Finding the Cash for Sustainable Energy

In order to develop a green and sustainable economy, we need efficient and non-fossil fuel based energy production and consumption systems. A number of technological innovations are needed before we can implement a smart grid and proliferate the use of solar energy. But a great deal can be done now if we take advantage of existing technology.

We are all aware of the need to make the transition from a fossil fuel based economy to a renewable and more energy efficient one. While we will not run out of fossil fuels in my lifetime or (probably) yours, finite resources will only get scarcer, more expensive and harder to get out of the ground. Even if you reject the compelling science of climate change, what real argument is there against a cheap, secure energy supply and efficient energy use? That the old ways are better?

We need to develop and implement a way to make green energy profitable. This is easier said than done. First of all, we need a lot of money. According to a United Nations 2009 report on sustainable energy finance, global investments will have to reach 500 billion dollars annually for the next ten years if we want greenhouse gas emissions to stabilize and start declining after 2020.

500 billion dollars is no small amount, and the private sector will have to play a more prominent role than governments in the transition to a sustainable energy economy. Thanks to the slow return rate on green investments, not to mention the recession, progress has been slow.

The main difficulty with financing green energy in the private sector is that investments require lots of cash and returns are uncertain. Landlords, for example, have little incentive to invest in energy efficiency retrofits that will accrue savings to their tenants but not to them. This problem is particularly pronounced where rents are strictly regulated, like here in New York City. Similarly, homeowners may not see a return on their investments before they intend to sell a property, and likewise have no incentive to invest in products like insulation or double-glazed windows. Investors will save money over the long run, but these days, who cares about the long run?

Renewable energy suffers from the same affliction. Even though costs of renewable energy will go down as the technology develops, financial returns are uncertain and given the choice, private equity firms are more likely to fund a fossil fuel project than a renewable energy project. Many investors think that the technology is still too new and risky.

However, change is coming and where the private sector falls short, public policy can help. One example of an innovative method of financing green energy is Property Assessed Clean Energy, or PACE legislation. PACE was one of the topics discussed in a Columbia University panel discussion that I moderated recently. PACE provides communities with the ability to designate a district where property owners can finance energy efficiency or renewable energy improvements to their property. The debt is then added to the property tax bill until it is retired so the costs of the improvements stay with the property if the current owner sells. As of today, 16 states, New York included, have passed PACE enabling legislation.

Until the financial recession, there were strong upward trends in private investment in green energy production. In 2008, investment in renewable energy was, for the first time, greater than new investment in fossil fuels. That year, total transaction value for the renewable energy sector--both public and private--was over 220 billion dollars. That's not 500 billion, but it is an indication of the growth of the green energy field.

Growth in the renewable energy sector fell as the financial markets destabilized during the financial crisis. In the first quarter of 2009, there was less than half the amount of private investment in green energy projects than during the same period of 2008. However, while the private credit market fell victim to the recession, the world's governments stepped up. In 2008, governments around the world, including the US, allocated a total of 155 billion dollars to green energy programs. Even as the recession deepened, governments passed stimulus packages increasing funding for green energy to 180 billion dollars, signaling the strong political support for efficiency and renewable energy investments.

Both the public and private spheres have shown their support for green energy. Despite this progress, investments in green energy are still considered risky by many financial professionals, and recessions make all of us more risk averse. It is now obvious that we need innovative ways to help steer funding toward energy efficiency and renewable energy production projects, despite fluctuations in the availability of credit. PACE is one innovative method. Others will surely follow.

To see what more experts are saying about innovative green energy investing, take a look at this. Members of the panel include Greg Hale of the Natural Resources Defense Council, Luke Falk of the New York State Energy Research and Development Authority, Fred Lee of NYC Economic Development Corporation, Mabell Garcia Paine of Willdan Energy Solutions, and Wayne Seaton of Wells Fargo Securities.