JOHNSON, South Dakota            LISA MURKOWSKI, Alaska
MARY L. LANDRIEU, Louisiana          RICHARD BURR, North Carolina
MARIA CANTWELL, Washington           JIM DeMINT, South Carolina
KEN SALAZAR, Colorado                BOB CORKER, Tennessee
ROBERT MENENDEZ, New Jersey          JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas         GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
JON TESTER, Montana                  MEL MARTINEZ, Florida

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
              Frank Macchiarola, Republican Staff Director
             Judith K. Pensabene, Republican Chief Counsel
                         Michael Carr, Counsel
           Kathryn Clay, Republican Professional Staff Member










                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     1
Denniston, John, Partner, Kleiner Perkins Caufield & Byers, Menlo 
  Park, CA.......................................................    20
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............     2
Liebreich, Michael, CEO and Founder, New Energy Finance Ltd, 
  London, England................................................    27
Musk, Elon, Chairman, Tesla Motors, El Segundo, CA...............    13
Peters, Jerome P. Jr., Senior Vice President, TD Banknorth N.A., 
  Westport, CT...................................................    17
Reicher, Dan W., Director, Climate Change and Energy Initiatives, 
  Google, Mountain View, CA......................................     3






                                APPENDIX

Responses to additional questions................................    55


                      ADVANCED ENERGY TECHNOLOGIES

                              ----------                              


                        WEDNESDAY, MARCH 7, 2007

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Jeff 
Bingaman, chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW 
                             MEXICO

    The Chairman. All right, why don't we go ahead and get 
started?
    Thank you all very much for being here. Today we're taking 
testimony on how we can stimulate investment and advance energy 
technologies.
    The challenges we face in the energy arena are very 
substantial, as we all know. It's going to take a lot of 
combined effort and coordinated effort between government and 
industry and the investment community to make progress on this.
    The problems of over-reliance on fuels from unstable or 
unappealing regimes and the looming problem of global warming 
lead to the conclusion that we need to find a new way forward 
on energy that reduces our reliance on foreign energy sources, 
and at the same time reduces the greenhouse gas intensity of 
our energy use. Whether you focus on the national security 
issue of energy independence or the environmental problems, 
obviously you wind up somewhat at the same place.
    There are near-term technologies that appear to be very 
promising, such as electric and plug-in hybrid electric 
vehicles, using advance batteries, ultra efficient lighting and 
appliances, bio-fuels, renewable energy sources such as wind 
and solar generators, and near-zero emission coal plants with 
carbon capture and storage. These are all technologies that we 
believe can be commercialized, and in many cases, are being 
commercialized.
    In addition to the use of these technologies, there's a 
great opportunity for us to establish U.S. leadership in the 
development of these technologies and the marketing of them. 
Other countries such as Japan, in the case of solar technology, 
and Denmark, in the case of wind power generation, have begun 
to stake out leads in commercializing technologies in these 
emerging markets.
    There's no lack of innovation here in our own country, but 
we do need policies in place to ensure that we are a major 
participant in the development and commercialization of these 
technologies.
    So we have a great group of witnesses today who are expert 
on these issues. We very much appreciate them being here. 
Before I introduce the witnesses, let me call on Senator 
Domenici for his opening comments, and then we'll introduce the 
witnesses.
    I was told earlier there would be a vote or two votes at 10 
o'clock. I'm now told that those have been put off. So we will 
just proceed after Senator Domenici's comments to the 
witnesses, and we'll go as long as we're able to.
    Senator Domenici.

   STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM NEW 
                             MEXICO

    Senator Domenici. Thank you, Mr. Chairman. I have a 
statement for the record, so we can get on with it.
    [The prepared statement of Senator Domenici follows:]
    Prepared Statement of Hon. Pete V. Domenici, U.S. Senator From 
                               New Mexico
    Let me begin by thanking our distinguished panel of witnesses for 
being with us today. All of you are involved in an important area for 
our nation's future--helping to make it possible for new energy 
technologies to make their way from the drawing board to the real 
world.
    Our nation faces important challenges that we will need new energy 
technologies to address. Our reliance on imported oil and increasingly 
liquefied natural gas is a detriment to our national security. And 
concerns about the potential risks of climate change are driving us to 
promote innovative technologies that do not contribute greenhouse gases 
to the atmosphere.
    I believe one of the most significant contributions of the Energy 
Policy Act of 2005 was authorizing the Secretary of Energy to issue 
loan guarantees for investments in innovative energy technologies.
    I was pleased by the Department's announcement yesterday that it 
has received 143 pre-applications for loan guarantees. This is real 
evidence that there is significant private-sector interest in bringing 
cutting-edge technologies to market to re-invent our energy sector.
    I continue to support DOE's efforts, and in fact I hope that the 
Department goes further to implement the loan guarantee program on the 
scale that was envisioned in the Energy Bill. In some cases, quick 
action on the loan guarantee process may make the difference between 
the United States gaining or losing the lead in commercializing new 
technologies.
    I noted an example of this last week when we reviewed the EIA's 
annual energy outlook, but it bears repeating here. There is a company 
currently planning to build the world's first commercial cellulosic 
ethanol plant in Idaho, that has submitted a pre-application under the 
loan guarantee program. If the Department of Energy delays too long in 
its process of awarding loan guarantees, this potential capital 
investment in cellulosic ethanol will almost certainly be deployed 
elsewhere in the world first.
    I also believe it is important to promote cleaner coal and advanced 
nuclear technologies. These are the bedrock of our power generation 
system. I noted that none of the witnesses discuss these technologies 
in their written testimony. I hope that we might have a discussion on 
financial incentives for nuclear and clean coal technologies at another 
time.
    Ultimately, it is up to the private sector to build the systems 
that will ensure our access to clean, reliable, and affordable energy. 
But the government can, and should, partner with industry to encourage 
the development and deployment of new energy technologies. I look 
forward to hearing from today's witness how we can best accomplish this 
task.

    Senator Domenici. It seems to me that nothing is more 
important than that we find ways to adequately finance the 
transition from the current economy to whatever the economy is 
going to look like after we have created innovations, 
innovations in the use of coal, other innovations.
    A bill that we passed the year before last, had a title--
title XVII, I didn't bring it with me--but I'll ask that it be 
made part of the record at this point as if it were here.*
---------------------------------------------------------------------------
    * The information referred to has been retained in committee files.
---------------------------------------------------------------------------
    Senator Domenici. Anybody that reads it and contemplates 
that paragraph would know that we did expect to give to the 
administration power for all kinds of financing mechanisms for 
innovative technology, in particular loan guarantees. We 
provided methods and manners for it.
    We even provided a method for loan guarantees that was 
turned on its head by the people at OMB. They read it 
completely wrong. It was just intended to be a provision that 
said that we can have loan guarantees, and it won't cost the 
Federal Government anything, because the borrowers will pay the 
risk. There's a risk factor to be attached to the loans, and 
you'd pay that in advance, and it goes into a pool and that 
pool is there to save the government harm.
    We've just been able to get that program started and it 
should be a very giant fund in my opinion. We're still pushing 
very hard, both the Chairman and I and many others, pushing the 
administration to do more, but I think eventually we're going 
to have to do more ourselves by being more specific in loan 
guarantee authority and loan guarantee mandates on the 
administration.
    This need is across the board as we make the transition 
from nuclear fuels to wind technology, nuclear energy to wind 
technology, and I hope we can make some strides during the 
remainder of this year.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much. Our witnesses today are 
Dan Reicher, who's the director of energy and climate 
initiatives for Google, out of Mountain View, California; Elon 
Musk, who is the chairman of Tesla Motors from El Segundo, 
California; Jerome Peters, the senior vice president with TD 
Banknorth in Westport, Connecticut; John Denniston, who's a 
partner with Kleiner Perkins Caufield and Byers in Menlo Park, 
California; and Michael Liebreich who is with New Energy 
Finance. He's the co-founder and CEO on New Energy Finance out 
of London, England.
    We very much appreciate all of you being here. Why don't we 
just go in the order in which you're seated, from left to 
right--our left to our right--and just take 6 or 8 minutes, if 
each of you would make the main points. Obviously, your full 
statements will be included in the official record of the 
committee hearing, but if you could make the main points that 
you think we need to understand, we would appreciate that. Dan, 
go right ahead.

   STATEMENT OF DAN W. REICHER, DIRECTOR, CLIMATE CHANGE AND 
         ENERGY INITIATIVES, GOOGLE, MOUNTAIN VIEW, CA

    Mr. Reicher. Thank you, Mr. Chairman. Good morning to 
Senators Domenici and Thomas, and Senator Bunning. I'm very 
pleased to be here today, and pleased to talk about this very 
important topic of how we accelerate investment in clean energy 
technology.
    I am at Google; have been there for the past 3 weeks. A 
year ago, Google set aside well in excess of a billion dollars 
to make major investments in climate and energy, global poverty 
and global health. I'm directing the climate and energy 
investment and policy unit at Google and we're intensely 
interested in this area of how you move clean energy projects 
and technologies to market. We want to be a big player in that.
    I spent several years with a private equity firm, New 
Energy Capital, where we invested in several ethanol plants, 
bio-diesel plants, co-generation facilities and bio-mass power 
facilities. I also was with a major engineering procurement and 
construction firm that built major energy projects around the 
world, and for a number of years I was at the Department of 
Energy, where I was Assistant Secretary of Energy for Energy 
Efficiency and Renewable Energy.
    To start, Mr. Chairman, I would note there is a very well-
worn pathway for investment in clean energy. It starts, as you 
know, with high-risk, generally government-backed research to 
move technologies forward. It goes from there to venture 
capital and corporation-backed commercialization of that 
technology, and then it goes from there to actual deployment of 
the technologies--as we say, ``steel in the ground,'' and that 
is the world of project finance and related financial 
mechanisms. Those are different steps along this pathway.
    I think today's hearing is focused primarily on that final 
stage. The actual deployment of clean energy technologies at a 
scale that is significant enough to actually address our 
energy-related challenges, climate change, national security, 
poverty alleviation and economic competitiveness.
    The good news, Mr. Chairman, is that there are an array of 
clean energy technologies that can be developed, that have been 
developed, with government and private sector investment, that 
can address many of these energy-related challenges. The not-
so-good news is that investment, in the actual deployment of 
these technologies--again, ``steel in the ground''--is lagging.
    Sometimes the risk profile of the technology is too high. I 
think about cellulosic ethanol projects in this category. 
Sometimes the return profile of this technology is too low. I 
think about energy efficiency projects in this category. 
Sometimes the technology is too costly in comparison with 
competing technologies. I think about clean coal projects in 
this category.
    The single most important point I'll make today, Mr. 
Chairman, is that aggressive Federal policy can drive private 
sector investment, measured in the trillions--trillions--of 
dollars that would be required to move the Nation and the globe 
toward a more sustainable energy future.
    There are several very critical steps the Federal 
Government must take. First, the Federal Government must put a 
price on greenhouse gas emissions in order to internalize the 
cost of climate change and move energy investments toward lower 
carbon and more efficient technologies.
    Second, we must remove barriers to cleaner and more 
efficient technologies and establish reliable, long-term 
incentives and rigorous standards to move these technologies to 
market.
    Third, we must significantly increase public funding of 
research development and deployment of these technologies.
    And fourth, the Federal Government must support fluid, 
transparent markets to monetize the environmental benefits that 
these technologies provide.
    Let me highlight three technology areas where there are 
important lessons to be learned about the important role of 
Federal policy in stimulating private sector investments. First 
is the unprecedented level of investment in new corn ethanol 
projects in the United States which reflects, in large part, 
major Federal policy mechanisms adopted by the Congress: a 
renewable fuel standard, a blender's tax credit that's good 
through 2010, and a phaseout of MTBE.
    In contrast, investment in cellulosic ethanol plants--which 
hold the prospect of a more sustainable approach to bio-fuel 
production--has lagged because of the higher risk associated 
with the projects and the weakness of the Federal Government's 
response--in particular, uncertainty surrounding the Federal 
appropriations for cellulosic ethanol projects and problematic 
Federal loan guarantees.
    The second area I would highlight is wind projects. There 
is no better example of the role of Federal policy in 
stimulating and retarding investment in clean energy projects 
than the on-again, off-again, investment in U.S. wind projects, 
because of the on-again, off-again nature of the wind 
production tax credits. For more than a decade these credits 
have been here for a year or 2 and then gone for months or 
years. Investors simply will not back a U.S. wind project if it 
looks like the tax credit authorization will expire prior to 
completion of the project. This has caused a damaging boom-and-
bust cycle in the industry. I would also note that largely 
because of IRS rules, the actual monetization of the tax 
credits is highly complex and expensive and there is a limited 
group of investors who actually qualify to use these credits.
    The third technology area where there are policy lessons to 
be learned is energy efficiency. Mr. Chairman, energy 
efficiency is the real low-hanging fruit in the U.S. and global 
economy. From cars and homes to factories and offices, we know 
how to cost-effectively deliver a vast quantity of energy 
savings today, and the exciting fact is that this low-hanging 
fruit grows back.
    The incandescent light bulb we replace today with a compact 
fluorescent, we will be able to replace again with an even more 
efficient bulb in the future. Similarly, we can take our gas-
guzzling SUV today and replace it with a more efficient full-
featured hybrid gas-electric model, and down the road we will 
replace the hybrid with an advanced model that runs on ethanol 
or bio-diesel and plugs into the electric grid.
    However--and this is the important point--relatively little 
investment has found its way to commercializing or deploying 
energy efficiency technologies despite their cost effectiveness 
and reliability. Explanations range from the simple to the 
arcane. The less sexy nature of efficiency technologies, the 
often more disaggregated nature of their deployment, the 
greater challenge of financing savings versus production and 
weaker policy support.
    In testimony last week that I gave before the Senate 
Finance Committee, I addressed how Federal policy can enhance 
private sector investment in energy efficiency. I highlighted 
an array of Federal policy instruments that can enhance 
investment, including automobile fuel economy standards, 
applying sufficiency standards, low income home weatherization 
investment partnerships, tax credits and research and 
development funding.
    One policy mechanism that I want to end up with, and that I 
urge you to take a look at, is the Energy Efficiency Resource 
Standard, which could drive massive new investment in energy 
efficiency. The EERS, as it's called, sets efficiency resource 
targets for electricity and gas suppliers over the period of 
2008 to 2020. It builds on policies that are now in place in a 
number of States across the United States, policies that have 
been quite successful, for example, in Texas and in Vermont.
    The EERS is a compelling complement to a renewable 
portfolio standard. By moderating demand growth through an EERS 
and increasing clean generation through an RPS, we can slow and 
begin to decrease carbon emissions in the utility sector while 
we work to adopt more comprehensive climate change legislation.
    In conclusion, Mr. Chairman and members of the committee, 
the investment community is ready, willing and able to back 
massive deployment of clean energy technology throughout this 
Nation and around the globe. However, without a major policy 
push by the Federal Government, that starts with long-term and 
reliable incentives and rigorous standards and includes putting 
a price on greenhouse gas emissions, we will simply not see the 
massive investment that our critical energy-related challenges 
require. The bully pulpit will not be enough to drive this 
critical investment. The Federal Government will indeed have to 
pay to play. Thank you very much.
    [The prepared statement of Mr. Reicher follows:]
  Prepared Statement of Dan W. Reicher, Director, Climate Change and 
             Energy Initiatives, Google, Mountain View, CA
    Mr. Chairman and members of the Committee, my name is Dan W. 
Reicher and I am pleased to testify today on federal policy measures 
that can enhance investment in clean energy, particularly energy 
efficiency. I recently joined Google where I serve as Director of 
Climate Change and Energy Initiatives for the company's new 
philanthropic venture called Google.org. Google.org has been 
capitalized with more than $1 billion of Google stock to make 
investments and advance policy in the areas of climate change and 
energy, global poverty and global health.
    Prior to my position with Google, I was President and Co-Founder of 
New Energy Capital, a private equity firm funded by the California 
State Teachers Retirement System and Vantage Point Venture Partners to 
invest in clean energy projects. New Energy Capital has made equity 
investments and secured debt financing for ethanol and biodiesel 
projects, cogeneration facilities, and a biomass power plant. Prior to 
this position, I was Executive Vice President of Northern Power 
Systems, the nation's oldest renewable energy company. Northern Power 
has built almost one thousand energy projects around the world and also 
developed path-breaking energy technology.
    From 1993 to 2001, I served in the Clinton Administration as 
Assistant Secretary of Energy for Energy Efficiency and Renewable 
Energy, Department of Energy Chief of Staff and Deputy Chief of Staff, 
and the Acting Assistant Secretary of Energy for Policy. Mr. Chairman, 
we have a broad array of options for addressing the nation's energy 
challenges, as other witnesses demonstrate in their testimony today. 
The federal government, through Congressional and Presidential 
leadership, has a powerful role to play in moving these energy 
solutions to market. I am honored to share with you my views as an 
investor, former policymaker and most importantly, as a professional 
dedicated to ensuring our success in meeting today's energy-related 
challenges: climate change, national security, economic competitiveness 
and poverty alleviation. There are several steps the federal government 
must take to drive massive private sector investment--measured in the 
trillions of dollars--that will be required to move the nation toward a 
more sustainable energy future:

   First, the federal government must put a price on greenhouse 
        gas emissions in order to internalize the costs of climate 
        change and move energy investments toward lower carbon and more 
        efficient technologies.
   Second, we must remove barriers to cleaner and more 
        efficient technologies and establish incentives and standards 
        to move these technologies to market.
   Third, we must significantly increase public funding of 
        research, development and deployment of advanced energy 
        technologies.
   And fourth, the federal government must support fluid, 
        transparent markets to monetize the environmental benefits that 
        these technologies provide. The market needs clear definitions 
        of and ownership rules for renewable energy certificates, 
        carbon offsets, white tags, and other environmental assets 
        created by regulation at the federal and state level.
  energy efficiency--our cheapest, cleanest and fastest energy option
    Today I have been asked to focus my attention on how to spur 
investment in what many see as our fastest, cheapest and cleanest 
opportunity to address our energy challenges--energy efficiency. Duke 
Energy CEO James Rogers has termed energy efficiency our ``fifth fuel'' 
and energy efficiency guru Amory Lovins measures it in ``Negawatts''. 
The federal government has the power to leverage vastly more private 
sector investment in energy efficiency thereby dramatically increasing 
U.S. competitiveness, improving our quality of life, and addressing 
climate change.
    Energy efficiency is the real low-hanging fruit in the U.S. and 
global economy. From cars and homes to factories and offices, we know 
how to cost effectively deliver vast quantities of energy savings 
TODAY. And the exciting fact is that this low hanging fruit grows back. 
The incandescent light bulb we replace today with a compact 
fluorescent, we will be able to replace again with an even more 
efficient bulb in the future. Similarly, we can trade our gas-guzzling 
SUV today for a more efficient full-featured hybrid gas-electric model. 
And down the road we will replace the hybrid with an advanced model 
that runs on ethanol or biodiesel and plugs into the electric grid.
    We have made an important transition in this country away from a 
focus on ``energy conservation'' and toward the more recent concept of 
``energy efficiency'' (or ``energy productivity''). In the era of 
energy conservation in the 1970's and 1980's we were asked to ``do less 
with less''--to lower the thermostat, turn off the lights, don a 
sweater and leave the car in the garage. Energy efficiency takes a 
different approach, offering the opportunity to ``do more with less''. 
As McKinsey and Company states in a 2006 report, ``By looking merely in 
terms of shrinking demand, we are in danger of denying opportunities to 
consumers--particularly those in developing economies who are an 
increasingly dominant force in global energy-demand growth. Rather than 
seeking to reduce end-user demand--and thus the level of comfort, 
convenience and economic welfare demanded by consumers--we should focus 
on using the benefits of energy most productively.''
    The main finding of the 2006 McKinsey report is that while energy 
demand will continue to grow, ``there are sufficiently economically 
viable opportunities for energy-productivity improvements that could 
keep global energy-demand growth at less than 1 percent per annum--or 
less than half of the 2.2% average growth to 2020 anticipated in our 
basecase scenario.'' According to McKinsey, ``Energy-productivity 
improvements can come either from reducing the energy inputs required 
to produce the same level of energy services, or from increasing the 
quality or quantity of economic outputs.'' The report concludes that 
globally the largest untapped potential for cost-effective energy 
productivity gains (>10% Internal Rate of Return) lies in the 
residential sector (e.g. better building shells and more efficient 
water heating and lighting), power generation sector (e.g. more 
efficient power plants and electricity distribution) and industrial 
sector (e.g. less energy-intensive oil refineries and steel plants).
    However, McKinsey concludes that capturing this vast potential will 
require a significant policy push. McKinsey says, ``market-distorting 
subsidies, information gaps, agency issues, and other market 
inefficiencies all work against energy productivity. Furthermore, the 
small share of energy costs for most businesses and consumers reduces 
end-use response to energy-price signals. Therefore shifting global 
energy demand from its current rapid growth trajectory will require the 
removal of existing policy distortions; improving the transparency in 
the usage of energy; and the selective deployment of energy policies, 
such as standards.''
    As we consider this policy dimension we also need to consider how 
to harness an important and heartening new trend--the unprecedented 
flow of private capital toward clean energy. Who would have thought 
even a few years ago that Goldman Sachs, Citigroup, John Hancock 
Insurance, General Electric, Morgan Stanley, the Carlyle Group, Kleiner 
Perkins and other titans of Wall Street and Silicon Valley would be 
major investors in clean energy technologies and projects? In fact, in 
just the last year we have seen literally billions of dollars invested 
in companies commercializing advanced energy technologies and tens of 
billions of dollars invested in building clean energy projects. 
``CleanTech'' has recently become the hottest new area of venture 
capital investing, while clean energy projects have become an important 
new element of the project finance world.
    At the same time, most of this increasing investment in 
technologies and projects has been on the supply side involving key 
technologies like solar, wind, and biofuels. However, little investment 
has found its way to commercializing or deploying energy efficiency 
technologies despite their cost-effectiveness and reliability. 
Explanations for this range from the simple to the arcane: for example, 
the less ``sexy'' nature of efficiency technologies, the often more 
disaggregated nature of their deployment, the greater challenge of 
financing ``savings'' measured in Negawatts than production measured in 
Megawatts, and weaker policy support.
    Regarding the last point, aggressive federal policy can make a 
major difference in the development and deployment of energy 
technology. In the case of ethanol, for example, Congress has enacted 
both a significant federal tax credit and major federal mandate which 
have helped stimulate massive new investment in production plants as 
well as new technologies. Energy efficiency has simply not enjoyed this 
kind of policy support and the investment that it generates. Below I 
address how federal policy can enhance private sector investment in 
energy efficiency, as it now supports critical investment in renewable 
energy.
    I should emphasize that by moderating demand growth through energy 
efficiency, and at the same time increasing clean generation using 
renewable sources, we can slow and begin to decrease carbon emissions 
while we work to adopt and implement a comprehensive approach to 
addressing climate change. Congress should pay careful attention to 
this complementary strategy involving both energy efficiency and 
renewable energy as an important down payment on reducing carbon 
emissions, while it deliberates the more complex issues entailed in 
enacting and implementing an economy-wide climate policy.
      federal policies to increase investment in energy efficiency
    There are an array of federal policy instruments that can enhance 
investment in energy efficiency including standards, tax credits, and 
RD&D funding.
Automobile Fuel Efficiency
    The single most effective energy efficiency policy ever adopted by 
the federal government is the Corporate Average Fuel Economy 
requirement (CAFE). Since its adoption in 1975, CAFE has cut U.S. oil 
consumption by over 1 billion barrels each year. Even with this 
progress, passenger vehicles today consume approximately 40% of the 
petroleum in the United States--with the transportation sector 
projected to generate 89 percent of the growth in petroleum demand 
through 2020. And the federal government has not significantly 
strengthened the CAFE standards in years, further diminishing their 
effectiveness. Raising fuel economy performance to 40 mpg over the next 
10 years--through revision of the CAFE standards--could alone cut 
passenger vehicle oil demand by about one-third or 4 million barrels 
per day by 2020--about twice current daily imports from Saudi Arabia 
and Kuwait.
    Existing technologies--hybrid electric automobiles, drive train 
improvements, lighter weight materials--can today get us to roughly 
double the mileage of our current passenger fleet. Perhaps the most 
exciting technological development has been the recent emergence of 
plug-in hybrids--a technology that will enable us to exceed any fuel 
economy proposals under consideration at this time. Plug-in hybrids 
have a more powerful battery than traditional hybrids and are designed 
to be connected to the electric grid for recharging. This allows the 
vehicle to cut gasoline use and, if charged at night, use lower cost 
and cleaner off-peak electricity. These cars can also benefit electric 
utilities when plugged in during the day by sending power back to the 
grid to meet peak power needs, thereby supplanting some of the most 
costly and often most polluting power generation. According to 
analysts, this benefit to utilities could be worth thousands of dollars 
per year per car, a value that could rapidly exceed the incremental 
cost of the vehicle's more powerful battery if shared with consumers.
    By increasing vehicle use of electricity over liquid fuels, we 
should have an easier time improving the environmental profile of our 
automotive fleet. This is because lowering emissions from hundreds of 
power plants will likely be a more rapid and straight forward task than 
influencing the fuel purchases and driving behavior of millions of 
individuals. Even charged with electricity from coal dominated parts of 
our electric grid, a plug-in hybrid is generally cleaner than a 
gasoline powered car. In addition, plug-in hybrid vehicles enabled to 
run on biofuels can reduce greenhouse gasoline emissions up to 80%, and 
oil consumption by as much as two thirds.
    The multiple benefits provided by plug-in hybrids call for 
significant federal actions to move this technology to market as 
quickly as possible. In addition to controls on greenhouse gas 
emissions and increased CAFE standards, the federal government can 
partner with the private sector to address outstanding technological 
barriers such as battery cost and performance. Even more importantly, 
the federal government should support deployment of plug-in hybrid 
vehicles through tax incentives and federal fleet procurement.
Energy Efficiency Resource Standard (EERS)
    Just as the Senate has voted in favor of a Renewable Portfolio 
Standard, it should strongly consider a similar--and highly 
complementary--mechanism called the Energy Efficiency Resource Standard 
(EERS). The EERS sets efficiency resource targets for electricity and 
gas suppliers over the period of 2008-2020. It builds on policies now 
in place in eight states--California, Texas, Vermont, Connecticut, 
Nevada, Hawaii, Pennsylvania, and Colorado--designed to cut the growth 
in electricity demand through energy efficiency. The Texas and Vermont 
policies have been implemented for several years and have been very 
successful. Texas utilities, for example, are required to meet 10% of 
their load growth needs through efficiency programs. Utilities are 
easily exceeding this target, resulting in current consideration of 
raising the standard to as high as 50% of load growth. Vermont created 
an energy efficiency utility that has helped the state in recent years 
meet more than two thirds of load growth (typically 1.5 to 2% per year) 
through energy efficiency and the state is on a path to avoid all load 
growth in the near future.
    Under the proposed federal EERS, suppliers are required to obtain 
energy savings from customer facilities and distributed generation 
installations in amounts equal to at least 0.75% of base year energy 
sales for electricity, and 0.50% for natural gas. This requirement is 
phased in over three years and cumulates during the compliance period. 
The requirement applies to retail suppliers, be they local distribution 
utilities or competitive energy suppliers, who sell annually at least 
800,000 megawatt hours of electricity or 1 billion cubic feet of 
natural gas.
    Eligible energy savings measures include efficiency improvements to 
new or existing customer facilities, distributed energy technologies 
including fuel cells and combined heat and power systems, and recycled 
energy from a variety of defined commercial and industrial energy 
applications. Savings are determined using evaluation protocols that 
can be defined by the Department of Energy (DOE), with state protocols 
available that the Department can build upon.
    Suppliers may obtain and trade credits for energy savings under 
procedures to be defined by DOE. This will enable suppliers with energy 
savings beyond the requirements of the standard to sell them to 
suppliers unable to obtain sufficient savings from their customers 
within a given compliance period.
    The EERS is a compelling complement to a Renewable Portfolio 
Standard (RPS), which the Senate has passed before and will consider 
again this year. EERS moderates demand growth so that RPS targets can 
actually reduce fossil fuel consumption. The RPS provision the Senate 
supported in 2005 calls for 10% of U.S. electricity generation to be 
generated from non-hydro renewable energy sources in 2020. However, the 
Energy Information Administration forecasts electricity demand to grow 
more than 22% by 2020. Unless we bring down demand growth, the RPS will 
not likely reduce fossil energy consumption or carbon emissions. The 
EERS proposal, as analyzed by the American Council for an Energy 
Efficient Economy would reduce 2020 peak electricity demand by about 
10% or about 133,000 MW--equivalent to almost 450 power plants at 300 
MW each. This would bring demand growth down to a level where a 10% RPS 
could meet all new electricity generation needs. ACEEE also estimates 
that by 2020, this provision will reduce natural gas needs by about 2 
billion cubic feet, reduce CO2 emissions by more than 340 
million metric tonnes, and result in cumulative net savings to 
electricity and natural gas consumers of about $29 billion. Moving to a 
15% or 20% RPS level, as proposed in recent bills, would further 
accelerate the move to a less carbon-intensive electricity system.
    These two policies, EERS and RPS, figure prominently in a 
forthcoming report, prepared by the American Council for an Energy 
Efficient Economy and the American Council on Renewable Energy and 
supported by the Rockefeller Brothers Fund, that explores the synergies 
between energy efficiency and renewable energy. These two energy 
sources offer a highly complementary approach to managing the 
challenges of the U.S. power sector in the coming decades.
    By moderating demand growth through an EERS and increasing clean 
generation through an RPS, we can slow and begin to decrease carbon 
emissions in the utility sector, while we work to adopt and implement a 
comprehensive cap-and-trade system. Congress should give strong 
consideration to this EERS-RPS approach as a straightforward down 
payment on reducing carbon emissions, while it deliberates the more 
complex issues entailed in enacting and implementing an economy-wide 
climate policy.
Utility Revenue Decoupling
    The recent National Action Plan for Energy Efficiency (http://
www.epa.gov/cleanrgy/actionplan/eeactionplan.htm) provides joint 
recommendations from federal agencies, states, the utility industry and 
environmental groups regarding energy efficiency. One area of focus in 
the report is the concept of ``revenue decoupling''. This approach, 
first instituted in California, decouples sales from profits, so that 
electric and gas utilities do not have a disincentive to promote energy 
efficiency. The current ``throughput'' incentive (the more electricity 
or gas a utility sells, the more it earns) is a significant impediment 
to energy efficiency. As state utility commissions work to advance 
decoupling, Congress and the Administration (especially FERC and DOE) 
should consider further incentives to promote energy efficiency. One 
important federal role would be to promote ``best practices'' and 
provide technical assistance to interested parties to facilitate energy 
efficiency.
Tax Credits for Efficient Buildings
    Thanks in part to the efforts of this Committee, the Energy Policy 
Act of 2005 provided important tax incentives for efficient buildings 
and equipment, in addition to significant support for renewable energy 
and other advanced energy technologies. Legislation introduced last 
year by Senators Snowe and Feinstein, called the EXTEND Act, extends 
and expands these building-related incentives to enhance investment in 
energy efficiency. The principal purpose of the bill is to extend the 
temporary 2005 EPACT tax incentives for a sufficient length of time so 
that the business community can invest in complying with the 
significant requirements for the incentives.
    Commercial buildings and large residential subdivisions have lead 
times for planning and construction of 2-4 years, so many businesses 
will refrain from making investments to qualify for tax incentives if 
the duration of the incentive is only 2 years.
    The EXTEND Act provides four years of assured incentives for most 
situations, and some additional time for projects with particularly 
long lead times, such as commercial buildings. The EXTEND Act also 
makes an important modification to the 2005 EPACT incentives so as to 
phase out incentives based on the cost incurred in saving or producing 
energy and replace them with incentives based on the actual performance 
(measured by on-site ratings for whole buildings and factory ratings 
for products like air conditioners, furnaces, and water heaters.) The 
legislation provides a new home retrofit tax incentive for ambitious 
levels of energy savings that are verified by a third-party rater.
    A goal of this bill is to provide a transition from the EPACT 2005 
retrofit incentives, which are based partially on cost and partially on 
performance, to a new system that provides greater financial incentives 
based on performance. These larger incentives should not cost the 
Treasury more because the ambitious requirement of a minimum 20 percent 
savings will effectively eliminate free ridership, which is the problem 
that caused the current EPACT incentives to be scored as high as they 
were.
    The Snowe-Feinstein bill also extends the applicability of the 
EPACT incentives so that the entire commercial and residential building 
sectors are covered. The current EPACT incentives for new homes are 
limited to owner-occupied properties or high rise buildings. The Snowe-
Feinstein bill extends these provisions to rental property and offers 
incentives whether the owner is an individual taxpayer or a 
corporation. This extension does not increase costs significantly, but 
it does provide greater fairness and clearer market signals to builders 
and equipment manufacturers.
Public-Private Partnership on Low Income Weatherization
    Across the nation, poor families often increasingly face the choice 
between heating and eating as prices for natural gas, heating oil, 
propane and electricity have skyrocketed and millions of poor Americans 
have found themselves spending more than one-quarter of their income to 
run their furnaces, air conditioners and keep the lights on. In a 
survey of low income families--before the energy price spike in 2005-
2006--32% went without medical or dental care, 24% failed to make a 
rent or mortgage payment, and 22% went without food for at least one 
day due to energy bills.
    Congress continues to debate the traditional fix for this problem: 
additional funding for the Low Income Home Energy Assistance Program 
(LIHEAP). But we need to recognize the serious limitations of the 
roughly $2 billion we spend annually on federal fuel assistance, 
particularly as Congress considers the Fiscal Year 2008 budget. LIHEAP 
is essentially a one-shot buy-down of energy bills that covers only a 
modest percentage of eligible families--an absolutely critical but in 
no way sufficient answer to the energy woes of the poor. Together, 
federal and state fuel assistance funds provided less than 10% of the 
total energy costs for low income households in 2006.
    The longer-term answer for the poor is home weatherization. By 
upgrading a home's furnace, sealing leaky ducts, fixing windows, and 
adding insulation we can cut energy bills by 20-40%--for years--and the 
substantial savings accrue with summer air conditioning as well as 
winter heating. And by adding energy efficient appliances and lighting 
the savings are even greater. Replacing a 1970's vintage refrigerator 
with a new energy efficient model will cut an average home electricity 
bill by 10-15%. Weatherizing low-income homes also improves comfort, 
reduces illness, and creates jobs.
    Unfortunately, we have taken a penny-wise pound-foolish approach to 
low-income weatherization with less than $245 million in the 2006 
Department of Energy weatherization budget, enough for only about 
100,000 U.S. homes. And while the nation has weatherized about 5.5 
million low-income homes since 1976, more than 28 million remain 
eligible. While the Bush Administration has supported increases in the 
weatherization program in the past, the 2008 budget proposes only $144 
million, a cut of about $100 million that will have serious 
consequences for the nation's poor.
    Instead of cutting weatherization funding, the President and 
Congress should make a national commitment to weatherize at least one 
million low-income homes each year for the next decade. This program 
would go a long way toward helping the most vulnerable among us--
something the nation pledged it would do after Hurricane Katrina 
emphasized the extent of American poverty. The price tag for 
retrofitting 10 million low-income homes is relatively modest--about $2 
billion annually when fully implemented.
    With such a commitment there would be other benefits that directly 
address our current energy and environmental challenges. Stresses we 
are seeing today on the U.S. energy system--from blackouts to natural 
gas shortages--will be dampened with every additional home weatherized. 
For example, weatherizing all the low-income homes that heat with 
natural gas would cut residential U.S. use of this clean-burning fuel 
by about 5%, dampen its price volatility and reduce the call on federal 
fuel assistance funds.
    The advanced technologies pioneered in the federal low income 
weatherization program can also be readily applied to the U.S. housing 
stock at large, with even greater energy savings. One technology 
developed in the Department of Energy weatherization program uses a 
pressurization device and a simple infrared sensor to pinpoint leaks 
down to the size of a nail hole for about $100 per home. With this 
information insulation can be installed in the right places with the 
least amount of waste.
    As we cut energy demand we also cut air pollution. An Ohio study 
showed that weatherizing 12,000 homes not only cut the average consumer 
bill by several hundred dollars each year but overall avoided annual 
emissions of 100,000 pounds of sulfur dioxide as well as 24,000 tons of 
carbon dioxide--the primary global warming gas. As Congress and the 
Administration consider changes to the Clean Air Act and how to address 
climate change we ought to create an effective way to encourage power 
plant owners to invest in weatherization and other ``downstream'' 
pollution reduction opportunities. This could leverage substantial 
additional private sector capital for low-income weatherization and 
avoid the need for new power plants.
    More broadly, we believe there are a variety of potential 
mechanisms to spur private sector investment in weatherization and we 
are currently exploring these within the financial community. One 
approach would:

   aggregate thousands of homes eligible for weatherization in 
        a locality,
   establish a base-line of energy use as well as associated 
        greenhouse gas and other emissions across the portfolio of 
        homes,
   install advanced metering to monitor post-investment savings 
        as well as provide utility load control,
   secure federal and state funding as well as carbon off-set, 
        pollution credits, and utility capacity payments,
   leverage private sector investment in the aggregated 
        portfolio through a ``shared savings'' approach or other 
        financial mechanism,
   benchmark the investment to enhance replication.

    There may also be an opportunity to provide an extra incentive or 
credit in the Energy Efficiency Resource Standard for investment by an 
electricity or gas supplier in low income home weatherization.
State Building Codes
    California has demonstrated the significant efficiency gains that 
can be achieved through state building codes that are well designed and 
implemented. Title 24 of the California Code has been the national 
model, helping the state avoid thousands of Megawatts of new generation 
capacity. Despite this impressive track record in California, many 
states have inadequate state building codes or none at all. Section 128 
of the 2005 Energy Policy Act authorizes $25 million per year for 
FY2006-FY2010 ($125 million total) for states that have adopted, and 
are implementing, both residential and commercial building energy-
efficiency codes that meet or exceed specific standards. For states 
where there is no statewide code, the money will be allocated to local 
governments that have implemented codes that meet the above standards. 
Unfortunately, the funding authorized in the 2005 EPACT for state 
building codes was never appropriated by Congress and therefore this 
important incentive for adoption of state building codes has not been 
implemented. Congress should appropriate the funds authorized in the 
2005 EPACT.
Appliance Efficiency Standards
    One of America's least-heralded energy success stories involves 
federal appliance efficiency standards. In the last 15 years, Congress 
and the Department of Energy have set new standards for dozens of 
products. Refrigerators sold since 2001 in the U.S. use just one-third 
the energy of comparable models sold in 1980. Home air conditioners are 
nearly twice as efficient as those sold at the start of the Reagan 
administration.
    Standards in place today will save American families and businesses 
about $200 billion cumulatively by 2020, cutting electricity demand and 
carbon emissions substantially. The 16 products in the Energy Policy 
Act of 2005 will save another $50 billion, and will cut carbon 
emissions by another 16 million tons in 2020.
    Unfortunately, DOE has issued only two new appliance efficiency 
standards during the tenure of the current Administration. In the 
settlement of recent litigation brought by states and environmental 
groups, DOE agreed to issue 22 overdue standards in the next four 
years. Congress should ensure that DOE has the funds to conduct the 
necessary analysis, that the Department stays on schedule, and that it 
adopts rigorous final standards.
    Section 124 of EPACT 2005 authorizes a new program to encourage 
deployment of high efficiency appliances, based on a successful New 
York program. The program, however, has not been funded. Congress 
should appropriate the authorized funds.
Federal RD&D Funding
    Research and development is essential to supplying the ``technology 
pipeline'' we need to provide this century's clean energy solutions. 
Unfortunately, R&D on energy efficiency, as well as other energy 
technologies, has been falling. The Bush Administration's 2008 request 
for efficiency R&D is 18% below the FY 2006 levels, and more than a 
third lower than the 2002 budget. Total federal spending remains far 
below the peak of investment that occurred in the 1970s. And the 
private sector has not yet picked up the slack; efficiency funding in 
the electricity and gas industries has fallen even faster than federal 
investment. Some states, like California, Iowa, Wisconsin, and New 
York, are trying to pick up the slack, but their work is no substitute 
for federal support. Congress should ensure that adequate funds are 
appropriated in Fiscal Year 2008 and beyond to advance critical clean 
energy R&D.
    Beyond R&D there are a number of deployment-oriented programs that 
Congress authorized in EPACT 2005 but has either not funded or has 
provided insufficient funds. These cut across many areas including 
buildings, appliances, energy codes, state energy programs, low income 
programs, public information and education, public buildings, and pilot 
projects. Also, the loan guarantee program authorized by Congress in 
EPACT 2005, which could be a significant help in energy efficiency 
projects, has yet to back any loans. All of these deployment programs 
help ensure that the technologies developed in the national 
laboratories or nurtured by federal R&D funding, actually get to the 
marketplace.
                               conclusion
    Mr. Chairman and members of the Committee I am confident that a 
concerted policy push by the federal government, as outlined above, can 
greatly increase private sector investment in energy efficiency, 
resulting in many benefits for the nation. I look forward to working 
with the Senate to develop, enact and implement legislation that will 
stimulate this much needed investment.

    The Chairman. Thank you very much. Elon, go right ahead.

        STATEMENT OF ELON MUSK, CHAIRMAN, TESLA MOTORS, 
                         EL SEGUNDO, CA

    Mr. Musk. Thank you, Mr. Chairman, members of the 
committee. The efforts of this committee really properly 
reflect our country's renewed emphasis on global climate change 
and on dependence of oil from nations that don't always have 
our best interest in mind.
    I credit the committee with recognizing in the theme of 
today's hearing that the fundamental technologies required to 
address those challenges already exist in our national labs, 
universities, and private sectors at the base level.
    The Tesla electric car is, I think, a clear example of 
technology that's here today that needs to be commercialized to 
the mass market. Let me talk a bit about Tesla's initial 
product, because this is a very good example that a lot of 
people are probably not aware of, of a working electric 
vehicle.
    Tesla's initial product is called the Roadster. It's a high 
performance electric sports car, and as our unveiling of the 
Tesla Roadster has demonstrated, reports of the death of the 
electric car are greatly exaggerated. Moreover, the Roadster 
defies the conventions associated with electric vehicles, 
particularly with respect to performance.
    My apologies for the brief commercial, but I think it's 
important to understand the key facts in order to appreciate 
what this car can do. It does 0 to 60 mph in 3.9 seconds. It 
has a 250-mile range, and that's an EPA highway range, that's 
not a figure we came up with by ourselves. It has a 135 mile-
per-gallon equivalent, again calculated by the EPA. It costs $3 
for a full charge, so less than a gallon of gas, of premium gas 
in California, about a penny a mile effectively. It's fully DOT 
compliant, crash tested, with air bags, crash structures, etc. 
and it has a price of $92,000.
    So the Roadster is designed to beat a regular gasoline car, 
like a Ferrari or a Porsche in a head-to-head competition, but 
it has more than twice the energy efficiency of a Prius, the 
fully calculated energy efficiency of a Prius. So, in other 
words, it's a great car, without significant compromise.
    Now some may question whether this really does any good for 
the world. Are we really in the need of another high-
performance sports car? Will it really make a difference to 
global carbon emissions and our oil dependence? Well, the 
answers are no, and not much, however that's not the point.
    Almost any new technology initially has a high unit cost 
before it can be optimized, and this is no less true for 
electric cars. The strategy of Tesla is to enter at the high 
end of the market where customers are prepared to pay a 
premium, and then drive down market as fast as possible to 
higher unit volume and lower prices with each successive model.
    We've seen this in, really, many industries. When cell 
phones first came out they were very expensive and then over 
time that technology cost got driven down. The same thing with 
laptops. Even things as mundane as airline tickets used to be 
very expensive, and now you can buy a round-trip ticket from 
L.A. to London for $400.
    So, I should say Tesla's second model will be a large four-
door family car, starting at $50,000 and the model that follows 
that will be an even more affordable family car, hopefully in 
the region of $30 to $35,000, again with similar statistics 
approaching a 250-mile range and that sort of thing.
    In keeping with a prospering technology company, all free 
cash-flow is plowed back into R&D. We don't issue dividends; 
the management team doesn't get big bonuses, or any of that 
sort of thing. When someone buys a Roadster sports car they're 
actually helping to pay for development of a low-cost family 
car.
    So the question becomes what public policy initiatives 
would be effective in accelerating the development of companies 
like Tesla Motors? What programs would inspire other companies 
to enter the arena? I believe that strategy boils down to three 
elements.
    The most important area to which I would direct the 
committee's attention is the challenge of financing the mass 
market commercialization of new innovations and alternative 
technology. How do we really bring this to the American people, 
to the average consumer?
    While the scale of various forms of equity investment in 
green technology has grown significantly in recent years, these 
sources of capital are expensive and volatile. Oil prices 
suddenly decline for a year and investment dries up, so what we 
really need is some form of debt financing that could be a very 
powerful catalyst for companies contemplating large scale 
production.
    In the absence of government loan guarantees, or some other 
sources of credit surety, the cost of such debt is prohibitive. 
But a part of energy's loan guarantee program would, properly 
conceived and executed, provide an ideal vehicle for early- to 
mid-stage innovators to access necessary production capital at 
a reasonable rate of interest.
    The delay of the loan guarantee program means that the 
tools for executing these programs are not yet in place at the 
Federal level. Our government has a number of departments and 
agencies, ranging from the Small Business Administration to the 
Department of Agriculture to Fannie Mae, that regularly engage 
in lending and other credit-related activities. I think we all 
agree that those do a very good job and serve an important 
purpose. To address America's pressing need for affordable, 
clean energy solutions, I urge you to provide maximum support 
for the DOE loan guarantee program.
    As another means of accelerating innovation, I would 
counsel the committee to explore the use of competitions such 
as the X Prize. This is a no-lose proposition for the American 
taxpayer. Unlike cost-plus contracting where failure is often 
perversely rewarded with additional money, failure to win a 
prize costs nothing.
    Offering prizes of meaningful size for achievements in 
alternative energy could pay substantial dividends. We've seen 
this be very successful in the Ansari X Prize, a prize for 
suborbital space transportation. It was also very effective in 
aviation with the Orteig Prize, which was won by Charles 
Lindbergh for crossing the Atlantic non-stop in a plane. It was 
very effective in figuring out how to determine longitude, the 
prize for ocean navigation.
    In closing, I would direct the committee's attention to the 
need to incentivize consumer acceptance of alternate energy 
technologies. The rate of growth of these technologies is 
reliant in large part upon how soon they become affordable; 
incentives such as income tax credits for the purchases of new 
technologies of proven devices would spur the adoption of 
hybrid vehicles and solar installations.
    I urge the committee to support the current effort to 
replace the recently expired electric vehicle tax credit with a 
meaningful tax credit that will catalyze the market for 
electric vehicles.
    A tax credit is particularly necessary in the case of 
electric vehicles, because pricing, the normal economic 
mechanism that causes a shift in use, is broken in the case of 
oil consumption. I am not, myself, someone who's generally a 
big fan of tax credits, but I think in cases where the normal 
economic pricing mechanisms break down, as is the case here, I 
think we do need a tax credit. The price of gasoline would 
actually be far higher than what we see at the pump if it 
reflected the true cost of climate change and our Nation's 
vulnerability to the whims of oil exporting nations. Thank you.
    [The prepared statement of Mr. Musk follows:]
Prepared Statement of Elon Musk, Chairman, Tesla Motors, El Segundo, CA
    Mr. Chairman and Members of the Committee, thank you for inviting 
me to testify today on the subject of advancing the commercialization 
of advanced energy technologies. The efforts of this Committee properly 
reflect our country's renewed emphasis on addressing global climate 
change and dependence on oil from nations that do not always have our 
best interests in mind.
    I credit the Committee with recognizing in the theme of today's 
hearing that the fundamental technologies required to address those 
challenges already exist in our national labs, universities and private 
sector. The Tesla electric car is stark evidence that the inventions 
necessary to develop viable alternatives to oil based automobiles are 
in place.
    Tesla's initial product is a high-performance electric sports car 
called the Roadster, but the intent is to build electric cars of all 
kinds, including low-cost family vehicles. As our unveiling of the 
Tesla Roadster has demonstrated, reports of the death of the electric 
car have been greatly exaggerated. Moreover, the Roadster defies all 
conventions associated with environmentally friendly cars, particularly 
those of a purely electric nature. My apologies for the brief 
commercial, but to understand what is possible, I must present the key 
facts of the vehicle:

   0 to 60 mph in 3.9 seconds,
   250 mile EPA highway range,
   135 mpg equivalent, per the conversion rate used by the EPA,
   $3 for a full charge,
   Fully DOT-compliant: crash tested, with airbags, crash 
        structures, etc.,
   $92,000 price.

