FINANCE:

Treasury breaks bread and shops ideas from big clean-tech players

Over dinner in a second-floor dining room at the U.S. Treasury Building, Secretary Timothy Geithner sought advice from a small handful of energy CEOs and climate policy experts on how to scale up investments in clean energy technology.

The mid-November meeting came a day before Geithner sat in front of Congress' Joint Economic Committee for a thorough scolding by lawmakers frustrated about rising unemployment and corporate bailouts. Republicans upset about Geithner's role in the takeover of insurer American International Group Inc. called for his resignation. Other critics asserted that the federal stimulus package enacted this year, including more than $80 billion for clean energy investments and tax credits, failed to generate jobs.

The storm surrounding the state of the economy comes as progress on energy and climate legislation grinds to a halt, at least until President Obama returns from the global climate summit in Copenhagen this month. Fear of the economic cost of addressing global warming has eroded support among Senate moderates. Meanwhile, the White House has struggled to explain how capping greenhouse gas emissions and trading pollution permits can spur a technology boom and fuel significant job growth in the U.S. manufacturing sector.

As the end of Obama's first year in office fast approaches, economic stress at home and pressure to marshal an agreement in Copenhagen tug at his climate agenda. Still, Treasury and the Department of Energy continue rolling out billions of dollars to support renewable energy projects and smart grid technology.

Geithner's Nov. 18 feast with seven energy executives and policy researchers sheds light on who has the administration's ear as Democrats in Congress consider proposing a second economic stimulus bill. Treasury left environmental advocacy groups off the guest list and bypassed big business coalitions such as the U.S. Chamber of Commerce and the National Association of Manufacturers, which have influence on Capitol Hill but tend to filter proposals to limit carbon dioxide emissions through the prism of jobs losses and capital destruction.

The glass is half full for the Treasury dinner attendees, including chief executives of utility giants American Electric Power and Exelon Corp., who say a national climate policy is an opportunity to redirect the economy and create new jobs.

Cap and trade maintains support inside and outside the White House

The names on the guest list suggest the administration stands by cap and trade as its strong policy preference and the right mechanism for generating private-sector clean energy investment, despite calls from Congress to constrain emissions trading. They also suggest that boosting support for nuclear power, carbon capture technology and the redoubling of U.S. financial commitments to renewable energy projects could be on the table.

"One of the principal goals is to keep renewable energy development on track," said Keith Martin, a Washington-based energy finance attorney at Chadbourne & Parke. "That has driven a lot of what's in the stimulus, and is driving ideas for a second jobs bill."

Treasury officials said an international deal in Copenhagen could turn on U.S. commitments to financing domestic and global clean energy projects. The lull in activity on Capitol Hill gives Treasury time to dissect some of the more opaque design features of the proposed emissions market. The Senate is the place to fix those problems, officials said.

Geithner, an aide and his guests dined at a conference table directly under the secretary's office, where he listened to CEOs of companies that generate and distribute electricity, including Antonio Mexia, the president of Portugal's EDP. It pledged last month to spend $4 billion on U.S. wind farms through 2012. Michael Morris of Columbus, Ohio-based AEP and John Rowe of Chicago-based Exelon had seats at the table alongside David Cote, chairman and CEO of Honeywell, the New Jersey-based aerospace and energy technology company.

The heads of research institutes steeped in energy policy and the mechanics of emissions markets also participated, including Eileen Claussen, president of the Pew Center on Global Climate Change; Jason Grumet, president of the Bipartisan Policy Center; and Phil Sharp, president of Resources for the Future.

Most of the people in the room see cap and trade, and the use of government financing to leverage private investment, as core elements of an effective U.S. policy. They defend against charges that climate bills passed in the House and proposed in the Senate are expensive "cap and tax" plans, too complicated to manage on a national and global scale, too laden with giveaways to coal-fired power producers to significantly reduce carbon emissions, and job-killers for manufacturers.

Bipartisan Policy Center, an idea incubator

Grumet and Rowe are particularly plugged into White House policymaking. Grumet and Rowe together run the Bipartisan Policy Center as president and chairman, respectively. The center has been an incubator for ideas on how to strike a political compromise on climate, and Grumet advised the Obama presidential campaign.

As the top executive of Exelon, which serves electricity customers in the president's home state of Illinois, Rowe has pressed the case for nuclear power and for cap and trade. Exelon has a large fleet of emissions-free nuclear power plants, and the company benefits from any climate bill that rewards utilities with nuclear generators.

Rowe's ready access to members of Congress, Treasury and the White House also comes as the significant financial hurdles marring plans to build out the nation's nuclear capacity creep into policy discussions.

The mechanics and the policy flexibility to speed and direct public financing for clean energy technology rest with Treasury.

The federal stimulus package, the American Recovery and Reinvestment Act, expanded the pot of money Treasury can use to reinforce renewable energy financing during a downturn in the economy. But the slow pace of legislation that could increase and further define Treasury's ability to funnel money to corners of the energy and high-tech sectors is a problem for Geithner.

