[Senate Hearing 113-79]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 113-79

 
                          CLEAN ENERGY FINANCE

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   TO

 RECEIVE TESTIMONY ON THE CURRENT STATE OF CLEAN ENERGY FINANCE IN THE 
  UNITED STATES AND OPPORTUNITIES TO FACILITATE GREATER INVESTMENT IN 
      DOMESTIC CLEAN ENERGY TECHNOLOGY DEVELOPMENT AND DEPLOYMENT

                               __________

                             JULY 18, 2013


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




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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                      RON WYDEN, Oregon, Chairman

TIM JOHNSON, South Dakota            LISA MURKOWSKI, Alaska
MARY L. LANDRIEU, Louisiana          JOHN BARRASSO, Wyoming
MARIA CANTWELL, Washington           JAMES E. RISCH, Idaho
BERNARD SANDERS, Vermont             MIKE LEE, Utah
DEBBIE STABENOW, Michigan            DEAN HELLER, Nevada
MARK UDALL, Colorado                 JEFF FLAKE, Arizona
AL FRANKEN, Minnesota                TIM SCOTT, South Carolina
JOE MANCHIN, III, West Virginia      LAMAR ALEXANDER, Tennessee
BRIAN SCHATZ, Hawaii                 ROB PORTMAN, Ohio
MARTIN HEINRICH, New Mexico          JOHN HOEVEN, North Dakota
TAMMY BALDWIN, Wisconsin

                    Joshua Sheinkman, Staff Director
                      Sam E. Fowler, Chief Counsel
              Karen K. Billups, Republican Staff Director
           Patrick J. McCormick III, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Coleman, Will, Partner, OnRamp Capital...........................    27
Coons, Hon. Chris, U.S. Senator From Delaware....................     7
Davidson, Peter W., Executive Director, Loan Programs Office, 
  Department of Energy...........................................    11
Kauffman, Richard L., Chairman of Energy and Finance for New York 
  State and Chairman of the New York State Research and 
  Development Authority..........................................    17
Loris, Nicolas, Herbert and Joyce Morgan Fellow, The Heritage 
  Foundation.....................................................    36
Murkowski, Hon. Lisa, U.S. Senator From Alaska...................     6
Wyden, Hon. Ron, U.S. Senator From Oregon........................     1
Zindler, Ethan, Head of Policy Analysis, Bloomberg New Energy 
  Finance........................................................    22

                                APPENDIX

Responses to additional questions................................    63


                          CLEAN ENERGY FINANCE

                              ----------                              


                        THURSDAY, JULY 18, 2013

                               U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:36 a.m. in room 
SD-366, Dirksen Senate Office Building, Hon. Ron Wyden, 
chairman, presiding.

 OPENING STATEMENT OF HON. RON WYDEN, U.S. SENATOR FROM OREGON

    The Chairman. The committee will come to order. Today's 
oversight hearing is on clean energy finance, and it is 
particularly timely because scientists at the National Oceanic 
and Atmospheric Administration recently sent a sobering message 
when they announced that carbon dioxide has now passed 400 
parts per million in the atmosphere. The last time that carbon 
dioxide levels were at 400 parts per million was a few million 
years ago. Scientists estimate that the Earth has to stabilize 
at just 450 parts per million to avoid the worst effects of 
climate change. So it is quite clear that it is going to take 
significant changes, significant changes, to stay under this 
goal, and obviously the clock is ticking.
    The good news is that, according to a recent study in 
Science, the science publication, by some of the most prominent 
researchers in the field, there is a path out of this bind. 
That is a path forged through technology and innovation.
    Addressing climate change in my view has got to happen on 
at least 3 tracks. First, more needs to be done to deploy clean 
energy technologies that the country already knows about--wind 
and solar and hydro, geothermal. The list goes on and on.
    Second, steps need to be taken, and bold steps, with 
technologies like energy storage. Energy storage solves the 
problems of intermittent renewable power and helps the grid 
operate more smoothly. For example, there is a proposal to 
build a facility near Boardman, Oregon, that would use 
compressed air to store energy from wind farms, allowing for 
even greater use of renewables while offering electricity for 
sale below the current average electricity rates.
    There is bipartisan legislation now before the Senate with 
respect to promoting energy storage and I'm very pleased that 
our new Secretary of Energy, Dr. Moniz, after years--and 
frankly, this has gone on through several administrations, 
where energy storage got at best short shrift--Dr. Moniz has 
committed to this committee that he is going to work with us to 
turn this around and we will shortly have a comprehensive plan 
on energy storage from the Department.
    The final track involves developing revolutionary 
technologies that nobody has thought about yet. For example, 5 
years ago nobody envisioned that shale oil and the gas boom 
would allow the United States to become a net exporter of 
petroleum products for the first time in 50 years.
    Let's push for the same kind of focus in the renewable 
energy field, with breakthrough technologies in a range of 
areas from hydrogen-powered cars, and in addition to 
renewables, we ought to look at modular nuclear reactors and 
fusion energy, because a variety of these fields are equally 
transformative for our Nation's economy and the environment.
    Finally, there's no question it's going to take smart 
people to design these technologies and skilled labor to deploy 
the infrastructure to support them. Both of these would promote 
domestic investment, creating high-skill and high-wage jobs in 
the country. Addressing climate change by taking on this 
technology challenge can reduce greenhouse gas emissions at the 
same time it promotes job growth and a stronger economy.
    Now, among the most useful things the government can do to 
reach that goal is to empower the immense amounts of private 
capital available to invest more easily in clean energy and let 
the private sector go to work. One source of low capital that 
can be difficult for clean energy projects to tap is the bond 
markets. We have seen, particularly in terms of encouraging new 
investment, that bonds clearly are an attractive way to bring 
in the private sector.
    For years, for example, there were discussion here in the 
Senate about bipartisan efforts to bond in terms of 
transportation. Finally, my friend and colleague Senator 
Stabenow knows from our service on the Finance Committee, I 
think there was a bipartisan interest in pursuing bonds finally 
so that we'd stop talking about it. The projection was for $3 
to $5 billion of investments through Build America bonds. It's 
now come in at over $180 billion.
    So my hope is that we can look at ways particularly to tap 
the bond market, to use the private sector in a creative way 
for clean energy and efficiency projects. In particular, bonds 
have been used for big projects--that's often done today--but 
too often don't get used for smaller projects, like residences 
or office buildings, because it's too hard to put together so 
many disparate projects in a pool large enough to float a bond.
    So that's leaving a significant demand for clean energy and 
efficiency going unmet and again causing us to miss a big 
opportunity to reduce emissions. Industry experts estimate 
there is $1 trillion in potential energy savings in buildings 
alone over the next decade and $300 billion in potential 
investment opportunities that could be realized from building 
efficiency alone.
    Another barrier that the committee has been told is 
hindering investment in clean energy technology is a lack of 
technical expertise by would-be investors. There are lots of 
Americans who would like to invest in clean energy, but don't 
have the ability to evaluate if a technology is meeting its 
goals and worth investing in. So certainly the Department of 
Energy could play an expanded role in assessing the technology 
progress across a broad range of clean energy technologies.
    At one point there was a role for government in this area. 
There was an Office of Technology Assessment, and there was 
significant bipartisan interest in this. Senator Kennedy, the 
late Senator Kennedy, and a variety of conservatives were 
interested in this. So a role for the government in terms of 
assessing these clean energy technologies I think is also a 
promising opportunity for us to explore.
    The final way is for the government to level the playing 
field so that clean energy technologies have the same benefits 
that fossil energy has enjoyed and to make sure that the 
government itself doesn't stand in the way of clean energy 
being deployed. One of the big challenges to the Shepherds Flat 
wind project that's getting built in Oregon--and this is one of 
the biggest projects, not just in the country; this is one of 
the biggest projects in the world--was to ensure, and the 
government really hadn't had to deal with this before--that the 
wind turbines didn't interfere with nearby defense radar 
installations. So the Oregon congressional delegation went to 
work with the the Air Force. We worked this out and now we're 
able to tap the clean energy benefits of wind power in eastern 
Oregon, and I think it's pretty obvious that the Department of 
Defense feels that we have worked through these issues 
sufficiently so as to be able to proceed and that we're 
proceeding in a way that's consistent with meeting our national 
defense needs at a dangerous time.
    Simple approaches like those that I've tried to describe 
here could have a transformative effect on the development of 
mature technologies, but it's going to take even more 
revolutionary technology to take America to a truly low carbon 
future. That's why investments in basic research and 
development are so important. Programs like the Advanced 
Research Projects Agency-Energy, which partner with the private 
sector to jump-start revolutionary technologies, is an 
important priority.
    I think we're going to have a pretty big debate this fall 
with respect to budget priorities and ARPA-E and I'm very 
hopeful that there will be bipartisan support for that.
    Finally, let me close with a couple of quick comments with 
respect to the loan guarantee programs. I also want to say that 
we already miss the late Herb Allison, who recently passed and 
who did particularly thoughtful work in terms of looking at 
these loan programs.
    Now, the loan programs have clearly produced some results 
that I think all parties ought to be encouraged by, including 
that of Tesla Motors, which has repaid its loan guarantee 9 
years early, while the Consumer Reports magazine evaluated the 
Tesla vehicle as the best car ever. As mentioned, Herb Allison 
has given us a number of instructive recommendations. Senator 
Murkowski and I think perhaps we're the only 2 Senators who 
were there when Mr. Allison testified.
    But out of those discussions it struck me that a flaw of 
the existing loan program is that all of the companies 
considered for loan guarantees in effect get placed in the same 
risk bucket. So regardless of the risk-reward, they're all 
clumped together. So you have a situation where a simple, small 
entrepreneur who's attracted some funding and has a buyer lined 
up for the product gets lumped in and treated the same way as a 
company building a large-scale manufacturing plant for a new 
technology in a rapidly evolving global market.
    So we now have new leadership at the program. Peter 
Davidson will be heading it. I'm encouraged by the discussions 
that we've had. He clearly is willing to look at some fresh 
approaches to incorporate some of the recommendations of these 
internal reviews. At the end of the day, the urgency behind 
this hearing--a number of colleagues who've done good work on 
the climate change have joined us--is to recognize that one of 
the best paths forward in terms of trying to address climate 
change in the days ahead is to find these new clean 
technologies that are going to help us create good-paying jobs 
while at the same time dealing with that disturbing finding 
that just came from the government recently that I cited 
earlier.
    Let's level the playing field, unlock private sector 
investment, and particularly continue investing in innovation.
    So I hope once again that the bipartisan cooperation that 
we've seen on this committee on so many issues is what we'll 
hear and learn about today. Nobody's done more to make that 
possible than my friend Senator Murkowski, and I welcome her 
for any comment.

     Prepared Statement of Hon. Ron Wyden, U.S. Senator From Oregon

    Good morning, and welcome to today's oversight hearing on clean 
energy finance.
    Scientists at the National Oceanic and Atmospheric Administration 
sent a sobering message earlier this year when they announced that 
carbon dioxide has now passed 400 parts per million in the atmosphere. 
The last time that carbon dioxide levels were at 400 parts per million 
was a few million years ago. Scientists estimate that the Earth has to 
stabilize at just 450 parts per million to avoid the worst effects of 
climate change, so it's clear that it's going to take big changes to 
stay under that goal, and there's not a lot of time.
    The good news is that, according to a recent study in Science by 
some of the most prominent researchers in the field, there's a clear 
pathway out of this bind--through technology and innovation.
    Addressing climate change has to happen on three tracks:

   First, by deploying more of all the clean energy 
        technologies that we already know about, like wind, solar, 
        hydropower, and efficiency.
   Second, by taking steps forward with technologies like 
        energy storage. Energy storage solves the problem of 
        intermittent renewable power, and helps the whole grid operate 
        more smoothly. For example, there is a proposal to build a 
        facility near Boardman, Oregon that would use compressed air to 
        store energy from wind farms, allowing for even greater use of 
        renewables, while offering electricity for sale below the 
        current average electricity rates. Energy storage offers such 
        great promise overall that I have offered legislation to 
        encourage its deployment.
   The final track involves developing revolutionary 
        technologies that no one has even thought of yet. Five years 
        ago, no one envisioned the shale oil and gas boom or that the 
        US would become a net exporter of petroleum products for the 
        first time in 50 years. In the next five years, breakthrough 
        technologies in any of a range of areas from hydrogen powered 
        cars to modular nuclear reactors or fusion energy could be 
        equally transformative for our nation's economy and 
        environment.
   There's no question that its going to take smart people to 
        design these technologies, and skilled labor deploy the 
        infrastructure to support them. Both of these mean greater 
        domestic investment and American jobs. Addressing climate 
        change by taking on this technology challenge can reduce 
        greenhouse gas emissions at the same time it promotes job 
        growth and a stronger economy.
    Among the most powerful things the government can do to reach that 
goal is to empower the immense amounts of private capital available to 
invest more easily in clean energy, and let the private sector go to 
work.
    One source of low-cost capital that can be difficult for clean 
energy projects to tap is the bond market. Bonds are favored by 
investors looking for a consistent, long-term yield over the potential 
for a high return, a profile that matches the profile of many types of 
clean energy and efficiency projects. Bonds are used for big projects 
today, but don't get often used for smaller projects like residences or 
office buildings because it's too hard to put together so many 
disparate projects in a pool big enough to float a bond. That's leaving 
a huge demand for clean energy and efficiency going unmet, and missing 
a big opportunity to reduce emissions. Industry experts estimate there 
is $1 trillion in potential energy savings in buildings over the next 
decade and $300 billion in potential investment opportunities that 
could be realized from building efficiency alone. If the government 
were to help set standards for high-quality efficiency or clean energy 
projects, capital will flow, jobs will be created by local contractors 
installing domestically made goods, and investors could get a stable 
investment.
    Another barrier that hinders investment in clean energy technology 
is a simple lack of technical expertise by would-be investors. There 
are lots of people in the United States that want to invest in clean 
energy, but don't have the ability to evaluate if a technology is 
meeting its goals and worth investing in. Think of the investment that 
would be unleashed if, say, the Department of Energy were to take an 
expanded role as a trusted and neutral evaluator of technology progress 
across a broad range of clean energy technologies. Interested companies 
could submit their technologies on a voluntary basis for testing, and 
investors would be empowered to choose to invest or not with 
confidence.
    A final way is for the government to level the playing field so 
that clean energy technologies have the same benefits that fossil 
energy has enjoyed, and to make sure that the government itself doesn't 
stand in the way of clean energy getting deployed. I'll note that one 
of the biggest obstacles to the Shepherd's Flat wind project getting 
built in Oregon, one of the biggest wind projects in the world, was the 
Air Force. Once the Air Force backed down, the project and all of the 
benefits that came with it could proceed.
    Simple approaches like I've just described could have a 
transformative effect on the deployment of mature technologies and 
energy efficiency, but it's going to take even more revolutionary 
technology to take America to a truly low-carbon future. This is why 
it's critical that our investments in basic research and development at 
the national labs and through our Universities continue, so that they 
can keep filling the innovation pipeline. Programs like the Advanced 
Research Projects Agency-Energy, which partner with the private sector 
to jump-start revolutionary technologies and take them the next step 
towards deployment are also critical, and must be supported.
    The government has sought to address some obstacles to clean energy 
development through the loan guarantee programs at the Department of 
Energy. These programs have generated some encouraging success stories, 
including that of Tesla Motors repaying its loan guarantee 9 years 
early while also releasing what Consumer Reports has called ``the best 
car ever''. The vast majority of the loan guarantees extended are 
healthy and on track for repayment. Not all of the loan guarantees have 
fared as well, though, and these programs have been the subjects of a 
very thoughtful external review by the late Herb Allison, as well as by 
the Government Accountability Office. The loan programs have also been 
the subjects of oversight here on the Energy Committee.
    As I've considered the loan programs myself, it strikes me that a 
flaw of the existing program structure is that all of the companies 
considered for loan guarantees are placed in the same ``risk bucket'', 
regardless of the risk/reward profile. For example, a small 
entrepreneur that has attracted some funding and has a buyer lined up 
for his product seems to be lumped in and treated the same as a company 
building a large-scale manufacturing plant for a new technology in a 
rapidly evolving global market.
    The Loan Programs Office at the Department of Energy that oversees 
these programs now has new leadership in Peter Davidson, and I am very 
encouraged at his willingness to join us today to discuss the current 
state of the loan programs, how DOE has adjusted to incorporate the 
recommendations of these external reviews, and describe how the loan 
programs will proceed in the future.
    There is no question, the challenge to address climate change is 
immense, and it won't get solved overnight. If our country can can 
level the playing field, unlock private sector investment in clean 
energy, and continue investing in innovation, this is also a challenge 
that America can meet.
    Let me turn to my colleague and friend Senator Murkowski for her 
opening comments.

        STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thank you, Mr. Chairman. I apologize for 
being a little bit tardy, so I missed the beginning part of 
your comments, but I appreciated what you have just outlined.
    I want to welcome back to the committee our friend Senator 
Coons. We miss you on the committee already. You've only been 
gone for a few weeks, but I have appreciated your contributions 
to this committee and am glad that you're here this morning to 
speak to us about the Master Limited Partnership Parity Act, 
something that I support, as you know, and encourage you in all 
you're doing on this and want to work with you.
    I think that this is one of those opportunities where we 
really do figure out how in perhaps a more creative way we're 
helping to provide a level of financial incentive out there 
within the private sector. So I applaud you for that.
    Mr. Chairman, I thank you also for noting the passing of 
Herb Allison. As you mentioned, his testimony before the 
committee I felt was very instructive. He was--in addition to 
being a good man, his life of public service was one that I 
think that we have benefited from particularly here in this 
committee, particularly as we look at what he look at what he 
did with the review of the Department's loan program.
    This is complicated as we deal with how we move forward on 
so many of these issues as they relate to whether it's loan 
programs or how we can bring about some of these changes, move 
the technologies from that R and D stage actually into 
implementation, recognizing the costs that are inherent there.
    But Herb in particular with his review and analysis left us 
better prepared to take that on. I'm grateful for that.
    Now, as many of you know, I believe that there is a role 
for the Federal Government to play in facilitating the 
deployment of new energy technologies, including our loan 
guarantee program. Even in the aftermath of some high-profile 
failures, I've never advocated the outright termination of 
these authorities, though some of my colleagues have 
understandably taken that position.
    But to the contrary, former Chairman Bingaman and I spent a 
good deal of time looking at different authorities that might 
make sense to provide a Clean Energy Deployment Administration 
within DOE. That proposal, like so many other bipartisan energy 
measures in recent years, languished on the Senate calendar 
after being reported from this committee back in 2009.
    But since 2009 we've seen some events that have caused 
perhaps us to pump the brakes, to rethink our efforts. All you 
need to do is mention Solyndra and you know what we're talking 
about here.
    Mr. Chairman, I do think it is vital for our committee to 
conduct regular and intensive oversight of the programs and 
agencies under our jurisdiction, particularly when serious or 
unexpected problems surface. So I want to thank the witnesses 
that will present today and for their role, not only in helping 
us understand what has gone wrong in our clean energy programs, 
but what has gone well, because we recognize that there have 
been some successes, and where we might be headed into the 
future.
    For my part, I believe hearings like this are an important 
first step. Once we have built a record and determined the root 
causes of the problems that we've encountered, I want to work 
to fix the programs that we have.
    While much of the focus today will be on macroeconomic 
trends, I remain focused on 3 specific programs. That's section 
1703 and section 1705 of the loan guarantee process and the 
ATVM direct loan program. I think there are some similarities, 
but there's also some important differences between these 3 
programs. I'll just very quickly run through them.
    Section 1703, which was created back in 2005, relied 
heavily on self-paid credit subsidy costs, made any project 
using new or significantly improved technologies eligible, and 
has not closed on a single loan guarantee.
    Section 1705, on the other hand, created back in 2009, was 
accompanied by $6 billion for credit subsidy, limited 
eligibility to renewable and transmission projects, and closed 
27 loan guarantees worth over $15 billion.
    ATVM, of course, was designed to offer direct loans to 
automakers. $7.5 billion was appropriated to cover credit 
subsidy costs, but just 5 loans have been issued. The last was 
in March 2011, and April 2010 before that. Two loan recipients 
appear to be on the verge of bankruptcy and, according to the 
GAO, the program has zero active applications.
    DOE's loan programs can serve a valuable purpose, but right 
now we need to know if the loans and the loan guarantees issued 
so far are as effective as we had hoped. We've got some tough 
decisions to make. I hope we learn enough this morning to make 
sure that those decisions are fully informed.
    Again, I will thank the witnesses in advance for their 
contributions and look forward to further discussion and 
debate.
    The Chairman. Thank you, Senator Murkowski. Again, I 
appreciate very much how constructive you have been in all of 
these discussions. I think it's not surprising, once again, we 
share the same views about Herb Allison, because he really was 
an extraordinary, extraordinary man who made huge 
contributions, and we do miss him.
    We're not really letting Senator Coons escape from this 
committee. I realize he had some difficult choices to make for 
his constituents, but he's been doing awfully good work and 
bipartisan work with master limited partnerships. Senator, we 
welcome you. Please make remarks you wish to make this morning. 
We'll make your prepared statement a part of the record in its 
entirety, and welcome.

          STATEMENT OF HON. CHRIS COONS, U.S. SENATOR 
                         FROM DELAWARE

    Senator Coons. Thank you, Chairman Wyden, and thank you, 
Ranking Member Murkowski. Thank you for your welcome. it is 
great to be back with you here at the Energy and Natural 
Resources Committee. For those keeping score at home, this is 
my second time appearing before this committee just in the last 
month, which is an accurate reflection of what I view as its 
central importance and reflects how much I enjoyed my time here 
and the spirit of cooperation and collaboration that this 
committee has demonstrated.
    So I'm grateful for the chance today to offer brief 
testimony on what I believe is one of the most fundamental 
challenges facing the development and deployment of clean 
energy technology, which is access to reliable long-term 
financing. This committee has considered this issue before. In 
2011 we held an oversight hearing on the concept of a clean 
energy investment fund and in 2012 another hearing on the role 
of the Federal Government in spurring American innovation. I 
was encouraged by the ideas brought forward during those 
hearings and I am looking forward to the renewed discussions 
that will take place at this hearing later this morning.
    There is little debate about America's potential to lead 
the world in clean energy development and deployment. We have 
unparalleled ingenuity. We have some of the most advanced clean 
energy technologies in the world. However, our innovations and 
the very real potential energy that they represent are 
struggling in part in terms of deployment because of the 
absence of a reliable source of financing. I think they need a 
catalyst, the catalyst of a clearer, stronger regulatory and 
statutory structure that allows access efficiently to long-term 
financing.
    Today's energy market broadly is defined by narrow profit 
margins and established technologies supported by low-cost 
long-term financing. If clean and renewable sources of energy 
are to grow and compete in the American energy marketplace and 
thus also around the world, we have to make sure they're given 
a level playing field on which to operate.
    The Master Limited Partnerships Parity Act of 2013, S. 795, 
which I reintroduced in April with Senator Murkowski, Senator 
Stabenow and Senator Moran, would do just that. It is a 
strikingly simple bipartisan bill that modernizes a section of 
our tax code to make it consistent with the ``all of the 
above'' energy strategy that so many of us have endorsed as the 
blueprint for energy independence and our energy future.
    The Master Limited Partnerships Parity Act would allow 
clean energy projects to utilize MLP's, a beneficial tax 
structure that taxes a project like a partnership or a pass-
through, but that trades its interests like a corporate stock, 
a C corp. This prevents double taxation, allows access to the 
liquidity of equity markets, and leaves more cash available for 
distribution back to investors.
    For the last 30 years MLP's have given the natural gas, 
oil, and coal industries access to private capital at a lower 
cost, something other capital-intensive projects badly need. It 
is a well-developed, well-established financing vehicle. 
There's roughly 100 MLP's and a market cap of about $450 
billion at the moment.
    The extension of access to this financing vehicle to energy 
efficiency technologies, energy storage, solar power, and a 
very wide range of other alternative or renewable energy 
sources has the real potential to bring a significant wave of 
private capital off the sidelines and into the renewable energy 
marketplace. It would not only level the playing field, but 
would also increase access to low-cost capital for all energy 
sources in our marketplace.
    I am so thankful to Senator Murkowski, to Senator Stabenow, 
and to Senator Moran for their tireless partnership in this 
effort, for working with me and my staff on this bill, and to 
Chairman Wyden for his ongoing support support of our efforts 
and for the opportunity to appear before you this morning.
    Companion legislation, bipartisan companion legislation, 
led by Congressman Ted Poe, by Mike Thompson, by Peter Welch, 
Cory Gardner, Chris Gibson, which is 3 R's and 2 D's, was 
reintroduced in the House earlier this year as well.
    Access to low-cost financing will define our Nation's 
energy future. It will determine how, when, and which energy 
sources emerge as the central players in the American energy 
marketplace in the long term. I believe it's up to us to ensure 
that our vast supply of clean renewable power, as well as 
energy efficiency, are a vital part of that equation.
    Thank you.
    The Chairman. Thank you, Senator Coons.
    I don't have any questions. I'm going to let colleagues ask 
questions if they do. But I'd just like to note that I think 
your work is especially timely right now as we convene, because 
I think, as Senators know, all Senators have been asked by 
Senator Baucus and by Senator Hatch to make submissions with 
respect to tax reform. So that obviously incorporates energy 
policy.
    One area that I feel very strongly about is to try to find 
ways to, if not secure parity between the various energy 
sources, let's at least narrow the gap, because there are some 
energy sources that in effect get subsidy levels up here and 
are permanent and then there are other energy sources that have 
this level of subsidy and they're kind of on a year to year 
roller coaster.
    What you seem to be doing in the bipartisan work that 
you're discussing with MLP's is you're saying here's an 
opportunity to again try to level the playing field and to 
bring more people into the debate. I intend to study very 
closely your legislation. I know my partner Senator Stabenow is 
on the Finance Committee as well.
    I think I just want to let colleagues ask questions. I 
think Senator Stabenow has one. Shall we have Senator Murkowski 
go, and then we'll go to Senator Stabenow.
    Senator Murkowski. No.
    The Chairman. Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman. Actually, not a 
question, but just a comment and show of support. I think 
Senator Coons has put forward excellent legislation. I'm very 
proud to be a co-sponsor of that, as the chair of the Energy 
Subcommittee of Finance. We certainly are going to be putting 
forward ideas on tax reform and I think the master limited 
partnerships approach is one that really makes sense. So I hope 
we're going to look more positively.
    Mr. Chairman, as you said, we have in the areas of energy 
some areas that have had long-term ability to make decisions 
because of tax policy and others that limp along with tax 
extenders year to year at best, and it doesn't seem to really 
be a level playing field. So I think this is one opportunity to 
create a level playing field.
    So congratulations and I'm pleased to join you.
    Senator Coons. Thank you.
    The Chairman. I also want to note that Senator Stabenow has 
been working to level the playing field in a variety of areas, 
vehicles being just one of them. So I look forward to working 
with you on those issues.
    Would other colleagues like to either make statements or 
ask questions of Senator Coons? Senator Murkowski.
    Senator Murkowski. No question, but again just to applaud 
you, Senator, in your efforts on this. You've been relatively 
dogged, which is what needs to happen around here. As the 
chairman has noted and Senator Stabenow has noted, I think the 
timing is good right now to help advance this. So the fact that 
we've got an opportunity in this committee to again highlight 
this as an opportunity to bring about parity, to bring about 
good news, I think, within the energy sector, again you're to 
be applauded.
    The Chairman. Senator Franken.
    Senator Franken. I just want to congratulate Senator Coons 
on this bipartisan legislation, which I co-sponsored last 
Congress and I intend to support wholeheartedly this time. 
Thank you.
    The Chairman. All right.
    Senator Heinrich.
    Senator Heinrich. Senator Coons, I've got a list of 1100 
questions that I'd like to get started on.
    [Laughter.]
    Senator Coons. I'll clear my schedule.
    The Chairman. He's lasted for 24 hours.
    Senator Heinrich. This is one of those issues that we 
really ought to be able to build substantial common ground on. 
So keep up the good work.
    Senator Coons. Thank you, Senator.
    Thank you very much, Chairman Wyden. Thank you, Senator 
Murkowski. I'm particularly grateful for your bipartisan 
leadership on this. Senator Stabenow, for your tireless 
advocacy for it both here and in the Finance Committee. I do 
think this is a simple but potentially very powerful idea that 
provides access to long-term financing on an ``all of the 
above'' basis, that will move our energy economy forward.
    Thank you for the opportunity.
    The Chairman. You certainly timed this ideally because, as 
Senator Stabenow remembers, back in the summer of 2012 in 
effect what we said in the Finance Committee is we were going 
to extend a lot of those various programs. Wind was 
particularly one that people cared about. But we said at the 
end of that period, which lasts just slightly longer than a 
year, it was going to be a new day, and in effect you're 
starting the debate about what the new day ought to look like.
    Senator Coons. If I could just be clear on that one point, 
I'm not personally advocating MLP parity as a replacement or to 
supplant any of the other sector-specific tax incentives.
    The Chairman. I understand.
    Senator Coons. I just think this is one way to take an 
existing piece of the code and open it up to all energy sources 
in a way that provides long-term predictability for capital 
financing.
    The Chairman. All right. Thank you.
    Senator Coons. Thank you, Mr. Chairman. Thank you, 
Senators.
    The Chairman. Good work.
    All right. Our panel: Peter Davidson, Executive Director of 
the Loan Program, Department of Energy; Richard Kauffman, 
Chairman of Energy and Finance for New York State; Ethan 
Zindler, Head of Policy Analysis for Bloomberg New Energy 
Finance; Will Coleman, Partner of OnRamp Capital; and Capital; 
and Nicolas Loris, Herbert and Joyce Morgan Fellow at The 
Heritage Foundation.
    We welcome all of you. We'll make your prepared statements 
a part of the hearing record in their entirety. I know that 
there is almost a biological compulsion to read every word on 
the piece of paper. We'll make your statements a part of the 
record, and if you'd just like to take 5 minutes or so and talk 
to us it'd be great.
    We'll start with you, Mr. Davidson.