    The Tesla Roadster is designed to beat a gasoline sports car like a 
Porsche or a Ferrari in a head-to-head showdown, but has more than 
twice the energy efficiency of a Prius. In other words, it is a great 
sports car without significant compromises. Now, some may question 
whether this really does any good for the world. Are we really in need 
of another high-performance sports car? Will it actually make a 
difference to global carbon emissions and our oil dependence?
    Well, the answers are no and not much. However, that misses the 
point. Almost any new technology initially has high unit cost before it 
can be optimized, and this is no less true for electric cars. The 
strategy of Tesla is to enter at the high end of the market, where 
customers are prepared to pay a premium, and then drive down market as 
fast as possible to higher unit volume and lower prices with each 
successive model.
    Tesla's second model will be a large four door family car starting 
at $50,000 and the third model will be a smaller, more affordable four 
door. In keeping with a fast-growing technology company, all free cash 
flow is plowed back into R&D to drive down the costs and bring the 
follow-on products to market as quickly as possible. When someone buys 
the Roadster sports car, they are actually helping pay for development 
of the low cost family car.
    So the question becomes what public policy initiatives would be 
effective in accelerating the development of companies like Tesla 
Motors and what programs would inspire other actors to enter the arena. 
I believe that the strategy boils down to three simple elements: lower 
the cost of production capital, accelerate innovation and catalyze 
consumer acceptance.
    The most important area to which I would direct the Committee's 
attention is the challenge of financing the mass market 
commercialization of new innovations in alternative technology. 
Specifically, how can companies like Tesla Motors accelerate the 
substantial investments in manufacturing and technology optimization 
that are necessary to bring electric vehicles to the average consumer? 
While the scale of various forms of equity investment in green 
technology has grown significantly in recent years, these sources of 
capital are expensive and volatile.
    Debt financing would be a powerful catalyst for companies 
contemplating large scale production. However, in the absence of 
government loan guarantees or other sources of credit surety, the cost 
of such debt is prohibitive. The Department of Energy's Loan Guarantee 
Program would, properly conceived and executed, provide an ideal 
vehicle for early to mid stage innovators to access the necessary 
production capital at a reasonable rate of interest.
    The delay of the Loan Guarantee Program means that the tools for 
executing these programs are not yet in place at the federal level. Our 
government has a number of departments and agencies, ranging from the 
Small Business Administration to the Department of Agriculture to 
Fannie Mae, that regularly engage in lending and other credit related 
activities. To address America's pressing need for affordable clean 
energy solutions, I urge you to provide maximum support for the DOE 
Loan Guarantee Program.
    As another means of accelerating innovation, I would counsel the 
Committee to explore the use of competitions such as the X Prize. This 
is a no lose proposition for the American taxpayer. Unlike cost plus 
contracting, where failure is often perversely rewarded with more 
money, failure to win a prize costs nothing.
    Offering prizes of meaningful size for achievements in alternative 
energy could pay substantial dividends. We are beginning to see how 
powerful this can be by observing the success of the Ansari X Prize, a 
prize for suborbital human transportation. It was a very effective use 
of money, as far more than the $10 million prize was spent by the 
dozens of teams that competed to win. At least as important, however, 
is the spirit and vigor it has injected into the space industry and the 
public at large.
    Beyond space, as the Committee is no doubt aware, history is 
replete with examples of prizes spurring great achievements, such as 
the Orteig Prize, won by Charles Lindbergh for crossing the Atlantic 
nonstop by plane, and the Longitude prize for ocean navigation.
    In closing, I would direct the Committee's attention to the need to 
incent consumer acceptance of the alternative energy technologies that 
are currently emerging. The rate of growth of these technologies is 
reliant in large part upon the degree to which these technologies 
become affordable.
    Incentives such as income tax credits for the purchase of new 
technologies are proven devices for spurring the adoption of hybrid 
vehicles and solar installations. I urge the Members of the Committee 
and the Senate at large to support the current effort to replace the 
recently expired electric vehicle tax credit with a meaningful tax 
credit that will catalyze the market for electric vehicles.
    A tax credit is particularly necessary in the case of electric 
vehicles, because pricing, the normal economic mechanism that causes a 
shift in use, is broken in the case of oil consumption. The price of 
gasoline would actually be far higher than what you see at the pump if 
it reflected the true cost of climate change and our nation's 
vulnerability to the whims of oil exporting nations.
    Thank you for your time.

    The Chairman. Thank you very much.
    Mr. Peters, please go right ahead.

 STATEMENT OF JEROME P. PETERS, JR., SENIOR VICE PRESIDENT, TD 
                  BANKNORTH N.A., WESTPORT, CT

    Mr. Peters. Thank you. I would like to thank the chairman 
and the members of the committee for inviting me here today to 
address the committee on matters which are vital to the 
development of policy that can provide this Nation with 
sustainable energy alternatives.
    In order to properly address the issues surrounding the 
impediments to the deployment of advanced energy technologies, 
we must first identify the goals that we, as a Nation, expect 
to realize from these technologies. The commercial promise of 
any energy technology must be its ability to deliver cost 
effective benefits to the consumer without putting a 
significant burden on the Nation's taxpayers while lessening 
our dependence on foreign sources of energy.
    Historically, governments have played a significant role in 
supporting the development of new energy technologies through 
the critical period between demonstration stage and the scale 
up commercialization. Over the last 25 years, U.S. policy 
intended to support and promote the development of new energy 
technologies has largely involved the availability of various 
tax subsidies to the owners of assets employing those 
technologies.
    While this strategy has contributed to the deployment of a 
significant number of mature technologies by subsidizing energy 
production costs, tax subsidies alone have done little to 
promote the early deployment of emerging energy technologies. 
Since the passage of PURPA in 1978, Federal energy policy has 
supported the notion that renewable and efficient energy 
production must be cost-competitive with conventional sources. 
Since this Nation generates the vast majority of its energy 
from fossil fuel sources, continued cost competitiveness and 
thus, sustainability of advanced energy projects has been 
directly correlated to the volatility of fossil fuel prices.
    History has demonstrated that energy projects which utilize 
advanced energy technology cost more than conventional energy 
projects; in many cases, 10 times as much. While efficiency 
gains and lowered or eliminated fuel costs offset a significant 
portion of the capital cost disadvantage inherent to these 
projects, the availability of tax subsidies alone do not permit 
such projects to be economically viable in certain low fossil 
fuel price environments.
    The capital cost disadvantage combined with fuel price 
volatility present a risk environment that only a limited 
number of sophisticated investors are willing to enter. Project 
equity investors are generally bigger risk-takers and have 
yield requirements to match. Because of this, advanced energy 
projects funded with 100 percent equity will not be economic. 
Risk adverse lenders with significantly lower yield 
requirements can provide significant leverage. Debt lenders 
however, have little appetite for either energy price 
volatility or technology risk. While fuel price volatility can 
be mitigated through the execution of price-hedging strategies, 
technology risks cannot.
    The Energy Policy Act of 2005 goes a long way in 
establishing a framework for the mitigation of technology risk 
for debt investors in advanced energy technologies; however, 
the subsequent issuance of DOE's August 2006 loan guidelines 
have dampened most, if not all, lender interest in 
participating in this program. While title XVII of the Act 
provides for loan guarantees up to 80 percent of total project 
cost, the DOE guidelines undercut that protection in two 
significant ways.
    First, they limit the guarantee to 80 percent of the loan 
amount, shifting 20 percent of the technology risk to the 
lender, and seem to prohibit the substitution of additional 
equity to make up for the un-guaranteed portion of the debt. 
The addition of this technology risk component will 
significantly reduce the pool of lenders willing to participate 
in the program and will result in higher rates to the project 
developers.
    Even more damaging to lender interests is the fact that the 
DOE guidelines require that any commercial debt brought into 
the project must be subordinate to the government guaranteed 
debt. The Superior Rights Provision of section 107(g) seems to 
prohibit the recovery of any unguaranteed portion of any 
commercial loan until the DOE's claim is paid in full.
    Without collateral protection, the loan default and 
guaranteed call would most certainly result in a loan loss 
equal to 20 percent of that loan amount. While many lenders are 
willing to assume some level of loan loss risk, none, that I am 
aware of, are willing to take the first loss position in assets 
in which the collateral is pledged to the guarantor.
    To summarize, I do believe that properly structured Federal 
loan guarantees can greatly assist in the accelerated 
deployment of advanced energy technologies. The USDA's business 
and industry guaranteed loan program comes to mind as a 
properly structured Federal guaranteed program that has 
contributed to the successful deployment of a large amount of 
current ethanol production.
    There also may be other mechanisms, in addition to loan 
guarantees, that the Federal Government can facilitate in 
cooperation with technology providers and the investment 
community, that can overcome the current impediments to advance 
energy technology deployment.
    Many of these mechanisms may well be technology-specific; 
for example, high capital costs may need to be overcome in 
certain technologies, such as cellulosic ethanol production and 
integrated coal gasification electric production, while 
uncertainty over long-term component light may be the impeding 
factor since the deployment of technologies such as fuel cells 
or concentrated photovoltaics.
    I believe that a focused dialog among the various 
stakeholders, designed to create technology-specific, 
federally-backed enhancement programs would result in an 
accelerated deployment of advance energy technologies.
    Properly structured, these enhancement programs need not 
put an undue burden on the Federal taxpayers or on the Nation's 
energy consumers. I, for one, would be happy to participate in 
these discussions. Thank you very much.
    [The prepared statement of Mr. Peters follows:]
Prepared Statement of Jerome P. Peters, Jr., Senior Vice President, TD 
                      Banknorth N.A., Westport, CT
    I would like to thank the Chairman and the members of the Committee 
for inviting me here today to address the Committee on matters which 
are vital to the development of policy that can provide this nation 
with sustainable energy alternatives. In order to properly address the 
issues surrounding the impediments to the deployment of advanced energy 
technologies, we must first identify the goals that we, as a nation, 
expect to realize from these technologies. The commercial promise of 
any advanced energy technology must be its ability to deliver cost 
effective benefits to the consumer without putting a significant burden 
on the nation's taxpayers while lessening our dependence on foreign 
sources of energy.
    Historically governments have played a significant role in 
supporting the development of new energy technologies through the 
critical period between the demonstration stage and the scale up to 
commercialization stage. Over the last 25 years, U.S. policy intended 
to support and promote the development of new energy technologies has 
largely involved the availability of various tax subsidies to the 
owners of assets employing these technologies. While this strategy has 
contributed to the deployment of a significant number of mature 
technologies by subsidizing energy production costs, tax subsidies 
alone have done little to promote the early deployment of emerging 
energy technologies.
    Since the passage of the PURPA in 1978, Federal energy policy has 
supported the notion that renewable and efficient energy production 
must be cost competitive with conventional sources. Since this nation 
generates the vast majority of its energy from fossil fuel sources, 
continued cost competitiveness, and thus sustainability, of advanced 
energy projects, has been directly correlated to the volatility of 
fossil fuel prices.
    History has demonstrated that energy projects which utilize 
advanced energy technology cost more than conventional energy projects, 
in many cases 10x as much. While efficiency gains and lowered or 
eliminated fuel costs may offset a significant portion of the capital 
cost disadvantage inherent to these projects, the available Federal tax 
subsidies often do not permit such projects to be economically viable 
in certain low fossil fuel price environments.
    The capital cost disadvantage combined with fuel price volatility, 
present a risk environment that only a limited number of sophisticated 
investors are willing to enter. Project equity investors are generally 
bigger risk takers and have yield requirements to match. Because of 
this, advanced energy projects funded with 100% equity will not be 
economic. Risk adverse debt lenders, with significantly lower yield 
requirements, can provide significant leverage. Debt lenders, however, 
have little appetite for either energy price volatility or technology 
risk. While fuel price volatility can be mitigated through the 
execution of price hedging strategies, technology risk cannot.
    EPACT 2005 goes a long way in establishing a framework for the 
mitigation of technology risk for debt investors in advanced energy 
technologies, however, the subsequent issuance of DOE's August 2006 
Loan Guarantee Guidelines has dampened most, if not all, lender 
interest in participating in this program. Title XVII provides for loan 
guarantees up to 80% of total Project Cost. The DOE Guidelines undercut 
that protection in two significant ways. First, they limit the 
guarantee to 80% of the loan amount shifting 20% of the technology risk 
to the lender and seem to prohibit the substitution of additional 
equity to make up for the un-guaranteed portion of the debt. The 
addition of this technology risk component will significantly reduce 
the pool of lenders willing to participate in the program and will 
result in higher rates to the project developers. Even more damaging to 
lender interests, is the fact that the DOE Guidelines require that any 
commercial debt brought into a project must be subordinate to the 
government guaranteed debt.
    The ``superior rights'' provisions of Section 107(g) seem to 
prohibit the recovery of any un-guaranteed portion of any commercial 
loan until the DOE's claim is paid in full. Without ``collateral 
protection'', a loan default and guarantee call would most certainly 
result in a loan loss equal to 20% of the loan amount. While many 
lenders are willing to assume some level of loan loss risk, none, that 
I am aware of, are willing to take a first loss position in assets in 
which the collateral is pledged to the guarantor.
    To summarize, I do believe that properly structured Federal Loan 
Guarantees can greatly assist in the accelerated deployment of advanced 
energy technologies. The USDA Business and Industry Guaranteed Loan 
Program comes to mind as properly structured Federal guarantee program 
that has contributed to the successful deployment of a large amount of 
current ethanol production.
    There also may be other mechanisms, in addition to loan guarantees, 
that the Federal government can facilitate in cooperation with 
technology providers and the investment community that can overcome the 
current impediments to advanced energy technology deployment. Many of 
these mechanisms may well be technology specific. For example, high 
capital costs may need to be overcome in certain technologies such as 
cellulosic ethanol production and integrated coal gasification electric 
production, while uncertainty over long term component life may be the 
impeding factor to the deployment of technologies such as fuel cells or 
concentrated photo-voltaics. I believe that a focused dialogue among 
the various stake holders, designed to create technology specific 
federally backed enhancement programs, would result in an accelerated 
deployment of advanced energy technologies. Properly structured, these 
enhancement programs need not put an undue burden on federal taxpayers 
or on the nation's energy consumers. I would be happy to participate in 
these discussions. Thank you.

    The Chairman. Thank you very much.
    Mr. Denniston.

STATEMENT OF JOHN DENNISTON, PARTNER, KLEINER PERKINS CAUFIELD 
                    & BYERS, MENLO PARK, CA

    Mr. Denniston. Good morning, Chairman Bingaman, Ranking 
Member Domenici, members of the committee.
    My name is John Denniston. I'm a partner with the venture 
capital firm, Kleiner Perkins Caufield & Byers in Silicon 
Valley. It's my honor to be before the committee this morning.
    So, Silicon Valley has long been the fount of innovation 
and Kleiner Perkins has been there for a long time. It is one 
of America's oldest venture capital firms. We're a founder of 
TechNet, a network of technology entrepreneurs and CEO's and a 
member of the National Venture Capital Association. My 
testimony this morning reflects my own views.
    Together with so much of the rest of America, venture 
capital professionals, both Republicans and Democrats, are 
concerned about the risks to our Nation's welfare stemming from 
our energy dilemma but we are also in a unique position to see 
how this enormous challenge presents new opportunities to build 
our economy, creating jobs and prosperity. Several years ago at 
Kleiner Perkins, we turned our attention to a new industry 
which we dubbed green-tech, which encompasses clean power, 
transportation and water.
    You've asked me this morning to specifically address the 
current market constraints to greater green-tech investment and 
what kinds of policies might help unleash those sorts of 
technologies. Before I speak to that, I'd like to make one 
additional comment about how I and many members in the venture 
capital community perceive the energy challenges and 
opportunities in front of us.
    I believe today that there's an unparalleled consensus in 
America on the three challenges that we face regarding energy: 
climate change, dependence on foreign oil, and the risk of 
losing our global competitive edge. But I am optimistic. The 
green-tech sector, in fact, is growing so rapidly it brings to 
mind for me a tenant of the information technology industry 
known as Moore's Law, and that's the idea that semiconductor 
performance will double every 24 months with no increase in 
price.
    It's a remarkable phenomenon and this phenomenon almost 
single-handedly explains how we have been able to transition in 
a very short period of time from the era of huge mainframe 
centralized computers that only the largest corporations in 
America could afford, to today, all of us can see the headlines 
in the news on our cell phones, a remarkable transition.
    What I'm here to tell you this morning, Senators, is that a 
similar wave of innovation and accelerating performance is 
taking place right now in the clean energy field and could lead 
to solutions none of us can even imagine, faster than most can 
imagine. So your question is: what's holding back green 
technologies?
    In my written remarks I describe several different sectors 
of our energy system and the specific constraints affecting 
green-tech investment in each, but since our time this morning 
is short, let me speak briefly about one of them: electricity 
generation.
    Here's the biggest barrier I see in the generation market--
green power costs more, relative to older, more established 
power sources. Why? Primarily because it's so new. Being new, 
it's at the very early stages of its inevitable cost reduction 
curve, and today it's being produced in such low volumes that 
the industry has yet to benefit from economies of scale.
    On top of this, government policy today has provided 
powerful economic aid to fossil fuel and nuclear energy. Direct 
benefits over a period of decades include subsidies, tax 
advantages and R&D funds. Society, meanwhile, has also 
subsidized fossil fuel sources by bearing the costs of 
pollution including greenhouse gases.
    In view of the urgent threats we face for our environment 
and to national security, public policy could and should at 
least level the playing field between the old incumbent sources 
and the new sources of energy. Indeed I would submit it should 
go one step further by driving the adoption of green 
technologies.
    Thus, here are some recommendations for how Federal policy 
might help unleash green-tech power. You will see others in my 
written remarks.
    First: adopt a market based national carbon cap-and-trade 
system which, if it sets an appropriate price on carbon 
emissions, will drive the adoption of green technologies.
    Second: create a renewable portfolio standard that sets 
minimum levels of clean, renewable energy sources.
    Third: strengthen Federal clean energy incentives, 
including tax credits, subsidies and yes, loan guarantees.
    Fourth: ramp up research funding so it is commiserate with 
the scope of the challenges we face.
    Fifth: make energy efficiency improvements a high national 
priority.
    Sixth: lead by example, by making the Federal Government 
the No. 1 energy consumer and also the single largest consumer 
of green technologies.
    Finally, seventh: follow through on President Bush's call 
for a 20 percent reduction in gasoline use over the next 10 
years by expanding the renewable fuel standard and 
restructuring existing bio-fuel subsidies.
    Once again I would like to thank the committee for inviting 
me here this morning. It has been a privilege. I believe we all 
have an opportunity to be part of the solution to our country's 
energy crises.
    [The prepared statement of Mr. Denniston follows:]
Prepared Statement of John Denniston, Partner, Kleiner Perkins Caufield 
                        & Byers, Menlo Park, CA
                              introduction
    Good morning, Chairman Bingaman, Ranking Member Domenici and 
Members of the Committee. My name is John Denniston and I am a Partner 
at the venture capital firm Kleiner Perkins Caufield & Byers. It's my 
privilege to be here today and to have the opportunity to share my 
views on moving advanced energy technologies to the marketplace.
    Ensuring a sound energy future is one of the most urgent policy 
challenges facing our nation and indeed the global community, and I 
sincerely appreciate this Committee's leadership in this arena.
    Along with the rest of America, venture capital and technology 
industry professionals--Republicans and Democrats alike--are deeply 
concerned about the risks to our nation's welfare posed by our energy 
dilemma. Specifically, this includes the looming climate crisis, our 
oil addiction, and the very real danger of losing our global 
competitive edge. Yet our industry is also in a unique position to 
recognize that each challenge presents dramatic new opportunities to 
build our economy, creating jobs and prosperity.
    Kleiner Perkins is a member of the National Venture Capital 
Association and a founding member of TechNet, a network of 200 CEOs of 
the nation's leading technology companies. I serve on TechNet's Green 
Technologies Task Force, which next week will release a detailed set of 
policy recommendations to drive the development and adoption of 
technologies we believe can help solve some of the world's most 
pressing energy and environmental problems. We refer to this emerging 
industry as ``greentech,'' and for us, it includes clean power, 
transportation and water. We look forward to sharing that report with 
the Committee. My testimony today reflects my own views.
    Based in California's Silicon Valley, and founded in 1972, Kleiner 
Perkins is one of America's oldest venture capital firms. We have 
funded more than 500 start-up companies over the years, backing 
entrepreneurs who have introduced innovative advances in such vital 
growth industries as information technology, medical products and 
services, and telecommunications. More than 170 of our companies have 
gone public, including Amazon.com, AOL, Compaq Computer, Electronic 
Arts, Genentech, Google, IDEC Pharmaceuticals, Intuit, Juniper 
Networks, Millenium Pharmaceuticals, Netscape, Sun Microsystems, 
Symantec, and VeriSign. Today, our portfolio companies collectively 
employ more than 275,000 workers, generate $90 billion in annual 
revenue, and contribute more than $400 billion of market capitalization 
to our public equity markets.
    Before joining Kleiner Perkins, I was a Managing Director at 
Salomon Smith Barney, where I served as the head of Technology 
Investment Banking for the Western United States. Prior to that, I was 
a Partner at the law firm Brobeck, Phleger & Harrison, where I was the 
head of its Venture Capital Practice Group.
    In the 1990's, I served on the Board of Directors of a California-
based fuel cell start-up firm. That experience opened my eyes to both 
the daunting energy challenges our country faces and the myriad 
opportunities we have to solve our problems through technology 
innovation.
    You've asked me specifically to address the current market 
constraints to greater greentech investment, and what kinds of policies 
might accelerate market adoption of alternative energy solutions. 
Before I speak to that, I'd like to take just a few minutes to offer an 
overview of how I and many of my venture capital colleagues perceive 
the energy challenges and opportunities facing our country today.
                             the challenges
    I believe there is an unprecedented degree of consensus in America 
today as to our three main energy challenges: the climate crisis, our 
dependence on oil, and the risk of losing our global competitive edge 
by failing to champion new technologies that are becoming a huge new 
source of economic growth, jobs and prosperity.
The Climate Crisis
    Just last month, the most recent report of the more than 2,000 
scientist members of the Intergovernmental Panel on Climate Change 
warned us, once again, that the planet is warming, glaciers are melting 
and sea levels are rising. The panel concluded, with ninety percent 
certainty, that most of this warming is due to higher greenhouse gas 
concentrations in the atmosphere, most of which result from human 
fossil fuel emissions.
    Many scientists predict we have only a short period of time to make 
dramatic cuts in our greenhouse gas emissions or risk irrevocably 
changing the climate. In fact, the IPCC report concludes temperatures 
and sea levels would continue to rise even if we were somehow able to 
immediately stabilize atmospheric concentrations. To date, we have 
failed to heed such warnings.
    I want to note that in the venture-capital profession, we never 
make commitments without thorough research and consideration. 
Professionally and personally, I'm convinced, on the basis of 
exhaustive scientific evidence, we need to take bold action to solve 
our climate crisis. But wherever you stand on this issue, it's clear a 
lot of creative momentum is building in this country to seek solutions 
to global warming, including new collaboration between energy 
companies, civic groups and scientists, such as the United States 
Climate Action Partnership (USCAP). This trend is promising not only 
for our environment, but for our national security and our economy.
Energy Security
    As for our energy security dilemma, this Committee is well aware 
the U.S. imports about 30% of its overall energy needs, including 
approximately 60% of its oil. Rapid growth in worldwide energy demand 
has stretched supplies, tripling the price of both crude oil and 
natural gas. And there is a significant risk this trend will continue, 
as world population and energy demand increase.
Global Competitiveness
    Finally, our future prosperity is at risk, and here I speak from 
very personal experience. Just in the past year, as I've traveled on 
business to China and Europe, I've witnessed how the rest of the world 
is striving, and often succeeding, to emulate the technology innovation 
that has been a hallmark of the U.S. economy and perhaps the single 
most important driver of our enviable standard of living. Increasingly, 
entrepreneurs overseas enjoy advantages in the form of determined 
government policies, including financial incentives and large 
investments in research and education.
    Credible economic studies suggest our technology industries are 
responsible for roughly one-half of American GDP growth. Our country 
would look quite a bit different today had we not, several decades ago, 
become a global leader in biotechnology, computing, the Internet, 
medical devices, semiconductors, software and telecommunications.
    Today, as our global energy challenges become ever more pressing, 
it's clear future economic growth throughout the world will depend to a 
great degree on new technologies to help us preserve our environment. 
Green energy technologies could very well become the economic engine of 
the 21st Century. Given its potentially massive market size, 
``greentech'' could be the most powerful economic force of our lives. 
But will America again lead the way?
                           the opportunities
    Kleiner Perkins has been investing in the greentech field for the 
past seven years, backing more than 15 innovative companies in the 
fields of biofuels, coal gasification, energy efficiency, energy 
storage, fuel cells, solar energy, thermoelectrics and transportation. 
In the process, we've witnessed how technological progress is already 
revolutionizing our relationship with energy, solving problems that 
only recently seemed all but intractable. Solar manufacturers are 
innovating their way around silicon shortages, with next-generation 
materials including pioneering thin-film technologies. The agriculture 
industry is producing transportation fuels from plant matter--even from 
microscopic algae--and is developing technologies so we can 
economically convert non-edible plants to biofuels. And nanotechnology 
breakthroughs are creating the promise of new ways to store energy, 
which in turn could dramatically accelerate market adoption of solar 
and wind power.
    At Kleiner Perkins, four accelerating trends have encouraged us to 
make greentech a core investment sector:

   The promise of exponential growth in the energy technology 
        field. The rapid cost-reduction curve we are already witnessing 
        will become ever steeper over time, making emerging sources of 
        energy more and more competitive in the marketplace;
   Rising prices for fossil fuels--oil and natural gas--are 
        making competing alternative energy sources more attractive;
   World class talent, with both missionary and monetary 
        motives, is racing into the greentech sector;
   Americans are growing much more aware of and concerned by 
        our energy crises, a development we believe will lend support 
        to more sweeping policy solutions.
Moore's Law & The Pace of Technological Progress
    In Silicon Valley, we often refer to a principle known as Moore's 
Law, which I'd like to explain briefly here, as it's fortunately quite 
relevant to what we see happening in the energy field. Intel co-founder 
Gordon Moore has been credited with predicting, back in the 1960s, that 
semiconductor performance would double every 24 months. That prediction 
was spot on, and helps explain the information technology revolution of 
the past three decades. Better, faster, and cheaper silicon chips led 
our transition from an era--remember, it was just 25 years ago!--of 
big, mainframe computers used principally by university researchers, to 
our capacity today to read the morning's headlines on our cell phones.
    Today, we can already see a Moore's Law dynamic operating in the 
energy sector, giving us confidence the rate of greentech performance 
improvement and cost reduction will offer new energy solutions we can't 
even imagine right now. At Kleiner Perkins, we are excited by the 
technical breakthroughs we have seen in a host of scientific 
disciplines relating to the energy sectors, including material science, 
physics, electrical engineering, synthetic chemistry, and even 
biotechnology. We are particularly encouraged by innovations resulting 
from combining breakthroughs in several of these separate disciplines 
into single products.
    Witness some of these examples of the greentech equivalent of 
Moore's Law:

   The price of wind power has plummeted by an order of 
        magnitude since 1980, to the point where, in some regions, it 
        is now very close to being able to compete with coal and gas 
        power;
   Solar power costs have fallen by more than 60% over the past 
        fifteen years;
   Ethanol production efficiencies per gallon have improved by 
        more than 45% since 1982. Back then, state-of-the-art 
        technologies produced a gallon of ethanol using 55,000 Btus 
        with a capital cost of $2.25 per gallon of annual production 
        capacity. Today, we can produce that same gallon of ethanol 
        with nearly half the energy previously required, and at nearly 
        half the cost.

