Targeting Clean energy for economic development
may 2014
state efforts to align economic and clean energy strategies
THE NATIONAL GOVERNORS ASSOCIATION (NGA), founded in 1908, is the collective voice of the nation’s governors and one of Washington, D.C.’s, most respected public policy organizations. Its members are the governors of the 55 states, territories, and commonwealths. NGA provides governors and their senior staff members with services that range from representing states on Capitol Hill and before the Administration on key federal issues to developing and implementing innovative solutions to public policy challenges through the NGA Center for Best Practices. NGA also provides management and technical assistance to both new and incumbent governors.
THE NGA CENTER FOR BEST PRACTICES (NGA Center) is the only research and development firm that directly serves the nation’s governors and their key policy staff. Governors rely on the NGA Center to provide tailored technical assistance for challenges facing their states, identify and share best practices from across the country, and host meetings of leading policymakers, program officials and scholars. Through research reports, policy analyses, cross-state learning labs, state grants, and other unique services, the NGA Center quickly informs governors what works, what does not, and what lessons can be learned from others grappling with similar issues. For more information about NGA and the NGA Center, please visit www.nga.org.
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For more information about NGA and the NGA Center, please visit www.nga.org.
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ConTenTs Executive Summary..................................1 Introduction .............................................8 Targeting Clean Energy for Economic Development Key steps for states Analyze Industry Assets, Opportunities, and Challenges................ 12 Employ Policies That Affect Supply of Clean Energy Technology, Products, or Services ................................. 16 Employ Policies That Affect the Demand for Clean Energy ........................ 25 Conclusion .............................................33
aCknowledgmenTs This report was authored by Aliza Wasserman, Sue Gander, Mary Jo Waits and Erin Sparks of the National Governors Association Center for Best Practices. This paper is based on work supported by the U.S. Department of Energy, under Award Number DE-FC26-08NT04390.
disClaimer
This paper was prepared as an account of work sponsored by an agency of the United States Government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendations, favoring by the United States Government or an agency thereof. The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States Government or any agency thereof. cover illustration by gerry fey cover photos istock.com
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exeCuTive summary TradiTionally, governors have set separate goals for economic development and clean energy and pursued those goals through separate agencies and policies. More recently, governors have begun to emphasize economic development through clean energy—as some two dozen did in their 2012 stateof-the-state addresses—and have called on their agencies to more effectively combine the strategies and resources from each area to yield greater collective benefit. This report examines how governors can pursue a comprehensive and coordinated approach to targeting clean energy for economic development. Such an approach involves a range of policies to increase both the supply of and demand for clean energy technologies, products, and services. Clean energy is defined differently in each state. Most definitions include energy efficiency; renewable energy sources such as solar and wind to generate electricity with lower emissions than other sources; and alternative transportation fuels such as biofuels, hydrogen, natural gas, and electricity. Some definitions include the use of nuclear energy, natural gas, and advanced coal. Definitions also may include technologies and infrastructure that support energy transmission and distribution. Clean energy has become a sizable business, with revenues of more than $1.1 trillion globally in 2013, making it an attractive target for state economic
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development programs. At the same time, risks to the clean energy market stem from near-term imbalances in the supply of some products, competition with lowercost natural gas, and challenges related to integrating renewable resources into the electricity grid. Therefore, as with any policy, governors should carefully weigh the likely benefits and costs and consider strategies to mitigate risks. The National Governors Association has identified three actions that governors can use to advance the development of clean energy for economic gains. Those actions, described below, engage the full range of state activities, including regulation, procurement, taxation, subsidy, and direct spending programs to increase both the supply of and demand for clean energy: >>>> Identify local assets, opportunities, and challenges by using industry cluster analysis; >>>> Employ policies to increase the innovation and supply of clean energy; and >>>> Employ policies to stimulate instate demand for clean energy. A state’s overall business environment— its infrastructure, geography, regulations, and taxes—might be as important to the growth and development of clean energy as policies specifically targeted to that sector. Accordingly, governors should consider the links between overall economic policies and more targeted interventions.
