from Mosaic team
To understand how important the financial industry is to the energy industry, and vice versa, you have to go back to the beginning. Both the first home and the first business to be lit with electric light belonged to J.P. Morgan. In the case of the business, Thomas Edison himself was on hand to flip the switch.
Edison needed the help of financiers like J.P. Morgan, and later the Vanderbilt Family, because he was launching an endeavor that required large capital investments. He was laying the framework for what would become big energy and to accomplish his goals he needed big finance.
Fast forward to the present. J.P. Morgan Chase is one of the two largest financial institutions in the world, General Electric is the third largest company of any kind in the world, and the U.S. electric grid is the biggest machine ever built.
To make a long story short, our highly centralized energy system and our highly centralized financial system grew up together and they run together. Finance and energy are the two world’s largest industries and they are inseparable.
With this in mind, let’s turn to a question that’s on a lot of people’s minds these days: how can we get off of fossil fuels? How can we create an energy system that doesn’t cause climate change, harm our health, or diminish our national security?
If we think back to the beginning, we see that energy innovations are only half of the puzzle. Building a new energy system is going to require building a new financial system.
The State of Clean Energy Investing
Building a new financial system requires understanding the current clean energy investment scene. How much are we investing in clean energy and how much investment would we need to avoid catastrophic climate change?
Recent years have brought some good news: clean energy costs are declining rapidly, leading to huge increases in clean energy investment, which are in turn reshaping our energy mix. In more detail:
• Since 1980, the prices for all of our fossil fuel energy resources have remained flat or risen, while solar and wind prices have declined year after year. From 2008 through to the end of 2012, the cost of solar photovoltaic modules (measured in dollars/watt) declined by 80%. Over the same period, prices for wind turbines fell by 29%.
• These price shifts are huge, tectonic—and even if the media has not picked up on them, investors have. Between 2004 and 2011, global investments in renewable energy increased six-fold, from $42 billion to $257 billion.
• Investments in clean energy have led to new clean energy capacity construction. This year will be the third in a row in which the world builds more new clean energy capacity than fossil fuel energy capacity. By the year 2035, according to Bloomberg New Energy Finance, 70% of new energy capacity additions will be clean energy capacity.
The shift underway in our energy system is so profound that few insiders I meet still ask if we’ll shift to a clean energy-dominated system. The question now is: when?
Of course, on a warming planet, when matter. Recently, the World Economic Forum (WEF) examined the state of clean energy investing, asking: How much investment in clean energy does the world need to make between now and 2030 to keep global temperature increases below 2 degrees Celsius?
According to the WEF, simply supporting an expected population of 9 billion people will require investing $5 trillion in infrastructure every year between 2010 and 2030. That is, even if we don’t address climate change, we’re going to have to build $100 trillion of new roads and power plants. The problem is that if we invest $5 trillion per year in our business-as-usual, emissions-heavy infrastructure, we’ll also be dooming the economy to ruin. In order to meet population growth and address climate change, the WEF says we’ll have to invest $5 trillion per year plus an additional $.7 trillion per year.
If anything, the WEF’s numbers are conservative. Still, they help to show the size of both the problem and the opportunity ahead. The problem is that we need to find a way to rapidly shift $700 billion dollars per year into a green economy. The opportunity is that this is an investment. Making the shift would provide at least $5 trillion in savings on fuel costs between 2010 and 2050.
In short, creating a clean energy economy is a financing challenge of epic proportions. At the same time, creating a clean energy economy may be the biggest business opportunity of the century.
Our Fossil Fuel Biased Financial System
So why aren’t we investing more, faster? If clean energy is such an opportunity, why is the market not rushing to fill the investment gap?
Our current financial system in biased against clean energy in at least two big ways.
First, there is a mismatch between clean energy technology and our existing approach to infrastructure finance. Our major financial institutions have spent their entire histories learning how to finance huge power plants. Now they are struggling to catch up with a decentralized energy paradigm. The banks have simply not developed—and may never develop—the agility necessary to profitably underwrite many small loans instead of a few large loans.