   STATEMENT OF PETER W. DAVIDSON, EXECUTIVE DIRECTOR, LOAN 
             PROGRAMS OFFICE, DEPARTMENT OF ENERGY

    Mr. Davidson. Thank you, Chairman Wyden, Ranking Member 
Murkowski, members of the committee. Thank you for the 
opportunity to testify before you today and it's a great honor.
    My name is Peter Davidson. I recently joined the Department 
of Energy as the Executive Director of the Loan Programs 
Office. Prior to the LPO, I served in New York State 
government, and for 25 years before that I worked as an 
entrepreneur and a banker.
    First, as others have already done, I'd like to share my 
condolences with the Allison family. He was a great working 
member of the LPO for a number of months, so we thank him for 
that.
    The Loan Program Office administers Federal loan guarantees 
authorized under Title 17 of the Energy Policy Act and the 
direct loan program for advanced technology vehicles 
manufacturing authorized under the Energy Independence and 
Security Act. Our mission is to commercialize innovative energy 
and transportation projects that are not yet able to secure 
funding from private sector banks, the bond market, or other 
lenders. As such, LPO support is critical in deploying 
innovative utility-scale energy and automotive projects that 
reduce greenhouse gas emissions and promote a stronger and 
cleaner American economy.
    LPO's overall portfolio is one of the largest clean energy 
and transportation portfolios in the world. As of today, we 
have committed or closed $35 billion in direct loan and loan 
guarantees to over 30 innovative projects with a total project 
cost counting the equity from the participating partners of 
greater than $55 billion.
    One of our projects, the Ford Motor Company, has used LPO's 
$5.9 billion loan to build out factories to produce more fuel 
efficient vehicles. Ford has developed the Ecoboost higher 
efficiency gasoline engine and its hybrid electric and all-
electric cars such as the C-Max, Focus, and Fusion with this 
funding. These new technologies have helped to raise Ford's 
2012 average fuel economy rating to nearly 35 miles per gallon, 
which is the highest among American automobile companies, as 
well as reduced emissions equal to taking one million cars off 
the road.
    To date, across our portfolio more than $1 billion in loans 
have been repaid, including Tesla's complete and early 
repayment of its $465 million loan earlier this year, as the 
chairman mentioned.
    Across the portfolio, to date our losses represent 
approximately 2 percent of the $35 billion portfolio of closed 
and committed loans and guarantees, 2 percent. This is less 
than 10 percent of the roughly $10 billion in loan loss 
reserves that Congress set aside for this program.
    A significant portion of today's discussion will look at 
the role of equity in financing clean energy. It's important to 
remember that the LPO does not provide equity. We provide debt, 
which has often been the most difficult type of funding to 
secure for new innovative large-scale projects. As the chairman 
has noted, private sector lenders have traditionally been 
adverse to lending to new technologies or new processes no 
matter how promising they may be. Importantly, debt is often 
the largest source of money in a transaction, typically 
representing more than half of a project's total capital.
    Simply put, without debt it is extremely difficult to 
develop next generation innovative projects. For innovative 
energy and transportation projects, the LPO is one of the few 
sources of debt available at large scale. As an example, the 
LPO helped create the utility-scale solar photovoltaic market. 
In 2009 no utility-scale solar PV projects over 100 megawatts 
had been built, largely because there was no commercial debt 
financing available. The LPO helped prove the performance of 
the PV solar market by funding a total of $6 billion in 2010 
and 2011 over the first 6 utility-scale PV plants in the United 
States. Since that time, ten new projects over 100 megawatts 
have been financed by lenders in the private sector without any 
support from the LPO.
    So the LPO demonstrated the commercial viability of these 
innovative energy projects in 2010 and 2011 and then 
traditional lenders came into the market in 2012 and 2013.
    Yet our program is not limited to a single technology or 
fuel source. To that end, the President in his climate speech 
recently announced a new draft loan guarantee solicitation for 
innovative and advanced fossil energy projects and facilities. 
As you all know, fossil fuels provide more than 80 percent of 
our energy today and they are likely to remain the largest 
source of energy for decades. The new fossil solicitation will 
help ensure that we adopt cleaner and more efficient 
technologies as part of a low-carbon future.
    I want to address the point raised earlier. As we move 
forward we are constantly seeking ways to improve the program 
to ensure we are protecting the interests of the taxpayer. The 
LPO underwrites and structures its loans and loan guarantees to 
maximize prospects for full repayment. Before making any loan 
or loan guarantee, we conduct extensive due diligence on the 
project, with rigorous financial, technical, legal, and market 
analysis by the LPO's professional staff, which includes 
engineers, financial specialists, and a battery of outside 
expert advisers.
    We've benefited from several recommendations for 
improvement, including those from Congress, the GAO, DOE's 
inspector general, and independent consultants such as the late 
Mr. Allison. The LPO has worked to adopt many of these 
recommendations, including adding staff and management, adding 
transparency to the approval process of the loans, and 
streamlining the application process. We continuously look for 
additional ways of improving our underwriting and asset 
monitoring activities to incorporate lessons learned and to 
ensure best practices to protect taxpayer interests.
    In conclusion, securing tomorrow's economic leadership 
requires the support and deployment of innovative energy and 
auto technologies today. Developing a robust low-carbon energy 
sector is crucial to our national interests by advancing our 
economy, protecting our environment and public health, and 
helping to ensure our energy independence.
    One of the most important tools in building this economy, 
as our global competitors have learned and are actually doing, 
is debt financing for large-scale projects on reasonable terms 
that is wisely targeted and responsibly deployed. That is the 
role that we in the Loans Program Office fill for the U.S. 
energy sector.
    Thank you very much and I look forward to any questions you 
may have.
    [The prepared statement of Mr. Davidson follows:]

   Prepared Statement of Peter W. Davidson, Executive Director, Loan 
                 Programs Office, Department of Energy

                              INTRODUCTION

    Chairman Wyden, Ranking Member Murkowski, and Members of the 
Committee, thank you for the opportunity to testify before you today. 
My name is Peter Davidson, and I am the Executive Director of the 
Department of Energy's (DOE) Loan Programs Office (LPO). Prior to 
joining the Loan Programs in May, I was Senior Advisor for Energy and 
Economic Development at the Port Authority of New York and New Jersey. 
Prior to that, I served as the Executive Director of New York State's 
economic development agency, the Empire State Development Corporation, 
where I oversaw public/private partnerships such as the Moynihan Train 
Station, Lower Manhattan Development Corporation, Columbia University's 
Manhattanville expansion, Brooklyn Bridge Park, and the Javits 
Convention Center.
    Prior to my government service, I was an entrepreneur who founded 
and managed six companies in the newspaper, broadcasting, out-of-home, 
advertising and marketing research businesses, many of which focused on 
Hispanic consumers. From 1989-2000, I was the owner and President of El 
Diario/La Prensa, the leading Spanish language newspaper in New York. 
Earlier in my career, I was an executive in the investment banking 
division of Morgan Stanley & Co.
    The LPO administers two federal loan guarantee programs-Section 
1703 and 1705-for energy technology projects authorized by Title XVII 
of the Energy Policy Act (EPAct), as amended. It also administers 
direct loans for the Advanced Technology Vehicles Manufacturing (ATVM) 
program as authorized under Section 136 of the Energy Independence and 
Security Act of 2007 (EISA). DOE's loan programs are a critical 
component of our nation's commitment to promoting innovative energy 
technologies, and I welcome the opportunity to discuss them with you.

Overview of the Programs
    The Section 1703 program was established to support the commercial 
deployment of new, innovative technologies that avoid, reduce, or 
sequester greenhouse gas emissions. The program currently has $34 
billion in loan guarantee authority across several technologies, 
including nuclear, advanced fossil, transmission, renewable energy, and 
energy efficiency. The Section 1705 program was created as part of the 
American Recovery and Reinvestment Act of 2009 (ARRA) to jump-start the 
country's clean energy sector by supporting various renewable energy 
projects that had difficulty securing financing in a constricted credit 
market. The Advanced Technology Vehicles Manufacturing Loan Program 
(ATVM) was established to expand U.S. business opportunities for 
advanced automotive technologies that contribute to energy independence 
and security.
    As of today, LPO has closed thirty-one direct loans and loan 
guarantees that total $24 billion in investments. These investments are 
supporting twenty-six energy and five automotive projects.
    In addition, the programs have conditionally committed an 
additional $10.3 billion to two nuclear projects.
    These projects have attracted more than $21 billion in private 
sector investment, and completion of the projects will result in total 
U.S. economic investment of $55 billion. To date, more than $1 billion 
in loans have been repaid, including Tesla's complete and early 
repayment of its $465 million loan earlier this year. Our losses to 
date represent about 2 percent of the $35 billion portfolio of closed 
and committed loans and guarantees-and less than 10 percent of the 
roughly 10 billion in loan loss reserves that Congress set aside for 
the program.
    In 2011, LPO represented the largest single public or private 
source of debt financing for clean energy projects in the United States 
as recognized in the Bloomberg New Energy Finance, 2011 Clean Energy & 
Energy Smart Technology League Tables. LPO's projects include:

   One of the world's largest wind farms;
   The world's largest photovoltaic and concentrating solar 
        power plants currently under construction;
   The first two all-electric vehicle manufacturing facilities 
        in the United States;
   A conditional commitment to the first commercial nuclear 
        power plant to be licensed and built in the United States in 
        three decades; and
   One of the country's first commercial-scale cellulosic 
        ethanol plants.

    I would like to highlight four projects to demonstrate how projects 
funded by the LPO are contributing to a clean energy economy.

   The 290 megawatt Agua Caliente solar generation project, 
        owned by NRG Solar, LLC and MidAmerican Energy Holdings 
        Company, is based in Yuma County, Arizona and will be the 
        world's largest solar photovoltaic installation when fully 
        operational. The project is approximately 96% complete with 
        more than 4.7 million solar panels spanning more than 1,800 
        acres installed. For the more than 1,300 workers at peak 
        construction, the project means steady employment, marketable 
        skills, and the opportunity to play a critical role in shaping 
        the nation's energy economy. The impact of this project goes 
        well beyond delivering clean, renewable energy to the power 
        grid. Last year, First Solar, the engineering, procurement and 
        construction contractor for Agua Caliente and other projects, 
        spent more than $1 billion with U.S. suppliers across 38 
        states. Major domestic suppliers of steel fabrications and 
        electrical equipment for Agua Caliente and other First Solar-
        supported projects include an Arizona-based division of Omco, 
        Connecticut-based 4 Highway Safety Corp., Texas-based 
        Powerhohm, and SMA Americas of Colorado. In addition, the 
        project is using approximately 39,000 tons of American steel.
   The 392 gross megawatt Ivanpah Solar Generating Complex, 
        which is owned by NRG Energy, Inc., Google and BrightSource 
        Energy, Inc., is located in Baker, California. The Complex is 
        one of the largest infrastructure projects in the nation and 
        the largest solar thermal power plant under construction in the 
        world. There are more than 1,200 workers currently on site, 
        including manual construction workers, engineers, biologists 
        and project managers. This project also has been a catalyst for 
        several supplier businesses, including the project's steel 
        supplier, Gestamp Solar Steel. Gestamp built a new 
        manufacturing facility in Surprise, Arizona just to keep up 
        with orders from Ivanpah. In addition, Michigan-based Guardian 
        Industries started supplying 160,000 of its EcoGuard Solar 
        Boost mirrors in November 2011. The Ivanpah Complex is 
        approximately 93% complete.
   With support from its Advanced Technology Vehicle 
        Manufacturing (ATVM) Program loan, Ford Motors is helping to 
        position the U.S. auto industry as a leader in fuel-efficient 
        vehicles worldwide. Ford's ATVM projects have and will continue 
        to raise the fuel efficiency of more than a dozen popular 
        vehicles, including the C-Max, Focus, Escape, Fusion, and F-150 
        trucks, representing approximately two million new vehicles 
        annually. Furthermore, the ATVM loan program has assisted Ford 
        in upgrading a number of key manufacturing facilities, enabling 
        Ford to transition approximately 33,000 employees into clean 
        engineering and manufacturing jobs in factories across six 
        states - Illinois, Kentucky, Michigan, Missouri, New York and 
        Ohio.
   Tesla's $465 million loan enabled it to reopen a shuttered 
        auto manufacturing plant in Fremont, California and to produce 
        battery packs, electric motors, and other powertrain 
        components. Tesla vehicles have won wide acclaim, including the 
        2013 Car of the Year from both Motor Trend and Automotive 
        Magazine, and Consumer Reports recently rated Tesla's Model S 
        as tied for the best car ever rated. Tesla has created more 
        than 3,000 fulltime jobs in California - far more than the 
        company initially estimated - and is building out a supply 
        chain that supports numerous additional jobs and technologies, 
        and is bringing advanced manufacturing technology back to 
        America. In May, Tesla repaid the entire remaining balance on 
        its loan nine years earlier than originally required.

The Loan Programs Fill a Critical Role in the Marketplace
    While the LPO's portfolio has performed well to date, it is 
important to understand why the LPO's performance is so critical to a 
domestic clean energy economy. Development and deployment of technology 
is severely limited by uncertainty in the availability of debt 
financing. Lenders and bondholders are often unwilling to finance 
innovative technologies at scale that do not yet have a history of 
credit performance, despite realistic projections of a market rate of 
return. This inhibition particularly hampered commercial technologies 
during the recent credit crisis.
    Project-level debt traditionally provides more than half of the 
funding for independent energy generation projects. Without debt, there 
are few-if any-new commercial projects and new innovative technologies 
that reduce greenhouse gas emissions. The Loan Programs are uniquely 
positioned to address this market need by bearing some of the risk that 
traditional debt providers are unwilling or unable to assume. Senior 
secured loans backed by DOE loan guarantees augment significant 
project-level equity investments from project sponsors to fund 
discretionary capital expenditures. Every transaction supported by the 
LPO is a public-private partnership. Equity invested from private 
sources represents at least 20% of the total cost of every project, and 
sometimes more, and DOE will not back a technology unless and until 
this substantial private equity support is available. This support 
reflects the commercial reasonableness for each of DOE's financings.
    The LPO support has proven and will continue to prove critical in 
deploying innovative energy projects at scope and scale that reduce 
greenhouse gas emissions and lead us to a cleaner economy. For example, 
the Section 1705 Program became available just as solar photovoltaic 
(PV) projects were being developed at utility scale. Given the lack of 
capacity in the private debt markets to fund those projects at the time 
of the financial crisis, DOE supported the first six utility scale PV 
projects greater than 100MW in the United States. There are now ten 
additional PV projects in the United States greater than 100MW-none of 
which benefit from DOE support. Such projects are now more readily 
financed by private lenders - many of whom began their participation in 
the sector by acting as lenders in the Section 1705 program. These 
lending partners include leading financial institutions such as John 
Hancock, Bank of America, Citigroup, and Banco Santander.
    DOE has also enabled debt financing for all concentrating solar 
power (CSP) projects in the U.S. This technology's high capital costs 
and long construction periods add to the financing challenges of 
innovative technology, and the Loan Programs appear to have played a 
vital role in advancing this technology. In addition, the LPO's support 
of utility-scale solar projects has indirectly contributed to other 
important industry developments. With an increased volume of projects, 
the solar industry has since seen a reduction in costs of constructing 
projects. In turn, prices for off-take agreements have declined, 
ultimately making these technologies more cost effective for consumers 
and more attractive to private lenders.

Advanced Fossil Energy Solicitation
    While the Title XVII program has largely supported renewable energy 
projects to date, the program's mandate is not limited to any specific 
technology. We endeavor to support a technology only when it is able to 
support debt financing, but we do not control when a given technology 
reaches that threshold. Most new, innovative, large-scale technologies 
will have difficulty accessing debt markets, and DOE will continue to 
support those technologies that best meet statutory requirements to 
reduce greenhouse gases and ensure a reasonable prospect of repayment.
    This month, LPO released a new draft loan guarantee solicitation 
for innovative and advanced fossil energy projects and facilities. The 
Department is in a unique position to evaluate the feasibility of these 
innovative technologies and assist the private sector as it clears a 
path to commercialization. Fossil fuels provide more than 80% of our 
energy today, and they are likely to remain the largest source of 
energy for decades. This solicitation will help ensure that we adopt 
the technologies to use them more cleanly and efficiently as part of a 
low carbon future.
    The draft solicitation is open for comments from industry, 
stakeholders, and the public until early September. The Department will 
make available up to $8 billion in loan guarantee authority through 
this solicitation. This figure may be reduced if DOE is able to close 
any of the active advanced fossil projects that were submitted under a 
previous solicitation. When issued, this new solicitation will seek 
applications for projects and facilities that cover a broader range of 
technologies than the original solicitation. These technologies could 
include any fossil technology that is new or significantly improved, as 
compared to commercial technologies in service in the U.S. and is 
described in one or more of the following technology areas:

          1. Advanced Resource Development
          2. Carbon Capture
          3. Low-Carbon Power Systems
          4. Efficiency Improvements

    Applicants must show that their proposed project avoids, reduces, 
or sequesters air pollutants or greenhouse gas emissions. In addition 
to soliciting public comment about the technologies that DOE identifies 
in the draft solicitation, DOE welcomes comments that identify other 
technologies within its statutory authority that DOE should consider 
supporting through this loan guarantee solicitation.

Innovation Equals Risk
    Whether solar, wind, advanced fossil or nuclear, financing 
innovation requires acceptance of a certain level of risk. Once again, 
it is the private sector that applies for loans and loan guarantees, 
and each project must have substantial private sector equity 
commitments before DOE will consider moving forward with a transaction. 
Even with these commitments, it is difficult to finance risk and 
minimize losses.
    The LPO underwrites and structures its loans and loan guarantees to 
protect the interests of taxpayers and maximize prospects for full 
repayment. Before making a loan or loan guarantee, the LPO conducts 
extensive due diligence on the application, with rigorous financial, 
technical, legal and market analysis by DOE's professional staff, 
including qualified engineers, financial experts, and outside advisors. 
A Government Accountability Office report stated that, ``it is 
noteworthy that the process [the LPO Title XVII loan guarantee program] 
developed for performing due diligence on loan guarantee applications 
may equal or exceed those used by private lenders to assess and 
mitigate project risks.''\1\
---------------------------------------------------------------------------
    \1\ Government Accountability Office, ``DOE Loan Guarantees,'' 
March 2012, available at http://www.gao.gov/products/GAO-12-157. While 
the March 2012 GAO report focuses on the underwriting and diligence 
process for DOE loan guarantees under Title XVII of the Energy Policy 
Act of 2005, LPO, which manages both the Title XVII loan guarantee 
program and the ATVM loan program, employs similar underwriting and due 
diligence processes for both programs.
---------------------------------------------------------------------------
    The LPO also has one of the largest, most experienced project 
finance teams in the world. As designed, LPO has the capabilities and 
tools to support a number of different project types, all while 
managing risk appropriately. Transactions are structured to identify 
and mitigate risk as effectively as possible before proceeding with a 
guarantee. Once a project closes, the LPO continues to use powerful 
monitoring tools-including strong covenants in all loan guarantees and 
strict project milestones-to control the amount of additional risk it 
assumes. DOE will continue to be an active manager, continuously 
monitoring projects, their market environments, and other identified 
risks to seize all opportunities to minimize exposure to loss.
    Despite these efforts, and consistent with Congressional intent 
through the creation of a loan loss reserve, we have experienced some 
losses and thus constantly strive to improve every aspect of our 
operations. Given the nature of our work, we have benefited from 
several recommendations for improvement, including recommendations from 
Congress, the GAO, DOE's Inspector General, and independent consultants 
such as Former U.S. Department of Treasury official Herb Allison.
    DOE has adopted many of these improvements, including streamlining 
the application process; adding transparency to the approval process; 
filling key positions with experienced professionals; clarifying 
authorities, strengthening internal oversight of the programs; 
developing a state-of-the-art workflow management system; establishing 
a robust early warning system; and improving reporting to the public. 
Furthermore, LPO continuously looks for additional ways of improving 
its underwriting and asset monitoring activities to incorporate lessons 
learned and ensure best practices to protect taxpayer interests.

Conclusion
    Securing economic leadership in the future requires the support of 
innovation and deployment today. Developing a robust energy sector that 
reduces greenhouse gas emissions to the greatest extent possible is 
crucial to our long-term national interests and will help American 
companies and workers attain the tools needed to succeed in this 
competitive space. And one of the most important tools-as our global 
competitors have learned-is debt financing on reasonable terms, wisely 
targeted and responsibly deployed.
    Other governments have reached the same conclusion. China, Germany, 
Canada, and Australia, for example, operate government-backed clean 
energy lending programs. The UK, the Netherlands and India have 
announced their intent to do the same. By facilitating credit, these 
programs allow projects to effectively deploy innovative energy 
technologies and establish a solid credit history-thereby making them 
more competitive useful and attractive to private lenders.
    The United States cannot cede the coming technological innovations 
and related economic development to competitors around the world. Not 
every company, nor every investment, will succeed, but the United 
States will be stronger and more competitive with continued support for 
a thriving energy industry here at home.
    The achievements of the Loan Programs to date are remarkable. But 
they are not enough. We need to do more to compete on the global stage. 
Starting with our recently issued Advanced Fossil Solicitation, we aim 
to do just that.
    Mr. Chairman, I thank the members of the committee and I look 
forward to answering your questions.

    The Chairman. We will have some in a moment.
    Mr. Kauffman, welcome.

   STATEMENT OF RICHARD L. KAUFFMAN, CHAIRMAN OF ENERGY AND 
 FINANCE FOR NEW YORK STATE AND CHAIRMAN OF THE NEW YORK STATE 
               RESEARCH AND DEVELOPMENT AUTHORITY

    Mr. Kauffman. Thank you very much, Mr. Chairman, Ranking 
Member Murkowski, members of the committee. Thank you very much 
for the opportunity to speak today on clean energy financing.
    My name is Richard Kauffman. I'm Chairman of Energy and 
Finance for New York State and I'm also Chairman of New York 
State Energy Research and Development Authority. Prior to my 
appointment in February, I worked as Senior Advisor to Energy 
Secretary Chu on clean energy finance, and it was my honor also 
to work with Herb Allison on his report, honor his service, and 
express condolences to his family.
    Clean energy technology costs are rapidly declining in 
virtually every sector. But the so-called soft costs, things 
like installation and financing, haven't declined as rapidly. 
As an example, in a typical solar home installation as little 
as a third of the costs are the cost of the panels. So two-
thirds of the costs are soft costs. Costs are costs, whether 
we're talking about technology costs or financing costs. 
Financing costs can be high, particularly for smaller projects.
    We will not achieve our climate or economic development 
development objectives unless we bring clean energy to scale by 
lowering financing costs. So why are financing costs high? The 
short answer is that, while the technology is modern, the 
financing structures that we use in clean energy are old-
fashioned. They aren't like other sectors of the economy. We 
don't generally use stock or bond markets to finance the clean 
energy sector, in contrast to other industries that easily 
raise billions in capital markets.
    Nor is it easy for developers to get financing from banks. 
Banks face capital constraints lending to small projects and 
it's hard for banks to lend to projects because they typically 
have long lives. A wind or solar project will last 20 years or 
more. A bank doesn't want a loan outstanding for 20 years.
    What this means is not only a lack of availability of 
capital or high cost of capital; it also means that there 
aren't the same kind of financing choices that are available to 
customers as other things we buy. When you want to get a new 
car, you can pay cash, you can get a loan, or you can lease it. 
But other than the solar residential lease, which has 
revolutionized the market, there aren't financing products that 
allow customers to pay as you go, like the way you pay your 
utility bill. You want a solar hot water heater, a ground 
source heat pump, combined heat and power combined heat and 
power unit, chance are you'll need to pay cash or take out a 
mortgage.
    These market gaps justify government intervention, and this 
committee is aware of these obstacles and in 2009 passed out of 
the committee on a bipartisan basis a bill creating CEDA, the 
Clean Energy Deployment Administration. The idea of a 
government financing mechanism for deployment has been taken up 
at the State level and in other countries, most notably in the 
U.K.
    Governor Cuomo has taken leadership by calling for the 
establishment of a billion dollar green bank in New York State. 
New York's green bank will be like others. It provides capital 
for clean energy generation, infrastructure, and energy 
efficiency projects. It will not make loans to manufacturers. 
It expects to get its money back. Because we're operating in 
areas where there are market gaps, we will earn a rate of 
return. The bank is not in the subsidy or grant business.
    The bank's goal is to work in partnership with the private 
sector to carve out new pathways into the clean energy markets 
for private capital flow past current market failures. The 
green bank will be successful if it mobilizes and leverages 
private sector capital, identifies new opportunities for 
private sector investors, and then steps out of the way.
    States can help solve clean energy financing gaps. However, 
States can address some of the financing gaps. They cannot 
address all of them, and this is where we need Federal 
leadership. There are 4 ideas I'm just going to quickly outline 
as to how the Federal Government might help.
    No. 1, States can't create stock market instruments for 
clean energy projects. Only the Federal Government can do that. 
Investors can buy shares of stock in assets that seem a lot 
like clean energy projects, real estate or oil and gas 
pipelines in the form of REIT's or MLP's. These instruments are 
not available for clean energy. Expanding REIT's or MLP's could 
be done on a revenue-neutral basis.
    Two, only the Federal Government can solve the overreliance 
upon tax equity. Most projects don't generate enough taxable 
income, so third party investors need to be brought in that can 
use tax benefits. There are only about 20 active players in the 
market. There simply isn't enough supply of tax equity for the 
demand. Making tax benefits refundable, transferable, would 
solve this problem.
    Three, help other States set up green banks that want them. 
New York State has identified its funding and structure, but 
not all States will be so able. Since green banks will generate 
assets that will be paid back, the Federal Government could 
help capitalize green banks and get paid back itself. State 
green banks would use the money according to certain 
guidelines, but the Federal Government would not pick specific 
targets or projects.
    Four, States can help create debt markets, but it would be 
better for the Federal Government to help standardize contracts 
and collect data needed to establish investment-grade bonds, 
rather than have 50 different State initiatives. Perhaps the 
remaining DOE loan authority could offer a modest credit 
subsidy in exchange for helping ought set up bond markets. Once 
bond markets are established, Federal involvement would end.
    None of these steps would involve undertaking a major new 
Federal commitment to subsidies to support the industry. The 
steps I've outlined involve repurposing existing programs, 
expanding others on a revenue-neutral basis, or providing 
financial support for which the government can earn a rate of 
return. Together with State initiatives, these proposed Federal 
actions would lower the cost of financing by leveraging private 
sector capital and by accelerating the transition to using 
stock and bond markets.
    Leaders in the clean energy industry look forward to the 
end of subsidies and the arrival of cost parity, since at that 
point the industry faces virtually unlimited demand for its 
products. The quickest way for the industry to achieve cost 
parity is through economies of scale. R and D alone is not 
going to solve the problem. Lowering financing costs is one of 
the most cost-effective ways to achieve scale.
    Thank you very much.
    [The prepared statement of Mr. Kauffman follows:]

  Prepared Statement of Richard L. Kauffmans, Chairman of Energy and 
   Finance for New York, Chairman of the New York State Research and 
                         Development Authority

    Chairman Wyden, Ranking Member Murkowski, and Members of the 
Committee, thank you for the opportunity to speak today on clean energy 
financing. My name is Richard Kauffman and I am the Chairman of Energy 
and Finance for New York State as well as the Chairman of the New York 
State Energy Research and Development Authority. Prior to my 
appointment in New York, I was Senior Advisor to Energy Secretary Chu 
on clean energy finance. Most of my finance and energy career has been 
in the private sector.
    Clean energy hardware costs have fallen dramatically. As one 
example, solar panel prices have come down more than 50% in the last 
three years. Costs of batteries, wind turbines and fuel cells have also 
declined. Clean energy is the only source of energy that gets cheaper 
the more of it that is made.
    However, as little as a third of the total cost of a residential 
solar system are the panels themselves. The rest are so-called soft 
costs-these include installation, permitting, and financing costs. 
Deployment at scale is the way to reduce soft costs (as well as to 
continue to reduce hardware costs). Through continued policies to 
deploy clean energy, costs will decline and the industry will achieve 
parity with conventional sources of energy. In 2013, solar, without 
subsidy, is competitive with about 5% of total electricity in the U.S.; 
in New York State that number is projected to be 50% by 2020. R&D is 
not enough to reduce clean energy costs-we need deployment to achieve 
economies of scale.
    In spite of nearly record low interest rates, financing costs for 
the clean energy sector remain high-not for the largest, utility scale 
projects-but for smaller projects, including small business and 
residential. Since the ongoing costs of clean energy are very low as 
wind and sunlight are free, the key to reducing clean energy costs is 
reducing the upfront costs. And costs are costs-whether they are 
hardware costs or financing costs.
    The key reason of why financing costs are high for clean energy is 
that the industry is financed in an old-fashioned, anachronistic way. 
We may be deploying 21st century technology, but the financing 
structures used are out of date. Discussions about clean energy finance 
often raise the role of venture capital equity, but by far the biggest 
source of capital needed for the sector is debt. Clean energy projects 
are principally financed using debt or debt-like instruments; true risk 
equity is around 10 percent of the project. In sum, there are three 
principal market gaps or failures in financing markets:

          1. Reliance upon tax equity. Since many projects are financed 
        on a non-recourse project finance basis by entities that do not 
        have large taxable incomes, the industry relies on a small 
        number of tax equity partners that in spite of the term 
        ``equity,'' offer debt like financing in exchange for tax 
        benefits. Today, there are fewer than 20 providers of tax 
        equity. Not only does the limited number of providers mean that 
        tax equity can be expensive, but also that it is primarily 
        rationed to the largest projects and developers. The other 
        problem with tax equity is that the deals are typically 
        structured so that the bulk of the cash flow from projects over 
        the first few years goes to repay the tax equity provider. 
        While investors everywhere are looking for current yield 
        investment opportunities of all kinds-after all there's only 
        the choice between low interest rates and a volatile stock 
        market-the current tax equity structure makes it difficult to 
        tap general investor demand for current yield opportunities 
        since renewable energy projects offer little current yield.
          2. Bank capital rules and insurance company regulations. 
        After the financial crisis, it is understandable that banks and 
        insurance companies need to be more prudent. In practice, the 
        amount of capital that banks need to reserve against smaller 
        loans, loans that are barely investment grade or below, or 
        loans that have long tenors mean that smaller renewable energy 
        projects simply cannot get loans from large financial 
        institutions at any cost. This is one of the reasons you seldom 
        see solar installations on all those flat warehouse and factory 
        rooftops when you are landing at airports. To be clear, I am 
        not talking about loans to finance the manufacturing of 
        renewable energy equipment; I am talking about loans to 
        renewable energy generation projects using proven technology.
          3. Little use of stock or bond markets. In most sectors of 
        the U.S. economy, companies use stock and bond markets to raise 
        billions of dollars of capital. Stock and bond markets 
        typically offer cheaper and deeper pools of capital than 
        private markets. However, in the clean energy sector, stock and 
        bond markets are scarcely used, except for bonds for the 
        largest of projects. Stock market investors can buy shares in 
        REITs or MLPs that have yield characteristics of renewable 
        energy projects; however MLP or REIT treatment is not available 
        for renewable energy assets. Bonds are a different story. To 
        create renewable energy bonds requires standardization of 
        contracts to aggregate small loans into larger bonds and 
        sufficient data to allow bond ratings.