    These and other improvements have occurred over a period of time in 
which there was relatively little government policy or entrepreneurial 
focus on these sectors. Imagine what American ingenuity could 
accomplish in the future as more and more of our best and brightest 
devote their efforts to the greentech field.
    But now I'll move on to speak specifically about my perspective on 
how government policy might encourage this emerging industry.
 barriers to greater investment and market adoption: the five faces of 
                           the energy market
    The energy market is not monolithic. In fact, it comprises several 
distinct markets, each massive in scale and each with its own unique 
challenges and opportunities. These include energy generation, energy 
storage, transportation fuels, transportation, and energy efficiency.
Energy Generation
    For the energy generation market, the high cost of new energy 
sources, relative to the incumbent competition, is the most serious 
barrier to greater capital investment and more rapid adoption of clean 
power. Why does green power cost more? Primarily because it's so new. 
Being new, it is still at the very early stages of its cost-reduction 
curve, and is presently being produced in such low volumes that the 
industry has yet to benefit from economies of scale. We can be certain 
American scientists and engineers will continually innovate to improve 
the performance and reduce the costs of these technologies going 
forward. But the speed at which they do so will depend to a large 
degree on government policy that is as bold and innovative as they are.
    There's another way older power sources benefit from their 
longevity. Most coal-fired and natural-gas plants were constructed many 
years ago, and are now fully amortized. That means those facilities' 
owners no longer need to charge rate-payers for initial construction 
costs. Clean-power companies, in contrast, still need to include 
construction financing costs in their customer pricing, putting them at 
a major disadvantage.
    On top of this, government policy to date has provided powerful 
advantages to fossil fuels and nuclear energy. In some cases, the 
federal government itself has paid directly for electrical generation 
facilities and transmission and distribution infrastructure. This 
pattern of favorable public policy goes back many years, and it made 
sense in its time. But times, as we all know, have changed.
    Beyond government subsidies, the fossil fuel industry has long 
benefited by escaping responsibility for the costs of the environmental 
consequences of its emissions--instead, society has paid the price. 
Clearly, traditional power sources would become much more expensive, 
and alternative sources of energy more cost-competitive, if plant 
owners had to take on the true costs of these emissions.
    In the special case of nuclear power, the federal government has 
for many decades assumed enormous research and development, operating, 
waste disposal and containment costs, which if borne by nuclear plant 
operators would dramatically change the industry economics. As an 
example, private insurance companies are unwilling to insure nuclear 
power plants, which leaves the federal government as the insurer by 
default. The federal government has gone one step further with laws to 
specifically relieve nuclear plant operators of liability in case of 
accident. Further, the federal government has spent billions of dollars 
on nuclear waste disposal, and will need to continue to do so far into 
the future.
    In view of the urgent threats we face to our environment and 
national security, public policy could, and should, level the playing 
field between old and emerging energy generation sources, and go 
further by driving the adoption of green technologies. There are indeed 
already several federal programs in place intended to encourage the 
adoption of renewable energy. Yet the incentives and benefits they 
provide pale in comparison to the advantages enjoyed by traditional 
energy sources, and have been inadequate in scope to meaningfully 
address the problems. In many cases, they are also of short duration, 
leading to a lack of predictability.
Energy Storage
    Technical difficulty and the relative scarcity of investment 
opportunity are the two leading barriers to higher capital investment 
in the energy-storage sector. Energy storage has historically been a 
challenging technical field: essentially, scientists have to operate 
within the performance limitations provided by the periodic table of 
elements. Lead-acid batteries were first developed more than 150 years 
ago, and are still widely used.
    Lithium-ion batteries alone have offered a significant jump in the 
amount of energy stored, yet still have safety and durability 
limitations. Until recently, we have seen only modest improvement in 
the performance characteristics of lithium-ion technology. It is 
important to note lithium-ion research and development has been 
dominated by Asian producers, leveraging off of their development of 
cells for consumer electronic applications. The number of U.S.-based 
electrochemistry experts is relatively small in comparison to U.S.-
based expertise in other greentech fields, as a result of which there 
are not as many investment opportunities. Some of the investment 
opportunities in the field today involve basic research, whose 
particularly high risk makes it unattractive to most private investors.
Transportation Fuels
    Private capital investment in the alternative fuels market 
increased significantly through the first three quarters of 2006, 
driven by excitement over ethanol's potential to address our oil 
dependence. However, these capital flows declined drastically in the 
fall of 2006, when in short order, crude oil prices plummeted from $78 
per barrel to $49 per barrel, and corn prices skyrocketed from $2.50 
per bushel to over $4 per bushel. The combination of higher feedstock 
costs and lower ethanol costs squeezed the profitability of the ethanol 
industry. As a result, the market capitalizations of public ethanol 
companies dropped dramatically, and these events had a similar ripple 
effect on private biofuels companies. I expect some of the publicly 
announced biofuels plants will not be completed on schedule, and others 
will not be completed at all.
    In addition, gasoline has benefited from favorable public policy, 
including direct and indirect subsidies going back many decades, as 
well as from a free externality in the form of costly environmental 
emissions which are not reflected in the price of gasoline at the pump. 
The retail price of gasoline would increase meaningfully, and cleaner 
alternative fuels would become much more competitive, if the United 
States required gasoline to reflect the societal costs stemming from 
emissions.
Transportation
    The market success of hybrid electric vehicles has produced 
heightened interest in high efficiency, low-cost vehicles. Most of the 
development work is taking place within the labs of major automobile 
companies. However, I expect several start-up automobile companies to 
introduce innovative vehicles in the coming years. Many hope the 
industry will be able eventually to produce commercially attractive 
plug-in electric vehicles in large volumes, although battery technology 
will need to improve considerably for that to become a reality, in my 
view. A relatively small percentage of automobiles sold in the United 
States today are flex fuel vehicles capable of being powered by 
gasoline or high blend ethanol (``E85''), in part because very few gas 
stations sell E85.
Energy Efficiency
    In the case of buildings, we have today a range of available 
technologies for building systems and equipment, including improved 
lighting, windows, heating and cooling, and appliances. Collectively, 
these hold the promise of significantly improving building energy 
efficiency. Still other building-related innovations remain under 
development, including solid-state lighting, electrochromic windows, 
and solid-state refrigeration systems. However, the construction and 
building industries are among the most fragmented in the United 
States--no single company has the ability to drive efficiency into a 
meaningful portion of the market. In addition, many owners of existing 
buildings do not have the capital budgets to retrofit them to increase 
energy efficiency, even if the investment to do so is quickly recouped 
in the form of energy savings.
                    key policies to drive deployment
    Federal policy can do a great deal to help advance clean technology 
in all five of the energy markets. These are some of the policy 
initiatives I urge Congress to implement:

          1. A Market-Based National Carbon Cap and Trade System.--A 
        well-designed national cap-and-trade system could 
        simultaneously address all three of America's energy-related 
        crises: climate change, national security threats stemming from 
        energy dependence, and the danger of losing American 
        competitiveness. America had great success with such a system 
        in the 1990s, when it was used to curb sulfur-dioxide emissions 
        causing acid rain. The system would place a price on carbon, 
        today a costly externality of our energy production and use, 
        and reward companies for progress in adopting clean power. I 
        urge Congress, in planning such a system, to assure that all 
        credible green technology solutions have a shot at the market. 
        It is impossible at this moment to predict which clean energy 
        sources will have the most impressive Moore's Law-like 
        properties in the future, and ultimately the lowest production 
        costs. In addition, the cap and trade system should also 
        include transportation fuels, as roughly 25% of U.S.-generated 
        greenhouse gas emissions emanate from our transportation 
        system.
          2. Renewable Portfolio Standard.--A cap-and-trade system is 
        no guarantee, by itself, of solving our carbon problem. Even if 
        adopted and signed into law, it may not require deep enough 
        reductions in carbon emissions to solve the problem, or it may 
        well encounter other problems in its implementation. A national 
        renewable portfolio standard would insure against such problems 
        by establishing minimum adoption levels of clean and renewable 
        energy sources.
          3. Federal Incentives To Drive Clean Energy Development.--In 
        my view, the federal government should dramatically expand 
        financial incentives to drive the market adoption of green 
        energy sources, with mechanisms including tax credits, 
        subsidies, loan guarantees and other programs. Leading 
        scientists tell us we need to have a national program of the 
        urgency and scope of the Manhattan Project to stabilize our 
        climate. Considering the added motivations of our national 
        security threats and the U.S. competitiveness crisis, I believe 
        such urgency and ambition is more than warranted. In addition, 
        Congress should consider creating incentives for U.S. greentech 
        companies to manufacture their products in this country. 
        European and Asian countries offer incentives for U.S.-based 
        companies to establish manufacturing operations overseas, in 
        some cases including government payment of 40% of upfront 
        capital costs and 15 year tax holidays. Loan guarantees may be 
        an important part of this set of incentives, as long as they 
        are structured to be attractive to lenders and to be available 
        to both large and small projects.
          4. Federal Research Funding.--Our urgent need to ramp up 
        government assistance to clean energy sources certainly also 
        applies to research and development monies. Total federal 
        research funding for renewable energy (excluding nuclear power) 
        and energy efficiency amounts to less than $2 billion per year. 
        Energy consumption and transportation account for roughly 15% 
        of U.S. gross domestic product, which is approximately the size 
        of the U.S. health care system. But research and development 
        funding for new and necessary technologies is not by any means 
        commensurate. By comparison, the NIH budget this year is around 
        $28 billion. To oversee our federal energy research funding, I 
        suggest Congress consider creating a new agency--you might call 
        it the National Institute of Energy--to consolidate and 
        rationalize federal energy research funding.
          5. Energy Efficiency.--The United States can make a 
        significant dent in our energy challenges simply by making our 
        energy system more efficient. Congress should strengthen CAFE 
        standards, require energy efficiency standards for electronic 
        equipment and appliances, and work with states to create energy 
        efficiency standards for buildings. Congress should also 
        evaluate how to work with utilities so their profit potential 
        is driven as much by introducing energy efficiency as it is by 
        selling power.
          6. Federal Procurement.--The Federal government is the single 
        largest U.S. energy consumer. As such, it can lead our energy 
        transition by becoming the single largest green-technology 
        user. Congress could establish a deadline for federal agencies 
        to meet minimum clean energy use requirements. In addition, 
        Congress could require all new federal vehicles to be hybrid 
        electric, electric or flex fuel vehicles.
          7. Biofuels.--Congress could take several steps to strengthen 
        the rapidly emerging biofuels market. I recommend an increase 
        in the Renewable Fuels Standard, consistent with President 
        Bush's call to reduce gasoline consumption by 20 per cent over 
        the next ten years. Another contribution would be to 
        restructure the existing blender's credit so it is paid to 
        ethanol producers rather than gasoline distributors, provides a 
        credit level that is inversely related to the price of gasoline 
        so as to create a safety net for ethanol producers in the case 
        of a sudden drop in gasoline prices, and is made available to 
        all alternative fuels, not just ethanol and specific molecular 
        formulations of butanol. Finally, Congress should provide an 
        additional subsidy for producers of biofuels from non-edible, 
        and thus more sustainable, feedstocks; mandate flex fuel 
        vehicles and E85 pumps; and create a fast-track approval 
        process for energy crops.
          8. Batteries.--Congress should define a program for the 
        objective analysis of rechargeable batteries, possibly using 
        one of the U.S. national labs. The battery industry has been 
        plagued by wild claims, most of which are compilations of one-
        off ``best-of'' single values. The industry would benefit from 
        a standardized, scientific-based testing program.
                     government program structures
    To my mind, two main structural issues significantly impede the 
effectiveness of existing federal policies and programs in driving new 
technologies.
    First, to drive the necessary level of private sector investment in 
new energy technologies, we need stable, long term and predictable 
incentives. I believe these incentives should be in place for a minimum 
of five years, and, ideally, longer. Existing tax credits, including 
the Production Tax Credit and Investment Tax Credit, have experienced 
lapses and short-term extensions. For example, the Investment Tax 
Credit, created by the 2005 Energy Policy Act, was scheduled to expire 
at the end of 2007 and was only recently extended through the end of 
2008. Such uncertainty limits the capacity of incentives to support 
projects with long lead times.
    Second, federal policy should not attempt to pick winners and 
losers. Federal tax incentive programs today frequently deter 
innovation by specifying a limited set of eligible technologies. For 
example, the Investment Tax Credit sets a cap on fuel cells that limits 
the credit's value in driving fuel cell development. None of us can 
predict which of these various technologies will have the lowest 
production costs in the future. We need to open up incentive programs 
to a wide range of promising technologies.
    Once again, I want to thank the Committee for inviting me here 
today. I believe we all have an opportunity to be part of the solution 
to our country's energy crises. I look forward to today's hearing and 
to learning about how we can work together to build a more secure 
future.

    The Chairman. Thank you very much.
    Mr. Liebreich, we're very glad to have you here. Thanks for 
coming.

  STATEMENT OF MICHAEL LIEBREICH, CEO AND FOUNDER, NEW ENERGY 
                  FINANCE LTD, LONDON, ENGLAND

    Mr. Liebreich. Thank you very much, Mr. Chairman. Thank you 
very much, Senator Domenici and the other Senators. I want to 
say how honored I am to be the only overseas representative 
here to give testimony today.
    Just in case anybody's wondering why a Brit is here doing 
this, I will let you know a little about New Energy Finance. We 
are a research and information provider with about 50 people. 
All we do is track renewable energy, biofuels, low carbon 
technologies and the carbon markets. We cover all stages of 
investment and we offer it globally, so we have offices in 
London, Washington, Shanghai, Beijing, Delhi, Perth, Tel Aviv 
and New York. So I hope to give a little bit of international 
perspective on the flows of financing and perhaps some figures 
to put in context the investment that is going on here today in 
the United States.
    I've prepared some written remarks which you should have in 
front of you, and I'd like to refer to them as I go through. 
But rather than go into every point in detail, I want to draw 
your attention to some of the key points and some of the key 
statistics and research on investment flows.
    So I want to start by saying that at this point in time 
there's no shortage of capital available for new energy 
ventures and for new energy projects, and this is what I refer 
to as the convenient truth. So if I direct your attention to 
the chart, in Figure 1* on page 2 of the testimony, there's 
investment overall globally in clean energy that has grown from 
$27.6 billion in 2004 to $70.9 billion. It's more than doubled 
over the past 2 years globally, and just to put that in 
perspective, the total investment globally in energy is 
somewhere in the order of $800 billion which means that around 
9 percent of all energy investment currently today is already 
going into clean energy.
---------------------------------------------------------------------------
    * Graphics have been retained in committee files.
---------------------------------------------------------------------------
    I won't go into the reasons for this rapid growth over the 
last 2 years. Senator Bingaman, in his introduction, touched on 
them and they've been much discussed, I think, already by this 
committee, but I would point out one of the results of this 
inflow of capital has also been a strong rise in valuations of 
new energy companies.
    We track company valuations in the clean energy sector by 
means of an index, the NEX and you can see from Figure 3 in the 
written testimony, the NEX has outpaced the border market for 
the past 4 years. The increase in valuations have companies 
operating substantially in the clean energy space has been just 
over 30 percent per annum for the past 4 years. So that the 
overall global environment is a more than doubling of the 
amount of money flowing into the sector over the past 2 years. 
That's some indication of the sort of returns that are 
available to investors.
    So let's turn to what's happening in the United States. In 
order to have a healthy clean energy industry you need to draw 
on different sorts of investors and Dan Reicher, in his 
testimony, referred to the difference between the technology 
investment side and the deployment investment. Indeed you need 
to kind of relay-race between different sorts of investors.
    So we take the first leg of the relay, which is venture 
capital and private equity, it turns out that the United 
States' performance is actually extremely strong, contrary to 
what one might guess reading the press. In fact, the United 
States has a strong leadership position in investing in clean 
energy technologies.
    Last year a total of $7.1 billion invested in venture 
capital and private equity in clean energy worldwide, of which 
$4.5 billion, just 63 percent, was here in the United States, 
so that's a very strong position. When you break it down even 
further and you start to look at the early stage technology 
investment, then the earlier the stage you get to, the stronger 
the U.S. position. So the United States actually out-invested 
Europe by a factor of something like 3-to-1 in early stage 
venture capital in 2005 and by 7-to-1 in 2006.
    U.S. venture capitalists puts $390 million into American 
solar start-ups last year, and overall we know of no fewer than 
627 funds in the United States that are either actively 
investing in clean energy technologies or looking to invest in 
clean energy technologies. We've got here on the panel, I 
think, some of the evidence of some of the people who've been 
so instrumental in building that leadership position and thanks 
to their efforts, the United States is among the leaders in 
some of the technologies that could eventually be 
revolutionary, such as thin film photo-voltaics and cellulosic 
ethanol, to name just a couple.
    So that's the good news. The not-so-good news is that when 
these earlier stage companies need to look for more capital and 
they go to the public markets, the United States has not been 
the best place to do that. So under one-third, 28 percent of 
$10.3 billion raised by the public markets last year was in the 
United States and Europe has quite a substantial lead.
    So you've got not a single pure play wind turbine 
manufacturer trading on a major U.S. stock exchange and you've 
got publicly-quoted Japanese, German, and Chinese companies 
that are clear leaders in silicone photo-voltaics as a result. 
There's a number of reasons for that weakness--one can 
hypothesize on many more--but certainly the high cost of 
regulation for going on to the U.S. public markets currently is 
one and also among the reasons is the perception that Europe is 
more committed to clean energy and is therefore a safer place 
to operate.
    Project finance is now the deployment part of the picture, 
as these technologies are rolled out, wind farms built, bio-
fuels, refineries built. There the United States was far 
behind, but has been catching up quite aggressively, adding 5.5 
billion gallons of capacity total now and also adding 2.5 
gigawatts of wind capacity last year. It has helped close the 
gap very substantially there, and so although the United States 
is still behind Europe, it has closed the gap substantially. 
But the fastest growing region is actually Asia.
    Finally, I want to mention the carbon markets. I think a 
number of the panelists, my fellow panelists, have mentioned 
the need for a Federal mandated cap-and-trade system. I'll come 
onto that in a second, but just to give a feel for the amount 
of money: there is now no less than $11 billion in carbon funds 
worldwide. London is the leading location for the management of 
private carbon funds at 60 percent of the private money. The 
United States is not doing badly, particularly considering the 
fact that the United States did not ratify Kyoto and in fact, 
$1.8 billion is managed out of the United States of that $11.2 
total, so that's a good sign of the fact that the United States 
will be a strong player in the carbon markets if and when on 
the State or Federal level joins in.
    So we're not a policy think tank. I came here with a few 
ideas of policy areas that you might want to look at in order 
to increase these numbers and spur further investment. I think 
almost all of the five areas have been mentioned individually 
by others, but I will just list them.
    First: there need to be some level of support. These 
technologies are more expensive. Clean technologies are more 
expensive currently and for the foreseeable future than dirty 
technologies. There needs to be a level of support but it needs 
to be stable and long-term support. The on-again, off-again 
nature of the current arrangements is very detrimental.
    Second: there are cheap ways to reduce risk. It's often 
cheaper for taxpayers, for policymakers to work on reducing 
risk, rather than increasing returns and providing subsidies.
    Third: accelerating, permitting, and time-to-market. 
There's nothing that our clients like less than projects that 
get delayed. It makes them feel like they're working in the 
wrong country, in the wrong region, on the wrong technologies.
    Fourth: strong, long-term signal on energy efficiency. The 
United States can and should be a world leader on energy 
efficiency. The leadership is currently being displayed by 
Germany, by Denmark, Netherlands, and Japan. That should change 
and investors need a long-term signal to change their 
investment patterns.
    And then, fifth and finally: a Federal carbon credit 
market. It needs to be one that establishes a cost of carbon 
that is sufficient to change investment decisions of the very 
large emitters.
    Those are the five policy areas to be thinking about in our 
opinion. I'll finish this by thanking you once again for 
inviting me to come here to testify.
    [The prepared statement of Mr. Liebreich follows:]
 Prepared Statement of Michael Liebreich, CEO and Founder, New Energy 
                      Finance Ltd, London, England
    Good morning.
    First, I want to say how honoured I am to have been invited to here 
today to share my thoughts on investment trends in renewable energy, 
low carbon technology and the carbon markets.
    Some of you may be wondering what a Brit is doing discussing the 
U.S. clean energy market. So, I thought I'd take just a moment to tell 
you a little about New Energy Finance. We cover all sectors of 
renewable energy, as well as biofuels, energy efficiency, carbon 
capture and sequestration, hydrogen and fuel cells, and the carbon 
markets. We cover all stages of investment, and we are global, with 50 
researchers in offices in London, Washington, Shanghai, Beijing, Delhi, 
Perth, Tel Aviv and New York. Our clients cover the spectrum of clean 
energy investors in a total of 26 countries.
    I have prepared written remarks, which you should have in front of 
you. Rather than go into every point in detail, I would like to draw 
your attention to some of the key points. Along the way, I may refer to 
the charts, so if you have the testimony in front of you, feel free to 
follow along.
    I'd like to start by saying that at this point in time, there is no 
shortage of capital available for new energy ventures and projects, 
either globally or in the U.S. This is what I call ``the Convenient 
Truth''. I would direct your attention to the chart in Figure 1 on page 
2 of the testimony. It shows that investment in clean energy worldwide 
has more than doubled in the last three years, from $27.6 billion in 
2004, to $70.9 billion in 2006.
    To put these figures in context, total investment in energy 
worldwide is of the order of $800 billion, so around 9% of all 
investment in the world in energy today is already clean.
    The reasons for this rapid growth in investment--concerns about 
climate change and energy security, high energy prices and so on--have 
been much discussed and I don't intend to go into them in detail here 
today.
    One of the results of this inflow of capital has been a strong rise 
in valuations of new energy companies. We track these via a global 
index of publicly-traded clean energy stocks, which is published under 
the symbol NEX. You will see from Figure 3 that the NEX has outpaced 
the broader market in the last four years, recording a compound 
increase of 30.2% per annum for the past four years.
    So that is the overall environment, globally, in terms of the 
volume of money flowing into the space, and the sorts of returns that 
are available.
    Now let's turn to what is happening in the U.S. A healthy clean 
energy industry needs to be supported by a range of different 
investors. On the one hand, you need investors to support the 
development of technologies and equipment providers. On the other hand, 
you need other investors to fund the roll out of capacity-to-build wind 
farms, biofuels plants, etc. It's a kind of relay race.
    In the first leg of that relay, venture capital and private equity 
(which have been such an engine of growth in this country), the U.S. is 
extremely strong. As you will see in Figure 4, in 2006 the U.S. 
dominated in this area, investing $4.5 bn out of the worldwide total of 
$7.1 bn. And when you break it down within that $7.1 bn, the earlier 
the stage of investment, the more the U.S. holds a dominant position. 
The U.S. out-invested Europe by a factor of nearly three to one in 
early stage venture capital in 2005, and by seven to one in 2006. Last 
year, U.S. venture capitalists put $390 m alone into American solar 
start ups.
    My fellow panellists here with me today are all outstanding 
examples of the sort of people who have created this leadership 
position. Thanks to their efforts and others like them, the U.S. is 
among the leaders in a number of technologies that could eventually 
revolutionize the energy industry, including thin-film photovoltaics 
and cellulosic ethanol.
    So that's the good news. The not-so-good news is that when these 
earlier-stage companies start to need more capital and look to the 
public markets, the U.S. has not been the best place to raise it. Note 
in Figure 6 that just 28% of the $10.3 bn in funds raised via the 
public markets in 2006 was in the U.S., with European stock markets 
taking the lead.
    There is not a single ``pure-play'' wind turbine maker that trades 
today on a major U.S. stock exchange, despite the fact that wind is by 
far the most mature of the renewable energy technologies. Publicly-
quoted Japanese, German, and Chinese companies are clear leaders in the 
production of materials used in silicon-based photovoltaic panels.
    There are a number of reasons for this weakness, among them the 
high costs of regulation in the U.S. and the perception among investors 
that Europe is more committed to clean energy and is therefore a safer 
place to operate.
    When it comes to project finance, the U.S. was far behind, but has 
aggressively begun to close the gap in the past two years. Last year, 
the nation's ethanol capacity more than doubled to approximately 5.5 bn 
gallons. A total of 2.5 GW of new wind projects were commissioned, 
bringing the installed base to 11.6 GW. As you will see on page four of 
my written evidence, the U.S. still trails Europe, but has made giant 
strides toward catching up, particularly in the last 18 months or so.
    One final area I would like to mention is the carbon markets. As 
shown in Figure 9, no less than $11.2 bn has now been raised by 
investors looking to purchase and trade in carbon credits. A 
substantial proportion of this will be invested in clean energy 
projects in the developing world, under the terms of the Kyoto 
protocol. Despite the fact that the U.S. did not ratify this treaty, a 
total of $1.8 bn of these carbon funds are being managed here in the 
U.S.
    London leads the world with 60% of all private carbon funds under 
management, but if and when carbon trading is rolled out in the U.S., 
whether on a state or federal basis, there is every sign that the U.S. 
financial sector will be a powerful player.
    New Energy Finance is not a policy think-tank, so I have not come 
here with any specific policy suggestions. What I would like to do is 
highlight five themes the committee might consider as it seeks to craft 
policy to promote further investment in clean energy in the U.S. I do 
this very much with our clients' perspectives in mind: these are the 
areas they are telling us they would like to see addressed in order to 
make the sector a more attractive place to invest.
    First, it's not just about subsidy and support. Clean energy is 
more expensive than dirty energy, so some level of support is needed. 
But when you do provide support, make sure it is long-term and stable. 
More than anything, investors want to know that the laws and 
regulations under which they created their original financial 
projections will remain the same for three, five, or even 10 years. A 
number of federal renewable energy policies provide subsidies which 
are, in some cases, generous but which periodically terminate. The 
recurring expiry of the wind Production Tax Credit, for instance, has 
pushed up the industry's cost of capital, causing bankers to 
incorporate ``political risk'' premiums into financing packages, and 
has kept turbine manufacturers from investing in the U.S. at the level 
required to create a domestic supply chain.
    Second, look for ways to reduce risk. It is often cheaper for the 
taxpayer for policy-makers to reduce risk than to provide subsidies. To 
produce adequate equity returns even pilot projects must be partly 
debt-financed, but debt providers will not accept technology risk so 
there is a role for loan guarantees and for other sorts of pooled 
technology insurance mechanisms. Similarly, volatile prices for 
commodities cause investors to demand higher interest rates and equity 
returns. Government cannot (and should not) seek to eliminate commodity 
risk, but should design policy to shield this embryonic industry, 
perhaps via a mechanism under which support for biofuels projects is 
linked to corn and oil price spreads, so that in good years the subsidy 
falls away but in bad years cuts in.
    Third, accelerate permitting and time-to-market. There is a strong 
correlation between the growth in clean energy capacity in any region 
and the speed with which permit applications are processed. Investors 
hate delays because they reduce returns and make them feel they are 
missing opportunities elsewhere. The U.S. should consider designating 
``clean energy zones'' where developers know they will receive 
expedited consideration of wind, solar, geothermal, marine, mini-hydro, 
biomass, or other projects.
    Fourth, lead the world in energy efficiency. This is an area where 
government must take the lead because consumers have shown they are 
generally not price-sensitive to energy costs and are thus rarely 
willing to make long-term investments to improve the energy efficiency 
of their homes or automobiles--even where such investments have 
positive pay back. There will be a huge economic prize for countries 
that lead--rather than lag--the trend. The U.S. can and should take the 
lead. Achieving improvements will take political leadership to change 
consumer attitudes, new regulations to insure compliance, and funding 
for new technologies. Investors need a strong signal of commitment in 
order to support the sector.
    Fifth, establish a federal carbon credit market. To take serious 
aim at greenhouse gas emissions, a system needs to be put in place that 
seeks to raise the price of carbon to $40-$50 per tonne. All the 
research shows that this is the level needed to make new coal plants 
uneconomic and spur the closure of the oldest and least efficient 
plants.
    Such a programme must be economy-wide, set long-term goals, and be 
locked in place for 20 years. And it has to be federal to prevent 
competition between the states to offer the most lenient emission 
terms.
    With that, I'd like to once again thank the committee for this 
opportunity. I look forward to your questions.