Targeting Clean energy for economic development:
Key StepS for StateS
1 2
Analyze Industry Assets, Opportunities, and Challenges
Employ Policies That Affect Supply
CuLTIVATE Innovation ● invest in research and development ● create proof-of-concept centers BOOST Entrepreneurship ● support enhanced training and investment ● encourage networking FOSTER Existing Businesses’ Growth ● promote global connections ● support access to financing ENSuRE a Skilled Workforce ● involve employers in design and delivery ● Develop sector strategies
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Employ Policies That Affect Demand
SuPPORT AND ENHANCE Clean Energy Standards REORIENT utility Regulatory Structures ● broaden regulators’ economic considerations ● realign utilities’ financial incentives ● clarify regulations for third-party owners of solar photovoltaics ● guide long-term planning ● consider long-term contracts ENHANCE Consumer Access to Clean Energy ● advance funding and financing measures ● streamline permitting of renewable energy ● enhance net metering uSE State Procurement of Clean Energy ExAmINE Carbon Pricing
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analyze indusTry asseTs, opporTuniTies, and Challenges A first step in targeting clean energy for economic development is understanding existing assets, opportunities, and challenges. Many states have experience analyzing industry areas outside of clean energy (such as information technology, biotechnology, and nanotechnology) to find the best opportunities and strategies to promote economic growth. They commonly use industry cluster analysis to identify unique concentrations of interconnected companies and institutions that drive economic growth and to suggest policies and practices that can increase an industry cluster’s contribution to a state’s economy. Several states, including California, Massachusetts, Michigan, North Carolina, Ohio, and Washington, have been early adopters of cluster analysis tools to help them identify the best opportunities for growth and to track performance over time. Applying a cluster analysis to the clean energy sector, California delineated 10 solar industry sectors (for example, material feedstock, solar panel producers, equipment sales and distribution, solar appliances and devices, testing and process equipment) and mapped the value network of the solar industry, showing the relationships among research and development (R&D); technical innovation; the key elements of business formation (market analysis and financing); the manufacture of systems (and the steps therein, beginning with raw material extraction and processing); and sales, installation, and servicing of
solar energy systems. Five New England states—Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont—identified gaps in resources for getting new technologies across the commercialization “valley of death.”1 employ poliCies ThaT affeCT supply of Clean energy TeChnology, produCTs, or serviCes By using cluster analysis and other assessments to develop their priority areas, states can examine policies to increase the supply of clean energy technologies, products, and services. Policies that help states address the supply side of the clean energy market include a variety of efforts to foster business growth—from providing resources and coordination to building businesses’ capacity for innovation and commercialization to improving access to both working capital and export financing for market expansion to supporting an expanded and skilled workforce. The following policies can stimulate clean energy supply:
• Cultivate innovation by making com-
mitments to r&d and commercialization. Arizona uses a public–private partnership, the Science Foundation Arizona (SFAz), to channel R&D funding to its three primary public universities. To access funding, researchers must partner across institutions, identify matching industry funding, and have their project competitively selected by industry experts. The SFAz Solar Technology Institute has invested $5 million since 2009. Washington created a fund to help commercialize energy storage by offering a
1 The valley of death is the period of a company’s development when it is not able to raise enough funds from traditional sources of capital or venture capitalists to cover the costs of getting the business off the ground.
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50 percent cost-share with corporate and utility investments and offers a slight preference to technologies developed in the state.
• Boost entrepreneurship through train-
ing and investment. Under its Jobs4TN plan, Tennessee awarded grants to entrepreneurial accelerators—institutions that support businesses in their startup and early growth phases. Two of the accelerators focus on clean energy and serve as the “front doors for entrepreneurs” in each of the state’s nine economic development regions. Massachusetts funded a Clean Energy Internship Program that provides paid internships and connects students and companies.