    What do these market failures mean? With limitations on 
availability of bank debt, little use of stock and bond markets and 
continued reliance upon tax equity, the clean energy industry relies 
upon private sources of capital where the U.S. has a competitive 
disadvantage relative to certain other countries and does not take 
advantage of the competitive strengths of its capital markets. Simply 
put, costs of financing remain too high. In addition to financing 
costs, customer choice is also limited. Consider getting a new car: you 
can buy it using cash or borrowed money, or, you can lease it. The same 
is true for most large capital expenditures customers make. The solar 
lease has revolutionized the residential solar market; given that 
energy is an ongoing operating expense, it is not surprising that 
customers would want to substitute one operating expense-their electric 
bill-for another-the lease payment. Unfortunately, in the clean energy 
space, the solar lease is the exception rather than the rule. You want 
a solar hot water system, an energy efficiency upgrade or a ground 
source heat pump? More likely than not, you will need to put a mortgage 
on your house or pay cash.
    All of these market gaps in financing limit economies of scale. 
Rather than a virtuous cycle where filling financing gaps helps achieve 
greater scale that in turn reduces costs which increases scale that 
further lowers costs, we are constraining scale.
    These market gaps justify government involvement. This Committee, 
on a bipartisan basis, voted in 2009 to support a Clean Energy 
Deployment Administration. Absent federal government action, several 
states have since set up or announced the formation of state green 
banks. In his State of the State address in January, Governor Cuomo 
announced that New York is setting up a $1 billion green bank to help 
address some of these failures in clean energy finance. New York's 
green bank strategy has several operating principles:

          1. New York's green bank will provide credit support to clean 
        energy generation and energy efficiency projects. Until it can 
        earn a meaningful surplus, it will not offer loans to 
        manufacturers.
          2. It will work where government activity can catalyze 
        private market activity. This was DOE's loan program at its 
        best-where government loans to large solar projects led the way 
        to private sector banks subsequently lending to other projects 
        without government involvement.
          3. The bank will find intermediaries in the market-project 
        developers, service companies, or private sector financial 
        institutions who are making progress in the market but where 
        their progress is constrained more by the lack of availability 
        in financing than cost. While it is easy to give away money for 
        free, a green bank should not fall prey to using artificially 
        low cost financing as the sole means of generating demand. It 
        will use up its money quickly and not engage in market 
        transformation. Market transformation requires partnership with 
        the private sector which means that the bank and its partners 
        must earn a rate of return. What are some examples of 
        activities the green bank intends to support-in conjunction 
        with private sector intermediaries? Loans to smaller clean 
        energy projects such as commercial and industrial solar 
        projects, which could be standardized, aggregated and sold to 
        the capital markets. Or credit enhancement for energy 
        efficiency loans, where data on project energy performance and/
        or customer credit performance is immature. Through risk 
        sharing, a green bank can help a private bank lend more than it 
        would otherwise feel comfortable doing on its own. The same 
        logic can be applied to partnerships with insurance companies 
        that are considering insurance products to help in financing 
        clean energy projects. Another example is to offer financing to 
        equipment providers that want to offer new clean energy 
        products to customers through a leasing structure or vendor 
        financing. Smaller scale combined heat and power units that use 
        natural gas might be an example.
          4. New York's green bank will work in partnership with 
        private sector finance institutions to offer financing not only 
        to leverage private sector capital, but to benefit from the 
        origination and underwriting capabilities of the banks. We do 
        not want to be in the direct lending business ourselves.
          5. The bank will facilitate development of bond markets. In 
        exchange for providing financing, the bank intends to help in 
        standardization of contracts and can provide warehouse 
        facilities to act as an aggregator of smaller loans. In 
        addition, the bank can help collect data to help rating 
        agencies with their work. Through credit enhancement, perhaps 
        in conjunction with an insurance company, the green bank could 
        also help clean energy bonds achieve investment grade ratings, 
        thereby further lowering the cost of capital.
          6. By focusing on areas where there are gaps in the financing 
        value chain rather than strictly on the costs of financing, the 
        bank will not be in the subsidy business per se. Instead, the 
        bank will operate at the near frontier, where financial 
        institutions aren't quite operating, and use its resources to 
        reduce risk for the private sector. Once the market sees that 
        specific opportunities are attractive, we can step out of the 
        way, leaving the private sector to take over and the green bank 
        to move on to the next frontier.

    State green banks can help solve clean energy financing gaps. After 
all, it makes sense for states to play a role in clean energy finance: 
projects are local, building codes are local, and a substantial part of 
utility regulation is also done at the state level. However, while 
states can address some of the financing gaps, they cannot address them 
all: we need federal leadership.
    You can see the outline of how federal government policy might 
address the remainder of the market gaps. While state green banks can 
try to expand the market for tax equity by finding local banks or other 
tax equity buyers, only the federal government can solve the industry's 
reliance upon it. Permitting refundability or transferability of tax 
benefits would reduce the overreliance upon tax equity and remove a 
barrier to tapping investor demand for current yield instruments. 
Because the current structure increases financing costs, it actually 
increases the industry's need for government support. Second, green 
banks can do little to help create stock market instruments for clean 
energy projects: only federal policy can do so. Giving MLP or REIT 
status to renewable energy would level the playing field. And to be 
clear here, the benefit in the cost of capital is less about the tax 
benefits of MLPs and REITs and more about the fact that the cost of 
equity is less in the stock market than in private equity. Expanding 
eligibility to renewable projects on a revenue neutral basis would 
barely change the cost of capital for those incumbent industries that 
currently enjoy MLP or REIT treatment. Third, while state green banks 
can work to accelerate the creation of debt markets, it would be better 
for the federal government to help standardize contracts and collect 
data rather than have 50 states work on the problem. We could imagine 
using the remaining DOE loan guarantee authority to offer a modest 
credit subsidy in exchange for standardizing contracts and creating 
data for bond ratings. Fourth, the federal government could help 
capitalize state green banks. New York State has identified likely 
funding sources for its bank, but other states may not have such 
resources. Since state green banks can focus on areas where there are 
market gaps and can therefore earn a rate of return, this support could 
be repaid to the federal government. We also know from Eximbank or OPIC 
that governments can offer guarantee programs that offer low cost 
financing and can earn a surplus from guarantee fees.
    None of these steps would involve undertaking a major new federal 
commitment to subsidies to support the industry. The steps involve 
repurposing existing programs, expanding others on a revenue neutral 
basis, or providing financial support for which the government can earn 
a rate of return. Together with state initiatives, these proposed 
federal actions would lower costs of clean energy financing by 
leveraging private sector capital and by accelerating the transition to 
using stock and bond markets. Leaders in the clean energy industry look 
forward to the end of subsidies and the arrival of cost parity, since 
at that point the industry faces virtually unlimited demand for its 
products. The quickest way for the industry to achieve cost parity is 
through economies of scale, and lowering financing costs is one of the 
most cost effective ways to achieve scale.

    The Chairman. Very well said, Mr. Kauffman. I remember your 
Governor, Governor Cuomo, talking to me about these clean 
energy technologies when I was just sitting pretty much down 
where Senator Heinrich was and he worked in Washington. So I 
appreciate the good work you all are doing in New York.
    Mr. Zindler, thank you.

STATEMENT OF ETHAN ZINDLER, HEAD OF POLICY ANALYSIS, BLOOMBERG 
                       NEW ENERGY FINANCE

    Mr. Zindler. Good morning and thank you. First I'd like to 
say thanks to the committee for this opportunity today. This is 
my first appearance before you, Chairman Wyden. I'm 
particularly proud to be here today and to try to be of service 
once again.
    I'm here in my role as Head of Policy Analysis for 
Bloomberg New Energy Finance, a market research firm focused on 
the clean energy sector. Our clients include major investment 
banks, wind, solar, and other clean energy equipment makers, 
venture capitalists and project developers, major energy 
producers, including utilities and integrated oil companies, as 
well as government agencies and NGO's.
    Before I begin, just a quick disclaimer from the lawyers: 
My remarks today represent my views alone, not the corporate 
positions----
    The Chairman. Never a morning without the lawyers.
    Mr. Zindler [continuing]. Of Bloomberg New Energy Finance. 
In addition, they do not represent specific investment advice 
and should not be construed as such.
    The topic of today's hearing is clean energy financing. 
It's a potentially broad subject covering both financing for 
established cost competitive clean energy technologies 
technologies such as wind, solar photovoltaics, or geothermal, 
as well as newer, more cutting edge technologies still in the 
development phase. I'd just like to highlight that my comments 
here are going to pertain to the former, that's conventional 
technologies that are now being deployed at scale. I think 
we've got some terrific panelists who are going to talk about 
the other challenges around demonstration-scale stuff.
    Bloomberg New Energy Finance has tracked well over $1.5 
trillion in mostly private capital that has been invested in 
clean energy globally since 2004. In 2011 annual investment hit 
an all-time high of $317 billion, then slipped 11 percent to 
$281 billion in 2012. This marked the first time in 7 years 
that we've been tracking the industry that year on year 
investment actually declined to a notable degree.
    Last week our firm released clean energy investment figures 
for the second quarter of 2013 and they offered a mixed 
outlook. On the one hand, total funds deployed globally rose to 
$53.1 billion in Q2 2013, from $43 billion or approximately $44 
billion in the first quarter of this year. On the other hand, 
total investment through the first half of this year was down 
18 percent from the same 6 months in 2012.
    Why has the rate of capital being deployed apparently 
slowed in the last 18 months? Two factors are primarily to 
blame: one, weakening subsidy support from governments in 
Europe and elsewhere around the world; and 2, rapidly declining 
equipment costs.
    The first of these trends, declining subsidy support, was 
to a large degree inevitable. In 2008 and 2009 governments 
globally pledged just under $200 billion in economic stimulus 
support to the clean energy sector. The large majority of those 
funds have now been spent or the programs behind them have 
expired. By our tally, the U.S. earmarked about $66 billion in 
energy-specific stimulus and most of those funds have now been 
spent. In addition, Nations such as Spain, Italy, and Germany 
have scaled back support for clean energy after seeing 
renewable energy installations skyrocket faster than they had 
anticipated.
    The second trend, the dramatic drop in equipment costs, was 
less predictable, but stands to have a much more profound 
longer-term impact on the market. Today a photovoltaic module 
bought at the factory gate in China or the U.S. costs less than 
a quarter of what it did just 4 years ago. Wind equipment 
prices are also down. Both technologies are cost competitive in 
certain markets around the globe, including some in the United 
States, without the benefit of subsidies.
    Technological improvements deserve part of the credit for 
the cost declines, but a bigger factor has simply been scale. 
Global photovoltaic manufacturing today stands at some 61 
gigawatts in capacity per year. That's twice as high as just 2 
years ago, 12 times as high as 3 years ago, and 25 times as 
high as 6 years ago.
    These lower costs are allowing dollars invested in 
renewables to go further than they would have just a few years 
ago. While global investment dipped 11 percent from 2011 to 
2012, the rate at which new capacity was actually deployed into 
the field actually accelerated. Annual capacity installations 
rose from 2011 to 2012 by 12 percent, as nearly 90 gigawatts of 
new capacity was brought on line last year.
    U.S. clean energy investment, which I'll define here as 
just renewables and biofuels, has followed a similar path. 
Total capital into the sector hit an all-time high in 2011, 
then slipped 36 percent in 2012. High investment in 2011 and 
fears over expiration of the production tax credit resulted in 
a record approximately 17 or 18 gigawatts of new capacity 
getting built in 2012. Lower equipment costs also have 
contributed to this boom.
    As I mentioned, through the first 6 months of this year 
investment is down compared with the first half of 2012. But 
unlike last year, the U.S. this year will also see less 
capacity additions, despite what will surely be a record-
breaking year for the solar industry.
    All this I hope is useful background to ask one fundamental 
question: Are the capital markets to blame for what appears to 
be a deceleration of financing over the last 18 months? In a 
word, no and yes. Sorry. Energy nerd attempt at humor here. I'm 
a professional here. I should know better.
    Anyway, I would argue that today there is simply no 
shortage of capital, debt, equity, so-called tax equity, or 
other, which is available for high-quality clean energy 
projects, that is projects being developed by reputable 
companies with relevant permits in hand and, most importantly, 
firm long-term agreements signed to sell their electricity at a 
reasonable price to a creditworthy buyer such as a major 
utility. The financial community will finance such projects.
    As an aside, I would note that this has not always been the 
case. At the height of the financial crisis capital for clean 
energy projects dried up almost completely. In response, 
Congress acted quickly to establish the so-called 30 percent 
cash grant program.
    Today, however, there is no such shortage of capital. 
Instead there's a shortage of projects that meet the criteria I 
outlined a moment ago. For developers it is now considerably 
more challenging to sign sufficiently priced power purchase 
agreements than it was. Demand for new wind energy capacity in 
particular has weakened. This is partly due to competition from 
low-priced natural gas, but it's also because the 30-State 
renewable portfolio standard projects--sorry--the 30-State 
portfolio standards in many cases are now being met or are 
going to be soon.
    So in the short run, no, I do not believe the lack of 
capital is to blame for the recent deceleration in investment 
for conventional technologies. However, looking beyond the 
immediate term, capital availability and clean energy capacity 
growth are inextricably linked together. That is, when you cut 
the cost for one demand for the other----
    The Chairman. Pretty soon we're going to have to break, so 
I have to break you off here, if you can wrap it up.
    Mr. Zindler. Yes, I'll wrap up real quick. But I do want to 
not leave you with the impression that the problem has been 
solved by any means. My point is basically that in the longer 
run we have a problem, which is that basically the cost of 
capital has to come down and the kind of financing that Richard 
is talking about, the kind of financing that takes place on a 
larger scale, has to become more present in the market, because 
that in turn helps allow developers essentially to sell their 
electricity at a lower lower cost and it makes it more cost 
competitive.
    We are not very bullish on the next couple years in terms 
of new capacity additions for the wind industry in particular. 
The cost of capital has to come down for that rate to go back 
up in terms of actual deployment into the field.
    So thank you, Mr. Chairman. I appreciate it.
    [The prepared statement of Mr. Zindler follows:]

Prepared Statement of Ethan Zindler, Head of Policy Analysis, Bloomberg 
                           New Energy Finance

    Good morning. First, I'd like to say thank you to the committee for 
this opportunity today. This is my first appearance before this panel 
under Chairman Wyden's leadership and I'm proud to try to be of 
service.
    I come here today in my role as head of policy analysis at 
Bloomberg New Energy Finance, a market research firm focused on the 
clean energy sector. Our clients include major investment banks; wind, 
solar, and other clean energy equipment makers; venture capitalists and 
project developers; major energy-producers including utilities and 
integrated oil companies; as well as government agencies and NGOs. Our 
group, a market research division of Bloomberg LP, provides timely, 
accurate, and actionable insights on how the energy sector is being 
transformed by new technologies.
    Before I begin, a disclaimer: my remarks today represent my views 
alone, not the corporate positions of either Bloomberg LP or Bloomberg 
New Energy Finance. In addition, they do not represent specific 
investment advice and should not be construed as such.
    The topic of today's hearing is ``clean energy financing.'' It's a 
potentially broad subject, covering both financing for established, 
cost-competitive clean energy technologies such as wind, solar 
photovoltaics, or geothermal as well as newer, more cutting-edge 
technologies still in the development phase such as marine, tidal and 
others. In the interests of time, my comments here pertain to the 
former--the financing of clean energy technologies that are now seeing 
significant levels of deployment.
    Bloomberg New Energy Finance has tracked well over $1.5 trillion in 
mostly private capital invested in clean energy globally (defined here 
as traditional renewables, biofuels, power storage and smart grid). In 
2011, annual investment hit an all-time high of $317bn then slipped 11% 
to $281bn in 2012. This marked the first time in the seven years that 
year-on-year investment actually declined to a notable degree.
    Last week, we released our clean energy investment figures for the 
second quarter of 2013 and they offered a mixed outlook. On the one 
hand, totals funds deployed globally rose to $53.1bn in Q2 2013 from 
$43.6bn in Q1 2013. On the other, total investment through the first 
half of 2013 was down 18.2% from the same six months in 2012.
    Why has the rate of capital being deployed apparently slowed in the 
past 18 months? Two factors are primarily to blame: (1) weakening 
subsidy support from governments in Europe and elsewhere; and (2) 
rapidly declining equipment costs.
    The first of these trends--declining subsidy support--was, to a 
large degree, inevitable. In 2008 and 2009, governments globally 
pledged $195bn in economic stimulus support to the clean energy sector. 
The large majority of those funds have now been spent or the programs 
behind them have expired. By our tally, the US earmarked $65.6bn in 
clean energy-specific stimulus funding and most of that is now gone.
    In addition, nations such as Spain, Italy, and Germany have scaled 
back support for clean energy after seeing renewable energy 
installations skyrocket faster than they had anticipated.
    The second trend--the dramatic drop in equipment costs--was less 
predictable but stands to have a more profound longer term impact on 
the market. Today, a photovoltaic module bought at the factory gate 
costs less than a quarter of what it did just four years ago. Wind 
equipment prices are also down. Both technologies are now cost 
competitive in certain markets around the globe--without the benefit of 
subsidies.
    Technological improvements deserve part of the credit for the cost 
declines, but a bigger factor has simply been scale. Global 
photovoltaic manufacturing capacity today stands at some 61GW -- twice 
as high as just two years ago, 12 times as high as three years ago, and 
25 times as high six years ago.
    These lower costs are allowing dollars invested in renewables to go 
further than they would have just a few years ago. While global 
investment dipped 11% from 2011 to 2012, the rate at which new capacity 
was actually deployed into the field actually accelerated. Annual 
capacity installations rose from 2011 to 2012 by 12% as nearly 90GW of 
new capacity was brought on line last year.
    US clean energy investment, defined here as renewables and 
biofuels, has followed a similar path. Total capital into the sector 
hit an all-time high in 2011 then slipped 36% to $35.6bn in 2012. High 
investment in 2011 and fears over expiration of the Production Tax 
Credit resulted in record 17GW of new capacity getting built in 2012. 
Lower equipment costs also contributed to the boom.
    As I mentioned, through first six months of this year, investment 
is down compared with the first half of 2012. But unlike last year, the 
US this year will also see less total capacity additions--despite what 
will surely be a record-breaking year photovoltaics.
    All of this I hope is useful background to ask one fundamental 
question: are the capital markets to blame for what appears to be a 
deceleration of financing over the past 18 months? In a word: no and 
yes.
    I would argue that today there simply is no shortage of capital 
(debt, equity, so-called tax equity, or other) available for high 
quality clean energy projects--that is, projects being developed by 
reputable companies, with relevant permits in hand and, most 
importantly, firm long-term agreements signed to sell their electricity 
at a reasonable price to a credit-worthy buyer such as a major utility. 
The financial community will gladly underwrite such a project.
    As an aside, this has not always been the case. At the height of 
the financial crisis, capital for clean energy projects dried up almost 
completely. In response, Congress acted quickly to establish the so-
called 30% cash-grant program.
    Today, however, there is no such shortage of capital. Instead, 
there is a shortage of projects that meet the criteria I outlined a 
moment ago. For developers, it is now considerably more challenging to 
sign sufficiently priced power purchase agreements than it was just a 
few years ago. Demand for new wind energy capacity in particular has 
weakened. This is partly due to competition from low-priced natural gas 
projects and partly because the large majority of 30 state Renewable 
Portfolio Standard mandates are now either being met or on their way to 
being so. So, in the short run, no I do not believe a lack of capital 
is to blame for the recent deceleration in investment.
    Looking beyond the immediate term, however, capital availability 
and clean energy capacity growth are inextricably linked. That is, when 
you cut the cost for one, demand for the other inevitably rises. Less 
expensive capital should result in more competitively-priced power and, 
in turn, greater demand for that power.
    Unlike fossil-fuelled plants, clean energy projects have virtually 
zero marginal costs. Once operating, these plants do not require their 
owners to spend on buying gas, coal, oil or other fuels to continue 
operating.
    Instead, nearly all the project costs are incurred up-front when 
the photovoltaic modules, wind turbines, geothermal turbines, or other 
equipment is put on the roof or in the ground. What this means is that 
the economics of clean energy are heavily dictated by a project's 
weighted average cost of capital which gets amortized over much of its 
operating life. The lower the cost of capital is, the more relaxed a 
project owner can be about what he defines a ``reasonable'' return on 
investment.
    Private equity companies, for example, may not be willing to invest 
in projects with returns on equity lower than mid-teens, and projects 
with these types of economics are increasingly rare. Utilities, on the 
other hand, or institutional investors, could be quite happy seeing 
returns in the high single-digits, and our analysis suggests there are 
plenty of projects with those types of economics out there.
    As I mentioned earlier, our firm has tracked over $1.5 trillion 
invested in clean energy since 2004. Very roughly 2/3 of that has come 
in the form of traditional project financing for large-scale power-
generating projects. Typically, these transactions involve a handful of 
financial institutions collaborating to provide private debt and equity 
at a cost of capital acceptable to the project's developer.
    This system has been adequate to date but it is not how more mature 
segments of the energy industry raise funds. Builders of large-scale 
transmission lines or natural gas pipelines for instance typically turn 
to the public markets to raise nine- or 10-figure sums by issuing bonds 
or through other financial vehicles such as Master Limited 
Partnerships.
    Greater scale means lower costs. And to continue reducing its 
costs, the clean energy sector must achieve the same or greater degree 
of scale in capital raising as it has in manufacturing.
    Already, we are seeing signs that this has begun as industry 
players are finding new and innovative ways to finance or re-finance 
projects. Most noteworthy have been the bond offerings from MidAmerican 
Energy Holdings Co., the subsidiary of Warren Buffett's Berkshire 
Hathaway. Most recently, MidAmerican sold $1bn in bonds to lower its 
cost of capital on a $2.74bn solar project it owns in southern 
California. Those bonds yield 5.375%. Globally, we have now tracked 
over $2.5bn raised this year via bond offerings for clean energy.
    There have been other, less high profile examples as well. NRG 
Energy Inc. recently created a ``yield co.'' to allow investors to take 
direct ownership in a portfolio of its operating solar, wind and gas-
fired generating plants. On Tuesday, NRG raised $431 million for that 
business, which now trades on the New York Stock Exchange and offers 
investors an approximate 6% dividend rate. Other creative efforts in 
this area have included a real-estate investment trusts and Canadian 
income trusts trading on the Toronto Stock Exchange.
    In all cases, what is being offered to investors is fairly 
appealing in today's current low interest rate environment: the chance 
to invest in a relatively low-risk asset and earn a fixed rate of 
return well above rates offered on 10-year Treasuries. As the committee 
well knows, there are now efforts afoot in Congress to make another 
form of ``yield co'' available to clean energy projects through 
legislation that would allow clean energy projects to use master 
limited partnerships as fund-raising vehicles.
    What all of these vehicles and potential vehicles have in common is 
that they seek to open the door to massive pools of institutional 
investor capital supplied by pension funds, insurance funds, and 
endowments. To date, that has gone largely un-tapped for clean energy. 
But as the successful bond offering from Buffett and others indicate, 
these investors are ready to invest in clean energy projects--if given 
the right opportunity.
    Finally, I would note that from the policy-making perspective, one 
question potentially worth considering is how to accelerate the 
maturing of clean energy project financing to reduce costs. But I would 
quickly also note that in doing so, policy-makers would be well served 
not lose sight of the other fundamental challenge I highlighted 
earlier: the relative weak demand for new renewable energy capacity, 
particularly wind capacity, today. If fostering strong long-term growth 
of this sector is a policy goal, then addressing both these challenges 
is critical.
    I would like to again thank the committee for offering me this 
opportunity. I look forward to your questions.

    The Chairman. Very helpful.
    Mr. Coleman.

       STATEMENT OF WILL COLEMAN, PARTNER, ONRAMP CAPITAL

    Mr. Coleman. Thank you, Chairman Wyden, Ranking Member 
Murkowski, and distinguished members of the committee. I 
appreciate the opportunity to be here today. My name is Will 
Coleman. I'm the founder of OnRamp Capital, which is a firm 
that partners with corporations to help them invest in early 
stage technologies. I've also spent the last decade working 
with emerging technologies in the energy space.
    So you've heard a little bit about downstream deployment. 
My focus is really on upstream in terms of new technologies and 
investing in those new technologies and what it takes.
    In my written testimony, I emphasize some things that we've 
heard a lot about both from myself and others in this 
committee, which is the need for certainty, the need for a 
level playing field, and the need to support innovation. I 
don't really want to repeat myself here today, but I think we 
can all agree that innovation in energy is important. It's 
critical to our competitiveness and it's a massive growth 
opportunity for our economy. It's been shown that 75 percent of 
the growth since World War II was driven by innovation in our 
economy.
    VC has invested over $25 billion--venture capital, I should 
say, has invested over $25 billion in the energy space over the 
last decade, largely because we saw an opportunity. We saw an 
opportunity because there was a growing need in the marketplace 
and there was momentum in terms of demanding new and diverse 
energy resources.
    This investment drove a boom in technology and attracted a 
pool of talent, which was critical. That said, venture capital 
has struggled to scale these technologies. Part of the reason 
is a structural problem which has to do with financing gaps for 
unproven technologies. Part of the reason is a little bit more 
ephemeral, which has to do with policy and momentum.
    As a result, as has been highlighted a little bit, venture 
capital is pulling back from this sector pretty significantly. 
The risk is not just that capital goes away for some period of 
time. The risk is that we also lose the knowledge, the 
experience, and the talent that has been built up, and if we 
don't address some of these fundamental obstacles the market 
won't come back any time soon.
    Venture capital is a bit of a canary in the coal mine in 
the sense that it is in a particular stage of the financing 
ecosystem, but it looks both upstream and downstream in terms 
of whether or not it has the ability to invest. The problem for 
us is that when we sit down on a Monday morning and we talk 
about what companies and what sectors we want to invest in, we 
have to answer some very basic questions for all of our 
partners, who are asking whether or not we should consider a 
sector. The first is: Is there a market need? I think in the 
energy industry it's pretty obvious that there's a massive 
market and there is a whole lot--there are a whole lot of pain 
points that we could solve. But we need certainty and we need a 
level playing field for new technologies to enter.
    The second question is: Is there a pool of knowledge, of 
technology, and of talent to go out there and actually develop 
new technologies and compete and execute? This is why it's so 
important I our mind to continue to support programs like ARPA-
E and other early research and development in the labs. We 
believe that both basic research and applied research is 
something that is critical, and getting further down the chain 
in terms of this research is important to compressing the time 
line associated with commercializing these technologies.
    The third question which is critical is: If we invest to 
develop these technologies, will there be other funding sources 
to help develop them all the way through to commercialization? 
This is critical because VC, as I said, is really only one 
small link in the chain, particularly in energy, where the 
capital and time that is required is enormous. Our partners 
sitting around that table on Monday will say: We've seen this 
before. We don't want to invest in another winning technology 
that can't get that last $70 million to scale a manufacturing 
facility and we end up having to sell it off for pennies to the 
Chinese or the Swiss or whoever.
    The problem is that as venture capitalists we take 2 kinds 
of risks. We take technology risk and we take talent risk. We 
take a modicum of market risk where we're opening up new 
markets, but we don't take funding risk. We don't actually take 
risk on whether or not a type of funding will materialize in 
time to support the technologies we've invested in. There's too 
many other alternatives for us to invest that don't take as 
much time and capital as the energy industry.
    Part of the reason that I started OnRamp Capital was 
because venture capital was struggling to overcome these issues 
and because corporates have a slightly different focus. There's 
an opportunity to help them leverage the ecosystem that has 
been built up, but they have historically been poor at 
commercializing early stage technologies. Even for corporates, 
though, they can't address this fundraising gap, this financing 
gap for early stage technologies in terms of scale. It's just 
simply too large.
    Which is why as a Nation I think we need an approach to 
address this single largest gap, this classical valley of of 
death. We need a provision that is an entity that allows any 
entity to leverage this approach, whether it's venture capital, 
whether it's corporates, or whether it's independents. We need 
to be able to reward the investment in innovation and then get 
out of the way.
    In my written testimony I discuss one such structure that 
I'm happy to talk more about. It's an innovation credit and it 
basically supports companies and technologies until they scale 
and then rolls off. It's technology neutral. It can be applied 
across the entire landscape, whether it's renewables or 
conventional. It would be permanent, but it would not create 
the permanent dependence that most permanent provisions create. 
The point is to draw capital into the gap and then force them 
to stand on their own 2 feet, so the market is making the 
decision where to invest.
    If as a Nation--in closing, if as a Nation we want to 
continue to support continued innovation in energy, we need to 
solve this problem. It's a structural gap and it's persistent, 
and we've had this as an ongoing discussion for many years. 
When we discussed this in 2011, the venture capital industry 
had invested $1.1 billion in the first quarter in new 
technologies. In 2012 when we discussed it again, that number 
had dropped to $780 million. Now in the first quarter of 2013, 
that number has dropped to $369 million. You can see where the 
trend is headed.
    Private capital does have the capacity, however. But we 
have alternatives, and we need to address these problems as a 
Nation if we are going to invest in this area.
    So I believe we have a rare opportunity to streamline the 
tax code in the coming Congress. It's clearly front and center. 
I also think we have an opportunity to support the next 
generation technologies. We must continue to support programs 
like ARPA-E and the national labs and maturation of 
technologies to maintain the innovation and flow of talent.
    Innovation is a really delicate phenomenon, something done 
very well in America over our history. But we must continue to 
nurture it in these important sectors that are critical to our 
economy.
    I look forward to working with you on these challenges. 
Thank you.
    [The prepared statement of Mr. Coleman follows:]

      Prepared Statement of Will Coleman, Partner, OnRamp Capital

    Thank you Chairman Wyden, Ranking Member Murkowski, and 
distinguished members of the Committee. I appreciate the opportunity to 
be here today. It is an honor and a privilege to speak with you on 
issues that are so critical to our nation.
    I am Will Coleman. I am the founder of OnRamp Capitalwhich partners 
with corporations to invest in early stage innovations.
    As someone focused on investing in and building companies at the 
earliest stages of the innovation process, and doing so in 
collaboration with larger corporate partners, I am constantly 
confronted with the challenge of taking products from early research to 
full commercialization in the energy industry. I am here today to talk 
about how innovation in energy continues to be critical to the strength 
of our economy and to share some perspective on how the overlap between 
economics and public policy is causing persistent and growing barriers 
to the kind of innovation that we need to remain competitive. I will 
also share a few thoughts on where I think the federal government can 
and should play a role.

