SOURCE: Milken Institute

Milken Institute

November 02, 2012 07:10 ET

Milken Institute Report Identifies Ways to Fund U.S. Energy Infrastructure Improvements

Federal Agencies Remain Stuck in Gridlock While Progress Marches Ahead Overseas

LOS ANGELES, CA--(Marketwire - Nov 2, 2012) - The United States is missing opportunities to lead in renewable energy, representing billions of dollars in lost technology exports and contributing to continued dependence on energy imports. Market dynamics -- notably, the very low cost of natural gas -- have created challenges for renewables, despite their importance to climate stabilization and role in reducing U.S. dependency on foreign oil. Another obstacle to the development of crucial renewables in the U.S.: the government agencies charged with promoting energy infrastructure improvement have been stymied by political gridlock and fiscal constraints. Meanwhile, other countries, like China, are out-investing the U.S. in this area, causing a drop in our global competitiveness.

To look for ways forward, the Milken Institute, in collaboration with the U.S. Department of Agriculture's Office of Energy Policy and New Uses, convened experts from the public and private sectors in a Financial Innovations Lab®.

Challenges to financing energy infrastructure improvement
According to a report of the meeting, "Developing Innovative Energy Infrastructure Financing," Lab participants identified three reasons progress in renewable technologies has slowed down in the United States:

  • Government support is tightening. This funding source -- crucial for helping get new technologies off the ground -- has slowed as production tax credit incentives for wind, biomass, geothermal, waste-to-energy, solar and fuel cells, among other developing areas are set to expire.
  • Gaps in financing persist -- especially for early ventures that are not yet credit-worthy and for later-stage projects facing the "valley of death" between viability and commercial scale.
  • Political risks are less predictable, and hinge on the policy makers in power. This makes investors "wait and see," fatal to an industry that requires that funders be able to take a long view.

"Real-world examples show that federal stimulus can help jumpstart innovation," said Joel Kurtzman, executive director of the Center for Accelerating Energy Solutions at the Milken Institute. "Companies with proven technologies sometimes can't reach the scale necessary to penetrate the commercial market, regulatory uncertainty undermines investor confidence, and equity markets are running in place while venture capital is on extended leave."

Crafting solutions
To streamline and prioritize capital access for bringing much needed improvement to the nation's energy infrastructure, Lab participants considered new potential institutions and focused on criteria for structure and governance. Among their recommendations:

  • Create a green finance facility. One approach would be a one-stop shop that would provide financial products and services to both early- and late-stage energy projects, recognizing their inherent risks and needs, such as for "patient capital" that is willing to wait for long-term returns.
  • Establish an infrastructure bank. Lab participants pointed out the success of similar programs at the state level. This approach could include the addition of energy projects into a broader infrastructure portfolio, or have a separate energy-specific bank.
  • Standardize and streamline potential solutions. Whatever form a facility or bank structure would take, it should be "technologically agnostic," meaning that performance would be the basis for choosing to invest in one technology over another. It should also operate with a long-term mandate of at least a decade. Finally, it should encourage the formation of project portfolios, offering diversification as a way to reduce overall risk and help attract private capital.

"We shouldn't play politics with energy. New technologies need to be recognized for their ability to create a more secure energy future, new jobs, economic growth, and a more competitive export market, not for their ability to benefit one side or the other of the political aisle," said Kurtzman.

Copies of "Developing Innovative Energy Infrastructure Financing" are available for download at http://www.milkeninstitute.org/publications/publications.taf?function=detail&ID=38801377&cat=finlab

About the Milken Institute
A nonprofit, nonpartisan think tank, the Milken Institute believes in the power of capital markets to solve urgent social and economic challenges. Its mission is to improve lives around the world by advancing innovative economic and policy solutions that create jobs, widen access to capital and enhance health.

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