    The Chairman. Thank you, and thank you all for being here. 
I think this has been very useful testimony. Why don't we take 
5 minute rounds of questions here, and maybe do a second round 
if people still have an interest in doing that?
    Let me start with Elon. Let me ask you, and maybe Mr. 
Denniston or anybody else who wants to comment, Dan Reicher. 
This issue of energy storage and battery technology is one that 
I think is key to either plug-in hybrid or electric cars, or a 
variety of the clean energy opportunities that may be there in 
the future.
    In your view, what are we doing and what should we be doing 
to try to get this technology developed and commercialized, the 
battery technology that's essential for us to realize the 
opportunities that you've discussed?
    Mr. Musk. That has actually been the primary area of 
research which has, of all the R&D money that we spent thus 
far, developed money, that's been the single biggest area. I 
think you've correctly highlighted what I think is the single 
biggest challenge in getting away from oil.
    Gasoline happens to be an excellent energy storage 
mechanism and we need to have something which is competitive 
that is capable of storing electricity at a similar level of 
density too. We've been able to do that thus far, get 250 miles 
comparable to an electric, power to a gasoline car.
    As far as what's needed, it's innovation needed at the cell 
level and at the pack level. Both are quite difficult. It's 
worth noting that currently, to the best of my knowledge, there 
is no mass-manufactured lithium-ion cell in the United States. 
I think it's actually very important that that capability get 
developed, that there is some--there's R&D activity in the 
United States but there's not manufacturing activity of the 
cell.
    Tesla does intend to manufacture its lithium-ion pack in 
the United States, long-term, but I think, very important to 
making that happen is something like the DOD loan program. I 
think that would be very effective because it is very capital-
intensive, and as I'm sure you're aware, in places like Japan, 
the government is very supportive of such activity and helps 
make that happen.
    Senator Domenici. What was that again?
    Mr. Musk. I beg your pardon, sir?
    Senator Domenici. Your last comments, what were those 
again?
    Mr. Musk. I was just saying that the lithium-ion cell is 
it.
    Senator Domenici. I got it. Thank you.
    Mr. Musk. Okay.
    The Chairman. Mr. Denniston, did you have a comment on 
that?
    Mr. Denniston. Yes, I do, Senator Bingaman.
    So, energy storage has historically been technically a very 
challenging field and essentially scientists are limited, 
they're bounded by the periodic table of elements. Scientists 
can't invent a new element. They have to deal within the 
periodic table that you saw in your chemistry class in high 
school and so the lead acid battery, which is still used today 
in autos and in other applications, was invented over 150 years 
ago. The only significant innovation that has come since then 
is in lithium-ion batteries, which offer advantages but still 
have limitations in terms of safety. You've all read about 
recalls of lithium-ion batteries' durability as well, and in my 
opinion you're question is what we can do.
    My answer is there needs to be more dollars going into 
basic research. I agree with Mr. Musk that the Asian 
manufacturers have led in research and development in energy 
storage, and my recommendation is that there be a research and 
development effort in energy storage in the United States.
    A number of efforts are here today. They have difficulty 
finding funding because it's early-stage basic research, and 
this is where the government can be enormously helpful. I 
believe that the DOE's budget for energy storage is very, very, 
very small. I don't know the number exactly, but I believe it 
to be a very small effort.
    I think you've asked an excellent question. Energy storage 
will help electric vehicles. It will help photovoltaics and 
wind power to become more valuable, lower their cost per 
kilowatt hour. Because when the sun is producing energy, if 
it's producing more than a house needs, then the homeowner can 
store that, but right now that's not economical.
    The Chairman. Dan, did you have a comment on this?
    Mr. Reicher. Yes, Mr. Chairman. I was just going to mention 
that there was the advance battery consortium, the ABC that 
Senator Domenici and others funded in the 1990's. I'm not sure 
what's happened to the ABC, but I suspect that funding which 
was pretty significant and did advance battery technology in 
the 1990's has in fact diminished. So I would encourage you to 
take a look again at that.
    Second, I do think government procurement can drive this as 
well, as we've heard from a couple of our, my fellow panelists. 
The government deciding to step up and whether it's a large 
buyer like the DOD and buy advanced storage technologies, 
battery technologies that can help as well.
    And the last thing I think is, the other big storage 
technology is, of course, hydrogen. I think it's worthy of some 
debate about whether that's in fact, the place to be putting 
large amounts of money in storage these days.
    The Chairman. Thank you very much. My time's up.
    Senator Domenici.
    Senator Domenici. Thank you very much, Mr. Chairman and let 
me say to all of the witnesses, I really thank you, thank you 
very much and appreciate your testimony, whether I agree with 
the whole testimony or not, I think your analysis for us of the 
need for money is in the right places.
    I think what you are also saying is that it is strange that 
money can't go to the right places in large abundance right 
now, when there is such an obvious disparity between the price 
of crude oil and the cost of the new things that we're 
building. If it was back down to $25, or $20, we'd be 
wondering, but when you've got oil at higher than $50, it just 
seems like all kinds of money should flow into those 
alternatives that heretofore had a difficulty competing with 
that black stuff. I think you've told us it is, not like I 
would like or not how you would like, but it's flowing.
    I, myself, want to put in the record the fact that the 
administration, it has been noted that the first cellulosic 
plant is proposed for Utah. Somebody wants to build it up 
there--Idaho--and has indicated to the Secretary that they 
would like to do that, and that they are looking for a loan 
guarantee and they will move with Canadian technology. That's 
not because of anything other than the fact that what they need 
to use for their basic fuel is in abundance in Idaho and not in 
Canada. It has nothing else to do with Canadian taste for 
research or the like, but that happened.
    That would be interesting if in fact we could get the first 
one. It's the big major one and they would build it there. You 
agree we should move with cellulosic and ethanol too, do you 
not? I think somebody mentioned that in spite of all the other 
things we should do that also. Do you think we should do that 
too, Dan?
    Mr. Reicher. Yes, absolutely and the good news, Mr. 
Chairman, is that in fact, the technology level, there is in 
fact, fairly significant money moving into a whole host of 
companies to develop various kinds of cellulosic technologies 
either biological or thermo-chemical.
    The challenge right now though, as you're indicating, is 
actually getting real plants built.
    Senator Domenici. Yes.
    Mr. Reicher. We made a prediction in 1999 when I was at the 
Energy Department that in fact by 2007 or 2008, we would be 
producing more ethanol in this country from cellulosic sources 
than from corn. We were terribly wrong and part of that is that 
technology didn't develop as quickly as we expected. But much 
more importantly is that it has been extremely difficult to get 
real projects built for all the reasons that we've discussed 
already.
    Senator Domenici. I also wanted to indicate--I didn't read 
my opening remarks--as evidence of the fact that there are 
plenty of people looking for loan guarantees, the Department of 
Energy has announced yesterday that it has received 143 pre-
applications for loan guarantees, and that's even without 
having the program that's worth very much. I mean the program 
is all, for many months was backward and had the wrong 
criteria. I think maybe it's getting there.
    I do give the two head men at the Department--I don't talk 
to them without telling them this story first. If they say, 
``Hello, Pete,'' what I say is, ``You're really messing up the 
portions of this bill on loan guarantees. Now we can talk. What 
are you going to do about it?'' It looks like it's slow, might 
say fellow Senators, it is slow. That's caused by some people 
at OMB that do not like them.
    Let me ask: you've spoken about a variety of things in the 
finance area that we need, but would loan guarantees work in 
the Department of Energy that were the kind we thought we 
ordered them to do? I don't know if you understand how it 
works, but essentially, you pay a premium for 80 percent and 
get 80 percent funding. You pay a premium. That premium is 
calculated on the basis of what Congressional Budget Office 
estimates for these kinds of loans, what the risk is on these 
kinds of loans. As a consequence the Federal Government doesn't 
lose any money. We don't get charged in our budget, so we 
thought we had a very good proposal which could have ended up 
with quite a few billions of dollars.
    I wanted to ask, do you think that it would be helpful, if 
we got that in and it was a large portfolio maybe in the 
neighborhood of $3, $4, $5 or $10 billion? Could I ask Mr. 
Denniston, John, what do you think?
    Mr. Denniston. Yes, Senator Domenici. I think that's a 
fabulous idea and yes it would be helpful; you've heard 
comments this morning on the need to build plants.
    I would make two comments, Senator. The first is in the 
case of cellulosic, and we have invested in some of these 
projects so we have first-hand knowledge of this. There is a 
property at play for some of these technologies where they can 
work at relatively low volumes, and the physics and the thermal 
properties are relatively well characterized, and yet there's a 
risk as you scale a plant up, that those properties change, and 
so there's technical risk. We call it scale-up risk in a number 
of these projects, and so that's where the financing difficulty 
comes in. Yes, having a loan guarantee would be an excellent 
way to propel some of these plants that otherwise might not get 
built.
    My second comment is as much as I am a fan of loan 
guarantees, and I am, I would respectfully submit that it's 
important to continually step back and ask ourselves what are 
the problems that we're trying to solve? I submitted three--
climate change, oil dependence and global competitiveness--and 
really ask ourselves what the policy initiatives are that we 
ought to adopt, that move the needle most on those three core 
issues. Loan guarantees are a part of the puzzle, really 
important, but only part of the puzzle.
    Senator Domenici. I understand that. If you read this Act 
you would see we did that.
    Mr. Reicher. Mr. Chairman, I would just say quickly that 
they really work in the real world. In my last position with 
New Energy Capital, we got a loan guarantee for a bio-diesel 
plant in Delaware, the first large scale bio-diesel plant in 
the Northeast or Mid-Atlantic. We got it from the USDA.
    There was some paperwork, but it allowed a regional bank, 
small regional bank that would otherwise have not made a loan, 
to make a loan for that plant and the plant is now up and 
running. So, it's pretty straightforward.
    The Chairman. And is that at 80 percent of the cost of the 
plant or do you remember the percentage of the cost of the 
plant that was guaranteed?
    Mr. Reicher. It was about 70 percent of the cost of the 
plant in that case.
    The Chairman. Okay, all right. Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman. I was going to 
ask Mr. Denniston or anybody else who wants to answer this 
question. The investment in energy technology and other 
technology that you've invested in the past, I'm assuming it's 
a similar model, right, that VC's look at the investment. You 
don't expect everybody you invest in to be successful. Well, 
you hope they're all successful, but what is that model or that 
number that you're looking at?
    Mr. Denniston. Yes, sure, great. It's a wonderful question. 
The venture capital business is a high-risk business. By 
definition we invest in early-stage projects that have 
technical risk, and sometimes that technology doesn't work out 
and sometimes there's market risk, where we think a product 
will succeed in the market. It's a novel product, a browser for 
the internet for example, and sometimes that works and 
sometimes it doesn't.
    So, yes it's a hits business and in the venture capital 
industry at large. Some companies don't make it, they fail and 
that's an accepted part of the model.
    Senator Cantwell. What are we talking about like 1 in 13?
    Mr. Denniston. Well, industry-wide you can see different 
estimates from 2 in 10 to 3 in 10--20 to 30 percent failure 
rates. Something in that range is probably an industry average 
measured over decades.
    Senator Cantwell. And so, and energy technology is 
following this similar model, is my question? Is it or is it 
not?
    Mr. Denniston. I would say, Senator, it's too soon to say. 
Let me give you some numbers that will help, I think, put this 
in perspective for you.
    The last year the venture capital industry in the United 
States invested about $2.5 billion in energy technologies. 
That's up from around $100 million, a mere $100 million, 5 
years previously. So typically the cycle for venture capital 
portfolio companies to mature and go public is 3, 5, 6 years, 
and I would say it's too early in the cycle to know what the 
batting average will be for this cohort of green-tech 
companies.
    Senator Cantwell. But that shift that you just articulated 
is a huge shift in energy investment.
    Mr. Denniston. Okay, so.
    Senator Cantwell. But I want to get to my point because my 
point is this. I didn't hear a lot about predictability per se 
and one of my questions is, given that model that we're talking 
about and I know we're talking about R&D and loans and grants 
and things, but I'm more interested in predictability and a 
level playing field. So in that context, the tax credits and 
tax horizons that we were looking at have, up to this day, have 
been more near, you know, short-term, 2 to 3 years.
    I'm assuming that if we're going to follow a similar model 
that's worked in other technologies' success, yes. VC's know 
they're going to choose well in some instances and not in 
another, but they want to understand issues over that horizon 
of the business. What are the likely other advantages that that 
technology investment might receive? So predictability from us 
in a longer horizon on tax credits, I would assume, would be an 
integral part of the strategy for investment.
    I didn't hear a lot about that, maybe I missed it in the 
written testimony, but if people could comment on what you 
think the appropriate horizon is for these various tax 
incentives that we're considering, that would be great.
    Mr. Denniston. I'll offer a point of view and then the 
other panelists, I'm sure, have a point of view.
    So, Senator, I think you put your finger on a critical 
shortcoming with existing subsidies, which is--and a number of 
my fellow panelists have given examples of subsidies and tax 
measures that are year to year--and I would submit it is close 
to impossible for companies to gear up their business plans not 
knowing whether these incentives are there for the longer term.
    In the case of wind, some of these projects take a couple 
of years to plan, get permitted and built, and if they have a 
12-month expiration on the programs----
    Senator Cantwell. So because I only have 56 seconds left, 
what length of time are you thinking?
    Mr. Denniston. I would suggest, and this is in my written 
remarks, no shorter than 5 years, hopefully much longer. 
Germany puts 20 years in.
    Senator Cantwell. And if you could in answering this, tell 
me also what you think the number is to actually get 
manufacturing of some of these facilities in the United States.
    My first question was just about investment, for your 
business model what horizon do you need to see so that you have 
that component in looking at what you think the return is, but 
when I look at this equation, I see manufacturers of technology 
like wind technology.
    They don't build wind turbines in the United States because 
they don't have the predictabilities and not only are we 
missing out on the ramp-up of wind, we're missing up on the 
ramp-up of manufacturing of wind. So what is the number for 
this, if it's 5 years for some predictability just on 
financing? What's the horizon that would actually get us job 
creation in the United States on this?
    Mr. Denniston. I'll answer, and then I want other panelists 
to answer as well because you directed the question at me, 
Senator. Minimum 5 years.
    I'm glad that you raised the point on manufacturing. You'll 
see that I addressed that in my written remarks as well. It is 
very important we try to hold manufacturing here in the United 
States through these kinds of incentives.
    Senator Cantwell. So how many years?
    Mr. Denniston. I said minimum 5 years, hopefully longer.
    Senator Cantwell. Okay, all right.
    Mr. Reicher. Senator, let me quickly draw an important 
distinction. There's venture investing which is in 
technologies, very high-risk, you know, put money up to lots of 
companies, only a few may succeed in a big way. That's simply 
to get the gadget ready to be used.
    The bigger issue right now is project investing, much lower 
risk, the banks get involved and it's there where the amount of 
capital that's required is vast compared to the early 
technology investing, actually getting projects built. It's 
also there where the tax credits become so critical. The 
duration of the tax credits--a project developer needing to 
know that a tax credit is going to be available for multiple 
years in order to make the numbers work, to go to a bank to get 
this high level of debt that they can on the project, put in as 
little equity as possible to make the project work, so it's 
that world.
    The venture world has a related but different set of issues 
and of course the venture world looks out ahead and says all 
right, I'm going to develop this gadget, can I ultimately get 
it deployed? What is the policy framework?
    I just urge you to think that there are these two separate 
worlds with very different investments.
    Senator Cantwell. I understand your point, but then you 
answered my question, which is you need predictability.
    Mr. Reicher. Long-term, stable, predictable support from 
the Federal Government.
    The Chairman. Senator Thomas.
    Senator Thomas. Thank you, Mr. Chairman. The purpose of 
this meeting, as you know--and thank you all for being here--
was to investigate ways to stimulate additional private sector 
investment into the deployment of technologies. You all have 
advocated and most of us do, for massive Federal subsidies.
    How do we get private companies to unleash a little more 
into this? We all tend toward government intervention to cause 
it to happen.
    How do we achieve advanced technology with the minimal 
amount of government intervention, other than spending 
taxpayers' money? I'd like each of you to comment on that.
    Mr. Musk. Actually, the point I wanted to make about the 
specific example of Tesla Motors. Tesla Motors receives 
actually no Federal support in any way either at the consumer 
level, at the company level, loans, any form whatsoever right 
now, and it's bringing a very competitive electric car to 
market starting manufacturing this year.
    The issue is not one of whether the companies will succeed; 
I think they will. I think the amount of private funding will 
grow over time and will succeed even if there's ultimately no 
Federal intervention at all.
    The question is whether we want to accelerate that pace or 
not, and I think we do need to accelerate that pace. The reason 
we need to accelerate that pace is because as I mentioned in my 
testimony, the normal way in which the economy drives 
innovation in a particular area is by pricing, and 
unfortunately the gasoline price at the pump does not reflect 
the true cost of gasoline. Even though we may think it's a 
little high, it does not reflect the true cost of gasoline 
because the cost of the damage to the environment, the cost of 
oil dependence, global warming, is not priced in.
    So we have a failure in the normal mechanisms of economics, 
which will result in a slower pace of transfer of private 
capital into that industry. That's why there is Federal 
intervention required, and ordinarily I would not be an 
advocate of Federal intervention.
    Mr. Denniston. Senator Thomas.
    Senator Thomas. Yes.
    Mr. Denniston. I think it's a fabulous question. I'd like 
to go back to the three problems I think we're trying to 
solve--climate change, oil dependence and our competitiveness--
and I think echo a little bit of what Mr. Musk said. I'm a fan 
of the free market but it so happens in the case of those three 
problems, the free market is not set up to react to those 
issues.
    So in the case of climate change: climate change is caused 
by greenhouse gases, which are a free externality. There's no 
way without government intervention that the market will 
recognize the real cost of those emissions and price it into 
the product, which in turn will reduce demand for the product. 
That will not happen in the free market.
    In the case of oil dependence, the price of gasoline at the 
pump, $2.50, $3.00 doesn't reflect the fact that two-thirds of 
known oil reserves are in Middle Eastern countries and that 
percentage will go up to over 83 percent in the next 15 or 20 
years. The free market will not recognize that risk. That's a 
risk that all of you are aware of. The market, the pricing 
mechanisms don't know, can't deal with that. That isn't what 
the free market does.
    And finally with respect to global competitiveness, I can 
tell you because in the past year I've traveled to Asia, I've 
traveled to Europe and I can see what the governments there are 
doing. They recognize that the United States for a century has 
been dominant in technologies and our standard of living has 
benefited from that. They're on to this game. They are 
investing. Their public policy is aligned to succeeding and 
having them be a leader in technology innovation in these green 
technologies. So we're in a flat world, globally competitive, 
and my answer to your very good question is: I love the free 
market. I just don't know that these three issues are ones that 
the free market is well-suited to address.
    Senator Thomas. Anyone else want to comment on that?
    Mr. Liebreich. Very quickly, if I can comment. I think that 
there is also--you can't get over the fact that the clean 
technologies are more expensive than the dirty technologies 
currently.
    Wind power does cost more than power from coal or power 
from gas, so having decided that you think it's a good thing to 
have some, there is almost no way away from some sort of 
regulation or some sort of subsidy-based support. But that is 
only a very small part of the answer, because I think there are 
other ways you could make an area interesting for investors by 
reducing the risk and by accelerating the implementation of 
projects. So there are a number of things that one can do on 
the policy front that don't require just pouring in more money.
    I think in terms of risk you can look at whether it's the 
way that the production tax credit has been on-again, off-
again. That has increased the cost of capital to developers of 
these projects. It has stopped turbine manufacturers from 
investing. There is no wind supply chain in the United States 
because you never know whether there's going to be a market or 
no market.
    On bio-fuels, there's commodity risk which even if, as 
Senator Domenici pointed out, when the oil prices are $50, $60, 
everybody should be pouring money into the sector. Well, they 
don't, as much as they would, because they're concerned about 
what happens to oil prices in the future. There are ways of 
providing coliseum caps or insurance or reducing risk, that 
don't necessarily cost a lot of money and that are being 
experimented with in other countries, that can spur an enormous 
amount of investment.
    Senator Thomas. Thank you. I do have to say, however, that 
I think there is a public feeling about the future and there's 
a public feeling about global warming. There's a public feeling 
about where we're going to go with these kinds of things. So, 
there's more to it than just the economic side, I think. Thank 
you.
    The Chairman. Senator Salazar.
    Senator Salazar. Thank you very much, Senator Bingaman, and 
I know we're running really short on time here, so I would 
appreciate it if you would be willing to provide some written 
response to the question that I'm going to ask.
    The question has to do with renewable portfolio standards 
and renewable fuel standards, and whether or not those are 
helpful in terms of incentivizing the investments from the 
private sector.
    In Colorado, for example, we passed an RPS a few years ago 
that said that we would get the 10 percent of our energy 
production from renewable energy resources by 2015. Lots of 
investment has gone into Colorado. We are now upping the RPS in 
Colorado in legislation just passed a couple of days ago to 20 
percent by the year 2015. So my question, I mean, we passed the 
RFS out of this committee just 2 years ago in the 2005 Act.
    So my question is when we look at an RPS or we look at 
changing the RFS in this committee as part of our energy bill, 
what does that do in terms of the private market, looking at 
investments in these renewable energy areas? Maybe, John 
Denniston, why don't you take a quick answer to that, but I 
would really appreciate hearing from each of you in writing in 
the response to that question.
    Mr. Denniston. I'll be brief to give time to my fellow 
panelists.
    I think it would be an enormous signal, Senator, for the 
Senate to, for the Congress to adopt an RPS. Germany did this 
in a somewhat different way. They have a feed-in tariff system, 
but it really accomplishes the same purpose as an RPS, which is 
a minimum level of renewable use throughout the country.
    That would be an enormous signal to the investment market 
and I think that single act would drive a lot of investment 
capital into this sector. It's an excellent idea and I urge the 
Senate to strongly consider that.
    The renewable fuel standard goes to 7.5 billion gallons in 
the year 2012, and I would urge that to be increased in concert 
with President Bush's twenty and ten initiative. While I think 
the current RFS hasn't really impacted the market, because 
there's core demand because of MTD and pricing, I think if you 
significantly increase the RFS that similarly would drive 
demand and investment in the category.
    Senator Salazar. Thank you very much.
    The Chairman. Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman. I noticed in all 
of your testimony, not one of you mentioned coal-to-liquid fuel 
as a green technology that you are developing. Do you plan to 
pursue coal-based transportation fuels as an alternative to 
oil-based fuels? That's question No. 1.
    I believe that coal-to-liquid fuels will dramatically be 
cleaner than conventional fuels. It's proven in South Africa. 
They're over 30 percent with that technology. The finished 
product is nearly zero in sulfur, low in NOX 
emissions and low in particulate matters.
    I know the real concern is carbon and carbon sequestration, 
and in the bill that I have put in, we sequester all the 
carbon. We are now doing a survey to find out how we can best 
serve by putting the carbon into either gasification and 
recycling it to the oil fields, or doing a survey in the United 
States and Canada right now on places to bury the carbon in the 
ground, the sequestration.
    The question I ask: since we do not have a cap-and-trade 
system and China and India are not included in any of our 
emissions caps, in other words, to do that to the United States 
is fine. Let's get everyone else involved to do it, because we 
can get to zero in emissions. But I've been to Beijing and 
can't see. Every day, open my eyes and I can't see out, because 
of the unbelievable pollution that is going on there.
    So, what I'm trying to say is that in 2005, we passed a 
bill. We're looking for help to go into 2007 now to refine that 
bill and most of you have said 5 years minimum. In the bill 
that I put in for coals-to-liquid, we put a 20-year because the 
Department of Defense asked for a 20-year cycle. They would be 
the biggest recipients and users of that type of fuels for not 
only aviation, but for their regular transportation system. So, 
anybody can pick up the ball.
    Mr. Peters. Well, first of all, Senator, I think that the 
coal-to-liquids technologies suffer from the same technology 
challenge that we have today, and that's scale-up. I think that 
loan guarantees are obviously something that are going to have 
to be required.
    Senator Bunning. But in the bill we require a 10,000 gallon 
scale in each of the first ten plants that we would invest in.
    Mr. Peters. Right.
    Senator Bunning. For the Government.
    Mr. Peters. But I think in addition to that, whereas with 
the V-tech legislation, we have a scaleable amount of credit 
that is available for cellulosic ethanol, for biodiesel, for 
corn-based ethanol. We're going to need something like that 
with the coal-to-liquids in order to be sure of the 
sustainability, long-term, of the product that you produce at 
the end of the day.
    If we as investors, debt investors, are going to look at a 
product that 1 day is competitive with $60 oil or $70 oil and 
all of a sudden becomes uncompetitive with $30 oil, it's not a 
technology we're going to invest in.
    Senator Bunning. Well, we understand that, but for the 
security of the Nation, for the Department of Defense, if we 
can guarantee a certain price, like $40 a barrel and say put 
that as a floor in the bill. I can tell you right now, they're 
willing to buy and they have tested the coals to liquids, 
particularly aviation side, and they have burned in B-52's. 
They have a pilot program for that.
    They also have a pilot program for on-ground vehicles for 
diesel, and they're testing that in a pilot program. They are 
ready to go if we can find the investors. Yes.
    Mr. Denniston. Senator Bunning, my firm is an investor in a 
coal-to-liquid, a coal conversion company, and one perspective 
I'd offer to you is that coal can be converted to natural gas.
    Senator Bunning. Yes.
    Mr. Denniston. Natural gas itself can be a transportation 
fuel. On my way here this morning, I saw many of your buses in 
Washington, DC are powered by natural gas. So it has the 
benefit of being both, coal to natural gas conversion, of being 
both a prime mover for electricity generation and a 
transportation fuel.
    The company we invested in is Grade Point Energy, based in 
Massachusetts.
    If I could add one more thing, the 5 years that I said 
before is absolute bedrock minimum.
    Senator Bunning. Minimum, I know.
    Mr. Denniston. I think anything less than that is not 
worthwhile.
    Senator Bunning. No, you have to have stability.
    Mr. Denniston. Germany went 20 years. I think they did that 
right.
    Mr. Reicher. Yes, let me just follow up on that.
    Senator Bunning. Go ahead.
    Mr. Reicher. When you look at support that the Federal 
Government has provided to energy generally in the traditional 
energy sources, there has tended to be very long-term support. 
I think about the oil depletion allowance, I think about 
nuclear liability insurance which is a minimum, I think, of 15 
years.
    So, I think that we have to adopt a mindset as we think 
about these newer technologies that not only is 5 the minimum, 
we should be thinking much longer term, with Federal support of 
the sort that the traditional technologies have enjoyed. I 
think if we level that playing field, we're going to be a lot 
further ahead as far as the investment community is concerned, 
with investment in technologies and investment in projects and 
investment in manufacturing facilities.
    So, we ought to look at what we've already done in the 
traditional sphere as we think about the measure for these 
newer technologies.
    Senator Bunning. The only reason I brought up coal-to-
liquids is we don't have to reinvent the wheel. It's already 
there.
    Thank you very much, Mr. Chairman.
    The Chairman. Senator Corker.
    Senator Corker. Yes, sir. Thanks again for great testimony. 
It's great to have people that are actually out there taking 
risk.
    Talking about energy policy agenda, we actually are 
piloting one of your companies in Chattanooga, Eye on America. 
I know it's merged with another entity now, but we're actually 
producing through a hydrogen fuel cell, power into the power 
grid. I hope that that's commercially viable and hope we make 
those in Tennessee when it is.
    As it relates to the macro public market issue, we hear a 
lot here in our country, obviously, about bio-fuels, and 
there's a lot of interest in that. I just had a long briefing 
this morning, but from the standpoint of investment that's 
taking place worldwide, obviously real money, smart money 
usually is going after those most promising technologies. I 
know that some of the bio-fuels are actually more mature and 
would be beyond venture capital funding at this point, but what 
are you seeing on the public markets as it relates to bio-fuels 
and their relevance? Or is most of the technology investment in 
harder type technologies? Either one of you.
    Mr. Liebreich. I'll start off and then pass it on to you to 
comment on that.
    I think that what you've got to bear in mind is that 
there's no single solution to rolling out clean energy. You've 
got a lot of different solutions, some including carbon capture 
and sequestration, some including bio-fuels, solar, wind. 
There's a whole broad spectrum with energy efficiency as well.
    They're at different stages of maturity. So what we see is 
that when you look at the public markets, fund-raisings, they 
play a role of a particular stage in the development. So the 
leading sector for public market fundraising last year far and 
away, was solar, followed by bio-fuels. Prior to that there was 
a spate of activity in fuel cells, in hydrogen and wind.
    So, it goes in cycles to a certain extent. There's some 
very real questions about what is the right sort of, who are 
the right equity investors for asset-intensive industries 
versus technology-intensive, depending on the different stages 
of development. So we have at the moment in the U.K. an 
alternative investment market called, the AIM, London Stock 