America Thrives on a Diversity of Energy Options
    America's economic strength over the last century has been fueled 
in large part by access to affordable and abundant domestic energy 
resources. Investments in oil, hydro, nuclear, and more recently 
natural gas have unlocked innovations that have ensured America's 
relative wealth of resources. We are all well aware of how recent 
advances in drilling and fracking have unlocked tremendous reserves of 
natural gas and helped address what has been a worrisome four-decade 
trend towards dependence on foreign resources.
    However, energy is a global commodity, and the unprecedented growth 
in global demand, a situation that is still in its infancy, has driven 
continued increases in prices. Thus even as we begin to import less, we 
are paying more. Even with the boom in gas production and slowing 
global economies the average price of oil increased to $112/barrel in 
2012 and the U.S. spent $434 billion on oil imports from foreign 
countries.\1\ That's up from $337 billion in 2010. In other words, we 
continue to transfer increasing amounts of America's wealth overseas-
dollars that could be reinvested here at home.
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    \1\ http://www.eia.gov/dnav/pet/
pet__move__impcus__a2__nus__ep00__im0__mbbl__a.htm
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    Many people argue that with low natural gas prices and a growing 
abundance of apparent reserves, we don't need alternatives any time 
soon. However, that ignores the reality of global growth in demand and 
the complexity of harnessing these resources. It is clear that natural 
gas will be an important and growing piece of the energy mix going 
forward, but it does not negate the need for other alternatives. We 
will continue to rely on coal and oil as well for decades to come, but 
we need to continue to develop and use these resources with increasing 
efficiency.
    Innovation will be needed to harness all of these resources 
efficiently, effectively, and safely. The federal government plays an 
important role in this effort. It's important to remember that the 
technology that has enabled the shale gas boom actually came from a 
legacy of federally funded research done in the national labs on 
horizontal drilling over the last 30 years.\2\ Similarly government 
research through the DOE, NASA, and DOD over the last 40+ years 
provided the technological foundation for dramatic improvements in cost 
and performance in solar, wind, biomass and other technologies.
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    \2\ http://thebreakthrough.org/archive/
shale__gas__fracking__history__and
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    These technologies would not exist if not for this research 
funding. At the same time, they would not be commercial without private 
capital investment. The high cost of gas and oil in the early 2000's 
and the presumption that governments would need to begin to regulate 
carbon emissions drove significant new investment in shale gas 
development and other alternatives. In both cases the investments in 
commercializing these technologies and then scaling them has led to 
impressive reductions in cost. Natural gas has dropped from a high of 
$7.97/thousand feet\3\ in 2008 to $2.66/thousand feet3 in 2012 and 
production has grown 16% over that time frame3. Wind, solar, biomass 
and other renewables are also playing increasing roles. Wind 
deployments grew over 500% from 2007-2012\4\ and solar grew over 1000% 
over the same time period. The cost of solar modules has dropped over 
60% in the last two years alone.\5\ In comparison, most conventional 
resources which are impacted by global demand have increased in cost. 
Coal prices have climbed over 200% since 2003\6\ and imported crude oil 
prices have climbed 350% over the same time period.\7\
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    \3\  http://www.eia.gov/dnav/ng/ng__sum__lsum__dcu__nus__a.htm
    \4\ http://www.awea.org/learnabout/industry__stats/index.cfm
    \5\ http://www.seia.org/research-resources/solar-industry-data
    \6\ http://www.eia.gov/totalenergy/data/annual/pdf/sec7__21.pdf
    \7\ http://www.eia.gov/forecasts/steo/realprices/
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    Despite the growth of alternatives, many of these technologies are 
still in their infancy. Wind provides only 2.9% of our electricity and 
solar just 0.4% as compared to 42% from coal and 25% from natural gas. 
The reason is not a lack of resource. The U.S. has some of the largest 
wind, solar, and biomass resources in the world. The US possesses over 
231,000 GW\8\ of annual capacity from untapped wind and solar resources 
alone. This is over 222 times our current total electricity 
capacity.\9\ Unfortunately, every day that these American resources are 
not captured they are lost.
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    \8\ http://www.windpoweringamerichttp://www.nrel.gov/docs/fy10osti/
45889.pdf http://votesolar.org/wp-content/uploads/2011/02/
NREL__olar__Tools.pdfa.gov/pdfs/wind__maps/poster__2010.pdf http://
www.nrel.gov/docs/fy10osti/45889.pdf
    \9\ http://www.eia.gov/electricity/annual/pdf/tables1.pdf
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    Technology transitions have always been good for economic growth, 
driving both investment and jobs. Even though solar still represents 
just a small sliver of the energy mix, the solar industry already 
employs more people in the U.S. (119,000)\10\ than the coal mining 
industry (87,000)\11\. Solar employment has more than doubled in the 
last 4 years alone.
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    \10\ http://thesolarfoundation.org/sites/thesolarfoundation.org/
files/2012%20Census%20Press%20Release%20FINAL.pdf
    \11\ http://www.bls.gov/oes/current/naics4--212100.htm
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    The U.S. must continue to leverage its energy assets effectively to 
embrace the growth potential and to remain economically competitive. 
Conventional technologies represent the vast majority of today's 
production; however, we cannot afford to ignore the growing opportunity 
that other alternatives represent.

Innovation Drives Long Term Cost Reductions
    Shale gas, wind, solar and other alternatives have achieved 
remarkable reductions in cost over the last decade, but continued 
innovation is absolutely critical. The cost reductions are the result 
of a fundamental premise of technology development which is that each 
technology reduces its costs over time through a combination of 
technical innovation and scaling the volume of production. The result 
is that each technology undergoes a ``learning curve'' that drives 
costs down.
    Different technology solutions--even within the same type of 
technology - can have different learning curves and development 
trajectories. For instance, in solar learning curves are specific to 
individual technology platforms such as Si panels (SunPower, Suntech, 
etc. . . . ) or CdTe panels (First Solar), and even specific to 
different approaches within these material systems, rather than to 
solar technology as a whole. Thus the dramatic cost reductions that we 
have seen over the last decade are really the aggregate result of 
several different unique platforms reaching commercial scale and 
driving the whole industry cost curve down.
    Continued innovation on variations and wholly new platforms will 
unlock step-changes in cost reductions even after existing technologies 
in a category have reached commercial scale.
    The main question for any technology investor is not ``what is the 
cost today?'', but ``can the cost of a technology ultimately get below 
existing alternatives?'' Technology development is one piece of the 
equation, but scale is critical. Further cost reductions are possible, 
but only if both research and deployment capital are available.
    Again, we can look at solar cost curves to see how this works. Over 
the past thirty years, solar engineers have reduced cost with every 
generation of new technology, but it took scaling the volume of 
production to close the gap with conventional technologies. For 
example, First Solar's panel production costs have dropped from over 
$3.00/watt in 2004 to under $0.66/watt in 2013, due in large part to a 
2,500% increase in production capacity from 2004-2008\12\.
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    \12\ http://www.greentechmedia.com/articles/read/First-Solar-
Surprises-With-Big-2013-Guidance-40-Cents-Per-Watt-Cost-by-201
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    Solar is not alone. Almost every technology-driven industry evolves 
this way, whether it is energy, semiconductors, or steel production. 
The U.S. has benefitted from leading the innovation cycles in many of 
these industries, but it always requires significant investments from 
private capital sources which in turn requires the right market 
conditions, a robust pipeline of technology, and constructive public 
policy. Unfortunately, when it comes to energy, the U.S. is faltering 
in all three of these categories.

The Innovation Gap
    We are fortunate to have a strong, diverse natural resource base. 
However, much of our competitive advantage over the last two centuries 
has come from our ability to innovate--to develop new, lower-cost or 
advantaged technologies such as oil, nuclear and now renewables, ahead 
of our global competitors. According to a report released by the 
Department of Commerce, ``Technological innovation is linked to 75% of 
the Nation's post-WW II growth rate. Two innovation-linked factors--
capital investment and increased efficiency--represent 2.5 percentage 
points of the 3.4% average annual growth rate achieved since the 
1940's.''\13\
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    \13\ U.S. Department of Commerce, Patent Reform: Unleashing 
Innovation, Promoting Economic Growth & Producing High-Paying Jobs. 
2010
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    Unfortunately, the energy industry is extremely slow to adopt new 
technology. In 2010 the five largest oil companies spent less than 2 
percent of profits and less than 0.4 percent of total expenditures on 
R&D.\14\ In the utility sector, the major U.S. utilities employ on 
average less than 5 people in R&D roles per 1000 employees. This is the 
lowest level of any industry.\15\
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    \14\ Congressional Research Service. Research and Development by 
Large Energy Production Companies. August, 2011. Calculations are based 
on total R&D spending of $3.6bn in 2010.
    \15\ National Science Foundation, Research and Development in 
Industry: 2006-07 (Arlington, VA: National Science Foundation, 2011), 
130-131. Table 31 and 261. http://www.nsf.gov/statistics/nsf11301/pdf/
nsf11301.pdf
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    Many companies recognize the value of innovation, but are 
understandably driven by optimizing and protecting existing business 
lines. This is particularly true when the majority of all federal 
energy incentives focus on bolstering supply of conventional resources, 
irrespective of the efficiency or efficacy of the technologies used to 
access those resources.
    The net result is an industry that does not natively produce an 
enormous amount of innovation or adopt novel technologies except in 
times of acute disruption. This would be fine if energy was not such a 
strategic imperative for our nation's competitiveness. But given the 
length of the innovation cycle, we cannot afford to wait until the next 
disruption or allow other nations to take over the lead on new 
technology. An opportunity exists and many forward looking companies 
are looking for ways to get ahead of this trend in the sector, but the 
bulk of investors in new energy technologies are struggling to overcome 
these industry dynamics.

State of New Energy Financing
    Over the last 10 years, market conditions, technology advancements, 
and public policy expectations led venture capitalists to deploy $25.1 
billion into energy related technologies\16\. Investors relied on the 
supposition that conditions would persist and other types of investors 
would participate in the scaling and deployment of the most effective 
technologies. This investment drove a boom in new technologies and 
attracted a growing pool of talent to the industry. However, scaling 
these technologies has proven to be a major stumbling block. 
Commercializing most energy technologies demands a magnitude of capital 
and level of collaboration with incumbents that goes beyond the 
capacity of the venture capital industry.
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    \16\ Source: PricewaterhouseCoopers/National Venture Capital 
Association MoneyTreeT Report, Data: Thomson Reuters
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    The challenge for most startups is that without operating track 
records or large balance sheets, they are unable to secure lower-cost 
debt capital to get to scale. This means that they typically need to 
raise higher-cost equity or some combination of equity, mezzanine 
financing (if available), or higher-cost debt (which often isn't 
available) to build early commercial plants. More expensive forms of 
financing impact the profitability of producing any technology and make 
it harder for investors at each level to realize competitive returns. 
The result has been a series of financing gaps that exist for scaling 
larger industrial technologies that need to reach a minimum efficient 
scale to be competitive.
    Venture capital has historically been able to bridge financing gaps 
in many sectors. Where it works, the results have been transformative. 
While under 0.2% of GDP is invested in venture capital each year, over 
21% of GDP is generated by companies that were originally venture-
backed, and 11% of all private sector Americans are employed by these 
companies. But in energy, the magnitude of capital requires many other 
investment partners.
    Even in the best market conditions, with robust financing options, 
many promising energy technologies are not able to overcome these gaps. 
Over the last few years changes in market conditions, instability in 
financing, and wavering policy commitment have eroded investor 
confidence in energy technologies. As a result, the financing gaps have 
grown and venture capital has begun to pull back from investing in new 
innovations in heavy industrial applications, including energy. Venture 
investors continue to support existing investments, and family offices 
and corporate investors have increased investments in the sector. 
However, we have seen a marked decline in early stage investments in 
energy technologies. This decline is concerning for the future of 
energy innovation.
    A healthy innovation process, particularly in energy, depends on a 
stable ecosystem of funding partners including venture capital, private 
equity, corporates, project finance, and other debt providers. If we as 
early stage investors don't believe that low-cost capital will be 
available to scale these technologies, then there is no way we will 
invest in the early technology development in the first place. Thus, 
financing gaps at any stage have a rapid domino effect on the rest of 
the financing ecosystem, and innovation funding begins to dry up at all 
stages.
    As I mentioned, large strategic corporate investors have begun to 
increase their investments in the sector over the last couple years. 
Strategics now account for 10.4% of venture type investment in energy 
technologies.\17\ Strategic investment is a critical piece of the 
equation. However, most strategic investors have historically relied on 
venture capital for the earliest stages of investment and face legal 
and structural challenges investing in the earliest stages of the 
innovation process. OnRamp Capital and other models are emerging to 
help address this constraint, but the bottom line is that fewer 
entities are actively investing in the kind of core energy innovation 
that is needed to continue progressing the industry. If investments 
decline so too will the interest from entrepreneurs and scientists. We 
risk losing the accumulated
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    \17\ Source: PricewaterhouseCoopers/National Venture Capital 
Association MoneyTreeT Report, Data: Thomson Reuters0% 10% 20% 30% 40% 
50% 60% 70% 80% 90% 100% Share of Equity Invested Share of Equity 
Invested by Round Type Series C+ Series B Series A Seed knowledge and 
talent we have developed over the last decade, and it will take a long 
time to rebuild these innovation ecosystems.
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The Role of Government
    Our premise and our requirement as investors has always been that 
we invest in technologies and companies that, regardless of political 
regulation or subsidy, will be able to stand on their own two feet and 
compete on a level playing field within the lifespan of our investment.
    At the same time, we recognize that even in markets that are 
considered free and open there are often market failures or financing 
gaps that can prevent new viable technologies from getting to market. 
In energy, incumbents benefit from decades of investment in 
infrastructure, legacy government support, fully depreciated plants, 
economies of scale, and operating track records that make it difficult 
for any new technology to compete without assistance.
    To create a level playing field that encourages continued 
innovation we must acknowledge past investments that have created the 
current systems. According to a report from DBL Investors, the average 
annual inflation adjusted federal spending on oil over the first 15 
years of its deployment in the U.S. was 5 times greater than what we 
have spent on renewables. Spending on nuclear was 10 times greater.\18\
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    \18\ Nancy Pfund & Ben Healey. What Would Jefferson Do? The 
Historical Role of Federal Subsidies in Shaping America's Energy 
Future. DBL Investors, Sept. 2011.
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    I am not suggesting that the federal government needs to spend 
enormous sums on any specific new technology, but it is important to 
recognize that the government has played a role in cementing the 
current energy landscape. If we can agree that continued innovation in 
energy is critical to our competitiveness as a nation, then the federal 
government can and should play a role in helping to unlock that 
innovation.

The Need for Certainty
    The primary challenge for Congress is to identify ways to support 
continued technology development while working with private capital to 
close the funding gaps around commercializing new technologies. For 
federal policy to unlock continued innovation, it will need to consider 
these scaling challenges, work to accommodate the financial constraints 
of smaller emerging companies, and provide enough certainty to draw 
private capital into the market.
    As investors we are seeking stable, open markets that reward better 
solutions over a long period of time. Any significant innovation takes 
years and sometimes decades to develop, deploy, and mature. Even in 
some of the faster moving industries that venture capital invests in 
the average time from initial funding to liquidity is 4-8 years. In 
energy, where large commercial facilities often take years to construct 
and cannot be financed until a technology has been fully de-risked, 
investors require piloting, demonstration, and operating track records. 
Even if a company can secure the financing for a first-of-a-kind 
commercial facility, they will then need to operate that facility for 
up to five years before they can secure conventional debt financing for 
future plants. That means the timeline can be 15+ years from early R&D 
to initial commercialization for some of these technologies. The 
timeline is even longer if we consider the need to attract researchers 
and other talent into the sector to invest their own time and energy 
well before the commercial development cycle even begins.
    For early stage investors, we can only take risks on a new 
technology if we believe the talent is available to develop it and that 
other investors and acquirers will be there to invest in the technology 
along the way. Other investors will only be there if the market need is 
persistent over a long period of time. Therefore, any solutions that 
the government provides need to have the same persistence and 
stability. Many of the conventional energy credits have been made 
permanent over the last several decades, which enables these industries 
to plan and invest with certainty. In contrast, almost all of the 
credits for alternative technologies have been temporary and 
continually threatened, which in turn creates a dual impediment to 
financing these new technologies. Short-term extensions of demand-side 
credits such as the PTC and ITC do not provide the long-term certainty 
necessary to incentivize early investment in innovation.
    The government could make these credits permanent, which would 
provide certainty, but would also create a permanent dependence. As a 
technology investor, I don't believe we should prop up any technology 
indefinitely, but rather support technologies to scale and then require 
that they compete on a level playing field. Federal structures already 
exist, such as the 30D advanced vehicle tax credits, which provide 
certainty without dependence. There are ways to replicate such credits 
in more technology-neutral approaches that will provide the certainty 
necessary to draw capital into the innovation cycle even at the 
earliest stages, and do not require significant government 
expenditures.
    Just as over the last few years we have seen the costs of 
alternatives drop significantly, we expect scale and continued 
innovation to drive costs lower. Eventually any given technology should 
not need support. If we as a nation want to reap the benefits of 
continued cycles of innovation then our focus should be on getting new 
and improved technologies down their respective cost curves and to a 
point of maturity where they can compete on their own two feet.
    Ideally, government would merely provide the conditions for private 
capital to work effectively. In the case of energy, improved, safer, 
cleaner solutions are well within our capability to develop and deploy. 
But the private market is not confident in the direction and stability 
of our policies. In this case, the government is both failing to 
address persistent market failures and compounding them with 
inconsistent policies.

Solutions--Accelerating the Adoption of Clean Energy Technology
    The good news for America is that for now our scientists and 
entrepreneurs are still churning out innovative energy technology ideas 
and companies. We still have a robust national lab system and we have 
some of the best university research labs in the world. We also still 
have a robust private capital ecosystem that has deployed significant 
investments in energy and clean technology over the last decade. In the 
first quarter of 2013, the venture capital industry has already 
invested more than $369 million dollars into clean technology 
companies.\19\ If the history of venture capital is any guide, then 
those dollars can generate ten times the investment downstream. The 
challenge is how to draw the necessary investors into the segments that 
represent heavier capital lifts and riskier market entry.
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    \19\ Source: PricewaterhouseCoopers/National Venture Capital 
Association MoneyTreeT Report, Data: Thomson Reuters
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    Fortunately, there are several ways in which the U.S can unleash 
private-sector investment and promote innovation at the same time. 
Government can do this without ``picking winners'' and without huge 
costs to the taxpayer.
            1) Support the innovation pipeline
    We need to make sure we continue to replenish the innovation 
pipeline. We cannot starve the research budgets that not only breed the 
next generation of innovation, but keep the talent here in the U.S. We 
have the talent, but we need the promise of commercialization to 
continue to keep that talent here. That's why it is critical that 
Congress continue to support basic R&D at universities and labs, and 
fund the Advanced Research Projects Agency for Energy (ARPA-E).
    ARPA-E was designed to spur exactly the type of early commercial 
research and development that our innovators and venture investors look 
for. ARPA-E is a small but critical program that has developed into a 
model program for how government should tackle these challenges. We 
should double down on the support for ARPA-E and also programs that 
provide follow on support for ARPA-E projects. These follow on programs 
help ensure that we continue to mature new innovations and support an 
ecosystem of researchers and entrepreneurs. We cannot afford for the 
sector to go dormant and expect that at some point we will be able to 
turn the lights back on. These communities take decades to build.
            2) Fill the financing gaps
    For those segments that have high strategic value to our nation, 
but do not attract private investment, we need a set of tools to help 
fill the financing gaps and draw private capital in. These tools should 
prioritize innovative technologies, and they need to be flexible, 
efficient, and technology neutral. Above all else, they must be 
predictable. Investors need to know that if they invest in a company 
that unlocks meaningful innovations they will be able to finance the 
company to scale.
    The primary financing gap typically occurs where a company must 
scale up to a demonstration facility and then first commercial plant. 
We've seen this in solar manufacturing facilities, biofuel plants, 
battery production lines and a host of other technologies. The capital 
requirements tend to outstrip the capacity of most equity investors 
that are willing to tolerate technology risk. Without an operating 
track record, capital is difficult to secure.
    We have already seen a mix of government solutions, ranging from 
grants to loans that target this gap. These are helpful but not 
sufficient. We need a solution that draws private capital in to fill 
these gaps, whether it is venture capital, debt financing, or corporate 
capital.
    In the past the venture industry has supported efforts by the 
Chairman and Ranking Member to create a Clean Energy Deployment 
Administration. On behalf of the venture industry I would also like to 
call for reform of the current energy tax code with a focus on leveling 
the playing field for new alternative technologies.
    The current process underway in the senate to re-evaluate the 
current tax code from the bottom up is a great opportunity to look at 
new approaches to energy. In particular, we support the creation of a 
new energy innovation tax credit that could replace many existing 
credits. This credit would provide incentives to companies as they 
scale an innovation and automatically sunset once a company hits a 
specified volume of production. The credit would be technology-neutral 
and accessible to all companies that invest in scaling innovative 
technologies across the entire energy industry. A one page overview of 
the proposal put forth by the National Venture Capital Association 
(NVCA) to streamline the energy tax code in this fashion is attached as 
Appendix A.
    The establishment of a tax credit that is permanent in the tax 
code-though only available to individual companies up to pre-
determined, commercial-scale thresholds-would create the long-term 
certainty necessary to drive private capital into the commercialization 
gaps discussed above. The capacity-based volume threshold and a 
secondary cap on qualifying capital expenditures would prevent 
companies from claiming the credit beyond what is necessary to level 
the playing field and allow companies investing in innovation here in 
the U.S. to compete on their own two feet.
    The bottom line is that if we are serious about filling these gaps 
in sectors that have high strategic value to our nation, then 
government needs to create more enduring structures that can evolve 
with the market over time.

Conclusion
    Let me conclude on a note of urgency. The global energy landscape 
is changing. New technologies are emerging, and the economic strength 
of our economy over the next several decades will depend not just on 
how effectively we use existing resources, but on how we choose to 
cultivate newer sources of energy.
    The energy industry as a whole must continue to innovate and adopt 
new technologies to provide the strong economic base that the U.S. 
needs to remain competitive. To do so requires a new way of thinking 
about energy policy, particularly tax policy, that can be applied 
consistently across the entire energy industry and provides the long-
term certainty that investors and corporations require to make rational 
decisions.
    This committee has held many hearings on the deteriorating 
competitive position of the United States in new energy markets vis a 
vis China, Japan, Korea, and Germany, so I will not recount those 
details here. As the U.S. emerges from recession it is critical that 
resources should be targeted at the most effective ways to strengthen 
the American economy. We need to remember that our legacy of innovation 
is uniquely American and a huge reason for our success over the last 
century, but it can't be taken for granted. Federal policy plays a 
critical role in whether we continue to build new American energy 
solutions that will keep us competitive. We have begun to see some of 
the limitations of our innovation process. It could not be more urgent 
to reduce the uncertainty of our current tax credits for alternative 
energy technologies and explore the creation of innovative, 
performance-based tax credits that are permanent and provide certainty, 
but do not create dependence.
    In this 113th Congress, the tax code is clearly front and center. I 
believe we have a rare opportunity to streamline the tax code to make 
it more efficiently support the development of the next generation of 
technologies. The focus must shift to accelerating the rate of 
innovation, continuing to reduce the costs to taxpayers, and reducing 
the long-term dependence on government support. Such a transformation 
need not be complicated. The tools and approaches already exist. But we 
must work to rationalize these structures to better support the 
innovative companies that fuel our economy. We have the talent, the 
capital markets, and the capacity to lead in energy technology. I look 
forward to the opportunity to work with this committee on addressing 
these challenges moving forward.

           APPENDIX A--ENERGY INNOVATION TAX CREDIT OVERVIEW

Objective
    Streamline the energy tax code; create a long-term policy that 
provides consistent, durable incentives for new technology across the 
entire energy industry; move away from the current practice of 
government picking winners through technology definitions; refocus 
federal support on early deployment and scaling of production where it 
is needed most; eliminate permanent dependencies on subsidies; and 
leverage private investment in innovation.

Credit Structure
    Eligibility--The credit provides technology neutrality by 
supporting any innovative technology used for the production of fuels, 
energy generation property, or any technology that can be paired with 
energy generation property to improve the performance or efficiency. 
Companies eligible to receive the credit must be operating qualifying 
facilities in the United States that manufacture or produce an eligible 
technology. The credit is only received for actual production of fuels 
or energy generation property.
    How is a technology deemed ``innovative''?--Qualifying technologies 
must be determined to meet a threshold as ``new and improved'' relative 
to commercially available alternatives. This means that a technology 
must be only recently developed and not yet commercialized and provide 
improvements to production processes or end products-i.e. the 
technology must involve or constitute new or improved performance, 
reliability, or efficiency in comparison to commercial technologies. 
Such requirements include as eligible the adoption of existing or 
previously proven commercial technologies at a different scale and/or 
for a wholly separate function in the market relative to their 
initially intended commercial application. Like other tax structures 
the burden is on the filer to maintain records to justify these 
qualifications such that they can be audited and verified.
    Permanence & Commercial Scale Roll-Off--The credit structure will 
be permanent in the tax code (until repealed by statute), but will not 
be permanently available to any given company. The structure uses two 
distinct ``roll-off triggers'' that reduce a company's ability to take 
the credit over time for any given innovation. Since the credit is 
awarded per unit of production (measured in KW or gasoline gallon 
equivalent), the first trigger is a volume-based threshold which sets a 
cap on the total cumulative production volume that a company can 
receive the credit for from any given innovation. The second trigger is 
a cap on ``qualifying capital expenditures,'' calculated as the 
aggregate capital expenditures by an individual company associated with 
the implementation of the new or improved technology elements of the 
system. A company can receive the credit for additional innovations 
based on the capital expenditures associated with additional 
innovations.
    The volume-based thresholds sufficient for an individual producer 
to have reached commercial scale will be determined for each qualifying 
technology by the Department of Energy (DOE) Secretary in consultation 
with the Secretary of Treasury. These thresholds will be subject to 
revision based on market conditions every five (5) years following 
enactment of this legislation and will be adjusted only in the case 
that technology development capabilities and market conditions have 
shifted significantly such that the volume at which commercial scale 
can be achieved is determined to have changed significantly. The 
Internal Revenue Service (IRS) in consultation with DOE will have 
authority to regulate the threshold on qualifying capital expenditures.
    Transferability--The credit will be transferable up and downstream 
in a company's supply chain via business relationships to allow pre-
revenue and emerging growth technology companies to obtain its full 
value.

