Conference Proceedings: 21st Century Infrastructure: Opportunities and Hurdles for Renewable Energy Development

conference proceeDingS
21St century infraStructure: opportunitieS
anD hurDleS for renewable energy
InTroducTIon: overvIeW
Not enough attention has been paid to renewable energy
infrastructure development critical to ensure successful
project development for wind, biomass, solar, biofuels,
geothermal, distributed generation, and waste management proj-
ects. With almost $13 tril lion slated to be spent in the upcom-
ing decade on energy supply and infrastructure, the Conference
sought to eluci date the type of integrated Federal, State, and
Wall Street support for infrastructure, we need to see:
Renewable ene rgy and efficiency supplies growing in
the mix
An estimated market clearing price for carbon
Increased renewable infrastructure investment
Access to capital
The Americ an University Washi ngton College of Law
(“WC L”) an d the Rene wable & Distr ibuted Gen eration
Resources Commi ttee of the ABA Section of Environment,
Energy and Resources co-sponsored this conference to evalu-
ate the i ssues surr ounding r enewable infrastructure develop-
ment. The national Conference was held at WCL on September
10, 2009. Podcasts of the panel d iscussions and lunch key-
note speech by the Federal Energy Regulatory Commission
(“FERC”) Chairman Jon Wellinghoff are available through the
WCL podcast directory.2
elecTrIc TransmIssIon Gaps and boTTlenecks:
Issues and poTenTIal soluTIons3
Assuming that we can gen erate all the renewab le energy
we need in this country, s ufficient electric transmission, distri-
bution, and storage is critical to move power from where it is
generated to where it is neede d and used. One of the primary
issues with transmission development is determining who i s
going to pay and how. The issue of who pays is in flux between
the regulated model with long-term purchase agreements and the
participant pay model, where the beneficiaries of the additional
transmission themselves pay for the cost of development.
tranSmiSSion Development: rto/iSo conteXt
In the RTO/ISO reliability and planning processes, several
payment methodol ogies have emerged. Fi rst is the cost alloca-
tion method, whereby one-third of the transmission development
costs are shared regionally through an increase in rate base, and
two-thirds of the costs are allocated to the regional zones in
which the transmission upgrade/expansion is located. The cost
allocation method is the basic plan generally used for adding a
designated network resource on the transmission grid.
Another payment method is the balanced portfolio approach.
In t he balanced portfolio, 10 0 percent of the costs are spread
across the entire region. Strict tests are in place to show how the
benefits exceed the costs for the whole region. This approach is
flexible enough to make adjustments to ensure that the costs are
balanced region-wide. If the analysis shows that certain area s
will not see as much benefit, then adju stments can be made to
the cost assessment for better parity within the region.
tranSmiSSion Development: private inveStorS
The goal of merchant transmission development is for pri-
vate investors to enter the market to build transm ission lines,
often to connect renewable generation. On Februar y 19, 2009,
the FERC, by order, adjusted the policy for merchant lines.4 The
pre-existing FERC policy required negotiated rates based on ten
criteria to qualify as a merchant line. In contrast, the new policy
enables private neg otiations with an “anchor customer” to help
diversify the risk. Instead of ten criteria, the new policy for mer-
chant tr ansmission lines consists of only four crit eria: (1) just
and reasonable rates (i.e. merchant has to be an investor assum-
ing th e full ris k of the line), (2) no undue discrimination (i.e.
when the remaining assets of the line are sold in an open market,
there mus t be consistency among all investors with regards to
the investme nt terms and co nditions), (3) no undue preference
and affiliate concern (i.e. the anchor cannot be an affiliate of the
investor), and (4) regional reli ability and operation effici ency
(i.e. RTO classification no longer required).
leSSonS learneD from the tranSmiSSion Development
Eminent domain and control of the environmental per-
mitting process can be trumped by “NIMBY” condi-
tions in the relevant market
Municipal utilities and cooperatives are more receptive
to building transmission than IOUs because of differ-
ences in their business models
70FALL 2009
Computing and quan tifying the benefits of transmis-
sion construction can help minimize potential lawsuits
enjoinin g de velopment and also attract stakeho lder
Having state regulat ors and permit ting authorit ies
review transmission projects in groups, not one-by-one,
together with stakehol der engagement can accel erate
the permitting process
The crucial question is still who pa ys for the transmis-
sion in vestment. State and Federal government cooperati on is
essential in ans wering this question because to date it has been
the combination of state mandates and federal tax incentives
that have enabled the success of renewab le energy. FERC has
solid experience in siting and approving natura l gas pipel ines
and LNG terminals that can be applied to this task. If regulatory
certainty can be provided, transmission investment by third par-
ties could be a major cleantech financial play for the upcoming
GeneraTIon resources: FIndInG The rIGhT mIx5
Renewable energy has ha d several techno logies dominate
the market for years, but new innovations are dev eloping all
the time. The panel also examined what the renewable energy
generatio n portfo lio coul d look like under proposed climate
A longstanding player in renewable energy is solar power.