For project developers, the upshot is that financing for clean energy is expensive. Expensive financing is a problem for any kind of infrastructure project, but it’s a particularly bad problem for clean energy. For a coal-fired power plant, much of the cost comes in the form of fuel expenditures. Solar panels or wind turbines, in contrast, have high upfront costs, but no long-term fuel costs. This means that while high fuel prices can slow growth in the fossil fuel industry, the quickest way to slow down clean energy is via high interest rates.
The second bias against clean energy investment is in the policy realm. The market is filled with distortions, almost all of which favor investments in fossil fuels. The fossil fuel industry created many of these distortions, and it has an interest in perpetuating all of them.
For example, the U.S. permits legal structures, such as Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs), that are designed to make it possible for people to invest in infrastructure projects without paying both corporate and personal income taxes. But most of these structures are not accessible for clean energy projects. MLPs, for instance, could be a boon to the wind industry, but are currently only legal for oil and gas companies. Mostly MLPs are used to build pipelines—like the Keystone XL.
Or here’s a more breathtaking example. Pension fund managers are required by law to maximize short-term risk-adjusted returns. Yet our laws don’t require fund managers to look at long-term, systemic risk. The trouble is that systemic risk is an immense problem for fossil fuel energy. If governments were to begin moving to limit carbon emissions, fossil fuel stocks would take a beating. According to a recent study, if the world’s governments simply met their existing emissions reductions, 2/3rds of all fossil fuel reserves would become unburnable, worthless assets.
Under current laws, in other words, the only way our pension funds will provide for our personal financial futures is if our governments fail to protect the future of the planet.
The New Clean Energy Barons
The situation sounds dire. We need to invest most in clean energy to avoid catastrophic climate change. If we make these investments, we’ll end up richer. And yet, for reasons both intentional and accidental, our linked energy-financial system is set against the kinds of investments we need.
There is reason for hope, however. While clean energy’s distributed nature makes it a bad bet for big banks, it also makes it a good bet for the rest of us. Bringing a community together to finance a billion dollar coal plant is an idea that would never work. Bringing thousands of communities around the country together to finance thousands of locally operated clean energy projects is an idea that can change the world.
If we want to rebuild our energy system, we need to rebuild our financial system. And if we want to rebuild our financial system, we should start from the ground up. As communities create their own clean energy projects, politicians will take notice, and the political system will change. As communities profit from clean energy, the banks will realize they too have to change.
This vision of distributed finance for distributed energy is already becoming reality. Communities around the country are finding ways to finance and build their own local energy projects. Some forward-thinking states and utilities, realizing that it’s better to be ahead of the future than behind it, are starting to pitch in with new laws and policies, too.
Meanwhile, my company, Mosaic, is one of a number of organizations aiming to leverage the power of the web to flood clean energy with inexpensive capital. Recently, we went live with our largest project to date—a 487 kW solar array on top of the Wildwoods Convention Center in Wildwood, New Jersey. Eight hundred and twenty three investors from 359 cities in 42 states have directly invested more than a million dollars in the project. The minimum investment is $25 and the investors will earn a projected annual rate of return of 4.5% — better than Treasuries, better than most bonds, and better than the S&P 500 over the past decade. We’re also working on new plans, such as a partnership called TruSolar, that will standardize the risk assessment process for solar projects, lowering underwriting costs and dramatically increasing opportunities for investment in clean energy.
We’ll need many more models like Mosaic. Nonetheless, the future is bright. J.P. Morgan had the first home in New York with an electric light bulb. Today, Americans all over the country are saving money via solar panels, windmills, EV cars, and efficiency upgrades.
If we want a new, clean energy system, it’s up to all of us to become the new, clean energy barons.
Article by Mosaic team (www.joinmosaic.com ) a clean energy investment platform, and the author of “Making Good: Finding Meaning, Money and Community in a Changing World”.