Exchange AIM, which has been enormously successful at 
attracting relatively early stage technology companies, 
something like $1.5 or $1.6 billion of investment was raised on 
London's AIM, and you don't have anything equivalent to that in 
the United States.
    There's a number of imbalances at the moment where venture 
capital type investing, this sort of relay race, is not 
working, because the investment at the early stage is 
happening. But then there isn't the public market appetite here 
in the United States for those investments as they move on.
    Mr. Denniston. Senator Corker, let me retrace the history 
of what's happened on the bio-fuels financing market for the 
past 12 months. In the first 9 months of 2006, there was a 
strong flow of capital into the sector, a lot of headlines, a 
lot of excitement, a lot of new plants being announced and 
planned, and then what happened in August and September 2006 is 
the commodity prices changed radically. Crude oil went from $78 
a barrel to $49 a barrel in a matter of 60 days. Spot prices 
for corn went from $2.50 a bushel to over $4.00 a bushel, and 
that sent a shock through the financial community as it relates 
to bio-fuels.
    I will tell you that the flow of capital into the sector 
has slowed significantly since then, and if you look at the 
market capitalizations for the public bio-fuels companies, 
they're off significantly from their highs over the summer.
    So one of the things that I asked for in my written 
testimony, or suggest, is a safety net--I won't talk in detail 
now, but a safety net for the bio-fuels community--so if the 
Senate believes that it's important and a strategic imperative 
for this country to have a domestic bio-fuel industry, where 
we're self-sufficient, creating our own fuels here in the 
United States with American farmers. Then I would submit that 
it would be important to look at ways to assure the 
sustainability and durability of the industry.
    Mr. Reicher. Senator, could I just add that I urge you to 
think even more broadly than bio-fuels when it comes to 
biomass. There's a whole host of things that we can do with 
biomass.
    It starts with very primitive technologies like just 
burning it to make heat and run a turbine based on that. We can 
gasify it, a higher-level technology; pull more energy out of 
it. We can turn it into liquid fuels, but even beyond liquid 
fuels, companies like Dupont and Dow and others are looking at 
biomass as a source of chemical feed stocks. Much higher value 
than even liquid transportation fuels, which are higher value 
than burning it for electricity in a fairly simple way.
    So, biomass, in a way, is the modern version of a fossil 
fuel. It's a fossil fuel that hasn't been underground for 
millions of years and of course anything you could do with a 
fossil fuel in terms of power, fuels and chemicals, you can do 
with biomass. It's just that we're a lot further behind 
technologically.
    There's one interesting thing that I mentioned at the 
Senate Finance Committee and I want to mention again here 
today. If you sequester the carbon that comes out of the 
conversion of biomass, essentially piggy-backing on the 
technology we're developing for coal, you can actually cause a 
net reduction in atmospheric CO2 because the 
CO2 that's bound up in biomass is the same 
CO2 you've pulled out of the atmosphere when the 
tree grew or the corn stalk grew, unlike fossil fuels where 
you're releasing the CO2 for the first time into the 
atmosphere. So if we develop sequestration technologies, mostly 
for the coal industry, we can apply those very nicely to 
biomass and get a net, an actual net reduction in atmospheric 
CO2.
    Biomass has a huge commercial potential. It also has very 
significant potential from a climate standpoint.
    The Chairman. Senator Craig.
    Senator Craig. And it doesn't take from the food chain.
    Let's go back to John Denniston and your comments about how 
market shift and adjust looking at impacts as to policy 
shaping.
    You, in your closing thoughts, John, mentioned something 
that was really fascinating to me, and I'll flash back to the 
early Clinton years when a bipartisan group of us went downtown 
to try to convince the Clinton administration to floor stripper 
wells at $13 a barrel. But it couldn't be done because somehow 
oil was tied to big oil and big business and nobody wanted 
their political fingerprints on stripper wells. Oh, gee if we 
had a $13 floor, what a simple investment to make to keep a 
million barrels a day in production. They got closed in. They 
got concreted in. That's history.
    A group of us have been talking about the reality of 
flooring--that's a term I use--certain technologies at where 
their break-even is or slightly above so that we don't get 
these distortions in the marketplace. We also know that OPEC 
plays a game and they watch markets and they know how to 
manipulate them by turning the valves on and the valves off.
    It is possible, some would suggest, that we might see $45 
crude or less this summer. That rippled through the markets. 
Why, because the $20 has come off from the $70 crude that was 
speculative to begin with, based on risk, I suspect.
    Would the rest of you respond to what John has mentioned as 
it relates in developing new technologies and investing in 
them? Whether it's private or public dollars, or the marriage 
of the two, and the reality of bringing them to maturity. As 
this Congress now believes it is good public policy to have a 
large portfolio of energy, that we ought to get at the business 
of looking at floors, or looking at a point to break even and 
guaranteeing a certain level, as these technologies move into 
the market are stood up and arrive at a commercial level or 
value. Responses?
    Mr. Peters. Well, I think that's an excellent idea. I think 
that if we look at the history of the corn-based ethanol 
markets and see the very turbulent nature of both the commodity 
risk on the feed stock side as well as on the finished product 
side. We have seen cycles of tremendous growth and depressed 
growth, and I think that from my standpoint as one of those 
low-risk debt investors, to the extent that I could have a 
floor, some formulaic floor that would allow me to recover the 
cost of production plus a capital cost recovery, I would be 
more inclined to invest longer term at significantly lower 
rates.
    We don't have that now. I'm one of those investors that is 
no longer interested in the corn-based ethanol market simply 
because of the market dynamics today. If you could eliminate 
that, I would be a full-time player in that market.
    Mr. Liebreich. Can I suggest----
    Senator Craig. Yes.
    Mr. Liebreich. It is a very good idea. It needs to be 
carefully thought through in two ways, particularly in the 
ethanol space. It needs to be linked really to the spread 
between the raw material of feed stock and oil. So it's not 
just the question of the floor, it's got to be related to the 
spread.
    Senator Craig. I agree.
    Mr. Liebreich. The other thing that's very important to 
bear in mind is that there also needs to be a ceiling, because 
I think one of the goals of whatever policy is enacted has to 
be to continue to discriminate between good and bad 
technologies, and also for the investors to discriminate 
between good and bad management teams.
    You don't want a situation where every single business 
plant is getting funded because the oil price is now $78 and 
then, the moment it dips down, you end up with a whole bunch of 
investors losing their money.
    So, you have to think about the floor but you also have to 
think about, I think, the ceiling.
    Senator Craig. You're reflective of the boom-and-bust in 
the tech market, and the venture capital that would do anything 
at one point and then got very silly and collapsed.
    Mr. Liebreich. We saw that early in 2006 in the ethanol 
space, where people had no background, even in venture capital, 
let alone in commodities, let alone in the energy industry, 
were able to raise funds. I think that's very exciting when it 
happens, but we all know that it tends to be followed by a 
headache.
    Mr. Musk. Actually, if I could make a point about electric 
vehicles which applies to my original testimony earlier.
    It only costs $3.00 to go 250 miles in an electric car. 
That's equivalent to having a gallon of gas at .20 cents a 
gallon, because electric cars are so much more efficient than 
gasoline cars. The electric motor in the Tesla runs at 93 
percent efficiency compared with 20 percent efficiency in an 
internal combustion engine.
    Also, I think the biomass is by far the best way, if you 
want to generate electricity, but by far the most efficient way 
is to just put biomass into a co-gen electricity station which 
generates better electricity at 60 percent efficiency. You 
could also put coal. It's basically energy source independent, 
sir.
    Senator Craig. My time is up. Anyone else wish to respond 
to that?
    Ten years ago if you'd have said that about electric cars I 
would have said it may have cost only that amount per mile but 
the extension cord is very expensive.
    [Laughter.]
    Mr. Musk. You need range.
    Senator Craig. You need range and we're getting it today.
    Mr. Musk. We have a 250-mile range.
    Senator Craig. Thank you.
    The Chairman. Why don't we just do any additional questions 
anyone has here? I'll go first.
    I wanted to ask you, Dan, about your suggestion of the 
energy efficiency resource standard. One of the things we run 
up against, obviously, is a political reality around here. That 
is any time you start saying we're going to impose requirements 
on utilities, part of the push back is that this is the State 
Regulatory Commission's job, they ought to be doing it. In fact 
you pointed out, I think, there are eight States that have 
something like an energy efficiency resource standard in place 
now.
    As an alternative to doing a national energy efficiency 
resource standard, what if we were to provide some Federal 
incentive and we can discuss what that would be, for States to 
do that? Basically it seems to me there are sort of three main 
things that State utility commissions ought to be doing to 
increase efficiency in the use of electricity and natural gas.
    One is this decoupling between the sales and the profit 
that utilities can achieve. One may be something like you're 
describing with the energy efficiency resource standard, and 
perhaps a third is this feed-in tariff idea that they've 
adopted in Europe, that the utilities have adopted, where 
basically the utility says to the customer, if you go ahead and 
produce energy through a solar system or through a wind system 
or whatever, we, the utility, will agree to buy that from you 
at an increased cost over what we can sell you electricity at.
    Now that's been very effective in Europe. I think that 
again there would be a strong sentiment around here that that's 
something the States ought to be doing and not the Federal 
Government, just because that's the way things have been done 
historically.
    What's your thought as to this idea? What can we do or 
appropriately do at the Federal level? Is it more appropriate 
for us to try to incentivize the States, State regulatory 
commissions to do?
    Mr. Reicher. Mr. Chairman, first of all the energy 
efficiency resource standard, I think is a good idea and can be 
pursued at the State or the Federal level. We've seen in a 
number of States working now.
    I guess I would go back to a question. We also see States 
succeeding with renewable portfolio standards in the same way. 
So, in my view actually, as a number of States have succeeded 
at both of these, the question has become what about a more 
uniform Federal approach? So I don't actually distinguish 
between the jurisdiction of States vis-a-vis an RPS versus an 
EERS, and energy efficiency resource standard.
    I think we have a patchwork of State standards in 
efficiency, a patchwork of State standards in renewables, and 
we ought to adopt a broader Federal approach.
    Interesting question whether you do a Federal RPS together 
with an energy efficiency resource standard or whether they are 
stand-alone, but I do actually feel like it's time to sort of 
set a floor for energy efficiency as this committee has done 
with respect to renewable portfolios.
    Having said that, I also do agree that incentives can be a 
very, very effective tool for driving efficiency. I think that 
incentives for building codes are a good example. We have huge 
success with building codes in certain States and in others, 
they're non-existent, and that can drive a great deal of 
efficiency investment.
    I think that the decoupling that you talked about between 
sales of electricity and profits is essential. States that have 
stepped up and moved decoupling forward have really shown that 
utilities can both make money and we can also reduce demand.
    So, the bottom line I think is that I do in fact think we 
have great complementarity between renewable portfolio 
standards and an energy efficiency resource standard. You 
should consider them both at the Federal level, but I also 
think that incentives can drive a great deal of this as well.
    The Chairman. John.
    Mr. Denniston. Senator, great question. I have three 
comments.
    The first is to the question of whether there's a Federal 
or State-by-State approach. I know that the history is State-
by-State. It just seems to me that if we have a sense of 
urgency about solving these problems that a Federal approach 
has advantages to moving quicker and pushing things along much 
faster than State-to-State. Many States have shown leadership 
in this, but it just seems that the Federal approach, properly 
done, would have some advantages.
    Second point is, I think it's very important for Congress 
to analyze the differences between a renewable portfolio 
standard and a feed-in tariff. An RPS regulates volume. Feed-in 
tariff regulates price. Those are two completely different 
approaches. Germany has gone with the feed-in tariff.
    We don't have time to go through the complex differences 
between the two, but the one issue that I would extract from 
the debate for you, Senator, is that one thing I think Europe 
has done well in structuring their program is to give a broad 
range of renewable sources a chance.
    So the risk of just doing a volume-based RPS is that the 
U.S. utilities will buy what today is the lowest-cost renewable 
source that by definition, will leave out other renewable 
sources that may have cost reduction curves in the future that 
beat the cost leaders today.
    None of us can predict what these cost production curves 
will look like, but the one principle that I would urge is give 
a lot of different renewable sources a toe at the starting 
line, and let them run, and let's see over time what the cost 
reduction curves look like. So those would be my comments.
    Mr. Liebreich. Could I just make a brief comment?
    The Chairman. Certainly, please.
    Mr. Liebreich. Because there's a very, very active debate 
in Europe about the certificate-based system, so it's 
equivalent of a renewable portfolio standard versus the feed-in 
tariff. Particularly the European wind industry is extremely 
keen to maintain the feed-in tariff structure.
    It has been very, very kind to them. One could argue that 
it's been too kind to them, because it's extremely difficult to 
build it down in mind with the technology developments that 
come around in the future. So going with the more volume-based 
approaches, it feels like there's a lower chance of excess 
subsidy or excess support, but it's a very, very active debate.
    It's not a debate that anybody, I think, has a single 
answer to, so I think I would take those two separate 
questions. One is what's the best answer here on that debate, 
and there's a separate question, which is should that then be 
applied at a State or a Federal level? If possible I would 
disaggregate those two questions, and it requires some analysis 
to think about the cost of any programs under those two 
approaches.
    Mr. Reicher. And Mr. Chairman, just to follow up quickly.
    The Chairman. Yes.
    Mr. Reicher. The beauty of linking efficiency and 
renewables is that in fact if you can lower demand, that rather 
expensive green electron can go further. That's the point of 
cutting demand as we move renewables, importantly, into the 
mix.
    We get more out of whether it's Federal dollars or private 
dollars going into the development of those renewable sources. 
So I think that's the beauty of linking efficiency and 
renewables in a system.
    The Chairman. Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman. Continuing on 
the efficiency area, obviously one of the big advantages that 
we have in this energy opportunity before us is distributed 
generation. The notion that people can start creating sources 
closer to home and delivering those energy supplies closer to 
home and in that as we look at incentives along the energy 
grid. Where do you think we should focus our attention? Because 
there obviously are transmission efficiencies and digitizing 
the grid itself, making it a smart grid.
    There are incentives to businesses who might do things like 
smart metering, or help with net metering, and then there's 
incentives to consumers who may obviously invest in technology 
that would help them with their energy use at home. So, I don't 
know if you've given thought to that and whether you, the 
Pacific Northwest Lab came out with an estimate that you could 
get a double-digit savings out of energy efficiency if we made 
these advances and what I just call, digitizing the grid? But 
if you could comment on those two points. Where should the 
incentives be, and do you believe this double-digit savings 
estimate--anybody who wants to answer?
    Mr. Liebreich. I think the attractive aspect of those 
ideas, those areas that you're talking about is that very often 
they actually have a positive payback. Energy efficiency, power 
saving, will actually have a positive payback, and very often 
the reason they're not done is because the consumers have a 
lack of access to either information, or lack of access to 
capital, or they simply don't pay back quickly enough for those 
consumers.
    So, I think that incentives will work, perhaps, but there 
also needs to be a level of regulation to cause people to do 
even things like compact fluorescent light bulbs. People tend 
not to unilaterally go out and change all the light bulbs in a 
house even though it has a positive payback. So there is a role 
there I think for regulation.
    Senator Cantwell. Okay, John.
    Mr. Denniston. Senator Cantwell. There's a very active 
debate within the venture capital community about whether 
there's an analogy between what we saw in the information 
technology field that went through a transition from 
centralized computing to distributive computing.
    Senator Cantwell. I think everybody knows the web is a 
distributive generation, obviously model cell.
    Mr. Denniston. Right, exactly. So the question is, is that 
an apt analogy for our energy system? The arguments in favor of 
a future of distributive generation are what you said--
efficiency--where you don't have load loss if the energy 
sources are localized, and there's also a security issue where 
you have no single point of failure.
    Senator Cantwell. But my question is and if you haven't 
given enough thought to it yet, is we look at this, obviously, 
the focus is of, given our challenges on foreign oil and other 
issues, how can we make this change happen?
    So my question is in looking at that, where do you think 
the incentives should be? Should they be on transmission 
capacity? Should they be more to businesses or should they be 
to consumers, or maybe they should be on all three? I'm just 
curious if people have given thought to that.
    Mr. Reicher. I'd say that we have an electrical system that 
we have today and it's going to change slowly, so in my view we 
do need to make transmission investments if we want to pull 
wind out of the Midwest and the Pacific Northwest and move it 
to other regions. We need upgrades in major transmission.
    At the same time incentives for distributed generation both 
at the commercial level and at the residential level, I think 
are very, very important. I think a tax incentive for onsite 
co-generation, smaller scale co-generation, could be very, very 
helpful.
    I think incentivizing consumers to buy more efficient 
products to more web-enabled products. I mean someone talked 
recently, imagine a computer chip in a dryer so that on a hot 
day in the summer when it's 100 degrees out you have a choice. 
You can either, the power company can say to you, if you want 
to dry your clothes now, it will cost you X dollars, if you're 
willing to wait 4 hours when the demand has decreased 
significantly, it's going to cost less. These interactive, web-
enabled sort of systems that frankly, my company is quite 
involved with, I think are very, very powerful ways to get to 
energy efficiency in a much faster rate then we have today.
    Mr. Denniston. Could I just offer a very brief answer to 
your question? I would urge Congress to give distributed 
renewable energy sources a shot. I think, let the market prove 
it.
    What I told Senator Bingaman before is what I would urge, 
in answer to your question, Senator Cantwell, which is, we 
don't know what the costs of these energy sources will look 
like 10, 20 years in the future. It could be that our energy 
system migrates toward a distributive model, but unless we get 
these distributed sources of generation in the marketplace, 
they'll have to have a very difficult time in getting there and 
getting there fast.
    Mr. Peters. Connecticut has an example. We have 
incentivized both the residential user as well as commercial 
developers of distributive gen to provide a renewable source of 
energy, while not taxing the existing distributive system, 
because we simply have upgraded in southern Connecticut as much 
as we can. We don't have any additional capacities, so the only 
way that we could go forward was to provide these incentives. 
They have been very effective for about two megawatts of 
distributive gen in the last 2 years.
    Senator Cantwell. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Corker.
    Senator Corker. You all are all market people and you're 
all putting real money out into investments albeit the industry 
that you're interested in is one of alternative energy and 
seeing growth there.
    Is there a way--you know cap-and-trade is something that 
most of you have referred to today, and obviously cap-and-trade 
is one of those bought right have sold, meaning that on the 
front end when the deal is made you either create tremendous 
wealth for people just by virtue of the way you set it up, and 
in some cases tremendous liabilities.
    But assuming that could be overcome, which is very, very 
difficult, is there a way in your minds, since you are market-
based, to create a cap-and-trade system that doesn't slow the 
GDP of the United States but actually causes it to remain the 
same or grow? Is that just absolute, is there any way of 
actually doing that, and if so what would be the components of 
that?
    Mr. Musk. Well, I think part of it is where you set the cap 
and if you set the cap high enough and maybe turn that down a 
little bit over time that would certainly ease the burden of 
introducing such a system. I think that's probably a good way 
to go.
    The details of a cap-and-trade system matter a huge amount, 
as I'm sure you're aware. If there's some distortion in the 
system, it will have a very negative effect. So I think 
something like that must be thought through very carefully, but 
I think the smart way to do it is just to start with a high cap 
and see what happens and then turn it down over time.
    Senator Corker. So a high cap in essence, one that has no 
short-term impact.
    Mr. Musk. I wouldn't say it's no, but it would be small.
    Mr. Liebreich. I think the short answer in the short term 
is probably naught, because if it's working then it is taking 
out some of the lowest cost-generating capacity, generally 
coal-based, and there's going to be a cost to that, but I think 
you've got to take a long-term view of, if it also creates 
technological leadership that spurs technological leadership in 
the United States, or it causes the U.S. manufacturers to be at 
the forefront providing the equipment and the solutions.
    Then I think in the long term you could see that it could 
be a benefit to the GDP, but I think it's a very difficult 
question. It is clearly something that can have a negative 
impact on international competitiveness, which is why I would 
say that engagement in the global process is critically 
important.
    Mr. Denniston. I would echo that. I think there's no 
avoiding the fact that a cap-and-trade system or carbon tax 
imposes a tax on an emission that currently doesn't have a cost 
in the system, so you're creating a new cost in the system. The 
hope is that innovation and a new industry is created that 
counteracts the effect of the new cost being imposed on the new 
system.
    The one analogy I can think of, Senator Corker, is the 
Clean Air Act of 1990 created a cap-and-trade system for sulfur 
emissions, and there were a number of pundits who predicted 
that the costs per ton of that program would be $2,000. The 
reality is, it's an order of magnitude less, $200 dollars a ton 
and it's been a very, very, very successful program. Sulfur 
emissions as a result of that program, single-handedly, as a 
result of that program are down 50 percent.
    Senator Corker. These are sort of outliers but we talked a 
little bit about the public markets here in our country and 
which is where Michael is, I think, and you guys are on the 
venture side and of course on the debt side.
    Is that a real impediment to your companies as it relates 
to getting that point of equity that you're looking for in 
venture capital? Is the fact that that most of the alternative 
energy market is not based here, from the standpoint of public 
financing an impediment to Kleiner Perkins or other venture 
capital entities?
    Mr. Denniston. I want to make sure I'm clear on the 
question. Is it an impediment that----
    Senator Corker. You're looking for a level of equity.
    Mr. Denniston. Correct.
    Senator Corker. Your whole deal is to put some money in.
    Mr. Denniston. Right.
    Senator Corker. And develop the technology, and you look 
for equity. Many times, most of the time, I guess, it happens 
in a public market.
    Mr. Denniston. That's right.
    Senator Corker. Is the fact that the technology you're 
involved in mostly, the public financing for that is off shore 
some other place, is that an impediment to yours, to way the 
world is today, that simply just another place for that level 
of equity to take place?
    Mr. Denniston. It's a great question. My own view is that 
just as we're seeing global competition for our products, we're 
seeing global competition in the financial services industry. I 
think it's a major issue for the United States. We are 
outsourcing a lot of financing to other countries and so many 
U.S. companies are now going public on the AIM for a number of 
different reasons, and I do think that's an issue that does 
need to be addressed. Yes.
    Senator Corker. May I follow up?
    The Chairman. Yes.
    Senator Corker. And is that generally speaking, SOCS, or is 
something else that's generating that movement to London and 
other places?
    Mr. Denniston. The pitch from the AIM bankers is come 
public on AIM, not in the United States. It will take you half 
the time, cost you half as much. You'll publicly report half as 
often, twice a year, not four times.
    You won't have to comply with SOCS and we don't have a 
litigious environment in our country, and so SOCS is certainly 
a major reason. But it's a package of different things.
    Mr. Liebreich. Senator Corker, may I add that we've done 
some analysis of the market performance of clean energy 
companies within the countries that ratified Kyoto and the 
countries--truthfully, the United States and Australia--that 
didn't, and the performance difference was absolutely stark.
    I don't have the exact figures with me here, but I'm happy 
to follow them up as a written submission. But during 2005, 
there was something like a 60 percent out-performance of clean 
energy companies in Kyoto-ratifying countries and then there 
was another 30-percent-odd in 2006.
    This is just too big of a difference for those people who 
are either financing pre-IPO, pre-public companies, or for the 
managers of those companies simply to say, ``Well, you know we 
want to go on NASDAQ anyway.'' So, it is a fact that the 
European markets have been a more welcoming environment, I 
think for the reasons that John has explained, but also because 
the investors are more comfortable with those sorts of 
companies operating in those industries.
    There's more certainty about the future, and the current 
levels of uncertainty about U.S. Federal policy is causing part 
of that. It's causing part of that migration of good companies 
to quote in Europe.
    Mr. Reicher. Senator, could I follow up? Linking these two 
questions that you asked about the economic impacts of cap-and-
trade and investments here in the United States, I think cap-
and-trade is necessary but not sufficient. We're going to have 
to do an awful lot more than cap-and-trade in terms of our own 
energy policy and things that this committee is looking at, 
even if we were to set a cap and begin to trade under it. 
Particularly if we want to see the investment made here in the 
United States as much as possible in controlling climate 
emissions, if we want to incentivize U.S. companies to do that.
    So I think this sort of energy legislation that you're 
looking at here, renewable portfolio standards, efficiency 
standards, incentives, a whole host of things are going to be 
very important complements to the ultimate cap-and-trade system 
that I hope we adopt. But they'll also be very critical to 
making sure that some of the up side that we see from 
controlling carbon emissions come home to the United States 
with the investment in wind farms, the investment in other 
sorts of things in fact happens here, as well as other places 
as it needs to.
    Senator Corker. And I hear that, and that's exciting to me, 
but just based on the past experiences I've had at the same 
time it does sound like just without those certainties, we're 
seeing tremendous amounts of investments right now on venture 
capital and those technologies, so both can't be true.
    Mr. Reicher. Both can't be true, meaning?
    Senator Corker. Well, I understand about the uncertainties, 
especially with petroleum prices fluctuating the way they are, 
but at the same time I see huge, huge volumes of investment 
going into new technologies, so both can't be true.
    I mean we're seeing a tremendous escalation in investment 
which truly is exciting to me. We play a role in that in my own 
city and are excited about that, but there's, I guess, a 
statement you want to make about that.
    Mr. Denniston. If that's okay? To put this into context, I 
don't think that the capital flows into green tech are large by 
any means in the context of the scope of the industries that 
we're talking about. They're microscopic.
    So last year the venture capital industry in the United 
States invested $2.5 billion in green tech companies, roughly 
$1 billion of that were to build ethanol plants. So the core 
technology investment piece is roughly $1.5 billion and the 
energy and transportation markets in this country are $1.5 
trillion, one-tenth of 1 percent, and if you think of that as 
the research budget that we're putting to play in this vast 
sector, it's microscopic. You can even add to that, DOE's 
annual research on renewables, which is in the couple-hundred-
million-dollar range, and it's a rounding error.
    So the growth rate has been large from almost nothing to 
$2.5 billion but relative to the scope of the problem, we're 
dealing with very, very, very small numbers, Senator.
    Mr. Reicher. And Senator, you may have not been here when I 
emphasized the distinction between technology investing and 
project investing.
    Technology investing, critical, but relatively inexpensive 
compared to ultimately deploying these technologies globally. 
We are literally talking, literally talking tens of trillions 
of dollars over 30 years.
    However we transform our energy system, hopefully toward a 
more sustainable one, but just given world energy growth, given 
turn over in stock, all sorts of things, we're putting 
trillions into this sector of energy over the next few decades. 
So even though as we've just heard it's absolutely exciting, 
heartening the increase in technology, it's going to, I think, 
give us a lot of benefits.
    We have not seen a corresponding ramp, I think, in the 
level of project investment that we're ultimately going to have 
to get to if we really want to transform our system.
    The Chairman. Do you have another question?
    Senator Corker. Just one more.
    The Chairman. Go right ahead.
    Senator Corker. Obviously, and that was great testimony to 
put it in perspective, obviously one has to precede the other.
    Mr. Reicher. Right.
    Senator Corker. The technology before you have the project. 
I'd like to go back to one last question with Elon, and that 
is: what is your production level? That is a project?
    Mr. Musk. Yes, absolutely. It's a good question actually. 
Basically with every new technology, you start off with low 
production volume and roughly high unit cost. That's why we 
start off with a sports car. It's $92,000, we expect to make 
somewhere between 1,000 and 2,000 cars a year, starting later 
this year. Development is essentially done, so we're just 
spinning up the factory to get those done.
    In 2009, we'll deploy our $50,000 sedan; that's a four-door 
family car. That will also have a range of about 250 miles, 
maybe more because we're attempting to advance the energy 
density of the battery pack and that will be somewhere between 
10 and 20,000 units a year.
    Model three which will be probably a couple of years after 
that, that's where we'd like to get down to the $30, $35,000 
range and 100,000 to 200,000 units a year, eventually getting 
to millions of cars per year.
    Senator Corker. And capital flow is in place to make those 
production levels happen at present?
    Mr. Musk. It is for the roadster and it will be, I feel 
quite confident for model two, which is code-named Whitestar.
    Senator Corker. Mr. Chairman, thank you for being so 
generous.
    The Chairman. No, thank you, for having such an interest in 
being here. Again thank you to all of the witnesses. I think 
it's been very useful testimony and we will try to take your 
good recommendations to heart and try to do some things 
legislatively.
    Thank you very much. That ends our hearing.
    [Whereupon, at 11:40 a.m., the hearing was adjourned.]
                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