Solar power has numerous benefits like low operating and main-
tenance costs, very l ittle degradation, low variability, and rel-
atively easy permitting. The price for photovoltai c panels ha s
dropped dramatically in the last 18 months, but solar power still
faces issues with scale-up. Gov-
ernment policies have been too
focused on single roofto p instal-
lations and provide mo re money
for small sola r i nstallations by
imposing size limits. To achieve
greater market penetration, solar
power will ha ve to become more
than a small distribute d genera-
tion resource.
Transmis sion is t he la rgest
current constraint on the use of
renewable energy sources regard-
less of w hether that e nergy is
wind, solar, biomass, or geother-
mal. New transmission lines must
be bu ilt to acc ommodate n ew
population centers and new loca-
tions of renewable energy. But even with the potential problems
of tra nsmission, wind power is the most ready for large-scale
production today . The Department of Energy has reported that
the United States could meet 20 percent of its total energy needs
using wind energy. Baseload renewables for the future to watch
are: biomass, geothermal, hydropower, and wa ste management
projects. Their dispatchability offers premium renewable energy
benefits to the uti lity and its customers e specially in a carbon
constrained world.
Natura l gas has emerg ed as the large st competitor to
renewable energy. Prices for natural gas have dropped due to
advances in drilling technology. However, government policies
are shifting to promote renewable energy with natural gas sup-
port as a transition fuel through 2030. The policy drivers for an
efficient ene rgy mix include: energy security, energy indepen-
dence, national security, stabilization of energy prices, and, most
importantly, dec reasing greenhouse gas emissions. These poli-
cies will result in a better renewable energy generation portfolio
with more innovation and operating efficiencies from transmis-
sion and storage.
Any climate or energy legis lation incentives must address
the charact eristics of project finance in order to encourag e the
development of re newable energy . Projects must ha ve a firm
method of revenue generat ion ( either through a contract or
rate ba se) and reven ue streams m ust be able to be aggregated
(securitized). Furthermore, a market mus t be fluid to function
properly, but must p romote regulatory certainty for long-term
planning. Only by keeping these project finance characteristics
in mind will policy-makers effectively incentivize and promote
the development of renewable energy.
prIvaTe InvesTmenT and The role oF The
Federal GovernmenT: “The GoldIlocks
The governme nt’s role in the development and promotion
of renewable energy needs to be the right size to be effective—
neither too big nor too small. Typically, the government role in
developme nt is to fund basic
and early applied research. As
techn ologies de velop, en tre-
preneu rs and ind ustry begin
to identify tech nologies with
market a pplications, and the
government’s role shifts. In the
energy field, however, the gov-
ernment role in inves tment is
more important because of the
high risk involv ed in fina nc-
ing capital-inten sive pro jects.
The l imited a vailabi lity of
capit al since 2008 h as also
fostered an impor tant govern-
ment role in facilitating market
The go vernm ent mus t
reconcile competing national interests: national security, cli-
mate change, supply reliability, and economic competitiveness.
Free m arket investors are hesitant to invest when policies are
uncertain. Without a national legislative mandate, unpredictabil-
ity re igns as re gulations change rapidly and state govern ment
policies develop in pa tchwork fashion. The utility market is a
particularly conservative market that tends to wait to see which
Transmission is the
largest current constraint
on the use of renewable
energy sources regardless
of whether that energy is
wind, solar, biomass, or
technologies the government will mark as winners and losers.
Adding to the uncertainty, Wall Street is re casting its bus i-
ness model after the financial meltdown. Particularly in a mar-
ket downturn, private investors tend to avoid risking corporate
investment into new technologies.
To develop d omestic energy in the U nited States, the gov-
ernment must assume a strong role by providing increased fund-
ing. If left solely to the free market, energy development will
happen slowly; megacities, populat ion growt h, and resource
pressu re will eventu ally force
prices to rise and res ult in new
tech nologi es in respo nse to
the need. However , the U.S.
can bec ome an energ y leader
and avoid the painful spikes in
energy costs if the government
steps in to fund th e b ridge to
facilitate market transformation.