Among the questions the secretary asked his guests, according to energy advisers at Treasury: To what extent are the political machinations on the other end of Pennsylvania Avenue holding up investment plans? How can the government unleash potential in the U.S. economy to build a cleaner and more efficient electricity system in a way that fosters economic growth?

"Everyone wants more policy certainty, that's the reality," said a Treasury source at the dinner, speaking on the condition of anonymity. "There's no question that getting more clarity and getting the incentives right would unleash a lot of investments in the United States."

An upcoming White House jobs summit

On Thursday, the White House plans to hold a jobs summit that includes advocates for a "green bank." If Congress adopts the program in the House-passed climate bill, a federal nonprofit bank would accelerate the diffusion of loans, loan guarantees and other financing to renewable energy, smart grid, energy efficiency and nuclear power projects. Treasury could channel as much as $10 billion to the proposed Clean Energy Deployment Administration. That federal support, according to advocates, could guarantee $100 billion in federally backed loans and leverage another $100 billion in private capital.

But until that and other financing mechanisms are in place or extended, Treasury officials say they're not certain about the adequacy of existing programs. "Are the incentives enough?" asked the Geithner aide who attended the dinner.

The CEOs and think tank heads who visited Treasury declined to discuss their meeting with Geithner. Administration officials, however, said the group told the Treasury chief that investors recognize the fundamental shift in U.S. energy policy, but the closer the government gets to a clampdown on carbon emissions, the more details matter. "People are dipping their toes into the water, given the difficulties of making investments," the official said. "Every single one said they're ready to go. They're looking for a little more direction."

By many accounts, U.S. funding for renewable energy and smart grid technology is being distributed more quickly than expected, and getting money out the door to "shovel ready" projects is a priority as Geithner and Obama feel pressure to show measurable progress on jobs and clean energy.

DOE announced another $620 million in grants for smart grid technologies last Tuesday, as government and private funds committed to smart grid projects in the past three months total nearly $10 billion. Investment is going toward integrating advanced meters and remotely controlled appliances, power storage, power grid control systems and plug-in stations for electric cars.

Treasury has handed out about $1.3 billion since August in cash grants for renewable energy projects and is on course to grant an estimated $3 billion for thousands of projects that start in 2009 and 2010. Under Section 1603 of the stimulus act, project developers eligible for an investment tax credit can instead apply for a cash grant equal to 30 percent of the cost basis for most eligible projects.

A flood of grant applications descends on Treasury

"If they wanted to expand capital for renewable energy, that's a good program," said Martin, the project attorney. "Capital is such an important part of the equation for smaller companies that incubate technologies. Most investors aren't equipped to make the bets that venture capitalists can."

With the recession lingering, developers of wind, solar, fuel cell, geothermal and biomass projects have flooded Treasury with grant applications. The banking crisis stripped away some of the existing models for financing large initial investments required for renewable energy projects.

Large lending institutions hit hard by the financial meltdown are financing far fewer projects with tax equity deals. Under that structure, for years investors have financed projects in exchange for partial ownership of the company and access to tax credits. But until profits emerge from energy projects built during a recession, tax credits are a drawback.

Branko Terzic, an energy policy consultant for Deloitte and a former member of the Federal Energy Regulatory Commission, said it benefits Geithner to hear directly from utility heads about costs and revenues. Utilities' financial health, a region's industrial base and housing stocks, benefits from smart grid technology and the shifting energy supply mix all factor into decisions about costly upgrades, Terzic said.

"How soon and where will the impact be felt?" Terzic said, referring to federal programs designed to cut emissions and jump-start investment.

Energy companies are using federal support and incentives for clean energy projects they never had before, Terzic said, but inconsistent state and federal regulatory policies remain an obstacle to large-scale integration of wind and solar power, transmission lines and smart grid technology.

A push for more money for carbon capture and storage

"The availability of federal funding will lower the cost of a proposal," he said. "But if you don't have the federal funding, will regulators go ahead with it or not?

Terzic urged the administration to strengthen government support for carbon capture and sequestration (CCS), the process of injecting carbon emissions from coal-fired power plants into underground caverns. He asserts that at least $12 billion a year is needed for research projects and testing.

"We don't have those projects going yet," he said. "Europe, China and the United States need to be sharing information on those projects."

AEP is among the nation's largest carbon dioxide emitters. The company's CEO, Morris, is optimistic about the idea that CCS technology will save coal as a fuel source so coal-fired generators can still pump out electricity under an emissions cap. AEP is partnering with the French engineering firm Alstom on a CCS project at its Mountaineer power plant in West Virginia. The test is meant to set the stage for a $600 million commercial-scale project at the giant coal-burning plant in Appalachia.

Over dinner with Geithner, Morris had the chance to press for more financial support. On Nov. 24, less than a week after meeting with the embattled Treasury secretary, Morris also had the ear of Energy Secretary Steven Chu. The secretary came to Columbus, Ohio, to roll out the $620 million in direct funding for 32 smart grid demonstration projects.

That day, AEP Ohio claimed $75 million in stimulus funding for a project involving 110,000 electricity customers, the second-largest outlay in that crop of grants.