 Responses of Jerome P. Peters, Jr. to Questions From Senator Bingaman
    Question 1. One of your primary critiques of the Department of 
Energy loan guarantee program is that it does not appear to take on 
enough of the technology risk to entice debt financing. Do analogous 
programs at the Department of Agriculture take on this risk?
    Answer. It's not that the DOE loan guarantee program does not take 
enough technology risk to entice debt financing, it's that the 
structure of the guarantee program forces the ``First Loss'' risk on 
the lenders. By only guaranteeing 80% of the debt amount, that leaves 
the lender with 20% of the loan which is not subject to the guarantee. 
The real problem with the DOE structure is that upon a call on the 
guarantee, the DOE now has a first lien on the project assets and the 
lender cannot recover the 20% un-guaranteed amount until the DOE has 
fully recovered their guarantee payout, almost surely resulting in the 
lender loosing 20% of the loan amount.
    In customary ``project finance'' loans, the lender is given the 
first lien on all of the project assets and if a guarantee is not 
sufficient to repay the debt in its entirety, the lender can liquidate 
the assets to make up the balance. Many lenders, including TD Banknorth 
N.A., might be willing to accept a DOE loan guarantee program that only 
covers 80% of the loan amount but only if they maintain the first lien 
status and the rights to liquidate the assets to recover their loan 
oustandings. In many cases a total ``call'' on the DOE loan guarantee 
may not be needed. We may only need enough to ``fix'' the project so 
that it can ``earn'' its way through the repayment of the debt. Again, 
under the current DOE guidelines, this would not be possible. To my 
understanding the USDA Business and Industry Guaranteed Loan Program 
resolve this risk.
    Question 2. Given that we are trying to push to commercialization 
generally unproven technologies with some inherent uncertainty about 
their eventual success, do you have some thoughts on how the government 
could manage risk to the taxpayers while still fulfilling the financing 
needs currently going unmet by private lending?
    Answer. I will again revert back to an analogous program at the 
Overseas Private Investment Corporation which takes on risks unmet by 
private lending. It is nearly impossible for private lenders to assess, 
much less mitigate, the sovereign risk involved with foreign government 
backed loan guarantees. OPIC mitigates such risks by charging lenders/
sponsors ongoing fees to guarantee the obligations of such governments 
based upon the relative risk that each government poses for non-
payment. In the same Way, the DOE would charge technology guarantee 
fees based upon the relative risk presented by each technology. More 
advanced technologies like fuel cells and IGCC might carry lower fees 
while less advanced technologies would carry higher fees. I would not 
rule out the possibility that the DOE might be able to obtain some sort 
of ``equity kicker'' for providing guarantees to some of the more risky 
technology deployments, much like what technology funds receive for 
early technology investments.
    Response of Jerome P. Peters, Jr. to Question From Senator Akaka
    Question 3. What is the proper role of government and private 
sector financing for large advanced alternative energy production 
plants? How should technology-specific federal loan guarantees be 
structured?
    Answer. The role of government and the private sector differ 
significantly in the financing of large advanced alternative energy 
production. The private sector will always invest if they believe that 
they can get an adequate return on their investment given the risks 
that they have to take. The higher the risk the higher the return 
expectations. During any commercialization process, there are very high 
risks associated with scale-up and operational costing. These risks are 
usually taken by venture capitalists but carry the cost of very high 
rate capital.
    Initially, most new technologies cost more to build and more to 
operate than existing technologies until those costs are reduced 
through the expected economies achieved through commercialization. 
Historically, alternative energy production has had to compete with 
conventional energy production on a cost of production basis. It is 
doubtful that large scale new technology deployment will be 
successfully achieved given its higher capital and operational costs. 
Technology grants and technology guarantees from governments can often 
level the playing field and enable new technologies to gain a foothold 
against existing energy infrastructure until such time as the 
commercialization economies are achieved.
    Since the risks associated with new technology deployment vary by 
technology, it seems reasonable that the structure and the type federal 
guarantee might vary as well. I will explain by example. The technology 
risks associated with the deployment of cellulosic ethanol projects 
differ greatly from the technology risks associated with the deployment 
of utility scale fuel cell projects. Utility scale fuel cell projects 
are much further along the technology development timeline than 
cellulosic ethanol projects.
    While there are many unknowns in the commercialization of 
cellulosic ethanol production, (capital cost per unit of production, 
operating costs, collection and storage of cellulosic material to name 
a few) there are far fewer unknowns with utility scale fuel cell 
commercialization. A complete federally backed loan guarantee program 
along with technology grants may be required to permit the deployment 
of large scale cellulosic ethanol production to enable it to compete 
with existing corn based ethanol production. With most scale-up 
questions already answered, utility scale fuel cell projects may not 
need a loan guarantee program and may only need the have the federal 
government guarantee stack replacement intervals which could be 
significantly less costly to the government than an 80% loan guarantee 
if called.
    There are many other examples of technology specific solutions 
which could potentially be less costly and less capital intensive 
(appropriations) which could be applied to enhance new technology 
deployment. The establishment of a dialogue between the stakeholders 
(government, technology providers and investors) will be necessary to 
identify the risks, either real or perceived, of each technology and to 
develop appropriate programs to mitigate them.
  Responses of Jerome P. Peters, Jr. to Questions From Senator Salazar
    Question 4. When we look at a Renewable Portfolio Standard (RPS) 
and look at changing the Renewable Fuels Standard (RFS) in this 
committee as part of our energy bill, what does that do in terms of the 
private market looking at investments in the renewable energy area?
    Answer. There is no question that the combined implementation of a 
national Renewable Portfolio Standard (RPS) and a national Renewable 
Fuel Standard (RFS) would significantly increase the pace of growth of 
the renewable energy industry in the United States. Investors in the 
renewable energy projects would take great comfort in knowing that 
there will be a continued need for the renewable product produced by 
their projects and that the products themselves would not necessarily 
have to compete on the same cost basis as conventional energy products 
due to the RPS/RFS requirement.
    The traditional way our government has provided incentives for new 
investment in renewable energy infrastructure projects has been through 
the granting of tax incentives (investment and production tax credits 
and accelerated depreciation). The major problems with tax incentives 
is that (1) you have to be a current taxpayer to be able to utilize the 
tax credits and (2) the incentive programs have lapsed several times in 
the past 20 years causing fits and starts in project investment. Many 
technology developers have invested significant amounts of capital in 
the technology development phase with little or no revenue coming 
through the door. These accumulated losses negate the benefit provided 
by the tax credits. Most projects are thus sold by their developers to 
``Tax Investors'' who require a premium return on their investment in 
return for utilizing their ``tax base''.
    The implementation of an national RFS/RPS would provide a long term 
stable growth environment for renewable energy investment. The free 
market atmosphere afforded by a national RPS/RFS would allow renewable 
energy technologies to compete against each other and not with 
conventional energy. Provisions could be made to allow emerging 
technologies a chance to compete early in their development cycle by 
providing a ``modifier'' for energy produced by that technology much 
like what is currently contained in the RFS for cellulosic ethanol.
    By far the most beneficial attribute to a national RFS/RPS would be 
the elimination of tax incentives which would create a level playing 
field for all investors and lower the cost of capital for these 
projects by opening up the investment market to all investors 
regardless of their tax base.
    Question 5. Loan guarantees have been discussed as an important 
federal incentive to drive clean energy development. Titles 15 and 17 
of the Energy Policy Act of 2005 authorize the Department of Energy to 
provide loan guarantees for energy projects that employ new or 
significantly improved technologies to avoid, reduce, or sequester air 
pollutants or reduce greenhouse gas emissions, and the FY 2008 budget 
proposes implementing a loan guarantee program that includes $4 billion 
in loans for projects that promote biofuels and clean transportation 
fuels. In my opinion, the Department of Energy has been slow to 
implement this program in a manner that best supports this industry. 
Can you address ways that this loan guarantee program could be improved 
to spur the use of cellulosic biofuel projects?
    Answer. There are three problems with the current federal 
legislation including loan guarantee program pursuant to Titles 15 and 
17 of the Energy Policy Act which will negatively affect the 
development of cellulosic biofuels: (1) the guarantees are unfunded, 
(2) the DOE's program is flawed (see answer 1) and, (3) the current RFS 
standards have already been achieved.
    The Congress needs to fund the guarantee program and fix the flaws 
in the DOE guarantee program before any investment will come from the 
private sector into cellulosic biofuels production infrastructure. 
Given cellulosic ethanol project's higher capital costs, it is not 
likely that those projects can compete with corn based ethanol 
production in the near. Congress, through the passage of a new RFS with 
a similar cellulosic ``modifier'' would allow cellulosic ethanol to 
compete.
    Question 6. Can you explain further how you envision Congress 
working with the utility sector to develop incentives to encourage the 
utilities to promote energy efficiency with their customers?
    Answer. I do not feel as though I am qualified to answer this 
question.
    Question 7. 25 Senators and 46 Representatives have endorsed the 25 
x 25 initiative to get 25% of our energy from renewable sources by 
2025. Do you have suggestions for policies Congress should consider 
that would help us meet this 25 x 25 goal?
    Answer. Various states have set renewable energy goals and have 
backed them up with meaningful RPS's. I certainly don't see why the 
federal government could not draft a national RPS which could achieve a 
25% renewable source content in the next 25 years. History has proven 
that when states have set a renewable energy use goal but have not 
mandated a RPS that the states have failed in achieving the milestones 
that they have set. In states where the renewable goal is backed up by 
an RPS, those states have met their milestones. (NY and CA as 
examples).
    Question 8. In your testimony, you discuss how alternative energy 
technologies are at a disadvantage because they have to compete for the 
same capital against fossil fuel technologies, which may have 
significant ``externalities,'' such as security concerns and 
environmental footprint that are not priced in the cost of that fossil 
fuel. What effect would a reasonable price on carbon have on the 
economics of alternative energy technology demand? What is the most 
efficient way to put a price on carbon?
    Answer. In addition to a national RPS, a national carbon tax or a 
cap and trade programs are both excellent means to provide that level 
playing field to allow clean and renewable energy to compete with 
conventional fossil fuel energy. A carbon tax program could be 
developed to create a system of transfer payments from carbon emitters 
to renewable and clean energy producers thus making the carbon emitters 
pay the true cost of their energy production. The problem here is 
setting the proper price for that carbon emission.
    I prefer a ``cap and trade'' approach to carbon emissions where the 
free market system set the price for carbon emissions.
    Question 9. We hear a lot of talk about the need for next 
generation energy technologies to address greenhouse gas emission 
reductions and the role of federal policies to achieve that goal. To 
what degree can Congress help bring these new technologies to market in 
the absence of a market signal such as a cost on carbon emissions?
    Answer. Again I believe a properly structured carbon cap and trade 
program would provide sufficient incentive to those ``next generation'' 
of energy projects which will either sequester or not emit carbon. When 
deciding how to replace existing fossil fueled energy production or 
when adding new production, the generator must take into account the 
market price for the carbon credits either avoided or added. In either 
case, that market price for emitted carbon will dictate the technology 
choice.
 Responses of Jerome P. Peters, Jr. to Questions From Senator Domenici
    Question 10. You note in your testimony that the USDA loan 
guarantee program is properly structured. Can you describe the elements 
of that program that you believe make it successful?
    Answer. The USDA Business and Industry Guaranteed Loan Program as I 
understand it, provides a full guarantee of the loan amount for up to 
80% of project cost. The full guarantee level avoids the lenders need 
for a first lien position.
    Question 11. You note that some emerging energy technologies, such 
as fuel cells and solar power units, have difficulties entering the 
market because of uncertainty about their useful lifetime. How can the 
government help these technologies enter this market?
    Answer. In certain technologies, the lenders may need a loan 
guarantee for the full amount of their debt due to the possibility of a 
complete failure of the technology to deliver cost competitive products 
such as in cellulosic ethanol projects. The two main risks associated 
with cellulosic ethanol projects are the fact that no one has built, 
and no one operated, a commercial scale project to date. Therefore no 
one really knows how much it will cost to build a project and no one 
really knows how much it will cost to actually produce a gallon of 
cellulosic derived ethanol.
    In the case of utility scale fuel cells and concentrated solar 
thermal/PV projects, the primary risk issue is related to the expected 
life of the components that make up the projects. In the case of fuel 
cells, stack life expectancy and degradation in efficiency are the 
primary risk issues. Solar cell life expectancy (concentrated solar PV 
issue) and durability in tracking systems (solar thermal issues) are 
the main risk issues in solar projects which are difficult for lenders 
to get comfortable.
    Most of the companies which are developing these technologies have 
demonstrated that their products work quite well and that they can 
deliver these products at a predictable cost. They have not been able 
to demonstrate, to the satisfaction of private lenders, that their 
products will last 20 or 30 years and will not degrade significantly 
over time. This is due to the fact that their existing fleet of 
demonstration projects have not accumulated enough operating time to 
prove the point of long term durability and reliability. Most, if not 
all of these technology companies, lack the financial strength to 
provide a meaningful (and acceptable) long term warrantee on their 
products.
    I believe that, while the government could provide a full loan 
guarantee, which would certainly satisfy most private lenders, a lesser 
level of government support would satisfy most lenders. The government 
may decide that is less costly to back the technology providers long 
term warranties on its concentrated solar panels or back guarantees of 
fuel cell manufacturers stack replacement intervals.
    Under a worst case scenario, the government might find itself in 
the position of paying for a few extra solar panels to make up for ones 
that fail or paying for replacements of fuel cell stacks every 4 years 
rather than every 5 years. The government might want to limit its total 
exposure to no more than 80% of the project cost which would be 
acceptable to most lenders. I believe that the potential long term risk 
exposure to the government under this type of guarantee program would 
be much less than a flat 80% federal loan guarantee.
  Responses of Jerome P. Peters, Jr. to Questions From Senator Thomas
    Question 12. At the hearing, every witness advocated for some form 
of federal subsidies to advance energy technologies. I believe that the 
central theme of the hearing was, primarily, how we get private 
companies to unleash their ingenuity as part of a free market, however. 
I am concerned about this tendency to advocate for more government 
intervention. The question I'd like to see answered is how we achieve 
advanced energy technologies with minimal government intervention. We 
can, and should, advance energy technologies by doing something other 
than spending taxpayer money. We can look at automobile mileage, 
streamlined facility permitting, modernized efficiency standards, and 
federal assumption of liability for demonstration projects. I do 
believe we must do these things in the absence of a price on carbon 
too, given that those costs will merely be passed along to consumers. 
In that context, can you provide some purely regulatory approaches that 
you believe would advance energy technologies without requiring a 
significant expenditure of federal dollars through direct 
appropriations, tax credits, or other forms monetary support?
    Answer. I have no answers to this question.
    Question 13. You stated in your testimony that the DOE Loan 
Guarantee Guidelines prohibit the substitution of equity to make up for 
un-guaranteed debt. Can you provide some examples of equity that could 
be used to offset the 20% required of applicants? Do you believe that a 
coal seam, to be used as a feedstock for a project, should qualify?
    Answer. According to my interpretation of the DOE guidelines, 
additional equity cannot be contributed so as to offset the 20% un-
guaranteed portion of the project debt. I would assume, that provided 
the purchase of the coal seam was part of the qualified ``Project 
Cost'' that its contribution by the sponsor in lieu of cash should 
qualify a equity as defined in the DOE guidelines.
    Question 14. You spoke of the need to establish goals that advanced 
energy technologies should seek to accomplish. At the end of your 
written testimony, however, you discuss technology-specific federal 
backing that may be needed. Can you clarify for us as to what approach 
you believe is most appropriate? I am concerned that politicians, 
myself included, and not the free market may end up choosing the 
technological winners and losers.
    Answer. I believe that we as a nation should choose, through our 
elected representatives, what goals we want our renewable technologies 
to achieve. If we, for instance, choose that cost of production is the 
most important criteria, then we must choose the lowest cost 
technology. This has been the case for the last 10 years as state and 
regional utilities have held competitive bidding solicitations for 
renewable power generation. Wind generation has won the vast majority 
of these solicitations on the basis of cost alone. It is currently the 
cheapest technology to deploy and operate and was the only viable 
technology benefiting from the Production Tax Credit until the passage 
EPA 2005.
    If on the other hand, we decided as a nation, that base load power 
capabilities and utilization of our nations huge coal reserves was the 
objective, then different technologies would be chosen which may not be 
the cheapest to install of operate. My belief is that we as a nation 
must deploy many diverse technologies in order to achieve a wide range 
of objectives from reduction of greenhouse gases to providing more 
efficient base load power. Only then can we begin to allow the 
commercialization process to determine the cost effectiveness of each 
technology.
                                 ______
                                 