    The Chairman. Mr. Coleman, well said. I'm very much looking 
forward to hearing about your innovation credit and 
particularly how you would pay for it, in your words, ``by 
replacing many existing credits.'' Senator Stabenow will be 
very interested in that on the Finance Committee.
    Mr. Loris, welcome.

 STATEMENT OF NICOLAS LORIS, HERBERT AND JOYCE MORGAN FELLOW, 
                    THE HERITAGE FOUNDATION

    Mr. Loris. Thank you. Chairman Wyden, Ranking Member 
Murkowski, and distinguished members of the committee: Thank 
you for giving me this opportunity to discuss investment in 
America's clean energy technologies. My name is Nicolas Loris 
and I am the Herbert and Joyce Morgan Fellow at The Heritage 
Foundation. I too have to appease the lawyers. The views I 
express in this testimony are my own and should not be 
construed as representing any official position of The Heritage 
Foundation.
    The number of investment opportunities is broad and 
expansive, but the capital to finance them is not. This 
requires that choices be made among different investments. 
Through a number of financing mechanisms of their own, the 
Federal Government has clouded these decisions. But it is not 
the role of the Federal Government to play venture capitalist. 
Instead, Congress should adopt free market policies and reduce 
unnecessary roadblocks to clean energy investments. Private 
investors should take the risks and reap the benefits or suffer 
the losses from their own investments. Government-backed 
investments impede that process at the risk of the taxpayer and 
to the detriment of the American economy.
    When we politicize the economic process by allowing the the 
Federal Government to highly influence decisions in 
investments, the incentive to lobby for these handouts is 
greater and the incentive to innovate, lower costs, and rely 
fully on private investment is substantially weakened. Such a 
process skews the rules of free enterprise. A dollar invested 
in a government-backed project cannot simultaneously be 
invested into another company. Department of Energy loans and 
loan guarantees pull capital out of the market and dictate who 
should receive it. This misallocation of labor and capital 
crowds out opportunities for new ideas and innovative 
technologies that may not reach the market because capital is 
diverted to projects that have higher political rates of return 
rather than economic ones.
    These programs are not job creators, but merely shifting 
labor and capital to where the government wants. To be clear, 
there is nothing wrong with more renewable energy or 
alternative fuels replacing conventional sources of energy. But 
that shift should be more effective and will be more effective 
when driven by market forces, not dictated through government 
investment.
    The market incentive for clean energy technologies already 
exists. The global market for energy is $6 trillion. Any clean 
energy technology that captures just a sliver of that market 
share will earn billions of dollars annually. This is precisely 
why we do not need the government skewing capital markets to 
promote politically preferred technologies. Markets make these 
investments and take on risks all the time, but rather than 
privatizing the gains and socializing the losses, risk and 
reward are properly aligned.
    It is also important to stress that whether a government-
backed investment is profitable or goes bankrupt, the policy 
itself is a failure. First, there are companies like Solyndra, 
where the DOE's involvement artificially made this dubious 
investment appear more attractive and lowered the risk of 
private investment. Private investors sunk over $1 billion into 
Solyndra, but much of that private financing came after the 
Department of Energy announced and closed the loan guarantee.
    These private investors look at government loans as a way 
to substantially reduce their exposure. A project may be an 
economic loser, but can attract private investment when the 
government covers a substantial portion of the down side with 
guaranteed loans. It essentially becomes heads the investor 
wins and tails the taxpayer loses.
    Now, supporters of these DOE programs offer a few failures 
are worth the risk and the number of success stories far 
outweigh bankrupt companies or ones facing difficult financial 
times. But the fact is, even if a project receives a DOE loan 
or a loan guarantee, it is a mistake to attribute that 
company's success to the Federal Government's involvement. Many 
companies receive investments from the private sector because 
their technology is promising and worth the risk.
    In these cases, especially when the government's 
investments go to more established companies, the DOE's 
involvement partially offsets private sector investments that 
would have been made without the Federal backing. This includes 
companies like Cogentrix, which received a loan guarantee for 
$90.6 million. At the time Cogentrix was owned by a subsidiary 
of Goldman Sachs, which has a market capitalization of $77 
billion and is one of the most successful financiers in the 
world. This is not an investment that needed government 
backing.
    Yet, when the government involves itself in capital markets 
Americans are continually promised the next Internet. Yet we 
continually experience the next Solyndra. That's not to say 
that innovative technologies cannot emerge from Federal 
spending, but there is a stark difference between how the 
Internet became commercially viable versus attempts to 
commercialize energy technologies.
    Government projects that have become commercial successes, 
such as the Internet or computer chips or the GPS, were not 
initially intended to meet a commercial demand, but instead 
national security needs. Entrepreneurs saw an opportunity and 
created the commercially viable products available today. I 
think this could be the role for the Department of Energy, to 
conduct that basic research that the private sector would not 
undertake, and then the private sector can come in and spur 
those innovative investments and create the innovative 
technologies of tomorrow.
    I think opportunities do exist to implement market reforms 
that would allow renewable energy companies and other energy 
technologies to be more competitive. I think we should allow 
all energy generation, including renewable energy generation, 
to form master limited partnerships because the combination of 
the partnership tax status and the liquidity of a publicly 
traded company make MLP's an attractive investment opportunity. 
We should make immediate expensing permanently available for 
all business, regardless of type, to allow new equipment and 
capital to come on line faster, which would improve energy 
efficiency and overall economic efficiency.
    In conclusion, I believe that the market, not the Federal 
Government, is much better at determining how to allocate 
resources and meet consumer demand. The government's 
interference in capital markets merely distorts distorts that 
process.
    Thank you and I look forward to your questions.
    [The prepared statement of Mr. Loris follows:]

Prepared Statement of Nicolas Loris, Herbert & Joyce Morgan Fellow, The 
                          Heritage Foundation

    My name is Nicolas Loris. I am a senior energy policy analyst and 
the Herbert & Joyce Morgan Fellow at The Heritage Foundation. The views 
I express in this testimony are my own, and should not be construed as 
representing any official position of The Heritage Foundation.
    I want to thank Chairman Wyden, Ranking Member Murkowski and 
members of the U.S. Senate Committee on Energy and Natural Resources 
for this opportunity to discuss clean energy investments in the United 
States.
    Over the past several decades Congress has implemented a number of 
policies to spur the investment of renewable forms of energy. Through a 
multitude of policies, the federal government has attempted to build a 
clean energy economy with the help of the American taxpayer and by 
doing so is skewing risk and reward of energy investments.
    All energy sources and technologies should have an opportunity to 
compete in the market place. Those investment decisions are best left 
for the private sector. The government's intervention in capital 
markets artificially lowers the risk of a project, decreases the 
incentive to innovate and increases the incentive to use the political 
process to lobby for handouts. Full or partial government investments 
reward special interests over market viability; those technologies that 
are truly marketable should not need financial support from the 
taxpayer.
    Congress should adopt free-market policies and reduce unnecessary 
roadblocks to clean energy investments, but it is not the role of the 
federal government to play venture capitalist. Private investors should 
take the risk and reap the benefits or suffer the losses from their 
investments. Government involvement impedes that process at the risk of 
the taxpayer and to the detriment of the American economy.

          Government Meddling Distorts Investment Opportunity

    The number of investment opportunities is broad and expansive but 
the capital to finance them is not. This requires that choices be made 
among the different investments. Through a number of mechanisms 
including grants, loans, loan guarantees, mandates and targeted tax 
credits, the federal government clouds these decisions. Government 
investments essentially pull capital out of those limited reserves and 
dictate who should receive it. While established and ``sure-bet'' 
companies will likely still receive a loan, those that are more on the 
margin may lose an opportunity.
    Because capital is in limited supply, a dollar loaned to a 
government-backed project will not be available for some other project. 
This means that the higher-risk, higher-reward companies that drive 
innovation and bring new services and technologies into the marketplace 
may not get support, while companies with strong political connections 
or those that produce something that politicians find appealing will 
get support.
    The market, not politicians in Washington, is a much better at 
determining how to allocate resources to meet consumer demand. When a 
firm minimizes costs, the firm not only maximizes profit but also 
maximizes value to the consumer. The government's interference in 
capital markets significantly distorts that process.
    By attempting to force government-developed technologies into the 
market, the government diminishes the role of the entrepreneur and 
crowds out private-sector investment. This practice of the government 
picking winners and losers denies energy technologies the opportunity 
to compete in the marketplace, which is the only proven way to develop 
market-viable products. When the government attempts to drive 
technological commercialization, it circumvents this critical process.
    Furthermore, when the government dictates how private-sector 
resources are spent, both industries that stand to benefit and those 
that are harmed by those policy decisions will concentrate more effort 
into lobbying for government handouts to prevent competitors from 
receiving the handout.
    This process, which results in the political process continually 
picking winners and losers, has been identified by economist Gordon 
Tullock and later defined by economist Anne Kreuger as rent-seeking.\1\ 
Rather than engaging in a profit-seeking behavior the producer is 
engaging in a rent-seeking behavior. The more the government involves 
itself in decisions that should be made in private financial markets, 
the more the American economy will experience misallocated labor and 
capital. The result will be less economic growth, not more.
---------------------------------------------------------------------------
    \1\ Tullock, Gordon (1967). ``The Welfare Costs of Tariffs, 
Monopolies, and Theft''. Western Economic Journal 5 (3): 224-232. 
doi:10.1111/j.1465-7295.1967.tb01923.x. Krueger, Anne (1974). ``The 
Political Economy of the Rent-Seeking Society''. American Economic 
Review 64 (3): 291-303. JSTOR 1808883.
---------------------------------------------------------------------------
Capital Markets, Opportunity and the Valley of Wealth
    The barometer of whether a good or service should be in the 
marketplace should be determined by the value of the output being 
greater than the input. We see investments that pay off, in both the 
short run and the long run, all the time without the federal government 
artificially propping up the value by lowering the risk with taxpayer 
dollars.
    Contrary to popular assertion, private investors will finance 
projects with longer term payoffs. Amazon.com was founded in 1994 and 
went public in 1997 with a business plan that did not expect a profit 
for four to five years. The dot-com bust delayed Amazon's progress, and 
it made its first full-year profit in 2003.\2\
---------------------------------------------------------------------------
    \2\ Saul Hansell, ``TECHNOLOGY; Amazon Reports First Full-Year 
Profit,'' The New York Times, January 28, 2004, http://www.nytimes.com/
2004/01/28/business/technology-amazon-reports-first-full-year-
profit.html (accessed July 16, 2013).
---------------------------------------------------------------------------
    More recently and in terms of energy development, the United States 
is witnessing a shift to a cleaner energy: natural gas. The investments 
are pouring in and the result has been lower energy prices, increased 
employment and resurgence in the manufacturing industry.
    Proponents of government investments in energy are quick to respond 
that the federal government helped create the shale oil and shale gas 
boom. But government involvement came years after the private sector 
developed the method. The roots of hydraulic fracturing go back as far 
as the 1860s and Stanolind Oil and Gas Corporation began studying and 
testing the method, with a patent issued in 1949 and a license granted 
to Halliburton to frack on two commercial wells.
    The Department of Energy partially funded data accumulation, 
microseismic mapping, the first horizontal well, and tax credits to 
extract unconventional gas. These activities would likely have occurred 
and should be driven by the oil and gas industry. Nevertheless, the 
real driver behind the revolution was George Mitchell, who invested 
millions of his own money in research and development for fracking and 
horizontal drilling. His company's geologist, Jim Henry, first 
identified Barnett shale as a possibility for more energy. It took 20 
years for their experiments with fracking fluids and techniques to find 
one that was cost effective and, as we know now, wildly successful.
    Saying that without government spending we would not have the 
natural gas production we have today is like saying without the grocery 
store down the street from your house, you would starve. You find 
another way to get food.
    The problem with the federal government's investment in the clean 
energy economy is that it does not allow technologies and companies to 
find another way but instead rely on the crutch of the taxpayer. If the 
cost renewable energy technologies decreases or improves and price of 
conventional energy increases, we may see increased generation. 
However, the signals of profits and losses determine what adds economic 
value and should determine the extent of that transition and investors 
should obtain their financing in private markets to properly align the 
risk and reward of such investments.
    To be clear, the market opportunity for clean energy investments 
already exists. Americans spent $481 billion on gasoline in 2011.\3\ 
Both the electricity and the transportation fuels markets are multi-
trillion dollar markets. The global market for energy is $6 
trillion.\4\ Clean energy investments alone totaled one trillion 
dollars from 2004-2011.\5\ Any clean energy technology that obtains a 
part of that market share will make tens, if not hundreds, of billions 
of dollars annually.
---------------------------------------------------------------------------
    \3\ Janice Podsada, ``Americans Spent Record Sum on Gasoline in 
2011,'' January 3, 2012, http://articles.courant.com/2012-01-03/
business/hc-gasoline-record-spending-2011-20111230__1__tom-kloza-oil-
price-information-service-crude (accessed July 16, 2013).
    \4\ SelectUSA, ``The Energy Industry in the United States,'' http:/
/selectusa.commerce.gov/industry-snapshots/energy-industry-united-
states (accessed July 16, 2013).
    \5\ Bloomberg New Energy Finance, ``Clean energy attracts its 
trillionth dollar,'' December 6, 2011 http://bnef.com/PressReleases/
view/176 (accessed July 16, 2013).
---------------------------------------------------------------------------
    Families in the United States and all over the world desire to get 
their vehicles from point A to point B and to turn their light switches 
on with a sense of reliability and affordability. The market demand for 
transportation and electricity is incentive enough to spur competition 
in the industry and obtain private financing without distortions from 
the federal government.

More Internets, Less Solyndras
    When the government involves itself in capital markets, Americans 
are continually promised the next Internet but we continually 
experience the next Solyndra. That is not to say, however, that the 
federal government does not have a role or that innovative technologies 
cannot emerge from federal research. But there is a stark difference 
between how the Internet became commercially viable versus attempts to 
commercialize energy technologies.
    Government projects that have become commercial successes-the 
Internet, computer chips, the global positioning system (GPS)-were not 
initially intended to meet a commercial demand but instead national 
security needs. Entrepreneurs saw an opportunity in these defense 
technologies and created the commercially viable products available 
today. The role of the DOE should be to conduct the basic research that 
the private sector would not undertake and create a system that allows 
the private sector, using private funds, to tap into that research and 
commercialize it. Federal labs should allow basic research to reach the 
market organically.

Socializing Losses
    Private investors look at government loans and loan guarantees as a 
way to substantially reduce their risk. Even if a project may be an 
economic loser but has a huge upside, private companies can invest a 
smaller amount if the government provides a loan. Those investments are 
especially attractive if the federal government complements loans with 
other policies like targeted tax credits, DOE research dollars, and 
fuel efficiency standards that allow electric vehicles to accumulate 
credits and then trade them with non-compliant manufacturers. If the 
project fails, private investors still lose money, but the risk was 
artificially distorted.
    For instance, private investors sunk $1.1 billion into the electric 
vehicle company Fisker but much of the private financing came after the 
Department of Energy approved and closed the loan for Fisker. Fisker, 
formed in August 2007, raised $94 million before the DOE approved the 
loan in September 2009.\6\ After DOE closed the loan, Fisker raised 
over $1 billion in various rounds of venture capital funding.\7\ The 
same holds true for the much-maligned bankrupt solar firm Solyndra. 
Private investors sunk $1.1 billion into Solyndra. Much of the private 
financing came after the Department of Energy announced Solyndra was 
one of 16 companies eligible for a loan guarantee in 2007.\8\
---------------------------------------------------------------------------
    \6\ Fisker raised $68 million of the $94 million after submitting 
the loan application
    \7\ PrivCo, ``FISKER AUTOMOTIVE'S ROAD TO RUIN: How a ``Billion-
Dollar Startup Became a Billion-Dollar Disaster'' http://
www.privco.com/fisker-automotives-road-to-ruin (accessed April 22, 
2013).
    \8\ IStockAnalyst, ``Fremont's Solyndra Goes from Stealth to Solar 
Star,'' October 7, 2008, at http://fefwww.istockanalyst.com/article/
viewnewspaged/articleid/2686855/pageid/1 (September 30, 2011).
---------------------------------------------------------------------------
    When economically uncompetitive technologies and companies cannot 
survive without the taxpayer's crutch, there is a good reason these 
companies cannot fully attract private financing. These investors are 
using political calculus to hedge their bets. Thus far, Americans have 
witnessed 19 taxpayer-funded failures\9\
---------------------------------------------------------------------------
    \9\ Rachael Slobodien, ``Green Graveyard: 19 Taxpayer-Funded 
Failures,'' The Foundry, November 5, 2012, http://blog.heritage.org/
2012/11/05/green-graveyard-19-taxpayer-funded-failures/ (accessed July 
16, 2013).
---------------------------------------------------------------------------
Privatizing Gains
    Supporters argue a few failures are worth the risk and the numbers 
of success stories far outweigh bankrupt companies or ones facing 
difficult financial times. But even if a project receives government 
investment, it is a mistake to attribute that company's success to the 
federal government's investment.
    There are companies that would, and often do, receive investment 
from the private sector because their technology is profitable or 
because investors find their technology promising and want to pursue 
the risk. In these cases, the government's investment partially offsets 
private-sector investments that would have been made without the 
federal backing. Although it remains to be seen if the electric vehicle 
company Tesla will be profitable in the long run, the automaker may be 
a prime example of this. Tesla, the recipient of a $465 million loan 
through the ATVM program, had its initial public offering in June 2010 
and paid off its loan early. If Tesla's electric vehicles are the wave 
of the future, they should have and could have secured investment and 
loans through the private sector.
    In other cases, the government investment is blatant corporate 
welfare. For example, Cogentrix of Alamosa received a loan guarantee 
for $90.6 million. Cogentrix is owned by a subsidiary of Goldman Sachs, 
a company that has a market capitalization of $77 billion and is one of 
the most successful financiers in the world.\10\ NRG's biggest loan 
guarantee was for its BrightSource project, where NRG's partners 
include subsidiaries of BP, Chevron, and Statoil. The Dow Chemical 
Company received a $9 million Advanced Manufacturing Program grant. The 
Dow Chemical Company also had $57 billion in sales in 2012 and invests 
over $1 billion annually in research and development.\11\
---------------------------------------------------------------------------
    \10\ Bloomberg, The Goldman Sachs, Inc, http://www.bloomberg.com/
quote/GS:US (accessed July 16, 2013).
    \11\ The Dow Chemical Company, ``Our Company,'' http://www.dow.com/
company/index.htm (accessed May 16, 2013), and The Dow Chemical 
Company, ``Research and Development,'' http://www.dow.com/michigan/
locations/midmichigan/research.htm (accessed July 16, 2013).
---------------------------------------------------------------------------
    Furthermore, a successful federally-backed company does not mean it 
is a good deal for energy consumers, though federal involvement gives 
this impression. One of the loan guarantee recipients, SolarReserve, 
has a project under construction and recently entered a contract to 
sell power to California's largest utility.
    But California law mandates that the utility must purchase 25 
percent of its electricity from renewable sources by 2016 and 33 
percent by 2020. With respect to SolarReserve entering into a contract 
with utility PG&E, the state utility commissioner acknowledged, ``This 
is expensive, there's no getting around it, but I think this technology 
is something that's worth investing in.'' Those investments should be 
determined in the free market, not artificially skewed by using the 
political process to pick one technology over another.
    If electricity generated by these projects were competitive with 
other sources of energy, there wouldn't be a law mandating its use. 
Instead, families are forced into buying pricier electricity and 
taxpayers are on the hook if the project fails.

Expanding Market Opportunities for Renewable Energy
    Opportunities exist to implement market reforms that would allow 
renewable energy companies and all other energy technologies to be more 
competitive and operate on a level playing field. To that end, Congress 
should:

   Allow all energy companies to form Master Limited 
        Partnerships--Under an MLP, businesses have the tax structure 
        of a partnership or a limited liability company, but ownership 
        equity trades publicly on a securities exchange. The 
        partnership structure allows the business's owners to pay its 
        tax on their individual tax returns while providing the 
        flexibility and opportunity to raise capital from smaller 
        investors directly from the stock market. About 81 percent of 
        MLPs today are in the energy and natural resources industry, 
        with investment and financial services making up most of the 
        rest. Most of the energy MLPs constructed today are related to 
        oil and gas activities; 52 percent of MLPs are in midstream and 
        downstream activities, and 14 percent are in oil and gas 
        exploration and production. Coal leasing and production 
        comprises only 4 percent. The combination of the partnership 
        tax status and the liquidity of a publicly traded company make 
        MLPs an attractive investment opportunity for renewable energy 
        companies as well.
   Make immediate expensing permanently available for all 
        business investments--For exploration and production, companies 
        have the ability to expense capital costs in the year of 
        purchase. Immediate expensing allows companies to deduct the 
        cost of capital purchases at the time they occur rather than 
        deducting that cost over many years based on cumbersome 
        depreciation schedules. Expensing is the proper treatment of 
        capital expenditures for any business. Depreciation raises the 
        cost of capital, which causes businesses to purchase less. Less 
        capital means businesses create fewer jobs and are not able to 
        increase wages as much as they otherwise would have for 
        existing employees.
   Allow states to conduct the environmental review and 
        permitting process for all energy projects--One of the primary 
        reasons shale oil and shale gas production has been so 
        successful economically and environmentally is state government 
        management. State regulators and private land owners have the 
        local knowledge and the proper incentives to promote economic 
        growth while protecting their environment. They understand 
        site-specific challenges and can address concerns efficiently. 
        Congress should consider privatizing some of that land, but in 
        the meantime, transferring the management of federal lands to 
        state regulators would encourage energy resource development on 
        the federal estate while maintaining a strong environmental 
        record. This could bode well particularly for renewable energy 
        projects who may have thinner profit margins. The United States 
        Chamber of Commerce identified 351 energy projects stalled by 
        ``not in my backyard'' suits, regulatory red tape and legal 
        challenges, mostly from environmental activist organizations. 
        Almost half these projects (140) are renewable-energy ones. 
        Transferring authority to the state would allow renewable 
        projects to come online in a timely manner while protecting the 
        environment.

Conclusion
    Congress should resist the temptation to distort the energy market 
even further. Specifically, Congress should refuse to expand loan 
guarantee programs or to implement any new capital subsidy programs. 
American taxpayers cannot afford these programs, and they would put 
taxpayers on the hook for an untold number of projects that could fail. 
If they are economically viable, they can be funded by the owner of the 
project. The government should pursue free-market policies that allow 
all energy technologies to compete rather than using financing programs 
to pick winners and losers in the marketplace. Renewable energy may be 
the way of the future, but America's experiences with government 
interference regardless of the type of energy show that we're doing 
more to hurt renewables and the energy sector right now than help them.
    The Heritage Foundation is a public policy, research, and 
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of the Internal Revenue Code. It is privately supported and receives no 
funds from any government at any level, nor does it perform any 
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the United States. During 2012, it had nearly 700,000 individual, 
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Foundation or its board of trustees.