Export markets for clean tech-
nology p roducts must al so be
preserved. Small businesses will
be hurt by large gover nment investment beca use they lack the
resources to participate in the gov ernment contracting process;
but small businesses will always foster technology development
by assuming entrepreneurial risk and will require special private
investment and government support to be an incubator of future
To make a difference in addressing greenhouse gas emis-
sions, we need to focus on th ree objectives: (1) a reliable elec-
tric system; (2) reasonable prices for electricity; and (3) an
environ mentally benign elect ric utility system. The fede ral
governmen t can encourage more private sector participation
and entrep reneurial response by clearly defining its legislative
goals. The current climate legisl ation proposals are not clearly
defined enough for capital markets to play a crucial role as advi-
sor or principal investor. The capital markets need stability and
certainty t o function properly. Markets are m ore efficient than
government policies for picking winners and losers. The market-
based process of seeking the most commercially viable projects
tends to eliminate those that are not viable based on price, scale,
or capital cost recovery.
FInancInG Issues: vIeWs From Wall sTreeT To
sand hIll road7
The issue of project financing is where the rubber hits the
road—where the sources of capital assess the project to deter-
mine whether it is worthy of inves tment. Ven ture capita lists
(“VCs”) are one source for financing renewable energy project
development. VCs have made significant investments in renew-
able energ y “moonshot” project s in fields such as solar, wind,
and biof uels, but only 20–30 percent of those i nvestments are
likely to mature to the projected rate of return. The shor t-term
effect of the financial downturn has been that VCs are increas-
ingly concerned about return on capital. Many VCs have gravi-
tated toward conservative investment approaches in familiar
sectors of investment for the mid-term which will be harmful to
renewable energy companies.
Entreprene urs and project developers must focus on the
basic needs and benefits of project proposals when positioning
for institu tional support. Con sumers in general are technology
neutral, meaning that they do not car e what technology is used
to power their cars as long as the car performs. Instead, consum-
ers are conce rned with whether a tech nology meets their needs
(low cost) and has additional benefits (quality and convenience).
Technological advancements in
each sector of renewable energy
will create winners and lo sers
in the sho rt term. However, the
market will likely create the
long-te rm w inners, subject to
regulatory policy.
Revivin g the Initial Pub-
lic Offering (“ IPO”) market is
critic al for funding eme rging
renewable energy technologies.
During the NASDAQ bust of
2000-2001, the market responded with larger investment banks
taking over smaller ones. Since the sma ller investment banks
were the primary sources of funding for the research and devel-
opment of new products and services by entrepreneurs, the bust
caused a shortage of capital for new ventures and innovations.
The demise of the IPO market has also caused a stressed envi-
ronment for VCs. The lack of a vibrant IPO market means that
VCs are locked into current investments and are unable to recoup
original investments to fund new projects. If the IPO market is
not revived, new technologies may die on the vine for want of
funding during this decade.
Acquiring credit to fund renewable energy projects has
become very difficult. The financial downturn has pushed banks
into an ultra-cons ervative mode in orde r to stay solvent. The
question remains, has the IPO market experience been tr ans-
ferred to the credit mar kets? Notably, credit markets are still
considerin g investm ents in sound renewable energy projects
with quality participants and a strong cash flow. In order to
secure credit, projects require concre te yields, well-structured
deals, and investment grade credits. Investment grade credits are
critical for power purchase agreements, construction, and ongo-
ing operations and maintenance in today’s markets.
As an alternat ive, the United States sho uld not establish
a sov ereign wealth fund. The federal govern ment often funds
“political” projects and continues to fund them even when they
are not profitable. Elected officials are ill-positioned to make
difficult de cisions that will cause companies to fold and cause
constituents to become unemployed. On the other hand, a fund
created by a group of states and mo deled on the National Sci-
ence Foundatio n, where projects do not have spe cific outcome
requirements, could be more successful than a sovereign wealth
fund. S uch a fund could team with private equity investors to
form joint ventures to fund r enewable project development.
The Clean Energy Development Authority (“CEDA”) under
Free market investors are
hesitant to invest when
policies are uncertain
72FALL 2009
consideration in the Senate also offers promise as an alternate
financing vehicle.
polIcIes For The TransITIon To a carbon-
consTraIned economy8
Climate change has created a pressing need for a technologi-
cal transition to a reduced carbon infrastructure, but the transition
also requires our vigilance against
unintended economic and envi-
ronmen tal conseque nces. Dis-
tributed power gene ration will
be part of this solution, but it
is not economical enough to be
the only appro ach. We need to
develo p a utility-scal e renew-
able energy ge neration sector.