• foster business growth through ac-
cess to networks, shared facilities, and new global markets. Pennsylvania’s Innovation Works uses an EnergyMatch portal and EnergyMatch events to bring together local entrepreneurs, researchers, and funders to connect, develop new products, form R&D teams, collaborate on grant opportunities, and seek investment capital. New Jersey’s Clean Energy Manufacturing Fund helps clean energy manufacturers identify a manufacturing site, support site improvements, construct a facility, or purchase equipment. Massachusetts has adopted a trade strategy that includes the Massachusetts–Israel Innovation Partnership between the State of Israel and the Commonwealth of Massachusetts to encourage and support ongoing innovation and business-development opportunities in clean energy and other technology sectors.
• ensure that workers are trained and
ready to fill current and new positions.
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The Pacific Northwest Center of Excellence for Clean Energy, serving Idaho, Montana, Oregon, Utah, and Washington, convenes a Power Generation Skill Panel involving public utilities, organized labor, workforce boards, and community colleges. The group leads the ongoing development of skills, standards, and manuals for critical middle-skill occupations in the energy industry. The Center of Excellence conducts focus groups and surveys workers and employers to identify the precise skills, knowledge, competencies, and work functions of the most critical occupations in the industry. employ poliCies ThaT affeCT demand for Clean energy A comprehensive strategy to target clean energy for economic development includes policies that increase the demand for clean energy. Some demandside policies guarantee a market for clean energy suppliers or use regulation to change incentives to encourage utilities’ demand for clean energy. Other policies enhance consumer access to clean energy through financial support, streamlined permitting, the use of state procurement authority, or putting a price on carbon emissions. The following policies can increase the demand for clean energy:
• support
and enhance clean energy standards. State economic development leaders surveyed in 48 states said that standards were the most effective policy tool to stimulate the market for renewable energy. Nevada’s renewable portfolio standard is an example. It requires energy producers to provide a minimum percentage of energy from renewable sources. Nevada’s standard encourages investment within the state as develop-
ers seek to locate close to the market and avoid challenges associated with interstate transmission infrastructure. To stimulate in-state investments further, Nevada’s utility regulations credit customer-sited solar energy at 2.45 times more per kilowatt (kW) towards meeting the standard than other renewable sources. Similarly, energy efficiency, which is also locally oriented, receives a multiplier of 1.05.
• reorient utility regulatory structures
to align incentives to support clean energy. To better align utility incentives to promote clean energy, Kansas allows utility investments in energy efficiency to earn an extra rate of return, from onehalf of 1 percent to 2 percent, on top of the rate of return authorized for capital investments. California, looking to remove barriers from private investors interested in clean energy, allows companies that supply solar energy systems for residential use to operate as third-party owners. That strategy has helped the market for such third-party ownership to grow from 9 percent to 36 percent of residential solar installations. Washington allows utilities to offer a fixed-price incentive to clean energy producers of 12 to 54 cents per kW hour and up to $5,000 per project per year.
• enhance
consumer access to clean energy through funding, financing, streamlined permitting, and net metering. Iowa financially supports solar, wind and residential geothermal heating and cooling by providing exemptions from a variety of taxes. Hawaii is developing an innovative financing program called GEMS (Green Energy Market Securitization) to make clean energy improvements, such as solar photovoltaic sys-
tems, more affordable and accessible to underserved markets, including low- to moderate-income homeowners, nonprofits and renters. It includes an on-bill financing component which will provide low-cost financing from private funding sources that is repaid directly on the utility bill from a portion of the energy bill savings. Utah put in place a voluntary Property Assessed Clean Energy Program for commercial properties whereby local governments can issue bonds to create a loan fund for approved energy improvement projects. Vermont eliminated permitting for solar energy systems up to 5 kW and authorized automatic installation after registering, unless the utility objects within 10 days. Kansas’s net-metering law allows owners of small commercial and residential solar energy systems to sell their net-excess generation back to the grid at the average retail rate.
• use state procurement directives that
support clean energy. Delaware Governor Jack Markell issued an executive order calling for agencies to meet at least 30 percent of their annual electricity demand from renewable sources by 2013 and to reduce energy use by 30 percent by 2015. By aggregating its electricity contracts, the state was able to purchase 25 percent of its electricity from renewable resources at a savings of $13.2 million over a three-year contract period. Agencies have reduced their energy use by 12 percent across 230 buildings and facilities. In addition, by setting long-term targets, the state is helping to create certainty of demand for renewable and energy-efficient products and services. In addition, governors of 22 states, led by Oklahoma and Colorado, are aggregating their state fleet vehicle procurements for for eConomiC developmenT
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natural gas vehicles to foster increased demand and reduce costs.