    The Chairman. Thank you very much, Mr. Loris.
    Let me start with you, Mr. Davidson. This is the first time 
that you've testified here and really the first time in a long 
time that we've heard from the Department with respect to the 
loan guarantees. As you know, there has been a pretty ferocious 
debate here in the Congress with respect to loan guarantees. 
I'm very appreciative of the comments that Senator Murkowski 
has made because we've been able to keep this a bipartisan 
issue here in the U.S. Senate, which, as you know, has not 
always been the case in this debate.
    Both of us have indicated that there is a role for 
government to play and what we want to do is make it a smarter 
and more creative role. That was essentially the thrust of what 
Dr. Allison had recommended when he was last here, to look at 
some fresh approaches. He was particularly supportive of the 
risk-reward effort, so that we could look, for example, at 
somebody who is just getting started but had already been able 
to attract some private sector support, some private sector 
investing, and there was promise of substantial gains down the 
road.
    Can you give us some examples, because you have cited on 
page 5, I think, of your testimony, you cited some areas where 
you felt the Department had made some changes. Can you kind of 
break it out in terms of some specific examples of what's 
changed, because this is really the first time the Department 
has been on record on this and I think it would be very 
helpful. It can include risk-reward, but other areas as well. 
What has actually changed?
    Mr. Davidson. Thank you, Senator, for the question. Let me 
try and respond to that.
    A number of things have changed in how we've proceeded with 
the Department. First I'd like to talk about the quality of the 
portfolio, which I think was a very interesting part of Mr. 
Allison's and other people's reports. I'm new to the Loan 
Office and one of the first things I really wanted to do in 
getting in there was to understand the quality and the strength 
of the portfolio. I've mentioned some of the statistics there, 
that of the overall loan, $35 billion in the portfolio, which 
is $24 billion of loans and $10 billion in conditional 
commitments, 2 of those conditional commitments are 1703 loans 
to the nuclear industry. But within that $35 billion portfolio, 
the losses to date are in the 2 to 3 percent range. So I think 
that is a very significant number, which is less than 10 
percent of the loan loss reserve.
    So that was a very large concern of Mr. Allison's looking 
into the portfolio and seeing the status of that. He confirmed 
that those type of numbers and the health of the portfolio was 
strong, so it was good to get that confirmation.
    But in the whole area of procedures and policies, which 
we've had a number of comments, and the LPO was very receptive 
and eager to hear those from Mr. Allison, as I mentioned, from 
the GAO, many comments about how we can improve performance. We 
are in the process of continually improving, but let me focus 
on 3 specific areas when you kind of pool together all the 
comments about how we could be improving, fall into 3 general 
areas I'd like to respond to.
    One is in the area of internal improvements and staffing. 
We have made a number of steps there, including putting in 
senior positions, principally in the risk area, chief risk 
officer, which was a concern. We've added that. We've also 
staffed up fairly significantly in the areas of portfolio 
management. As I mentioned, we have a $34 billion portfolio. 
Many of those loans were put on the books in 2010, 2011, and 
now the government will be owning those loans for 20 to 30 
years. That's the average time of these loans. So we have to be 
sure that we are sufficiently staffed to really track those in 
a very prudent fashion. So we've staffed up in our portfolio 
management division, which are the people who really track the 
loans and work them. That was a very large area to do.
    The other thing we've done is we've tried to bring more 
more eyes onto our loans and our processes, first from within 
DOE. So outside of the loan program area we have other people 
throughout DOE participating in reviewing our procedures and 
our policies and our loans. Then we've also stretched out to 
other areas in the government, other agencies, for inter-agency 
coordination of the loans we're doing. So we think that has 
buttressed and helped our internal process.
    The Chairman. Let me if I might, just so I can bring the 
private sector in: Mr. Coleman, what do you think of the 
changes that have been made there in the loan program for the 
government? In other words, you get a chance to give some tips. 
You're the private sector. You can give some tips to the feds.
    Mr. Coleman. I can't say that I'm incredibly familiar with 
all the changes.
    The Chairman. Fair enough.
    Mr. Coleman. The one thing I would say is that I think that 
the loan guarantee program, my understanding of it is it has 
performed within the metrics, as you've pointed out, but also 
that I think it is an incredibly important program for 
particularly areas that are of common need, so whether that is 
infrastructure or whether it is the kinds of common problems in 
industry that need to be solved.
    The Chairman. Good.
    I'm over my time. Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    Mr. Davidson, let's go ahead and just continue with this 
discussion in terms of some of the changes that we have seen 
following the Allison report. Contained within that report it 
was stated that DOE should better define the desired balance 
between policy goals and financial goals. Pretty basic 
managerial function. You have detailed to the chairman here 
some of the internal process changes that you have made with 
beefed-up staffing, more extensive outside review. I appreciate 
all that, but can you give me more details with plans to 
perhaps develop a more formal process for establishing these 
goals, the distinction then between the policy goals and the 
financing goals, and measuring there their attainment, because 
I think this notion or the concept of accountability and being 
able to determine whether or not we have achieved these goals 
is critical to the operations of the loan program. So if you 
can speak to that aspect of it.
    Mr. Davidson. Thank you, Senator. As you mentioned before, 
we are executing a number of programs, 1703, 1705, and the ATVM 
program. Each of those is very specific in the policy goals 
that are trying to be achieved. The policy is really coming 
from you in the Congress to what the policy of the policy of 
these loan programs should be.
    The metrics of the type of loans that we can give are 
fairly well defined, which is what we execute against. As you 
know, every loan that we approve, first of all, it is a loan. 
We are not in the business, as is ARPA-E, as other 
demonstration areas of DOE, of giving grants. We are a loan-
only program.
    So any time we get involved in a project, it is a private 
developer who comes to us. It is the market that comes to the 
Department of Energy, a private company. That company must come 
with at least 20 to 25 percent of the total capital of a deal 
in the form of equity, and only then will we respond to what is 
put in front of us. We do not go out and seek companies. They 
come to us.
    We then have to make a determination within the loan 
program area that the company has a reasonable prospect of 
repayment--that's the fundamental choice--also that a new 
technology or a new process that is innovative will be 
employed, and as a result of that innovative new technology or 
process there will be a meaningful reduction in greenhouse 
gases. Those are the 3 steps we have to do for every project.
    Senator Murkowski. So it gets into this area, particularly 
when we're talking about risk tolerance and probability or 
likelihood of success there, where it gets a little grey, 
certainly more subjective. Is there a more formal process for 
analysis when it comes to the risk and the risk tolerance 
there, rather than just somebody saying: This looks like a good 
idea.
    Mr. Davidson. As I mentioned, I'm new there. I've been 
there for 8 weeks. Before that, I come a significant time in 
the private sector, having been in the banking industry. My 
impressions coming in are that the policies, procedures, and 
oversight within the DOE and within the LPO are certainly 
comparable to things I've seen in the private sector, if not 
more rigorous. I believe the GAO report and others have pointed 
to the degree of oversight within our loan program.
    But in terms of goal-specific, one of the things we are 
doing now--I mentioned the President has authorized and we're 
moving ahead on the $8 billion fossil solicitation. What we are 
doing with that different than other solicitations, we are 
putting that out now for public comment, and we are right now 
in a 2-month public comment period. That is to have input from 
all the stakeholders, industry stakeholders, about how they 
feel the whole fossil availability of this $8 billion can be 
most helpful.
    Senator Murkowski. I will have other questions for you. It 
may be that they're submitted for the record. But again, in 
these areas of the risk assessment, the issue of subordination, 
which I think we all learned a lot more about that as a 
consequence of several of the loans that were made in the last 
year.
    Let me ask you very quickly here, and this relates to the 
ATVM program. The statutory authority for that is now expired. 
I think a very relevant question is whether or not the Federal 
Government needs to continue to make a direct loan program 
available exclusively for automakers, particularly when we've 
got zero active applicants. Can you give some explanation as to 
whether or perhaps why the administration believes that there 
is a continued need for a separate loan program for vehicles?
    Mr. Davidson. Thank you for that question. First, I'd like 
to get back to you, because I think recently a number of 
applications have been received within the program, but I'd 
like to confirm that and get back to you if I can.
    There have been a number of very successful loans. $8 
billion of the $25 billion has been put in that program. We 
have over $4 billion of credit subsidy available still for 
that. I think you can look at the example of--excuse me. You 
can look at the example of Tesla as the type of thing. That was 
a significant amount of private equity coming to the 
government, the DOE providing a loan. There was no other debt 
capital available for that. The founders of of Tesla had 
broadly canvassed the market. There was no debt available. The 
DOE debt made that project and that company possible. 
Obviously, we know what's happened and it's worked out.
    So the ability to build a new car company, the ability to 
be a significant investor with new suppliers and components 
manufacturers, there are fewer of those applying, but the need 
for them is crucial, and the work being done in energy 
efficiency for companies like Ford, Nissan, and Tesla I think 
demonstrates the real value of the program. Our mission now is 
to make sure that applicants come forward and apply for the 
program.
    Senator Murkowski. This will be a subject of further 
discussion. We could talk about Tesla. That has--proven 
successful. We know that there are some that have not proven so 
successful, certainly Fisker. But I do think that this is, as 
you have noted--you're new, you're figuring out what's going 
on, what's not going on. I do think that this is something that 
should be subject to greater scrutiny, greater discussion, as 
to whether or not we make vehicle technologies and components 
eligible for a broader loan guarantee program and not 
necessarily exclusive to the auto industry.
    My time is well over, so I'll yield, Mr. Chairman.
    The Chairman. Thank you, Senator Murkowski.
    This is Senator Stabenow's time. Let's just be clear in 
terms of the question. Senator Murkowski has an important one 
that you know about with respect to the vehicles. Also, Mr. 
Davidson, I have a question from Senator Manchin with respect 
to that fossil program that you mentioned, the $8 billion one. 
By unanimous consent, we'll put Senator Manchin's question in 
the record. We need you to get back to us promptly. Could you 
get back to us with respect to Senator Murkowski's question and 
also Senator Manchin's question within 10 days?
    Mr. Davidson. Certainly, Mr. Chairman.
    The Chairman. Very good.
    Senator Stabenow.
    Senator Stabenow. Thank you very much, Mr. Chairman, and 
thank you for each of you being here. It's been a very helpful 
discussion and one that we need to continue.
    An overall theme I think from the majority of what I have 
heard is the fact that there are in fact either market gaps, 
Mr. Kauffman, as you talked about, or financing gaps, Mr. 
Coleman, as you talked about. We've heard over and over again 
about the valley of death, how do we go from R and D to a place 
where, frankly, Mr. Zindler, we can meet the standards that you 
put out, a pretty high bar for what folks will invest in in 
terms of meeting all the various criteria. So how do we make 
sure that we get there?
    Mr. Chairman, just to back up a moment before talking about 
specifics, I just want to stress again how important it is that 
we be engaged in this area. We are in a global marketplace 
where every other country is rushing into this space. China's 
spending, the latest numbers are, $178 million a day to develop 
clean energy technologies, $178 million a day. I realize we 
could argue about how they're different and their structure is 
different and so on. But they want to make sure that if folks 
are going to be buying solar panels or advanced batteries or 
wind technology it's going to have ``Made in China'' on it.
    So we're in a race and we've got to figure this out if 
we're not going to go from dependence on a certain kind of 
energy to other kinds of energy. The good news is for us that 
this is also creates jobs. So I want to go then to the jobs 
piece of this as well as the public piece of this, which is so 
important.
    Obviously, as the author of the Advanced Technology Vehicle 
Program, manufacturing program, I believe that we have seen 
positives, although I believe that there are some things that 
need to be changed. I'm not happy with the slowness and what 
has happened in terms of the applications. But I can say that 
there is a public interest.
    When we gave a higher CAFE standard in the public interest, 
there were 2 pieces of achieving that. One is being supportive 
on the R and D end; and then the other piece is making sure 
that the support is there to retool so that these are American 
jobs as we retool for higher standards, lower--better fuel 
economy and so on, which is in the public interest.
    Ford Motor Company is the poster child for that. Their 
largest facility, in Wayne, Michigan, has been retooled with a 
$5.9 billion loan. They are bringing jobs, they have brought 
jobs back from Mexico, China, Europe, and we're we're creating 
more jobs here because we helped retool.
    So I just want to say that--and we can show in other areas 
as well.
    I do have concerns, though, Mr. Davidson, and that relates 
to having this program, frankly, work better, because we've had 
a number of companies, companies that were solid companies that 
would, if they had been given a loan, would be repaying it and 
doing well, who got caught in the bureaucracy, in the morass 
right now, one company spending $25 million on a -year process 
and then finally said, forget it. We've had a number of folks 
that have said that. So I am anxious to work with colleagues on 
how we do this better, because I do believe there's a need.
    I also believe, Mr. Chairman, on the tax side of things, we 
do have examples of things that have worked well but been 
limited. The effort that Senator Bingaman and I were able to 
put forward in 2009 for the advanced manufacturing clean energy 
tax credit, which has been dubbed 48C, was oversubscribed 3 
times by companies in fact who have used this 30 percent tax 
credit for equipment and buildings and retooling to do clean 
energy extremely successfully.
    I would love to show you in Michigan 12 different 
companies, from doing the towers for wind turbines to retooling 
a factory that did large boats to do wind turbine blades, to do 
generators at another company. So there are important areas 
where we have made a difference. I would ask, Mr. Davidson, 
just in the brief time that I have here to respond on ATVM: How 
do we make this better so it works?
    Mr. Davidson. Thank you, Senator, and thank you for your 
support in this program. One way I think--the point you speak 
to about the customer service aspect of the LPO is certainly 
something I'm very concerned about and we're working very hard 
to improve. The staff before I got there has put a number of 
work into that also. I think there we can see real improvement, 
and I think that was part of the issue of why there may have 
been some complaints from suppliers before.
    One of the principal things we've done there is we've 
automated the whole front end application system. Before it was 
essentially a manual process and people would submit their 
applications, which are sometimes voluminous applications, and 
there was no way to get back to the applicant unless that had 
been physically checked, which sometimes took 2 or 3 months. 
We've now been able to automate that. It's an automated 
application system. So the initial response to the applicant 
has dropped down from months to a matter of days or weeks.
    So this did not really exist the last time that some of of 
the people you deal with maybe have applied to the program. So 
we have fixed that and we're looking forward now as the next 
group of applicants come in as a result of the fossil 
solicitation and the auto that it will be a much more customer-
friendly operation, which we hope will make some difference.
    Senator Stabenow. I think we have a lot of work to do that, 
and I'm anxious to work with you and the leadership of the 
committee on it.
    Mr. Davidson. We're very happy to do that, Senator. Thank 
you.
    Senator Stabenow. Thank you.
    The Chairman. Thank you, Senator Stabenow.
    Now, we've got a number of colleagues waiting, in order of 
appearance: Senator Heinrich, Senator Franken, Senator Baldwin. 
So let us then go to Senator Heinrich.
    Senator Heinrich. Mr. Coleman, I want to start with you for 
a moment. It's often been said that without risk there's no 
reward. If we were in the business of investing in zero-risk 
projects, we wouldn't be innovating at all, obviously. Are you 
concerned that the political reality of this is that 
politicians, the media, we're all happy to focus on the 2 
percent of a program like 1703 epitomized by Solyndra--we heard 
Solyndra raised again today--while ignoring the 98 percent of 
the program that might be epitomized by Energy Solar or U.S. 
Geothermal or all the very successful implementation projects 
that are providing clean energy at a competitive price?
    Mr. Coleman. I think the challenge is that those political 
conversations do obviously skew the risk tolerance. So there's 
no up side reward in a government program for taking that kind 
of risk, and what happens in my mind is that the initial scope 
of the program, which was intended to go even earlier--and 1703 
was a perfect example of that--gets skewed later.
    So it may be that the program is still significantly in 
need and that it is solving certain problems. But in terms of 
the challenges that we face as early stage investors, it is 
harder and harder for the program to target those kinds of 
problems. Those are problems--in particular, if you look at the 
actual structure of 1703, it's exactly what the challenge is, 
which is it was meant to be oriented toward technologies that 
were unproven and yet it was the unsubsidized portion of the 
program.
    Senator Heinrich. You've got to wonder if the point is to 
bridge the valley of death, but there's this incredible 
resistance to taking on any sort of risk, then you just start 
funding implementation projects and not the truly innovative 
ideas that can change the landscape from the bottom up.
    Mr. Coleman. Yes. I think that the government has to be 
willing to take some element of risk in regards to things that 
are strategically important. If there is a national imperative, 
then there's a reason to take that risk. I would say that there 
is a need to make sure it's combined with the market making 
decisions about risks that are worth taking.
    Senator Heinrich. You mentioned our national laboratories 
as well and ARPA-9E, which is another program I'm very 
supportive of. What is your experience with regard to the 
national labs and whether or not they're doing the kind of job 
they could be doing in terms of making sure that technology 
actually transfers out of those institutions and into the 
private sector, particularly on the cultural side, where 
sometimes there are impediments that don't need to be there, 
that can really make enormous differences in terms of getting 
things that we develop through basic R and D, out into the 
private sector world where we can see the most benefit on a 
national scale?
    Mr. Coleman. I think that the national labs do a lot of 
great work and I think we should continue to support them. I 
sit on the Venture Advisory Board for the National Renewable 
Energy Laboratory and the constant conversation there is 
exactly this: How do you actually bridge the gap between the 
research that's being done and the marketplace?
    One of the challenges that is a constant refrain is that 
there are limitations, that there is not necessarily an 
incentive structure that drives researchers to take the kind of 
risk with their time associated with actually doing applied 
research and taking time off to go and do that. Certain 
universities, like Stanford University and others, this is part 
of the culture, and it is not part of the incentive structure 
of the national labs.
    The other is that there's a real constraint that is--I 
think it's driven by the policies associated with how these 
national labs are structured, which limits the amount of 
applied research and commercial work that they can do. I think 
the hard part there is just simply that if we don't have 
communication between the early research and the marketplace, 
then it's more likely that you're going to invest in things, in 
research things, that don't get there.
    So I do think we need to open that up. I think we need to 
be less concerned about the overlap, particularly in a world 
where it's eroding.
    Senator Heinrich. I want to thank you for your perspective 
on that. It's helpful.
    I want to get to one last question while I still have a 
little bit of time. I suspect, Mr. Kauffman, you might have an 
opinion on this, but I'm open to input from any of you. I'd 
like to know the relative relationship between the the 
limitations of finance and implementation and the challenges 
that we're having nationally and certainly in my State of New 
Mexico with getting transmission in place to utilize 
implementation in the places where it makes the most sense?
    Mr. Kauffman. The transmission questions--there is not 
difficulty in financing transmission. Generally speaking, the 
issues relate to whether or not you have all the various 
permitting in place.
    Senator Heinrich. My experience is that, not in the finance 
side, but that if you can't get the regulatory side and work 
through the NEPA process, then there are projects that could be 
financed in places like Arizona and New Mexico that don't end 
up being financed because of the lack of transmission and the 
inability to work through that.
    Mr. Kauffman. That's right, absolutely. You can't develop a 
project unless you can deliver the power. So transmission is an 
issue, no question about that, if that's the answer to your 
question.
    Senator Heinrich. Thank you, Mr. Chairman.
    The Chairman. Senator Franken has done good work on these 
issues and he is recognized.
    Senator Franken. Thank you, Mr. Chairman.
    I have a bill I've introduced, the Local Energy Supply and 
Resilience Act. It speaks to a number of issues that we've 
raised on transmission. These are generally distributed 
generation projects, so they don't require--they don't really 
require transmission. They can work in island mode, etcetera. 
They can feed into a grid if they need to, and they do in 
certain areas.
    Let me talk about combined heat and power. In the U.S. up 
to 36 percent of all energy we consume is lost from power 
plants and industrial facilities and buildings as waste heat. 
This is 36 percent of all energy that we produce in the 
country. We can capture waste heat and put it to use. We do 
that in the city of St. Paul. They burn biomass. It's really 
from the city, from the tree trimmings and that stuff. They 
burn that biomass, generate electricity. They heat and cool 80 
percent of the buildings in downtown St. Paul.
    There's another benefit from using biomass. Senator Risch 
has talked about all the hazardous fuel. We're having these 
terrible, terrible wildfires and he's talked about we don't 
have--we're not--actually, we're losing--all the money we're 
using to fight these fires sometimes comes away from 
eliminating some of this hazardous fuel.
    So that's why I've done this bill. I'm kind of trying to 
thread a needle here, because I want to do this through 1703--
and this is proven technology. I think the needle here, though, 
has a very big eye, because the 1703 program still has--am I 
right, it says $34 billion still in loan authority? Is that 
right, Mr. Davidson?
    Mr. Davidson. Roughly that amount.
    Senator Franken. OK. Here it is a proven technology, so 
it's not about--but it's about--Mr. Zindler, you talked about 
scale, scale, scale. It's about scaling up something that works 
and that works well, works in island mode, so when you have 
these disruptive storms like Sandy and we save a lot of money 
in places, like in Princeton, New Jersey, where they had data 
centers that didn't go down because they had combined heat and 
power.
    But to scale this up we need the up-front. We need--how big 
a problem is the up-front cost of these things, Mr. Kauffman?
    Mr. Kauffman. I think this issue of CHP is a very good 
example where there are financing gaps, because it's very 
difficult, for example, to have CHP as a service. In other 
words, somebody will have to buy the equipment. Energy is, 
after all, an operating expense, and so it's perfectly 
understandable that somebody would want to substitute one 
operating expense for another operating expense.
    So CHP is a good example of where it's not so much the need 
for subsidized financing, but for the ability to get the 
financing, and that financing is difficult to obtain either on 
a large scale, with either banks or from the capital markets. 
So you don't have financing widely available.
    I would also observe, by the way, that you talked about 
wildfires. In Texas, the Governor just signed a bill promoting 
CHP because it reduces the quantity of water that's used from 
central station power generation. So it's not only good in 
terms of capturing waste heat; it's actually, CHP is also good 
in terms of reducing water consumption.
    Senator Franken. How much could we scale up this sort of 
renewable, use of renewable energy, if we had the right 
financing? Do you want to talk about it, Mr. Davidson or Mr. 
Kauffman?
    Mr. Kauffman. I wanted to point out because, you know, I am 
in New York and so this issue about resiliency is really 
critical. So we have a financing product that's coming out of 
our green bank that's going to be focused specifically on 
trying to leverage private sector capital to finance CHP. So 
CHP is absolutely a critical area of interest for us for both 
resiliency as well as value for customers.
    Senator Franken. In my subcommittee I think we're going to 
have, pretty soon, I hope, a hearing on State-based programs, 
what States are doing. Minnesota has been--in--in terms of 
opening demand for these renewable and for energy efficiency 
and those kind of programs. I'd love to ask you to participate 
in that.
    Mr. Davidson.
    Mr. Davidson. If I can just jump in on that, the issues of 
CHP are very significant. It is a huge way to reduce carbon 
footprint if we can start moving the needle ahead on that. 
There are great new technologies becoming available for that, 
that can really help speed the introduction and the market 
adoption of CHP.
    I'd like you to be aware that in the new fossil 
solicitation that I've mentioned that's coming out, that is 
really about lower carbon uses, ways in the extraction of 
fossil fuels we can lower the carbon footprint, ways in dealing 
with existing industrial and energy processes we can lower the 
carbon footprint. Things like retrofits fit into that 
solicitation.
    But a very large part of what we expect to be coming in as 
applications is the area of reducing fossil fuels through 
energy efficiency measures. So combined heat and power, waste 
heat recovery, microgrids, fuel cells are all things that will 
fully qualify, assuming the other metrics are met, a reasonable 
prospect of repayment, greenhouse gas reduction, and a new 
technology. Those are the type of programs that could be 
financed through the fossil solicitation.
    So I would encourage you to look at that and if we could 
discuss that further. That is something we're very interested 
in doing.
    Senator Franken. I would love to follow up with that.
    I'm out of time. Mr. Loris, I apologize because you won't 
have a chance to respond to this, but I'd just like you to 
think about things like the Erie Canal, which the government 
paid for, and Mr. Kauffman knows about it. It opened up, 
because--and this was actually the State government of New 
York. It increased the efficiency of moving good from the 
Midwest right to Europe, because it came through the Great 
Lakes to the Erie Canal, down the Hudson River. We could sell 
our timber and our--it opened the Midwest to the world and made 
transporting our goods, our crops, our timber, improved it by 
97 percent, the efficiency. That was really just something the 
government paid for.
    I had this discussion in the HELP Committee with a witness 
from AEI, who started his testimony saying that it's a myth 
that the Federal Government creates jobs and ended his 
testimony, after I went through all these things like the 
Interstate Highway System, etcetera, to him saying that to say 
the Federal Government doesn't create jobs would be absurd, 
which was kind of a 180-degree change in that. So I that. So I 
wish we had had that chance.
    I again apologize for going over, but it used to be my job 
to identify absurdity.
    The Chairman. I thank my colleague.
    I just want you to know I'm very interested in working with 
you on this combined heat and power technology. I think it is 
very important. With respect to the fire situation, you and the 
Senator from Idaho are spot on with respect to what's going on 
with the fires. What happens in the West, when we have one of 
these huge infernos, essentially the bureaucracy pilfers from 
the prevention fund in order to fight the fires, and then the 
problem gets worse.
    So the fact that you're looking at some new technologies is 
very helpful, and I'm going to work with you on this issue.
    Senator Franken. Think of the waste heat that you have from 
those fires.
    The Chairman. There you are. You say it all, as usual.
    Senator Baldwin, welcome.
    Senator Baldwin. Thank you, Mr. Chairman and Ranking Member 
Murkowski. I really appreciate the fact that you're holding 
this hearing and having this deep discussion on such a critical 
topic.
    I also want to just associate myself with the comments of 
Senator Stabenow. There's such exciting potential. It is so 
needed. Yet, especially as I represent a State with a lot of 
manufacturing traditions, legacy, and history, we want those 
jobs to be here, and we need to send the right signals.
    Mr. Coleman, I took great interest in your discussion of 
the innovation pipeline and your emphasis on the importance of 
ongoing investment in research, research that debuts new 
technologies and can then be transferred out of our labs and 
into commerce. A few weeks ago I had the honor of introducing 
my first bill as a member of the U.S. Senate and it focuses on 
increased access to venture capital for early stage startups. 
It is wider in scope than clean energy technology, but 
certainly that's among the targets. It prioritizes funding for 
those technologies that were developed through federally 
supported research. So you can assume that it's gone through at 
least one stage of vetting in order to get that first whether 
it's NSF or NIH or SBIR support.
    So this entire topic is of great interest to me. But it's 
the next few steps in the pipeline, the task, as you described 
it, of closing the funding gaps around the commercialization of 
new technologies that's so critical to address. There's a 
couple things I wonder if you could elaborate on further. Let 
me just put both of them out there.
    Are there State-level programs or other models that are 
effectively responding to this challenge? Then I'd like you to 
also elaborate further on your comments about the loss of 
expertise that has been assembled to make these venture capital 
decisions and investments. What does it take to assemble this 
expertise in these teams, and what advice do you have for us 
along those lines?
    Mr. Coleman. In answer to the first one, which was the 
State programs, I don't know of a lot of them, to be honest, 
that address this problem very well. There are some in the 
State of California that are using their funding mechanisms and 
particularly now are leveraging their AV32 funding in order to 
go focus on transformative technologies that can help those 
States. So it's worth looking at some of those.
    The provision that we put forward that is the innovation 
credit is something that I think can do this and it can do it 
at the Federal level, it could do it at the State level as 
well. It is a provision that is intended to address exactly 
this gap, but to do it in a way where specifically we're 
solving this problem of unproven technologies. I think that's 
what you're getting at. Most of the conversation has been 
revolving around how do we deploy proven technologies, and the 
unproven technologies are something that are really difficult. 
They're difficult because the more that we skew toward 
traditional financing the less risk debt is willing to take on 
those kinds of projects.
    The challenge for us as early stage investors is that there 
is no class of capital that will fill that gap. So debt won't 
come in to a project that hasn't had a 5 to 10-year track 
record, and equity is way too expensive for an emerging 
technology, which will only be competitive once it's at scale, 
to actually get financed and get to scale.
    So it is a sort of twofold problem. The reason I bring that 
up is the context of the expertise, which is the challenge in 
this space is it takes a long time. So to go and develop a 
technology and prove it at some sort of lab or bench scale and 
then demonstrate it for some amount of time and then build your 
first commercial plant and then operate it for enough time to 
actually build your second commercial plant, and your third, 
that takes decades.
    So we have to figure out as venture investors how to invest 
in the innovation process in a small sliver of that, such that 
it makes sense, because there are other investors in the back 
end and such that--in a way where we can leverage the 
technology that exists before us, that's been created before 
us.
    The challenge is that to build that ecosystem of talent 
takes decades. It takes those researchers looking out and 
saying, there's an opportunity here, it's worth doing, or the 
government saying, there's an opportunity here, it's worth 
doing. That's well in advance of it ever being executed. So we 
need provisions that assure that people see that opportunity 
and continue to invest their time and effort in building it.
    If it goes away it's going to take a long time to rebuild.
    Mr. Zindler. If I could just add one quick comment, which 
is that--well, first, there are some efforts at the States. I 
certainly would advise looking at Connecticut is doing some 
interesting things, among others, and certainly what Richard's 
looking at in New York.
    The second thing is I would suggest looking globally, 
because the U.K. and Australia have now both established 
essentially green banks that are going to be looking at this 
area. So internationally, other countries have recognized that 
this is a national priority and have been thinking about ways 
to leverage national resources to invest in new technology 
development to bridge what I think Will very accurately points 
out is this sort of valley between when a technology is first 
being developed to when it has to actually be proven at some 
level of scale.
    Senator Baldwin. Thank you.
    The Chairman. Thank you, Senator Baldwin.
    I think we have a few additional questions. One I wanted to 
ask you, Mr. Coleman, just to sort of see if you can walk us 
through some of the things that you think are promising. I 
think you heard me talk earlier about storage technology. 
That's something I put a lot of chips into and, frankly, I was 
kind of skeptical. We've been at it for 3 or 4 years now and my 
staff started talking to me about it, and after a few 
algorithms I was pretty much asleep. It's clear now that it has 
such an important connection to renewables, because it's 
obvious that the sun doesn't always shine, the wind doesn't 
always blow, and then along comes storage technology to give us 
an opportunity to address those issues.
    Anything else that you're particularly attracted to now, if 
you could just wave your wand? Again, this is not to light up 
everything on Wall Street this morning as if you're giving 
investment advice, but just in terms of----
    Mr. Coleman. My investment advice, as an early stage 
investment it would take a long time to matriculate to Wall 
Street.
    The Chairman. There you are.
    Mr. Coleman. I would say that you should talk to the 
entrepreneurs because they're the ones who, their eyes light 
light up when they talk about any one of these technologies. We 
try and pick the ones that can actually succeed, and we try and 
do it in a very broad way.
    I would say that there is an opportunity now in the current 
market dynamic to go out there and think about the technologies 
that already exist and how to optimize those, in particularly 
new technologies like wind, solar, storage, CHP, you name it. 
There are a lot of opportunities to combine these technologies. 
So we're seeing an increasing application of the kinds of 
optimization software and approaches that you see in other 
sectors being applied to the assets that we have in place to 
make sure that we deal with things like intermittency and being 
able to deploy at the time of need. All those issues are 
important.
    I wouldn't say there's a silver bullet out there. I would 
say that there are a lot of promising technologies, and I 
think, honestly, there's still way more to invest in areas like 
solar and wind and storage, particularly materials systems that 
change the way we think about those technologies.
    The Chairman. Let me ask one last question and the entire 
panel can get into it. That's the question of pricing carbon. 
As you all know, some countries have taken the approach that 
they ought to just go ahead and put a price on carbon emissions 
directly. I'd be curious just by way of getting your 
assessment: How many of the issues, financing issues for 
example, go away if you take that step? In effect, you will 
continue to have questions about a variety of approaches with 
respect to climate, but how many of the issues that we're 
talking about here today, that we're thrashing about over here 
in the Congress, go away if you put a price on carbon emissions 
directly?
    Mr. Zindler was reaching for his mike.
    Mr. Zindler. I'll take a hack at that, which it's a very 
interesting question. I guess to just go back to my testimony 
for one moment, I would say that the best way to address all 
the financing issues that are out there is to create a clear 
signal of demand for clean energy, and that in turn would make 
more projects more appealing, more financeable, immediately. So 
I should put that out there.
    Now, whether a price on carbon is the thing to do that is 
an interesting question. If you put a CO2 price into 
the market right now, I would argue that you will certainly 
help with the continuing development of natural gas, but you 
will not necessarily see the kind of growth in zero emissions 
energy projects that I think some people might always hope for.
    We've done a survey, we did a survey of our clients a few 
years ago in Europe, where they have had a price on carbon and 
they've also had heavy feed-in tariff subsidies to support 
specifically solar and wind. We asked a number of the 
utilities, what was your motivation for adding wind and solar 
capacity? They were much more inclined to say the specific 
feed-in tariffs on renewables more than they pointed to the 
price of carbon.
    So I'm always a little wary of people saying that it's just 
purely a panacea to put a price on carbon and then you'll get 
renewables here. You certainly will get some more renewable 
build, but it will be an unpredictable build for sure. I guess 
the question is back, obviously, to the committee, which is 
what's the priority? If it's purely to drive down 
CO2 emissions, then obviously you can achieve that 
goal, I think, through a price on carbon. But if it's to drive 
down carbon emissions and develop other new technologies that 
are zero carbon, it may not be sufficient just to have a 
CO2 price.
    The Chairman. Mr. Coleman--Mr. Kauffman, why don't you go 
next, and then we'll go back to Mr. Coleman.
    Mr. Kauffman. I guess what I would say is that some of the 
things we're talking about in terms of financing gaps are not 
solved by a price on carbon. So I'll give you a good example 
which also picks up the question about ATVM. One of the issues 
with the ATVM program is it's focused on manufacturing and it's 
not focused on things that might enable manufacturing, like 
charging stations. So charging stations are economic--I'm 
talking about charging stations that are out, not in your 
garage, but out there, and you need a certain percentage of 
charging stations in order to--so people get comfortable 
driving.
    Those charging stations are economic. They will generate a 
rate of return to the investors that would invest in the 
charging stations if they could get debt. They're not 
financeable. So it's an example of something that's economic 
today, but not financeable. The cost of carbon would not change 
that.
    The Chairman. Others, carbon.
    Mr. Coleman. I think it's actually a really interesting 
example of what a long-term program would do, whether it's 
carbon or any other metric. I think if you give the market the 
kinds of signals that a long-term price on carbon would give, 
you would see people feeling around to solve that problem.
    I think that, particularly if you make it something that 
scales in over time, you could see something where early stage 
investors would get in to solve a problem where there's a clear 
reward for doing so.
    On the other hand, I think that it wouldn't solve all the 
financing problems, exactly as Mr. Kauffman pointed out. I 
think that there are scaling challenges, that still this this 
financing gap I've talked about for unproven technologies is 
still a problem. There is not a type of capital that will fill 
that void. I also think there'd be a problem with 
infrastructure. So I don't think that--I think the challenge 
would be areas where you can't tie a direct reduction back to 
the actual investment would be a challenge.
    The Chairman. These are good answers, and part of the 
reason I worded the question the way I did is I think we're 
certainly hearing not everything is resolved. The question 
would be how many, if any, of the problems we're talking about 
today would be resolved by pricing carbon.
    All right. Anybody else?
    Mr. Loris. Yes, I would like to just quickly add to Mr. 
Zindler's point. The Heritage Foundation recently ran a model 
as to what a phaseout of coal would do and we used the same 
model essentially that the Energy Information Administration 
uses and found a 42 percent increase in renewable energy, but 
that only makes up 4.5 percent of the market. The majority of 
it is made up by natural gas, and it increases natural gas 
prices, we found, over a 15-year period by 42 percent.
    So I think this phaseout of coal, whether it's by a price 
of carbon or if it's by the regulations that are being imposed 
by this administration are going to have or the the consequence 
of raising natural gas prices and really I think squashing this 
manufacturing renaissance that we're seeing as a result of the 
shale gas revolution.
    The Chairman. All right. Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman. Just one very 
quick, hopefully last question to you, Mr. Davidson, and then 
I'd like to pose a question to the panel here. This is back to 
the ATVM loans. You've noted the success of Tesla. I noted the 
very precarious position that Fisker is in, on the brink of 
bankruptcy. We've also got the Vehicle Production Group, which 
received a $50 million loan from DOE and has ceased operations 
and fired nearly all of its employees.
    So can you give me a very quick update on the status of 
these 2 loans for these 2 companies? Are we looking at any 
potential taxpayer losses with these, do you know?
    Mr. Davidson. Thanks, Senator, for the question. Both of 
those loans are now being worked on in real time. There are 
issues with both of them, so I can't give you specific 
commentary on them. But there has been public, widely 
disseminated information about Fisker and VPG in the press, and 
we are taking the steps really in real time to deal with both 
of those situations.
    Senator Murkowski. My hope, of course, is that we don't see 
losses that the taxpayers will be carrying on this. Again, I'm 
looking at this specific program and really questioning whether 
or not we need a specific program. It was not too many years 
ago that the industry voluntarily stepped forward and say, yes, 
we'll move on with the CAFE standards, and a big ceremony in 
the Rose Garden, and the next thing you know we now have a 
program to help them all out there with subsidies.
    So anyway, I don't mean to dwell on that. I would 
appreciate, as you're responding to the questions that the 
chairman has asked you to respond to, that you can give me more 
of an update on these 2 loans as well.
    Then to the panel here: This is a broader question here, 
but it's one that I raised in the policy report that I issued 
some months ago, my ``Energy 2020.'' In that I expressed my 
view that the Federal Government should prioritize more on the 
research activities side rather than deployment subsidies.
    So the question that I would have to you is whether or not 
you think that the Federal Government has struck the right 
balance here between clean energy research and clean energy 
subsidies, and then whether or not you believe it's more 
appropriate and perhaps a more effective role for the 
government to act as a facilitator for fundamental research 
that might not be undertaken by the private sector, or is the 
role of government to serve as the provider of deployment 
subsidies?
    So have we reached the right balance? Where should we be? 
Because I'm looking at this and saying we can spend a lot of 
money in a lot of different places, but where is that more 
appropriate role?
    I don't care where I start. Mr. Loris, we can start with 
you and go on down the way.
    Mr. Loris. Sure. Heritage is opposed to all energy 
subsidies, so for oil and gas, for renewables. We don't 
necessarily view that as the role of the government. But when 
it comes to Department of Energy research, we think there is a 
critical role to provide that basic research to meet whatever 
security needs, whatever the necessary actions that are for the 
Department of Energy to undertake and allow the private sector 
come in and commercialize that research. We think there's 
tremendous opportunity there.
    In fact, we recently released a report with the Center for 
American Progress on this very issue, identifying the 
bureaucracies and the challenges of the national labs to 
increase their flexibility and really return to that GOCO model 
that the labs were initially intended to serve. I could submit 
that report for the record to show how we can really remove 
some of the institutional bureaucracies in the lab to create 
these innovations, like we've seen in some of the national 
security research, like the Internet and like and like GPS. I 
think that's the model moving forward for innovation and 
economic success.
    The Chairman. Thank you.
    Mr. Coleman.
    Mr. Coleman. I think it's a challenging and very large 
problem and question. I think that the question is what problem 
are you trying to solve as the Federal Government, and I think 
that I certainly agree with the fact that we need to be putting 
more into research. I think we as early stage investors have 
drawn on that historically throughout the entire existence of 
the venture capital industry. So I think it is something that 
if we ignore it will atrophy and it'll be very difficult for us 
to enter into these sectors.
    I think in terms of the deployment side of the equation, we 
are biased toward thinking that we should help deploy 
technologies that need the help and get them to scale and then 
get out of the way and roll off and let the market work. I 
think the challenge on the deployment side is if it's purely a 
supply problem then there's a reason for the government to be 
involved in continuing to foster supply. If it is a cost 
problem, then there's a different way of approaching the 
deployment problem. If it's an innovation problem, then there's 
a different way.
    Our bias is that if you can support innovative technologies 
then you will solve those problems without having to create 
permanent structures that support them until we don't know 
when.
    Senator Murkowski. Which of course is the problem. We 
continue to support them.
    Mr. Zindler.
    Mr. Zindler. I guess I would say that if your goal--and 
this is the ``if,'' because I know not everybody agrees on 
this. But if your goal is to create a strong and vibrant and 
competitive U.S. clean energy sector over the long term, then I 
think, unfortunately, perhaps from a spending perspective, the 
answer is you need both, because they are part of an integrated 
whole.
    If you want to inspire creativity and investment and 
venture investment back at the beginning of the technology 
chain, you need to show that at the end of the line there's 
going to be a big market at the end of it as well. I think 
scale, sort of on the theme of some of the things I've said 
earlier, scale really is important. I think Richard mentioned 
that these days we've seen this incredible decline in the cost 
of a solar module, right, but we've seen nowhere near as much 
of a decline in the cost of the end cost that the consumer 
gets.
    So for instance, in Germany right now they're installing 
residential systems for as low as $2.25 per watt, watt, but in 
California and other places it's $4, $5, $6 a watt. There's no 
reason for that discrepancy other than that market in the U.S. 
has just simply not reached the kind of scale that we've seen 
in European markets.
    So if the goal is to bring costs down, we need scale on 
deployment. We also need scale in terms of investment in R and 
D as well.
    Senator Murkowski. Thank you.
    Mr. Kauffman.
    Mr. Kauffman. Thank you. We do need to support both 
innovation and deployment. Deployment matters because, as Mr. 
Zindler just said, scale matters. Renewable energy I believe is 
the only energy source that the more of it you make the cheaper 
it gets. So R and D is not going to be enough. Some of the 
deployment stuff isn't--and the innovation--isn't hard 
innovation. It may be just the learning that comes from taking 
what comes out of the truck first, and that just comes through 
lots of processes.
    All of us have heard, I think, of Moore's Law about the 
semiconductor industry. It shows how every so many months you 
have a doubling of improvement. That's not a law of physics. 
That's a law of markets. It's because there's a market into 
which chips are sold.
    I think when we talk about the financing of innovation its' 
hard to tell how much of the financing of innovation and the 
problems in the sector are due to the inherent nature of 
financing innovation and how much of it is due to the fact that 
we're trying to finance innovation on the back of a financing 
infrastructure generally in this sector that's incredibly old-
fashioned and anachronistic.
    That's one of the reasons why I think we have a valley of 
death that's as big as it is. So if you could imagine creating 
capital markets instruments that were for the kinds of things 
that are broadly available for both equity and debt for 
investment-grade large utility-scale projects that paid, say, 
for equity 6 or 7 percent yields, you could easily imagine the 
subsequent evolution of instruments that would pay a somewhat 
higher yield, that took a little bit more risk in technology or 
credit, just in the way that the high yield market followed the 
investment grade market.
    That's what the bulk of the 1705 program's doing. So you 
could imagine actually the markets solving what was otherwise a 
government problem.
    The last point I just want to make is, when we talk about 
deployment I think the things that I was talking about are not 
about subsidy. It's about government involvement removing some 
of these obstacles and creating a better and more up to date 
financing structure for deployment, which will lower the cost 
and shorten the valley of death for innovation.
    The Chairman. Mr. Davidson.
    Mr. Davidson. Thank you, Senator. I like that term 
``integrated whole,'' because I think that really is what's 
happening. If I look at the Department of Energy, which I have 
a very good understanding of, we have certain parts--the 
national labs and ARPA-E--which are doing a very important part 
of contributing to innovation, and they essentially hand off a 
project to the deployment areas of DOE, the fossil area, energy 
efficiency, and the nuclear programs. They will do a 
demonstration project, and from that we'll have something 
proven but not yet commercialized.
    Then we get into this valley of death, this tricky area, 
where there are equity investors willing to put in money, but 
because it's the first commercial scale deployment or the 
first, second or third, there is not the significant, 
oftentimes hundreds of millions of dollars, that need to be 
committed to the project to make it viable, to really test out 
the technology. Once that technology is proven, as Mr. Zindler 
said earlier, once the technology is proven, there is a great 
deal of capital ready to come in. So it is that fundamental 
question of how you prove out a new technology at scale so that 
it can really contribute to helping energy creation, greenhouse 
gas, or in automotive.
    So I think all components are crucial. So it's very 
important--it's very tricky, but I would not want us to lose 
sight of the very significant resources that are needed, that 
you have committed to the programs that we oversee in the LPO, 
but that are absolutely crucial to deploying technology, new 
innovative technology, at utility scale.
    Senator Murkowski. Mr. Chairman, thank you.
    To all our witnesses, thank you for the time you've given 
us this morning and the information shared.
    The Chairman. Let's just recap on where we are. Mr. 
Davidson, we need to have a response from you to Senator 
Murkowski's important questions. We'll need that within 10 
days; and also Senator Manchin's questions with respect to the 
fossil program that you talked about, the new $8 billion 
program that he has important issues that he wants raised.
    Then, Mr. Coleman, let me formally ask you that, with 
respect to your innovation credit--love the concept. I'm very 
interested in hearing what you think ought to be struck from 
the tax code in order to fund that. I can tell you, I also 
serve on the Finance Committee. I've been at this tax reform 
effort for a full decade, and Rahm Emanuel and I introduced the 
first bill in almost 20 years, and that was some time ago 
because he's moved on to a number of other very valuable public 
service efforts, and then Senator Gregg and I sat across from 
each other for almost 2 years so that we could put together the 
first bipartisan bill. He then retired. In addition, Senator 
Coats has been very constructive on this, along with Senator 
Begich and a number of other Senators.
    It always comes down to the question that I'm asking you: 
what you would strike from the code in order to actually 
address some of these issues? By the way, I think Mr. Loris 
knows that we have talked extensively to Heritage about these 
issues over the years.
    So let's make that your question. Do you think you could 
get us an answer say within 10 days with respect to the 
credits?
    Mr. Coleman. We can work on that completely uncontroversial 
question in the next 10 days.
    The Chairman. I just thought since you volunteered it in 
your testimony, I'd follow up.
    Here's the point with respect to where we are. I think 
you've heard from Senator Murkowski and I pretty clearly that 
we think that there is a very significant role that has to be 
afforded the private sector and marketplace forces and a broad 
berth to encourage the kind of investments that come from the 
private sector that can be so important. government, and the 
question, as we talked about today, is how do you do it and how 
do you do it in a smart and creative way. I tried to lead into 
it that this has a new sense of urgency on the question of 
climate finance now with that remarkable, really very ominous, 
finding from NOAA here a couple of weeks ago.
    So you all have been very good and very helpful, and I 
think you've seen we want to tackle these issues in a 
bipartisan way. So we'll look forward to your responses.
    With that, the Energy Committee is adjourned.
    [Whereupon, at 11:43 a.m., the hearing was adjourned.]