This new energy secto r will
require revising federal and state
laws and regulations. Currently,
renewab le energy policie s are
developed at the state level. The
need for rapid development of
renewable energy to meet climate and carbon-reduct ion goals
will require the federal government to provide more stable direc-
tion and a market clearing price that properly evaluates the cost
of carbon.
Large scale renewable generation will require a grid ov er-
haul. Climate legislation alone is insufficient in reducing carbon
emissions w ithout addressing the national transmission issues.
While a national super-grid may not be effective from a cost
perspective, an alternative proposal would be to create several
regions to plan total energy infrastructure and transmission sys-
tems. S uch plans would simultaneously conform to a national
carbon budget. The federal government can facilitate renewable
energy deve lopment by accelerati ng siting approval instead of
the current difficult and slo w state approval process es. Smart
grid a nd advanced metering will be essential for the solution.
This approa ch should also recognize that effective energy an d
environmenta l policy in the U.S. is best implemented on th e
regional level.
At present, carbon prices are neither high enough, nor inte-
grated on a national level, to prompt a national renewable energy
source portfoli o. Comp ounding this situation are the dif fer-
ing needs of states, and varying amounts of in-state renewable
resources , forcin g states to grap-
ple with the choice of whether
to c reate in -state gr een jobs
through development of renew-
able ener gy, o r sim ply b uy
cheap, out-of-state energy cred-
its. Many ene rgy and environ-
mental policy decisions are best
made at the st ate or regional
level. However, decisions about
tra nsmis sion in fras truct ure,
plan ning, an d si ting, wh ich
must often be done simultane-
ously, are best coordi nated at
the federal level to remove bar-
riers to development and allow access to capital investment.
Energy, economics, and the enviro nment have merged to
drive renewable energy development. We must manage these
sectors in an integrated manner by coupling the power of inter-
net technology, advanced metering, storage, and smart grid with
access to capital. The U.S. is a center of innovation and financial
structuring as well as the “Saudi Arabia” of waste heat, materi-
als, and greenhouse gases. We will need 21st century infrastruc-
ture to achieve important national solutions, meet our renewable
energy goals, and compete with emerging g lobal economi es.
Achieving these goals requires political leadership working with
the wisdom of men and women and the rule of law to contribute
to a better modern global society.
Climate legislation alone
is insufficient in reducing
carbon emissions without
addressing the national
transmission issues
Endnotes: 21St century infraStructure: opportunitieS anD
hurDleS for renewable energy Development
1 Conference sponsored by American University Washington College of
Law and the Renewable & Distributed Generation Resources Committee of
the ABA Section of Environment, Energy and Resources. The Committee is
co-chaired by Michael J. Zimmer and Baird Brown. The Committee would
like to acknowledge and thank the following law students who attended and
provided content for the Conference Proceedings: Eric Adams, Amanda Bart-
mann, Adam Burrowbridge, Paulo Lopes, Lyndsay Gorton, Rachel T. Kirby,
Scott Richey, Winfield Wilson, Meti Zegeye, and Beth Zgoda. The Committee
also thanks WCL, the Committee Program Vice-Chairs Roger Stark and Girard
Miller, and the special assistance of Jennifer Rohleder of Thompson Hine LLP.
3 Moderator: William Snape, Fellow in Environmental Law and Practitioner
in Residence, Washington College of Law. Panelists: Stephen Zaminski, Exec-
utive Vice President and Managing Director, Starwood Energy Group Global;
Craig Roach, Ph.D., President, Boston Pacific Company, Inc.
4 126 FERC ¶ 61,134.
5 Moderator: Girard Miller, Partner, Fulbright & Jaworski, L.L.P. Panelists:
Roger Feldman, Andrews & Kurth LLP; Greg Wetstone, Director, Government
Relations, Terra-Gen Power, LLC; Robert Hemphill, President & CEO, AES/
6 Moderator: Girard Miller, Partner, Fulbright & Jaworski, L.L.P. Panelists:
Todd Lee, Morgan Stanley; Elliot Roseman, Vice President, ICF International;
Patti Glaza, Executive Director/CEO, Clean Technology and Sustainable Indus-
7 Moderator: Roger Stark, Partner, Curtis, Mallet-Prevost, Colt & Mosle LLP.
Panelists: Peter Flynn, Principal, Bostonia Partners; Scott Livingston, Principal,
Livingston Securities, LLC; Jean-Luc Park, Calvert Funds.
8 Moderator: Roger Stark, Partner, Curtis, Mallet-Prevost, Colt & Mosle
LLP. Panelists: Nathanael Greene, Natural Resources Defense Council; George
Knapp, General Counsel, Wind Capital Group; Peter Fox-Penner, Principal and
Chairman Emeritus, The Brattle Group.