• examine carbon pricing to build mar-
ket demand and a potential funding stream for clean energy. The states participating in the Regional Greenhouse Gas Initiative (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont) created a cap-and-trade program on carbon emissions from power plants that shifts market incentives toward clean energy. The cap declines through 2018 to a level that is 10 percent below 2012 emissions. Power plant operators purchase allowances to cover their emissions through a quarterly auction. States invest funds raised in the auction in energy efficiency and other clean energy projects. Three years into the program which began in 2009, an analysis found that the region gained $1.6 billion in economic value and 16,000 jobs, net-
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ting out the extra cost to produce goods and services. Furthermore, although energy prices rose slightly in the first three years (approximately 0.7 percent), the analysis projected that consumers will save a total of $1.1 billion in energy costs over the following 10 years as the investments in energy efficiency lower overall bills. Governors increasingly see opportunities to marry policies that promote state economic development with policies aimed at the development of clean energy. Because the clean energy market is still emerging, investments in clean energy efforts should be evaluated against alternative uses of funds, the risks associated with emerging technologies, and industry-specific investments. However, by using well-crafted policies that recognize supply-and-demand conditions, governors can develop strategies that address risks and yield net benefits.
introduction
t
raditionally, governors have set separate goals for economic development and clean energy and have pursued those goals through separate agencies and policies. Economic development policies focus on supporting new and existing businesses to increase the size of a state’s economy and create jobs. Economic development or commerce agencies are usually responsible for policies that support innovation, entrepreneurship, and workforce development. Clean energy policies aim for a cleaner environment and reduced dependency on out-of-state energy supplies. To achieve those ends, state public utility commissions or energy offices employ regulation and subsidies that benefit clean energy. More recently, governors have begun to emphasize economic development through clean energy—as some two dozen did in their 2012 state-of-the-state addresses—and have called on their agencies to more effectively combine the strategies and resources from each area to yield a greater collective benefit. This report examines how governors can pursue a comprehensive and coordinated approach to targeting clean energy for economic
development that involves employing a range of approaches to increase the supply of and demand for clean energy technologies, products, and services. Clean energy is defined differently in each state. Most definitions include energy efficiency; renewable energy sources such as solar and wind to generate electricity with lower emissions than other sources; and alternative transportation fuels such as biofuels, hydrogen, natural gas, and electricity. Some definitions include the use of nuclear energy, natural gas, and advanced coal. Definitions also may include technologies and infrastructure that support energy transmission and distribution. Clean energy has become a sizable business, with revenues of more than $1.1 trillion globally in 2013 from such segments as renewable energy; energyefficient heating, cooling, and lighting; nuclear energy; biofuels; natural gas turbines; and advanced transportation such as clean diesel and hybrid electric cars.2 That market has made it an attractive target for state economic development programs. Among other supportive
2 Advanced Energy Economy, Advanced Energy Now 2014 Market Report, (February 2014), prepared by Navigant Research, http://info.aee.net/advanced-energy-now-2014-market-report (accessed April 4, 2014)
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market factors are the following: >>>> Recent U.S. federal fuel economy standards could shift about 30 percent of the light-duty vehicle market share from gasolineonly vehicles to micro-hybrids by 2025.3 >>>> U.S. utility ratepayer funding created a pool of more than $7.2 billion for electricity and natural gas efficiency programs in 2012, up from $4.3 billion in 2009.4 >>>> U.S. Department of Defense spending on clean energy is
projected to grow to $2.25 billion annually by 2015.5 >>>> Many companies, such as DuPont, General Electric, IBM, and Nike, and diverse industries from construction to semiconductors to automobiles are integrating clean energy technologies and practices into their business models and supply chains. >>>> Major energy-consuming countries are making significant commitments to energy efficiency. China set a target of 16 percent reduction in energy intensity
3 Micro-hybrid vehicles are powered by gasoline engines, have larger electronic and battery capacity, and use regenerative braking to recharge batteries. Data from Pike Research, Economic Impacts of Advanced Energy: U.S. and Global Market Size, Economic Impact, Tax Revenue Generation, Key Trends, and Representative Companies (Pike Research, 2013), http://arkansasadvancedenergyfoundation.org/files/dmfile/AEEIEconomicImpactofAdvancedEnergy-Final.pdf (accessed March 3, 2014). 4 American Council for an Energy-Efficient Economy, The 2013 State Energy Efficiency Scorecard, (November 2013), http:// aceee.org/research-report/e13k, and The 2010 State Energy Efficiency Scorecard (October 2010), http://www.aceee.org/ research-report/e107 (accessed March 3, 2014). 5 Pew Project on National Security, Energy and Climate, From Barracks to the Battlefield: Clean Energy Innovation and America’s Armed Forces (2011), http://www.pewenvironment.org/news-room/reports/from-barracks-to-the-battlefield-cleanenergy-innovation-and-americas-armed-forces-85899364060 (accessed March 3, 2014).