                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

       Responses of Will Coleman to Questions From Senator Schatz

    Question 1. Several witnesses touched on this in the hearing, but 
it is important to further explore the effectiveness of county and 
state-level policies to support clean energy financing versus similar 
policies at the federal level. In recent years it seems safe to say 
that certain states have had far more success at implementing 
innovative programs than Congress. My home state of Hawaii is one 
example. We are making good progress in implementing the Hawaii Clean 
Energy Initiative, which establishes aggressive clean energy standards. 
In addition, the state legislature recently passed a Green Market 
Securitization Program (GEMS) which uses on-bill financing for 
residents of all income levels to avoid the high up-front costs 
associated with solar panels.
    How effective can these state programs be, relative to federal 
government efforts, which invariably will have more financial 
resources? What is the opportunity for establishing regional 
initiatives--a ``New England Green Bank'' for example--that pool 
resources from multiple states. Would such a structure even be 
desirable?
    Answer. State initiatives can be extremely effective at driving 
local deployment and in some cases local industry development. However, 
most of these programs are targeted at attracting existing businesses 
or creating market demand for existing technologies through regulation. 
Very few have addressed the need for private investment in innovative 
technologies and deployment of these innovative technologies. Only a 
few markets such as California or regional partnerships, if aggregated, 
have markets large enough to drive early stage investment in 
technologies that address regulated needs. But even these are typically 
not large enough to provide the necessary incentive for investors to 
take early stage technology risks. So regional programs can be set up, 
but often regulators are left asking why more companies don't show up 
to meet the market need created.
    Some states have begun to set up financing structures for clean 
technologies. My co-witness Richard Kaufmann spoke about New York 
State's efforts to create a ``green bank.'' Such an entity could be 
very helpful in supporting deployment of current technologies and may 
attempt to address the early commercialization and scale-up challenges 
I discussed in my testimony; however, this approach is better as a 
rifle shot at specific high potential technologies. The advantage of a 
federal tax structure like the new energy innovation tax credit I 
discussed during the hearing is that it creates a single, clear 
incentive for investing in new technology commercialization across the 
entire energy sector. It provides the kind of long-term signal that 
draws capital into the market long before any single company or 
technology would actually use the credit. It would also be self-
executing in the near term. Innovative energy companies entitled to the 
credit would claim the credit on their tax returns (much like a refined 
R&D credit), or transfer the credit to their strategic partners, and 
use the credit to finance their first commercial manufacturing plants. 
No organization needs to be set up, no screening needs to take place, 
and no funds need be appropriated for a ``green bank'' entity. The tax 
credit provides a unique level of transparency and simplicity due to 
its clear and consistent qualification criteria. Regional Green banks 
or other regionally specific programs could be excellent complements to 
such a credit.
    Question 2. Most of the discussion at this hearing focused on 
options for creative financing policies for large entities building 
utility-scale projects. It is important to examine the suite of 
financing ideas directed at consumers for distributed generation and 
efficiency investments. Ideas such as property assessed clean energy 
(PACE), on-bill financing (similar to PACE but financed through 
electric bills instead of property taxes), and leasing structures 
(largely for residential solar), are three of the most often discussed 
methods.
    Please discuss how financing structures directed directly to 
consumers can be helpful to clean energy deployment relative to 
structures such as a national green bank or innovation tax credit. How 
effective are these structures at spurring demand and overcoming high 
up-front costs to consumers? Designed properly could they be more 
effective than current federal tax credits, or are these credits also 
necessary? Are you aware of any barriers to smaller-scale financing 
efforts?
    Answer. Consumer-focused financing structures such as property 
assessed clean energy (PACE), on-bill financing (similar to PACE but 
financed through electric bills instead of property taxes), and leasing 
structures (largely for residential solar) can help broaden the market 
support for new energy alternatives and overcome some of the additional 
financing costs typically associated with emerging solutions. Financing 
costs are higher on these technologies because the financing community 
perceives ``new'' as riskier even when these technologies have a fairly 
long operating track record. So they are harder to finance, insure, and 
sell than more proven technologies. These financing structures are 
helpful to overcoming early barriers to entry for emerging technologies 
because they can offset some of the market resistance that typically 
exists.
    However, consumer-focused structures still typically drive demand 
only for the most proven technologies within a category and do not 
provide enough ``pull through'' to drive investment in the next 
generation of technologies. If we put these mechanisms in place but do 
not overcome the gap for financing and scaling less proven technologies 
to feed the demand then we may end up simply driving demand for 
technologies manufactured elsewhere. Countries like China, for example, 
chose the opposite approach of financing the manufacturing first to 
meet global market demand and then spurring domestic consumption to 
augment the market.
    Question 3. Cheap financing is important to scale up renewable 
energy, and as a consequence, drive down costs. I agree with this in 
principle but since most renewables use power purchase agreements to 
sell energy to utilities, it seems that securing a long-term stream of 
income may be more important. Power purchase agreements typically need 
to be approved by Public Utility Commissions. Similar to transmission 
constraints, there may be other issues limiting the scaling of 
renewables even with improved financing. What are your thoughts on 
addressing these other issues? How do they compare to the need for 
cheap financing in terms of importance to the renewable industry?
    Answer. Thank you for this question. It highlights some of the 
subtlety of how regulation and finance interact in energy markets. 
First, it is important to differentiate between the challenges of 
scaling renewables as a whole versus scaling an individual renewable 
technology. When I spoke at the hearing about the scaling challenge I 
was focused on the difficulty of financing and scaling the production 
of an individual new innovation such as a new type of solar cell or a 
new type of wind turbine blade. The question focuses on how regional 
regulatory bodies drive the growth of a specific category like 
renewables as a whole.
    PPAs and Public Utility Commissions do play a large role in 
dictating the growth of renewables as a whole. For the newer 
innovations they also play a role in that it is important that 
utilities be willing to sign PPAs for unproven technologies to assure 
the financing community that if it is built then the utilities will buy 
it. Without these PPAs, project financing is impossible. Unfortunately, 
some of the changes in the tax code have actually made it harder for 
utilities to sign prospective PPAs due to how they impact their debt-
coverage ratios. However, even with these PPAs, emerging technologies 
still need to get to a sufficient scale and operating track record to 
be used in a power project. The PPA helps, but does not solve the 
scaling challenge for individual new technologies, which means we risk 
not having the technologies necessary to continue driving down the 
costs of new PPAs and supplying them with U.S. manufactured products.
    It's also important to note that the innovation credit we are 
proposing is targeted at innovation across the energy industry broadly. 
PUCs and PPAs influence only regulated electric power production and 
not the broader energy industry such as distributed generation, private 
power assets, fuels, etc.
    There are many obstacles to deploying new technologies, but the 
lack of financing for the scale-up of new technologies is a fundamental 
barrier that prevents the United States from continuing to develop 
better, more cost effective solutions. If we don't address this 
financing gap then we will not be the ones to supply the solutions to 
meet regulated demand.

        Response of Will Coleman to Question From Senator Wyden

    Question 1. What sort of impact on investment would it have for an 
entity like the DOE to take an expanded and more defined role to 
evaluate and report on the technical progress of different technologies 
that companies were developing? In effect, the DOE would serve as an 
impartial reporter to benchmark these technologies and make that 
information available to potential investors.
    Answer. To the extent that such an expanded and more defined role 
for DoE would establish a two-way dialog between DoE and energy 
investors, such a role could be useful. To some extent, this already 
happens. While information exchanges with the national laboratories has 
been sporadic over time, ARPA-e has made a concerted effort to share 
its analysis of breakthrough technology areas with the investment 
community. The highly successful ARPA-e Summit may be the most visible 
example, but the ARPA-e program managers have been consistently 
striving to gather and share information and perspectives with the 
energy technology investment community about developments in their 
program areas and areas of opportunity that could be transformative for 
future programs.
    Some of the programs under the Assistant Secretary of Energy for 
Energy Efficiency & Renewable Energy have also been diligent in seeking 
industry input, both in terms of the realistic goals they should set 
for their programs and in terms of technology developments that are 
most likely to help them achieve those goals.
    The value of a benchmarking program depends on the objective. It 
could be useful for creating more transparency about the state of 
technology development such that research and investment is not wasted 
on duplicate efforts or irrelevant performance targets. However, if the 
hope is to reduce the perceived risk of a new technology to make it 
easier to finance, technology qualification is not the primary issue. 
Many independent engineering firms exist that provide qualification and 
performance assurances. The risk associated with a novel technology 
that makes it hard to finance is a combination of technology, 
execution, market-timing, counter party (exacerbated for small 
companies), and lack of residual value if a one of a kind technology 
fails. Large amounts of capital and time may be required to build a 
first plant at a scale that produces a cost-competitive product. 
Benchmarking by the DOE may complement what independent engineering 
firms are doing, but it is one piece of the equation.
    Any effort to create a more significant role for DoE to evaluate 
and report on technological progress would have to: (1) establish 
robust two-way communication channels between the technologists at DoE, 
on the one hand, and technologists in the investment and 
entrepreneurial community; (2) work in real time, by making fast-
changing technology developments the center of the dialog; and (3) be 
transparent to, and open to sometimes critical input from the full 
scope of the technology community--including academia, corporate 
research labs, government research labs, technology investors, 
entrepreneurial technology companies, and technologists in similar non-
US institutions. A real-time, two-way dialog is critical to the 
investment community as technology advancements occur frequently, and 
analysis needs to up to date to be useful.
                                 ______
                                 
     Responses of Richard Kauffman to Questions From Senator Schatz

    Question 1. Most of the discussion at this hearing focused on 
options for creative financing policies for large entities building 
utility-scale projects. It is important to examine the suite of 
financing ideas directed at consumers for distributed generation and 
efficiency investments. Ideas such as property assessed clean energy 
(PACE), on-bill financing (similar to PACE but financed through 
electric bills instead of property taxes), and leasing structures 
(largely for residential solar), are three of the most often discussed 
methods.
    Please discuss how financing structures directed directly to 
consumers can be helpful to clean energy deployment relative to 
structures such as a national green bank or innovation tax credit. How 
effective are these structures at spurring demand and overcoming high 
up-front costs to consumers? Designed properly could they be more 
effective than current federal tax credits, or are these credits also 
necessary? Are you aware of any barriers to smaller-scale financing 
efforts?
    Answer. Financing obstacles manifest most acutely in small 
renewable energy and energy efficiency projects. Bank capital rules 
make it difficult for banks to lend to smaller projects which, by their 
very size, are below investment grade. Without aggregation of smaller 
loans into instruments that can be sold to bond investors, bond markets 
cannot provide financing either. In fact, while the financing 
innovations highlighted in the question (solar lease, PACE, and on-bill 
recovery) offer benefits for consumers, the entities that may wish to 
offer these financing products have difficulty financing themselves 
because they have not been able to access bond markets for their 
underlying financing.
    Moreover, large, utility scale projects can get access not only to 
bank and bond markets, but they have a much easier time tapping the 
limited tax equity market; smaller projects often can't get tax equity 
at any cost. Given that energy efficiency and rooftop solar are 
distributed solutions that can improve resiliency and help grid 
efficiency-and by definition are deployed at the individual building 
level-we cannot gain scale in advancing distributed solutions without 
addressing financing obstacles to smaller projects.
    A national green bank along the lines of DOE's Loan Program Office 
would be helpful if it provided financing to wholesale intermediaries 
(finance companies and service providers) who served smaller customer 
segments. In addition, as discussed elsewhere in earlier testimony and 
in the following answers, a national green bank should standardize 
contracts, establish market standards for data, and aggregate smaller 
loans into large bonds that could be sold to the bond markets. Just as 
banks and other finance companies aggregate credit cards and car loans 
to sell into bond markets, these financial entities could similarly 
aggregate consumer related clean energy loans. As an early example of 
this approach, in August 2013, NYSERDA sold a portfolio of residential 
energy efficiency loans to the bond market. Once there is a robust bond 
market that would provide underlying financing to entities offering 
financing to smaller projects, it may be that there is no further need 
for government involvement. Put differently, it is important to 
separate the roles of a national green bank in providing subsidy and 
the role of a state green bank in providing financing where market gaps 
make obtaining financing difficult. Many smaller projects do not 
require subsidy but instead require access to financing which bond 
market structures could provide.
    It is not clear to me how an innovation tax credit would help in 
deployment of clean energy projects, unless its intent were to give a 
tax credit to deploy a more innovative product (a next generation solar 
panel, for example). If so intended, such a tax credit would face 
several obstacles. First, it is already difficult for exiting tax 
benefits to be monetized for smaller projects, so adding another tax 
credit will strain an already limited tax equity market. Second, banks 
only lend to technologies that they consider to be ``bankable:'' in 
other words, banks need to review performance of equipment for a 
considerable amount of time in the filed before lending against it. A 
tax credit might initially attract a customer to consider a new 
technology but without a government warranty or guarantee on equipment 
performance, a customer would be unable to get a loan. And the same is 
true for the tax equity market; since tax equity investors largely get 
a fixed rate of return over a period of time, they do not have much 
interest in providing capital to projects that use innovative 
technology.
    Question 2. Several witnesses touched on this in the hearing, but 
it is important to further explore the effectiveness of county and 
state-level policies to support clean energy financing versus similar 
policies at the federal level. In recent years it seems safe to say 
that certain states have had far more success at implementing 
innovative programs than Congress. My home state of Hawaii is one 
example. We are making good progress in implementing the Hawaii Clean 
Energy Initiative, which establishes aggressive clean energy standards. 
In addition, the state legislature recently passed a Green Market 
Securitization Program (GEMS) which uses on-bill financing for 
residents of all income levels to avoid the high up-front costs 
associated with solar panels.
    How effective can these state programs be, relative to federal 
government efforts, which invariably will have more financial 
resources? What is the opportunity for establishing regional 
initiatives-a ``New England Green Bank'' for example-that pool 
resources from multiple states. Would such a structure even be 
desirable?
    Answer. There are several reasons that states and local level 
entities should play a role in financing of clean energy projects. The 
projects are local, building codes are local, much utility regulation 
is done locally, and it is increasingly clear that local communities 
can play a major role in stimulating interest in and demand for 
projects. This last point is particularly important in both residential 
solar and energy efficiency. Community involvement in residential solar 
can lower costs by as much as 25 percent since a service provider gets 
scale of installations. In residential energy efficiency, the challenge 
is less financing and more a result of a low level of demand; community 
involvement seems to show the most effective means of generating 
demand.
    It is for these reasons that New York, along with several other 
states, is setting up a state green bank. As stated elsewhere in 
testimony and in answers to questions, it will work in partnership with 
intermediaries (financial institutions, service providers, or community 
groups) that are making progress with customers but where their growth 
is constrained by the lack of availability of financing rather than 
cost of financing. The bank also intends to work in conjunction with 
other entities in establishing standards to encourage bond markets.
    There are limits to what states can do alone, even large states 
such as New York working in collaboration with others (which we intend 
to do). First, states do not possess the borrowing costs of the federal 
government and therefore cannot offer the potential for providing 
subsidy. States must then use subsidies very scarcely; New York's green 
bank, as noted above, will emphasize opportunities where there are gaps 
in financing, rather than provide subsidy. The federal government can 
offer a financial guarantee that is superior to most states; such 
guarantee could provide assurance to financiers as to equipment 
performance or act as bond insurance to facilitate bond market 
instruments.
    Question 3. Cheap financing is important to scale up renewable 
energy, and as a consequence, drive down costs. I agree with this in 
principle but since most renewables use power purchase agreements to 
sell energy to utilities, it seems that securing a long-term stream of 
income may be more important. Power purchase agreements typically need 
to be approved by Public Utility Commissions. Similar to transmission 
constraints, there may be other issues limiting the scaling of 
renewables even with improved financing. What are your thoughts on 
addressing these other issues? How do they compare to the need for 
cheap financing in terms of importance to the renewable industry?
    Answer. While ongoing costs of renewable energy of electricity are 
very low in comparison to conventional generation since feedstock costs 
are zero, upfront costs are greater. Therefore, the challenge in 
achieving grid parity involves reducing all costs-hardware costs as 
well as a range of ``soft costs'' including customer acquisition and 
development costs, permitting, installation, and financing. The 
question above highlights the relationship between the importance of 
power purchase agreements (PPAs) and financing, although it is 
important to break the value of PPAs into two pieces. First, PPAs 
represent customer demand and since lower cost financing would reduce 
total systems costs, lower costs would increase the demand; put simply, 
through price elasticity of demand, lower costs mean more PPAs. Second, 
because upfront capital costs for renewable energy are inherently high, 
it is difficult to obtain either debt or equity financing without a 
long term purchase commitment.
    The broader question is what other obstacles exist beyond financing 
costs that prevent utilities from entering into more PPAs. Even though 
Renewable Portfolio Standards (RPS) that states have adopted are the 
primary driver behind demand, this policy approach has some weaknesses. 
First, since overall demand for electricity in many parts of the US is 
low, utilities have limited inherent interest to add to generation of 
any sort. Second, utility scale renewable projects do not help in 
improving grid efficiency any more than conventional generation; in 
fact, given concerns about intermittency, renewable projects require 
some conventional backup. Smaller projects located near bottlenecks or 
in capacity constrained markets could help improve system efficiency, 
but few state regulators have created economic incentives for system 
efficiency; the industry and its regulatory regime is still oriented to 
deploying capital rather than on capital efficiency. Nor does the 
wholesale pricing regime adequately take in to account the value that 
distributed solar provides to grid stability.
    In sum, removing financing barriers will go a long way to improve 
scale and adoption of clean energy, particularly for smaller projects, 
but financing alone is not enough. Getting the right market signals and 
regulatory rules are the other part of the puzzle.