   Responses of Michael Liebreich to Questions From Senator Bingaman
    Question 1. You mention as a primary constraint on investment in 
the United States the lack of policy certainty with regard to clean 
energy. In your survey of markets in other countries have you 
encountered policy regimes that were particularly effective in spurring 
investment in clean energy?
    Answer. New Energy Finance is not a public policy think tank and it 
is not our role to render judgement on which clean energy incentives, 
mandates, or subsidies have accomplished the overarching goals of 
promoting energy independence or reducing greenhouse gas emissions. 
However, since our firm specialises in tracking capital flows in clean 
energy, we can speak with some authority on which programmes have 
successfully sparked investment activity. Below is a glance at key 
policies around the globe.
    In Germany, a generous feed-in tariff scheme for solar power 
development has created its intended ramp in production and 
consumption. Currently, the country dominates the world PV market, 
making up an estimated 44% of all new build photovoltaic installations 
in 2006 and driving up module prices worldwide. This has been achieved 
through a feed-in tariff of $0.61-0.75 per kilowatt hour, and a tax 
credit system for individuals. While smaller systems get a higher feed-
in tariff than large ones, the difference is not sufficient to 
preferentially incentivise distributed generation, and so the German 
market is slanted towards utility-scale power plants on agricultural 
land.
    The aim of the tariff was to foster the domestic PV manufacturing 
industry, which indeed has seen incredible growth since 2004. But the 
tariff declines 5% per year, and that has begun to slow the German 
market. Moreover, there are questions over whether Germany was the 
right place for such a generous tariff programme given the country's 
unspectacular solar resources. Today, Germany's manufacturers are 
struggling to diversify their markets to find more than just domestic 
sales. And they are encountering stiff competition for large contracts 
from lower cost producers in China.
    In Spain, the government is also supportive of photovoltaic 
installations on residential roofs and the development of large-scale 
grid-tied solar thermal electricity generation (STEG) projects that 
employ mirrors to generate heat and turn a turbine. In fact, the 
country has a set a goal of 500MW of STEG capacity by 2010.
    Under existing law, power generated from photovoltaic systems under 
100kW in size in Spain can be sold for nearly six times as much as 
power generated from other sources. This has led to large-scale 
projects set up as multiple 100kW legal entities. The law is expected 
to be reviewed in the next few months, but the market is growing fast.
    Brazil's support for the use of alternative fuels is often cited as 
a great success by ethanol supporters in the U.S. and elsewhere. But 
the country's experience with clean fuels has seen its share of ups and 
downs.
    In response to the oil crisis of the 1970's, the government 
initiated two parallel policies: increased oil prospecting and 
increased substitution of ethanol for gasoline. This programme began 
with a mandatory 10% ethanol/gasoline (``gasohol'') blend, which has 
since increased to between 20-25%, set annually by the government.
    The trajectory from 1975, when the programme began, to 2007 has 
been discontinuous. By 1985, more than 90% of cars produced in Brazil 
ran on ethanol--but at a high cost to the government in the form of 
ethanol subsidies. These subsidies proved difficult for the government 
to sustain as oil prices fell. When the government relaxed car import 
regulations and reduced subsidies on the ethanol in the 1990s, many 
consumers took the opportunity to switch to imported gasoline cars. 
Flex-fuel vehicles had not at that time been developed, meaning that 
consumers were tied either to gasoline or ethanol. Local car producers 
were forced to adapt. By 1995, less than 5% of cars produced in Brazil 
used ethanol.
    Though falling oil prices had severely constrained demand for 
ethanol, it did not destroy the industry. Brazil's ethanol was produced 
primarily by family-owned sugarcane processors. These companies 
regarded ethanol primarily as an alternative end use to their product, 
so when sugar returns were higher than ethanol returns, they would sell 
sugar, and vice versa. Today, the most advanced plants can switch from 
producing one to the other in around an hour.
    It was the introduction of flex-fuel vehicles that revitalised 
Brazil's ethanol programme. In January 2004, FFVs made up a little more 
than 10% of new light vehicle sales; by January 2006, they accounted 
for almost 80%. FFVs allowed consumers to buy whichever of ethanol and 
gasoline was the cheapest, and to run on any mixture of the two. Not 
tying them into a particular fuel was evidently the way to persuade 
consumers to accept ethanol through the market--but, of course, with 
the implication that demand could dry up during a sustained period of 
low oil prices.
    In China, the country's National Reform and Development Committee 
has set developmental goals for the country's renewable sectors for the 
next decade to meet increasing energy demand and support a sustainable 
economy. As of 2005, 7.7% of the country's primary energy use came from 
renewable sources (including large-scale hydro) and the government has 
aimed to up that to 15% by 2020.
    To accelerate the development of renewables, Chinese officials have 
announced plans to institute pricing mechanisms for wind, solar, tidal, 
geothermal, biomass and hydro power. Officials say consumer electricity 
rates will increase as the country's citizens bear the cost of 
producing power more cleanly.
    The government has also taken steps to insure that the economic 
benefits of the development of clean energy projects stay within China. 
For instance, a minimum of 70% of the parts in a utility-scale wind 
turbine installed in China must be originated in the country. This rule 
has compelled foreign wind turbine manufacturers to partner with local 
companies in China in order to build out manufacturing capacity there.
    Question 2. in your observations of other countries' public 
incentives for development of clean energy technologies how have you 
seen other countries manage the risks of investing in unproven 
technologies?
    Answer. Please see above.
    Question 3. I'm intrigued by your comments about the effect on 
domestic investment in clean energy technologies of ratifying the Kyoto 
Accords. Can you give us some more information on what you've seen?
    Answer. New Energy Finance closely follows the performance of 
approximately 80 publicly-traded companies worldwide with a direct 
involvement in clean energy through our WilderHill New Energy Global 
Innovation Index, which can be tracked under the ticker ``NEX''. The 
NEX includes a representation of the world's top wind turbine 
manufacturers, solar cell producers, fuel cell developers, and other 
companies with a significant involvement in clean energy.
    We have found that NEX companies that trade on exchanges in 
countries that are signatories to the Kyoto accords have performed 
better than those trading on markets in countries which did not sign. 
Over the course of 2006, Kyoto country stocks in the NEX gained 49%. 
Meanwhile, non-Kyoto country stocks in the NEX rose 8%. Clearly, 
investors have expressed a higher degree of confidence about companies 
trading in Kyoto country markets.
     Responses of Michael Liebreich to Questions From Senator Akaka
    Question 4. You were quoted in Investment Dealers Digest (Feb, 12, 
2007) as saying ``2007 will be a critical year for the clean-energy 
industry. There has been no shortage of capital, but now the industry 
has to deliver cost-effective power and fuels in large volume.'' If 
capital is not an obstacle, what in your opinion, constrains large 
power and fuels production?
    Answer. In that comment, I was referring to the fact that over the 
past 18-24 months, an enormous amount of venture capital has been 
poured into early-stage technologies that have the potential to 
revolutionise the energy infrastructure. The onus is now very much on 
the firms that have received venture backing to prove their 
technologies are viable. This will require a tremendous amount of 
research, development, creative thinking, and hard work.
    But technologists and entrepreneurs are not the only ones facing 
challenges. Those who run the existing energy infrastructure are being 
forced to adapt to a carbon-constrained world. For them, integrating 
renewable resources into the grid poses a new challenge--significant 
and unpredictable variability. By their very nature, wind and solar 
projects offer intermittent sources of energy--when the wind doesn't 
blow, a wind farm doesn't produce. As more such projects come on line, 
utilities will be forced to find innovative ways to integrate them into 
the existing power pool to insure demand is met seamlessly.
    For policymakers, the challenge going forward will be to create 
streamlined policies that not just promote renewables but ``get the 
rocks off the rails,'' as Assistant Secretary for Energy Efficiency and 
Renewable Energy at the Department of Energy Alexander Karsner so often 
says. That could mean expedited permitting processes for clean energy 
projects or the establishment of national transmission corridors such 
as the two recently announced by the DOE.
    Finally and inevitably, consumers themselves will be forced to make 
some adjustments to living in a carbon-constrained world. This may mean 
taking the steps to improve efficiencies in their homes by purchasing 
compact fluorescent light bulbs or replacing drafty windows. It might 
mean thinking twice before objecting to a local wind farm based on 
NIMBY concerns. Or it could mean learning to accept slightly higher 
monthly electricity bills that result from their state's commitment to 
clean energy and energy efficiency.
    Question 5. You were also quoted as saying, ``We need efficient, 
minimally-distorting policy support frameworks.'' What would be an 
example of this?
    Answer. I believe the best policies are, in effect, technology 
agnostic, i.e. they don't promote the use of one particular clean 
energy technology or fuel. Rather, they set certain targets for an 
industry or a region to achieve then leave it to the free market to 
work out how best to reach the goal.
    Governor Arnold Schwarzenegger of California's Low Carbon Fuel 
Standard is an intriguing example of a technology agnostic policy. In 
January, the Governor issued a directive requiring that passenger 
vehicles in California reduce the carbon intensity of their emissions 
by at least 10% by 2020. It is my understanding that Governor 
Schwarzenegger intends to leave it largely to industry to sort out how 
to achieve the target.
    Responses of Michael Liebreich to Questions From Senator Salazar
    Question 6. When we look at a Renewable Portfolio Standard (RPS) 
and look at changing the Renewable Fuels Standard (RFS) in this 
committee as part of our energy bill, what does that do in terms of the 
private market looking at investments in the renewable energy area?
    Answer. Raising and extending the U.S. standard could boost 
investor confidence in the longevity of the U.S. biofuels sector. Over 
the last six to nine months, major banks and private equity firms have 
retreated from financing new ethanol plants after corn prices climbed 
above $4 a bushel. Those higher feedstock prices have shrunk producers' 
margins and also raised fears on Wall Street that publicly-traded 
ethanol firms are over-valued. A higher RFS could convince investors 
that there will be a strong market for ethanol longer term, regardless 
of short-term corn or ethanol prices.
    Question 7. Loan guarantees have been discussed as an important 
federal incentive to drive clean energy development. Titles 15 and 17 
of the Energy Policy Act of 2005 authorize the Department of Energy to 
provide loan guarantees for energy projects that employ new or 
significantly improved technologies to avoid, reduce, or sequester air 
pollutants or reduce greenhouse gas emissions, and the FY 2008 budget 
proposes implementing a loan guarantee program that includes $4 billion 
in loans for projects that promote biofuels and clean transportation 
fuels.
    Answer. Energy Finance does not directly offer debt financing clean 
energy companies or projects and thus I have had no direct experience 
with DOE's loan guarantee programme.
    Question 8. In my opinion, the Department of Energy has been slow 
to implement this program in a manner that best supports this industry. 
Can you address ways that this loan guarantee program could be improved 
to spur the use of cellulosic biofuel projects?
    Answer. Energy Finance does not directly offer debt financing clean 
energy companies or projects and thus I have had no direct experience 
with DOE's loan guarantee programme.
    Question 9. Can you explain further how you envision Congress 
working with the utility sector to develop incentives to encourage the 
utilities to promote energy efficiency with their customers?
    Answer. It strikes me that to a large extent there is little 
Congress can do directly to compel utilities to pursue energy 
efficiency programmes since utilities are primarily regulated by state 
public utility commissions. However, Congress could provide 
encouragement to both utilities and their regulators to pursue 
responsible policies that promote energy efficiency measures such as 
``de-coupling.''
    Question 10. 25 Senators and 46 Representatives have endorsed the 
25 x 25 initiative to get 25% of our energy from renewable sources by 
2025. Do you have suggestions for policies Congress should consider 
that would help us meet this 25 x 25 goal?
    Answer. A federal renewable portfolio standard that codifies those 
goals is one possibility. Another would be a comprehensive and 
aggressive cap-and-trade programme that mandates major cuts in 
greenhouse gas emissions. Such a programme would inevitably spur the 
development of more clean energy projects as utilities and other 
emitters seek to shrink their overall ``carbon footprints'' by 
purchasing power from clean sources.
    Question 11. In your testimony, you've discussed how alternative 
energy technologies are at a disadvantage because they have to compete 
for the same capital against fossil fuel technologies, which may have 
significant ``externalities,'' such as security concerns and 
environmental footprint that are not priced in the cost of that fossil 
fuel. What effect would a reasonable price on carbon have on the 
economics of alternative energy technology demand? What is the most 
efficient way to put a price on carbon?
    Answer. Please see my prior written testimony to the committee, 
section six, item 5.
    Question 12. We hear a lot of talk about the need for next 
generation energy technologies to address greenhouse gas emission 
reductions and the role of federal policies to achieve that goal. To 
what degree can Congress help bring these new technologies to market in 
the absence of a market signal such as a cost on carbon emissions?
    Answer. I would argue there are a number of such options at 
policymakers' disposal to promote the development of clean energy. 
Please refer to questions 1, 5, 10 and others here for examples.
   Responses of Michael Liebreich to Questions From Senator Domenici
    Question 13. In your written testimony, you note that the United 
States out-invested Europe by a factor of three in ``early stage 
technology'' investing, while Europe invests more heavily in technology 
deployment measures. If this trend continues, is it likely that 
technologies originally developed in the United States will be 
manufactured in Europe for their market, creating European jobs?
    Answer. That is an undeniable possibility, given the nature of the 
global economy. However, I would argue that it is more likely that 
nations with substantially lower pay scales stand to benefit more than 
Europe. China, for instance, has virtually overnight become a major 
player in manufacturing the equipment used in photovoltaic panels. 
Today, there are no fewer than five Chinese solar companies trading on 
major U.S. exchanges with potentially more to come.
    However, the nature of the global economy also offers opportunities 
for U.S.-based manufacturing. For years, major wind turbine makers have 
resisted investing to expand capacity in the U.S., primarily based on 
concerns tied to the on-off nature of the federal Production Tax 
Credit. With PTC extension now regarded as more likely, attitudes may 
be changing. Indian wind turbine maker Suzlon, for instance, today 
makes turbine blades and nose cones at a facility in Minnesota. In 
March, Danish turbine maker Vestas announced plans to open a $60 m 
plant in Colorado. And Spanish turbine maker Acciona plans to open a 
facility in Iowa later this year.
    Still, the majority of manufacturing of wind turbine components for 
projects in the U.S. today takes place overseas. Should Congress pass a 
long-term PTC extension, we could see further capacity build out in the 
U.S. to meet expected demand.
    Question 14. In your testimony, you noted that U.S. CEOs choose to 
locate energy technology firms in Europe because of greater perceived 
sophistication among energy investors. How can we address these 
perceptions?
    Answer. To clarify, what I intended to communicate is that in the 
past we have seen U.S. companies float their shares on overseas 
exchanges such as the London Stock Exchange's Alternative Investment 
Market (AIM). The perception has been that investors in Europe were 
more receptive to clean energy ventures because Europe has shown 
greater commitment to cutting greenhouse gas emissions than the U.S. In 
addition, the provisions of the Sarbanes-Oxley law generally do not 
apply to U.S. companies who list on AIM, so going public there is less 
expensive for small firms than debuting on NASDAQ or on the New York 
Stock Exchange.
    There are some signs that may be beginning to change, however. Over 
the past 12 months, we have seen more U.S.-based solar, biofuels, and 
other companies list their shares on U.S. exchanges. Clean energy has 
been widely identified as a ``hot'' area for investing in the U.S. in 
recent months. As discussed above, we are also seeing foreign firms 
such as Chinese photovoltaic equipment makers listing on the U.S. 
exchanges to tap into opportunities.
    Looking ahead, the establishment of a comprehensive long-term 
policy framework would demonstrate to the world that the U.S. is 
committed to promoting clean energy and to cutting carbon emissions. It 
would appear that this committee and others on Capitol Hill are well on 
their way toward building such a framework.
    Responses of Michael Liebreich to Questions From Senator Thomas
    Question 15. At the hearing, every witness advocated for some form 
of federal subsidies to advance energy technologies. I believe that the 
central theme of the hearing was, primarily, how we get private 
companies to unleash their ingenuity as part of a free market, however. 
I am concerned about this tendency to advocate for more government 
intervention. The question I'd like to see answered is how we achieve 
advanced energy technologies with minimal government intervention. We 
can, and should, advance energy technologies by doing something other 
than spending taxpayer money. We can look at automobile mileage, 
streamlined facility permitting, modernized efficiency standards, and 
federal assumption of liability for demonstration projects. I do 
believe we must do these things in the absence of a price on carbon 
too, given that those costs will merely be passed along to consumers. 
In that context, can you provide some purely regulatory approaches that 
you believe would advance energy technologies without requiring a 
significant expenditure of federal dollars through direct 
appropriations, tax credits, or other forms monetary support?
    Answer. Governments have a slew of ways to spur clean energy growth 
without direct government spending in the form of tax credits or 
subsidies.
    Mandates requiring consumption levels of certain cleaner-burning 
fuels (a renewable fuel standard) or certain cleaner sources of energy 
(a renewable fuel standard) do not cost taxpayers directly. Rather, 
they set certain benchmarks for industry to achieve on their own, 
presumably with the help of private investment. In addition, government 
can take specific steps to streamline the permitting for certain 
projects it deems of high importance (see question four).
    Question 16. You testified about your belief that the U.S. has 
strong programs in clean coal. Can you explain what you believe the 
economic and policy reasons are for a coal-to-liquids facility having 
not been built yet here in the United States? We're told it's because 
people haven't done it yet. How are the plants in China and South 
Africa any different than what we'd build here? Why isn't there private 
sector money available for coal-to-liquids plants given that it's been 
done in other countries?
    Answer. To understand why there has not been more development of 
CTL projects in the U.S., it is instructive to look at the reasons 
behind their construction abroad.
    In the case of South Africa, the state oil company backed CTL 
because the country was, in effect, isolated from the international 
community and could not easily import crude. South Africa's need for 
energy independence trumped whatever concerns there might have been 
about the environmental impact of converting coal to liquid fuel.
    In China, the high rate of economic growth has created an 
insatiable thirst for liquid fuel. Much has been written about the 
environmental conditions in China and the fact the country is bringing 
one new coal-burning plant on line per week. The country is showing 
similar disregard for the environment in the construction and operation 
of CTL facilities. In both South Africa and China, as in Nazi era 
Germany decades ago, energy independence concerns have been a driving 
force in the construction of CTL capacity.
    In the U.S., for decades there was no economic impetus for CTL 
since the price of imported or domestically-produced crude was so low. 
Today, with oil prices in the $60 to $70 barrel range it is 
understandable that CTL is getting a serious look, given the U.S.'s 
increasing desire for energy security and independence.
    However, building a new CTL plant is highly capital intensive. 
Among the relatively small number of players with the resources to 
finance such projects are the major oil companies and they would appear 
to have little interest in promoting a competitor fuel.
    In addition, there appears to be a growing consensus within the 
U.S., particularly in the power generation sector, that the federal 
government will impose some kind of cap on carbon emissions. 
Calculating the potential cost of complying with any new ``cap-and-
trade'' regime is nearly impossible for potential backers of CTL plants 
and introduces far too much risk into the equation.

                                    

      
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