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(energy per unit of gross domestic product) by 2015; the European Union committed to cutting 20 percent of its demand by 2020; and Japan aims to reduce electricity consumption by 10 percent by 2030.6 At the same time, clean energy faces a variety of risks common to efforts to boost any market, nascent technology, or emerging economic sector. Investments may be poorly targeted. Better opportunities for the use of funds may exist. Money may be spent to fund activities that would have occurred in any event, leading to no additional effect. Technology might not pan out, and existing technologies may improve to compete with their newer rivals. States may lock into an emerging technology only to find out later that a newer, different technology was superior. Policy changes at the federal level or legal challenges to state policies can change conditions significantly. States should also consider the following near-term imbalances in the clean energy market: >>>> Oversupply of manufactured products in some segments of the market, notably wind turbines, solar panels, and lithium-ion batteries used in electric vehicles;7 >>>> Competition between renewables and low-cost natural gas;8
>>>> Commercialization challenges that reflect long investment-tocommercialization cycles; >>>> Infrastructure challenges related to integrating renewable energy into the transmission grid; and >>>> Policy challenges that reflect regulatory uncertainty. Taking those considerations into account, including potential strategies to mitigate risks, the National Governors Association has identified three actions that governors can take to advance their targeting of clean energy for economic gains. These actions, outlined below, engage the full range of state activities, including regulation, procurement, taxation, subsidy, and direct spending programs, to increase supply and demand for clean energy: >>>> Identify local assets, opportunities, and challenges by using industry cluster analysis; >>>> Employ policies to increase the innovation and supply of clean energy technologies, products and services; and >>>> Employ policies to stimulate in-state demand for clean energy technologies, products, and services. Table 1 summarizes examples of key activities under each action area, which are explained further in the report, alongside examples of state best practic-
6 Bloomberg New Energy Finance, “Q3 2012 Clean Energy Policy and Market Briefing” (October 23, 2012), https://www.bnef. com/InsightDownload/7218/pdf (accessed March 4, 2014). 7 Bloomberg New Energy Finance, October 23, 2012. 8 Low-cost natural gas can also provide benefits to clean energy. For instance, lower-cost gas can provide “firming” for variable renewable resources such as wind and thus help make those resources more attractive. It can also support the development of manufacturing expertise that can be applied to the clean energy sector.