     Responses of Richard Kauffman to Questions From Senator Wyden

    Question 1. In your testimony, you recommended that the federal 
government should play a role to standardize contracts for small clean 
energy and efficiency projects, as well as collect data on these 
projects. Could you please expand on how the government would actually 
go about this standardization, and discuss how much of an impact you 
think it would have on clean energy deployment and job creation?
    Answer. Federal government involvement in contract standardization 
and data collection could have a significant impact on clean energy 
deployment, which in turn will promote job creation and economic 
development across the United States. One particular area where the 
Federal government could play a role is through the bond market, as 
better access to bond market financing data would help advance clean 
energy. As one example, more than 70 percent of New York's homes were 
built before 1970; virtually all can be retrofitted with net savings to 
homeowners if there were adequate financing and business models to 
support the effort. To create bond instruments requires aggregating 
smaller loans into a single bond, and to accomplish aggregation 
requires standardization of contracts. In addition to aggregation, 
certain data on credit quality or on equipment performance needs to 
collect on a consistent basis so that investors and credit agencies can 
evaluate bonds.
    As it stands now, only large single projects (a large wind or solar 
park) with an investment grade power purchase counter party can issue 
bonds. Smaller projects-or projects with weaker credit characteristics-
cannot access the bond market. As a consequence, there are many kinds 
of projects (commercial and industrial solar, most residential energy 
efficiency projects, combined heat and power projects, smaller wind 
projects) where financing availability is limited. This limited 
availability of financing means less clean energy deployed and less 
economic activity generated. The solar industry in the U.S. now employs 
more than 100,000 people. With greater access to financing through 
access bond markets and continued lowering of costs through scale, the 
number employed could grow much larger and the potential employment in 
energy efficiency becomes much greater.
    While there are a number of banks, NGOs, and state governments 
working on these challenges, they are making only limited progress. The 
reason that there is a lack of standardization and inadequate data is 
that many market actors want to compete on a ``closed architecture'' 
basis; these actors include equipment manufacturers, utility companies 
that want to use their own power purchase agreements, and service 
companies that view specific equipment performance data as a 
proprietary advantage.
    While federal leadership can help, to be clear, if the federal 
government merely acts as a ``clearing house'' in trying to standardize 
contracts and data collection, it will not meaningfully accelerate the 
creation of a bond market. To change the game requires actors with 
greater market power that will lead the industry to ``open 
architecture'' competition. A clearinghouse only acts as a facilitator 
to other actors that have decided that they want someone to play that 
role in their interest. Simply put, to make a difference, the federal 
government will need to play a direct role in the market itself.
    There are two examples where the federal government can play an 
effective leadership role in accelerating the creation of the bond 
market. First, there are large energy efficiency and renewable energy 
projects deployed on federal and military facilities. None of these 
projects are financed with a structure that facilitates access to bond 
markets for financing or enables subsequent sales to bond markets. As a 
major customer, the federal government could use its market power to 
establish structures from which the private sector could also benefit. 
Second, for a restricted period of time, the federal government could 
provide a limited credit subsidy to borrowers; in exchange for 
receiving concessional financing, market participants would need to use 
certain standard contracts and supply certain data. Since rate payers 
would benefit from lower cost financing, public service commissioners 
would encourage utilities to standardize power purchase agreements.
    Question 2. What sort of impact on investment would it have for an 
entity like the DOE to take an expanded and more defined role to 
evaluate and report on the technical progress of different technologies 
that companies were developing? In effect, the DOE would serve as an 
impartial reporter to benchmark these technologies and make that 
information available to potential investors.
    Answer. This idea warrants further discussion with industry and 
investors. As there are third party testing laboratories (including 
universities and national labs) that already evaluate the technical 
performance of new technologies, it is not clear that there is any 
incremental benefit for an expanded federal ``stamp of approval' on 
technical merits alone of a technology. We know from the experience 
with ARPA-E and the New York State Energy Research & Development 
Authority, that government investment in emerging technologies can 
attract multiples of subsequent private sector capital, but these 
involve not just an evaluation of technology but also government 
capital; it is hard to know whether the interest from the private 
sector is related to which factor. In addition, the challenges to 
financing are different for each stage of a company's development.
    At the early VC (or pre-VC) basis, technology viability can (but 
not always) be the critical factor. However, other factors (the ability 
to bring down manufacturing costs, an effective publicity campaign en 
route to market, quality of management to execute plans and to attract 
and manage talent to grow a business are only a few examples) can 
typically become more important than the technology itself. As these 
are qualitative factors, they can be challenging for governments to 
assess.
    In raising capital for deployment of technology, capital providers 
are worried about the longevity of product life, costs of operations 
and maintenance, and as a consequence, have doubts about warranty 
protection from companies that are new with limited financial 
resources. In short, the answer to this question can be determined by 
engagement with lenders and investors to ask if there are market gaps 
that can be filled by federal evaluation of technical progress. At a 
minimum, one could imagine a ``Better Buildings'' type of challenge 
with lenders and early technology adopters (including government 
facilities) volunteering to work with new technology providers whose 
technical milestones have been evaluated by DOE.
    Question 3. Senator Sanders and I have introduced a bill to help 
states with residential energy efficiency retrofits. The new program 
would provide loans to states, which they could in turn use to reduce 
the cost of efficiency retrofit financing for consumers.
    What are the programs New York has in place to help homeowners 
retrofit their houses, and how would money loaned to the state from DOE 
help your efforts?
    Answer. At present, various New York State entities collect and 
spend $1.4 billion per year on renewable energy and energy efficiency 
projects. Of this amount, approximately $140 million is allocated for 
the residential energy efficiency sector through grants, rebates, and 
financing. While the Senate bill introduced would be helpful in 
providing a source of low cost financing to states, it is important to 
consider the following:

          a. The trigger to a homeowner's energy conversion decisions 
        is not typically low cost financing. Instead, customers appear 
        more motivated about issues of comfort or become interested in 
        energy efficiency conversion when there is community 
        involvement. While there is indeed a need to establish 
        financing instruments and markets to support residential energy 
        efficiency, the bigger problem today is creating the demand for 
        projects rather than supply of capital to finance them.
          b. Part of the challenge to generating more demand for home 
        energy efficiency projects is that the cost of customer 
        acquisition is very high. Each home is different and the costs 
        of eliciting customer interest, visiting homeowners and 
        evaluating projects are high. Again, the solution is less about 
        providing cheaper financing and more about finding ways to 
        lower customer acquisition costs for service providers by other 
        policies that can stimulate demand. These include grants to 
        communities to ``energize'' activity where towns generate 
        community interest for energy efficiency projects, accelerate 
        permitting where required, and provide information on 
        retrofits.
          c. In order to make the financing arrangement more permanent, 
        the use of federal funds should be combined with efforts to 
        establish data and standardized contracts to establish 
        securitized energy efficiency loans. NYSERDA recently released 
        a Preliminary Official Statement for $24.3 million in 
        Residential Energy Efficiency Revenue Bonds to finance and 
        refinance loans issued through the Green Jobs-Green New York 
        program to fund energy efficiency improvements in 1-4 family 
        residences. This offering will be one of the first energy 
        efficiency bond financings in the country, and as such, they 
        represent a helpful innovation, but the bonds could not have 
        been sold without a financial guarantee provided by the AAA 
        rating of the State Environmental Facilities Corporation. There 
        was insufficient history in underlying valuation and credit 
        history for rating agencies to rate the bonds at a high level 
        without a guarantee.
          d. The provision of low cost capital by the federal 
        government could be used to finance the capitalization of state 
        green banks. As Hawaii intends to do, by lending to energy 
        efficiency and renewable energy projects at a cost greater than 
        the federal rate, states would lower costs of financing to 
        projects, build an institution that is self-sustaining, earn a 
        modest surplus to cover losses, and to repay the federal loan.

    Question 4. Bond programs like the Build America Bonds I championed 
during the recovery dramatically increase infrastructure investment, 
making communities safer and creating jobs.
    In general, I like programs that increase the efficiency with which 
Federal dollars are used to support clean energy, and analysis shows 
that direct-pay tax credit bonds like the ones I've just mentioned 
achieve this. Both the Treasury Department and the Congressional 
Research Service have said that direct-pay tax credit bonds like these 
enable the federal government to use small amounts of money, leverage 
large sums of private capital, and build clean energy projects.
    What is the role for bond programs such as these financing both 
public and private clean energy projects going forward?
    Answer. As in the answer to question three, federal credit support 
to local projects can leverage private sector capital and thereby 
deploy more clean energy. In assessing this kind of federal 
intervention, it is important to consider the same general concepts 
discussed above. First, not every project requires subsidized 
financing; many projects simply need access to financing (or in the 
case of residential energy efficiency, the main constraint may not be 
financing at all). Second, for those projects that would benefit from 
subsidized financing, the subsidized financing costs need to be 
incorporated in market competition so that it has the effect of 
improving price elasticity of demand, perhaps best illustrated in lower 
power purchase prices (more contracts signed up because power prices 
can be lower because financing costs are less). Without the 
incorporation of lower financing prices in markets, the effect of 
subsidized financing incurs to project owners, increasing returns, and 
will not likely result in more deployment.
    By the same argument, it is best, then, for subsidized financing to 
be predictable for a period of time so that an industry can achieve 
scale, which itself will lower costs. Third, federal credit support 
should ``buy'' more than just more project deployment. Support should 
help create structures that extend beyond the support itself; these 
structures create even more leverage. One example is helping to create 
financing structures that will facilitate bond market development and a 
second is using federal credit support to capitalize a green bank.
    Question 5. During our hearing, my colleague Senator Coons 
described the bill he has introduced to allow clean energy companies to 
take advantage of Master Limited Partnership structures.
    What do you think will be the impact of that legislation on 
investment in commercialized and innovative clean energy technologies? 
How would you compare the effectiveness of that legislation in 
increasing the competitiveness of renewables to the effects of current 
incentives like the production tax credit or investment tax credits?
    Answer. Although equity in a clean energy project is a small amount 
of the capital required (in a typical wind or solar project, equity is 
around 10 percent), creating an MLP structure for clean energy will 
have a compounding effect well beyond a lower cost of equity (although 
it would lower the cost of equity by at least 25 percent). MLP 
structures would accelerate the creation of a debt market, since equity 
investors will have incentive--and market power--to collect data and 
standardize contracts. Put differently, MLPs will have a lower cost of 
equity and better access to liquidity than many competitors, and as a 
result will have influence through the value chain to drive 
standardization. The benefits of standardization extend beyond 
financing to other soft costs (e.g. permitting and installation). MLPs 
will also be able to act as aggregators for smaller projects which have 
difficulty accessing capital. And finally, once equity and debt 
structures have been established for large utility scale projects, it 
is easy to see an evolution similar to what occurred in investment 
grade debt markets where once investors become comfortable with market 
structures, they wanted an opportunity to earn higher yields that led 
to creation of the high yield debt market.
    Clean energy MLPs could offer investors higher yields if they took 
more credit risk (e.g., commercial and industrial solar) or technology 
risk (e.g., run of the river hydro, landfill gas, and anaerobic 
digesters). In this way, MLPs would play the role that DOE's 1705 loan 
program served in promoting deployment of innovative generation 
projects.
    Question 6. What, in your opinion, were the most significant 
changes DOE made to the loan guarantee program in response to Allison 
and other reports, and what do you think remains to be done?
    Answer. I was a Senior Advisor to Secretary Chu from September 2011 
until February 2013. While my original mandate was to help the 
Department with clean energy finance policy, in the wake of the 
Solyndra bankruptcy, part of my duties included helping oversee the DOE 
Loan Program Office. (LPO). In this regard, I was a key point of 
contact with the Allison team. I agree with the valuation conclusions 
of the Allison report (and with others that have also been done): the 
actual cash losses to tax payers of the program will be substantially 
less than the credit subsidy appropriated by Congress to cover losses. 
The bulk of the portfolio consists of loans to power generation 
projects and to large auto companies, not to smaller, riskier 
manufacturing companies.
    Nonetheless, there are improvements that LPO has made in monitoring 
the portfolio. While the LPO staff is highly professional, the key to 
making good credit and monitoring decisions is a culture where there 
are many eyes looking at a situation. It is in this area where there 
have been substantial improvements due to increases in portfolio 
management and risk management staff and in governance processes. The 
Risk Committee, in particular, has created a forum where all non-
routine issues-from deviations in forecasts, to covenant changes, to 
decisions on funding-are thoroughly debated among the senior LPO 
professional staff and with members of Credit Committee. In cases where 
there are material issues relating to covenant relief, loan 
modifications or funding, or in rare cases where the Risk Committee is 
unable to arrive at a consensus recommendation, matters are elevated 
directly to the Secretary.
    At the time I left the Department, work was ongoing to implement a 
couple of the Allison report recommendations, including creating an 
advisory committee to the Secretary, made up of other executive branch 
members, that will review LPO credit processes and an improved 
management information system.
                                 ______
                                 

     Response of Peter W. Davidson to Question From Senator Manchin

    Question 1. Mr. Davidson, as you state in your testimony, your 
department has just released a solicitation for advanced fossil energy 
projects. The President announced that this would happen during his 
climate change plan announcement last month, saying $8 billion worth of 
loan guarantees for Fossil Energy projects.
    While this sounds good, it doesn't mean anything unless we actually 
approve a project and it gets built. The truth is that this $8 billion 
was already available through a 2008 Fossil loan guarantee 
solicitation, yet the President didn't approve any projects.
    For example, I know that the loan guarantee department reviewed an 
application for a coal to liquids plant in Medicine Bow, Wyoming, and 
from what I understand, your department completed the technical review 
ofthe project, but it hasn't been approved. If we offer funding but 
never approve any projects, that's just smoke and mirrors, and I'm 
concerned that's what will happen with this ``new'' solicitation.
    I know that you are new on this job, but I wanted to know if you 
can comment on the status of the Medicine Bow project and why it hasn't 
been granted a loan. I'd also like your assurances that we will 
actually fund some of these projects that are ready to go and just need 
a little help.
    Answer. While the Department cannot address individual applications 
that are under consideration, I can assure you we work to reach 
decisions on projects as expeditiously as possible. In an effort to 
improve transparency and involve stakeholders early in the process, the 
Department has made the draft solicitation available for public 
comment.

    Responses of Peter W. Davidson to Questions From Senator Portman

    Question 1. Under Section 1703 of the Energy Policy Act of2005, DOE 
loan guarantees are available for energy projects that avoid, reduce or 
sequester air pollutants and anthropogenic greenhouse gas emissions and 
that ``employ new or significantly improved technologies'' as compared 
to technologies currently in commercial use. DOE recently announced 
that it would be renewing its focus on power generation projects 
employing carbon capture technologies. Certain components of CCS 
projects employ established commercial technologies, including elements 
ofthe power plant itself, the CO2 pipeline and the injection 
of CO2 for EOR. I have been told that the integration of the 
capture, transport and storage associated with power generation has not 
yet been accomplished on a commercial scale in the United States, and 
that the inability to finance all of the components required for a 
successful CCS project is a major stumbling block to achieving 
commercial scale CCS.
    Would the financing of a pipeline that is a critical part of a 
project to carry CO2 from a first commercial scale power 
plant using a carbon capture technology to a field where the 
CO2 can be used for EOR qualif'y for a loan guarantee under 
Section 1703?
    Answer. When issued, the solicitation will seek applications for 
projects and facilities that cover a range of technologies. These 
technologies could include any fossil technology that is new or 
significantly improved, as compared to commercial technologies in 
service in the U.S. Applicants must show that their proposed project 
avoids, reduces, or sequesters air pollutants or greenhouse gas 
emissions. In addition to soliciting public comment about the 
technologies that DOE identifies in the draft solicitation, DOE 
welcomes comments that identify other technologies within its statutory 
authority that DOE should consider supporting through this loan 
guarantee solicitation.
    Question 2. Mr. Davidson, as you know, the House and Senate 
Appropriations Committees have recognized the critical national role 
the American Centrifuge project (ACP) plays in our nation's national 
security, and has included language in their respective Energy and 
Water measure to authorize DOE to transfer up to $48 million to compete 
the RD&D phase of the program. With the closure of the Paducah 
enrichment facility, the ACP, located in Ohio, will be the only source 
of domestic uranium enrichment needed to produce the tritium for the US 
weapons program. The govermnent has committed $200 million to date, in 
this RD&D program, which will result in advanced centrifuge machines 
available to partially meet the nation's future domestic enrichment 
needs. The commercialization of the ACP will create over 8,000 jobs 
nationally, with 4,000 of them in my state alone. Companies in 28 
states are manufacturing the centrifuge machines.
    As the RD&D is completed late this year, the applicant for the $2 
billion loan guarantee intends to update and reactivate their 
application. It is hoped that with the successful conclusion of the 
RD&D program, your loan division will have all the data necessary to 
expedite the department's consideration of the application. With all 
this current and new information and knowledge obtained from the RD&D 
program, there is an urgent need to avoid bureaucratic delays in the 
transition from RD&D to the loan guarantee. Significant delays could 
derail the national security benefits of moving forward with the ACP.
    In that regard, I urge you to include the critical knowledge and 
expertise obtained by Oak Ridge, NE and NNSA, as they have been 
monitoring and observing the RD&D program on a daily basis. In order to 
make the most knowledgeable assessment of the merits of the 
application, the knowledge and data obtained by Oak Ridge, NE and NNSA 
are essential.
    Does your office intend to use the Department's collective 
expertise on this important technology by including Oak Ridge, NE, and 
NNSA in the loan guarantee review process?
    Answer. During the due diligence process for any project, Loan 
Programs staff members collaborate with a wide range of experts and 
advisors to make the most knowledgeable assessment ofthe project's 
technology and creditworthiness, including, for example, relevant 
programs throughout the Department, DOE labs, and third party 
financial, technical, and legal advisors.

     Response of Peter W. Davidson to Question From Senator Schatz

    Question 1. Cheap financing is important to scale up renewable 
energy, and as a consequence, drive down costs. I agree with this in 
principle but since most renewables use power purchase agreements to 
sell energy to utilities, it seems that securing a long-term stream of 
income may be more important. Power purchase agreements typically need 
to be approved by Public Utility Commissions. Similar to transmission 
constraints, there may be other issues limiting the scaling of 
renewables even with improved financing. What are your thoughts on 
addressing these other issues? How do they compare to the need for 
cheap financing in terms of importance to the renewable industry?
    Answer. Each project faces three major costs: equipment and labor, 
financing costs, and ``soft costs'', which represent permitting and 
other regulatory matters. While access to debt financing on reasonable 
terms is a critical component for the health of any industry, you are 
correct that it not in itself sufficient to ensure the viability of 
that industry. One issue that DOE cannot address through the Loan 
Programs Office is soft costs, such as the time it takes a project to 
achieve approval from a public utility commission. However, an industry 
can only become financeable by debt if it addresses many of the other 
concerns you allude to, including technological feasibility, regulatory 
compliance and creditworthiness.

      Response of Peter W. Davidson to Question From Senator Wyden

    Question 1. In your testimony you gave a very brief overview of the 
actions DOE has taken to respond to feedback from audits of the loan 
programs by the GAO and Herb Allison. Could you please expand on this 
overview to discuss these actions in greater detail?
    Answer. Please see the table below which tracks LPO's efforts to 
address all issues raised by the GAO, DOE IG, and Mr. Allison.







                                 ______
                                 
       Response of Ethan Zindler to Question From Senator Manchin

    Question 1. Mr. Zindler, in your testimony you talk about how 
capital is still available for high quality clean energy projects, but 
that not as many of those projects are available. You also state that 
the demand for wind energy capacity is decreasing because many of the 
state mandates have been met or are already being met.
    Is part of the problem here that those technologies are 
intermittent, and that's why they can't get the purchase agreements to 
hook up to the grid? And as a result, that's why they can't get 
financing?
    It seems to me that we may be hitting a point where we need to do 
infrastructure upgrades--like adding battery storage and upgrading our 
electrical grid--before more of these projects can be handled by the 
grid.
    Answer. These are very important points but I would be careful to 
avoid conflating them. Yes, there are indeed issues related the 
intermittency of renewable energy and there is little doubt that in the 
long run what will be needed are new power storage technologies that 
can ensure that clean power is available when it is needed most. 
However, by and large, the intermittency issue is not what we have seen 
hindering the most recent development of new clean energy capacity.
    Capacity levels for renewables have been rising, but for the most 
part wind, solar, geothermal, biomass and other clean technologies 
still represent a relatively small enough fraction of overall 
generation. As a result, in most locations intermittency is not yet a 
major concern. Rather, it has been competition from low-price natural 
gas projects, the achievement of state-level renewable portfolio 
standard targets, and policy inconsistency on the Production Tax Credit 
that are mainly to blame for the current situation.
    Looking longer term, as renewables begin to account for larger 
shares of overall generation, yes, there will inevitably need to be 
further power storage technology developed and capacity deployed.

      Responses of Ethan Zindler to Questions From Senator Schatz

    Question 1. Cheap financing is important to scale up renewable 
energy, and as a consequence, drive down costs. I agree with this in 
principle but since most renewables use power purchase agreements to 
sell energy to utilities, it seems that securing a long-term stream of 
income may be more important. Power purchase agreements typically need 
to be approved by Public Utility Commissions. Similar to transmission 
constraints, there may be other issues limiting the scaling of 
renewables even with improved financing. What are your thoughts on 
addressing these other issues? How do they compare to the need for 
cheap financing in terms of importance to the renewable industry?
    Answer. Indeed, there are issues having nothing to do with 
financing inhibiting clean energy growth at the moment and potentially 
into the future.
    One that immediately comes to mind is the need for streamlined 
permitting for small-scale photovoltaic installations. In the US, 
paperwork/legal costs associated with adding a PV system are far higher 
than elsewhere in the world, most notably Germany. The implications of 
this are clear enough: today, the ``all-in'' (capex) cost of going 
solar in California for a homeowner or small business is approximately 
twice as high as in Germany. One reason for this is the onerous amount 
of paperwork required to get the job done in California. (Another is 
that German installers have simply achieved greater economies of 
scale).
    PV modules today cost less , what they did just several years ago. 
Yet US consumers have yet to enjoy the full benefit of that price 
decline. The chart below demonstrates the gap between final system 
costs in Germany, Japan, and California while also showing how module 
prices have dropped. Clearly, more can be done to streamline solar 
permitting and to reduce all ``soft costs'' not associated with the 
photovoltaic equipment.
    Small (<10kilowatt) photovoltaic system costs in Japan, Germany and 
California, $/Watt (Source: BSW-Solar, California Solar Initiative 
filings, JPEA, Bloomberg New Energy Finance research)
    Question 2. Most of the discussion at this hearing focused on 
options for creative financing policies for large entities building 
utility-scale projects. It is important to examine the suite of 
financing ideas directed at consumers for distributed generation and 
efficiency investments. Ideas such as property assessed clean energy 
(PACE), on-bill financing (similar to PACE but financed through 
electric bills instead of property taxes), and leasing structures 
(largely for residential solar), are three of the most often discussed 
methods.
    Please discuss how financing structures directed directly to 
consumers can be helpful to clean energy deployment relative to 
structures such as a national green bank or innovation tax credit. How 
effective are these structures at spurring demand and overcoming high 
up-front costs to consumers? Designed properly could they be more 
effective than current federal tax credits, or are these credits also 
necessary? Are you aware of any barriers to smaller-scale financing 
efforts?
    Answer. These kinds of financing mechanisms are critical to the 
development of small-scale distributed clean energy capacity 
(photovoltaics primarily, but also micro-wind and other technologies). 
They also are vital to energy efficiency efforts.
    The reality is that homeowners and many business owners tend to 
view their electricity consumption costs only on a marginal basis. That 
is, they recognize and are willing to pay a reasonable amount for power 
every month. Obviously, over months and years, these marginal costs add 
up to represent a major household burden or business cost. But smaller 
scale consumers rarely have either the capital or the willingness to 
pay ``up front'' for power.
    This is where so-called 3rd party financing comes in and can be so 
critical. For photovoltaics, in particular, we have seen a dramatic 
expansion in options for customers to ``go solar'' without having to 
put up major sums of cash from the start. Companies such as SolarCity, 
Sunrun and others install systems atop customer roofs and finance those 
systems. The chart* below highlights the amount of capital these firms 
have raised from banks and other financial institutions that they in 
turn are using to finance small-scale photovoltaic systems. To date, 
these firms have raised over $2bn cumulatively to support such efforts.
---------------------------------------------------------------------------
    * All charts have been retained in committee files.
---------------------------------------------------------------------------
    Our firm has written quite a bit on these issues in the past and I 
would recommend our June 2012 white paper entitled ``Re-imagining US 
solar finance'' which can be found here: http://www.cohnreznick.com/
sites/default/files/Re-imagining %20US %20Solar%20Financing.pdf
    The report seeks to explain the full range of new financing options 
being devised to foster deployment of distributed capacity.
    Question 3. Several witnesses touched on this in the hearing, but 
it is important to further explore the effectiveness of county and 
state-level policies to support clean energy financing versus similar 
policies at the federal level. In recent years it seems safe to say 
that certain states have had far more success at implementing 
innovative programs than Congress. My home state of Hawaii is one 
example. We are making good progress in implementing the Hawaii Clean 
Energy Initiative, which establishes aggressive clean energy standards. 
In addition, the state legislature recently passed a Green Market 
Securitization Program (GEMS) which uses on-bill financing for 
residents of all income levels to avoid the high up-front costs 
associated with solar panels.
    How effective can these state programs be, relative to federal 
government efforts, which invariably will have more financial 
resources? What is the opportunity for establishing regional 
initiatives--a ``New England Green Bank'' for example--that pool 
resources from multiple states. Would such a structure even be 
desirable?
    Answer. It is worth noting that the state-level initiatives played 
a critical role in creating the boom in clean energy investment and 
deployment we've seen over the last decade. I would argue that the 
approximately 30 state renewable portfolio standards (RPS) provided the 
industry with far clearer guidance of policymakers' intents than most 
initiatives offered at the federal level. Given that power generation 
is for the most part regulated at the state level, states will continue 
to play a leading role if the US wants to scale clean energy further.
    In terms of ``green banks'', Connecticut has made major progress 
developing its own. New York State, under the leadership of Richard 
Kauffman, is developing its own authority in this area. These types of 
institutions can play a vital role in fostering development of the 
newest technologies and promoting the roll-out of those technologies 
that have reached some level of maturity.

       Responses of Ethan Zindler to Questions From Senator Wyden

    Question 1. What sort of impact on investment would it have for an 
entity like the DOE to take an expanded and more defined role to 
evaluate and report on the technical progress of different technologies 
that companies were developing? In effect, the DOE would serve as an 
impartial reporter to benchmark these technologies and make that 
information available to potential investors.
    Answer. It certainly would not hurt for DOE to involve itself in 
this way though it should be noted that to some large degree this is 
already being done by private sector research firms, trade groups, and 
others.
    That said, there is little question that the Energy Information 
Administration plays a critical role in setting benchmarks that are 
used by players throughout the energy sphere. In recent years, EIA has 
made a concerted effort to stay more abreast of the latest pricing and 
other trends in renewable energy for its various reports. Our firm 
provides data and research to EIA which we hope the agency finds 
useful. EIA certainly seeks input from other private sector players as 
well.
    Question 2. The Chinese have invested billions of dollars in US 
clean energy companies and projects in the last few years, in 
technologies ranging from solar, wind and batteries to clean coal, 
advanced engines, and shale gas. US taxpayers supported some of these 
companies and projects. But now, in several cases, manufacturing, 
operations, and even ownership of these companies is moving to China.
    How concerned should we be about the major push the Chinese are 
making to lead the multi-trillion dollar global clean energy industry, 
much of which was launched here in US?
    Answer. This is an enormously complex topic. I would direct the 
committee to a report our firm wrote in partnership with the Pew Center 
on the nature of US-China clean energy trade here: http://
www.pewenvironment.org/uploadedFiles/PEG/Publications/Report/US-China-
Report-FINAL.pdf
    One of the report's key conclusions is as follows:
    ``China's strength is more narrowly based on assembly and high-
volume manufacturing. The data show that Chinese firms are relied on 
for large-scale manufacturing and high-volume assembly of finished 
products such as solar modules and LED fixtures, whereas the United 
States' strength lies in a wide variety of high-technology products 
across clean energy sectors. Domestic clean energy targets for solar 
and wind power in China have provided ready and proximate markets for 
rapidly expanding its manufacturing capacity and allowed Chinese firms 
to gain a competitive advantage in the global marketplace.''
    The US continues to be the world leader in developing the very 
newest clean energy technologies and in attracting the necessary 
venture capital that allows these technologies to flourish. The US also 
plays a key role in the most advanced forms of manufacturing of new 
products and of capital equipment. Where it has found difficulty 
competing is in manufacturing of products that have become commoditized 
and can be shipped across the globe at relatively low cost.
    Question 3. During our hearing, my colleague Senator Coons 
described the bill he has introduced to allow clean energy companies to 
take advantage of Master Limited Partnership structures.
    What do you think will be the impact of that legislation on 
investment in commercialized and innovative clean energy technologies? 
How would you compare the effectiveness of that legislation in 
increasing the competitiveness of renewables to the effects of current 
incentives like the production tax credit or investment tax credits?
    Answer. Our firm has written a number of papers on this topic, some 
of which have already been provided to committee staff and all of which 
I will gladly share upon request.
    In a nutshell, our view is that expanding access to MLPs would spur 
further clean energy deployment by potentially making more capital 
available at a lower cost. However, expanding MLP access should not be 
viewed as a proxy for extending other federal supports for clean 
energy, most notably the Production Tax Credit for wind. The PTC is 
simply a more potent policy tool for supporting development. It 
directly reduces the cost of building a new wind project for developers 
while the MLP takes a more indirect route to make an impact. There are 
also important questions to be answered about just how many projects 
would be moved into MLPs, given the nature of who owns these assets 
today and other issues.
    Expanding access to MLPs would have the potential impact of raising 
the value of existing wind projects on the balance sheets of project 
developers. They could then essentially sell off such assets through 
the creation of an MLP that public market investors could buy stakes 
in. This would provide developers with new capital they could use to 
develop new projects.
    This cycle would certainly prove positive for clean energy 
deployment in the US, particularly in the long run. But it would not 
have nearly the same direct stimulative impact that simply extending 
the PTC would.
    It should be noted MLPs represent just one of several ``exit 
vehicles'' that developers are now seeking to exploit. These include 
Real Estate Investment Trusts, bond offerings, ``yieldcos'' (dividend-
generating publicly-traded companies), and others. Each of these 
options allows developers to package up existing assets on their 
balance sheets into new entities they can then raise funds against via 
the public equities or bond markets. The public markets have thus far 
proven receptive to such exit vehicles and more are planned.
    Our firm discusses all of these in a Aug. 16 research note entitled 
``Yieldcos, FAITs, and more: sizing the market for North American exit 
vehicles.'' We note the US could have up to 36GW of yieldco-eligible 
projects by 2014. But a considerably smaller sub-set of that total 
(well under half) are likely to be candidates for MLP treatment. This 
research note has been sent to committee staff for review.

                                    

      
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