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>>>> TaBle 1. Targeting Clean Energy for Economic Development: Key Steps for States
Targeting Clean energy for economic development:
Key StepS for StateS
1 2
Analyze Industry Assets, Opportunities, and Challenges
Employ Policies That Affect Supply
CuLTIVATE Innovation ● invest in research and development ● create proof-of-concept centers BOOST Entrepreneurship ● support enhanced training and investment ● encourage networking FOSTER Existing Businesses’ Growth ● promote global connections ● support access to financing ENSuRE a Skilled Workforce ● involve employers in design and delivery ● Develop sector strategies
3
Employ Policies That Affect Demand
SuPPORT AND ENHANCE Clean Energy Standards REORIENT utility Regulatory Structures ● broaden regulators’ economic considerations ● realign utilities’ financial incentives ● clarify regulations for third-party owners of solar photovoltaics ● guide long-term planning ● consider long-term contracts ENHANCE Consumer Access to Clean Energy ● advance funding and financing measures ● streamline permitting of renewable energy ● enhance net metering uSE State Procurement of Clean Energy ExAmINE Carbon Pricing
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es and guidance on policy program and design. The examples are intended to serve as ideas for states to examine the choice of a path that should depend on local and global conditions. This report focuses on renewable energy and energy efficiency, with additional examples from the alternative transportation segment. A state’s overall business environment— its infrastructure, geography, regulations, and taxes—may be as important to the growth and development of clean energy as policies specifically targeted to that sector. Accordingly, governors might consider the links between overall economic policies and more targeted interventions.
1 analyze industry assets, opportunities, and Challenges Experts in economic development use industry cluster analysis to identify concentrations of firms, find unique strengths and critical weaknesses, and determine which interventions can support the growth of clean energy markets in the context of a state’s economic development goals. An industry cluster is a geographic concentration of interconnected companies and institutions in a particular field. Those companies and institutions may be connected by functional relationships (for example, suppliers and purchasers, producers and distributors, and primary researchers and venture capitalists).
A complete cluster analysis requires data in addition to that available from federal and state statistical agencies. Some states are developing their own data sets using input from the private sector. In doing so, states should carefully determine the logic for including firms and other institutions in a cluster. The common denominators could include common products, similar processes, overlapping supply chains, technologies, skill requirements, or proximity to natural resources. A state’s measurement of its current and potential industry cluster must be able to capture activity in recognized clean energy workplaces (for example, a solar panel manufacturer or an energy efficiency services company) and slices of economic activity across traditional boundaries, picking up the “clean” activities of many businesses that are not inherently clean energy businesses. States are gathering data and analyzing specific clean energy sources in more detail to help them craft their economic development strategies. California’s analysis of its solar energy sector, contained in the 2012 California Green Innovation Index, delineates 10 solar industry sectors (for example, material feedstock, photovoltaics (PV) producers, equipment sales and distribution, solar appliances and devices, and testing and process equipment) and finds that solar installation and manufacturing accounted for 27,000 of 34,000 employees in the solar value network in 2010.9 The same report includes a map of the
9 F. Noel Perry et al., 2012 California Green Innovation Index (San Francisco, CA: Next 10, 2012), http://www.next10.org/sites/ next10.huang.radicaldesigns.org/files/2012_GII%20Report_R6.pdf (accessed March 3, 2014).
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value network of the solar energy supply chain (See Figure 1 on page 14), showing the relationships among research and development (R&D); technical innovation; the key elements of business formation (market analysis and financing); the manufacture of systems (and the steps therein, beginning with raw material extraction and processing); and sales, installation, and servicing of solar energy systems. Since 2008, the Massachusetts Clean Energy Center (MassCEC) has been analyzing the state’s clean energy markets from the perspective of renewable
[noTable number]
27,000
number of employees in solar installation and manufacturing out of the 34,000 in california’s solar value network in 2010.
energy, energy efficiency, and alternative transportation fuels and from the perspective of the value chain, such as manufacturing and assembly, engineering and research, sales and distribution, installation and maintenance, and finance and legal support. MassCEC is required to conduct an annual accounting of the clean energy industry in the state. It gathers data directly from clean energy employers and conducts a survey of randomly selected employers from industries identified as being potentially
related to clean energy. That approach differentiates the report from other studies, which typically rely solely on databases of companies that self-identify.10 The 2013 report found that in 2012, the clean energy sector included more than 5,500 firms that employed near 80,000 clean energy workers, or almost 2 percent of all employees in the state. The study also reports that the number of jobs in the clean energy sector grew by nearly 7 percent in 2011, 11 percent in 2012, and almost 12 percent from 2012 to 2013.11 Michigan designed a strategy to foster development in its wind energy supply chain that increased the number of companies in the supply chain from 15 to more than 120. The state undertook a thorough mapping of general economic assets (such as power supplies and transportation facilities) alongside clean energy resources to identify potential clusters. The cluster analysis included various aspects of the value chain for five segments of the wind sector, as illustrated in Figure 1. It also conducted detailed surveys of various segments of the wind industry to determine their capacity for growth, interest, and support needs. It complemented those analyses with efforts to foster innovation by building awareness of market opportunities for potential suppliers; matching high-potential suppliers in the state with the global manufactures of equipment for electricity-generation systems fueled by wind; tailoring technical assistance to high-potential suppliers; and funding
10 Massachusetts Clean Energy Center, 2013 Massachusetts Clean Energy Industry Report, http://images.masscec.com/uploads/attachments/2013/09/MassCEC_2013_IndustryRpt.pdf (accessed March 3, 2014). 11 Massachusetts Clean Energy Center, 2013.
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>>>> figure 1. California’s solar energy sector value network map
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>>>> figure 2
wind Cluster Capability analysis regional capability analysis example
low
high
illuStratiVe
areas of focus Value chain
materials r&D
process innovation
component Design r&D
Design Validation
manufacturing
logistics & ops
r&D
transport
production
o&M
rotor gearbox generator controls & electronics tower and foundation Source: Kinetik Partners
centers to help manufacturers finance new capital needs. Important steps in cluster analysis are assessing the effects of the state’s economic environment and business conditions on the cluster and taking an inventory of the cluster’s assets. Because the sector is dependent on new technologies, services, and business models, states are finding that an inventory of the assets critical to innovation—universities, research labs, and so forth—is
important.12 Examining their assets more closely can help states determine what might be missing, such as financing, human capital, or certain kinds of specialized business services. Starting a business is a challenge under the best of circumstances. Doing so in the clean energy sector is no exception. States are finding it important to identify the specialized resources—for example, training, education, venture capital, research, and technical support
12 The innovation challenge as summarized by Richard Lester, director of the Industrial Performance Center at the Massachusetts Institute of Technology, is “ . . . technologies available today are variously too expensive, too difficult to scale, or have other negative environmental or economic impacts. Only through innovation can these problems be solved. There will be no single technological solution. Instead, a continuing flow of innovations in many different fields of application will need to be sustained over decades. New technologies for storing, converting, and transporting energy efficiently; new value-added services to help industrial, commercial, and residential users manage their energy use intelligently; new business models to encourage new technology entry into traditional energy monopolies; new technologies to lower the costs of renewable and nuclear electricity; new technologies and systems for capturing and sorting carbon dioxide: all of this and much more will be needed.” Richard K. Lester, America’s Energy Innovation Problem (and How to Fix It), November 2009, http://web.mit.edu/nse/ lester/media/EIP_09-007.pdf (accessed March 3, 2014).
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that entrepreneurs require to start a business that will survive and grow. One example of asset analysis is the New England Clean Energy Council’s (NECEC) matrix from 2011 (See Figure 3 on page 17). That matrix shows how the region, composed of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont, is tracking against five key factors for business startup and growth. The NECEC found, with help from interviews with venture capitalists and researchers at the Massachusetts Institute of Technology, that like those in other new-technology industries entrepreneurs in the clean energy sector face several challenges to get clean technology companies off the ground.13 They face uncertainty in future demand generated by barriers to replacing traditional fuels, which are only partially offset by state and federal policy measures that stimulate demand. The path to the market can also be longer and more difficult for entrepreneurs in the clean energy sector, because important parts of the sector are capital intense and characterized by long invention-to-commercialization cycles and less established valuation comparables.14 Guided by the analysis presented in the NECEC matrix (See Figure 3), the region is taking steps to address the challenges in each area.15
Because of the risks involved in the clean energy market, states should develop appropriate risk-mitigation strategies. Below are principles for states to consider in managing the risks for sector-based support that they can apply to the clean energy sector:16 >>>> Select sectors of clear state strengths; >>>> Aim to develop globally competitive firms; >>>> Require that funds invested by the state be matched by private investors; >>>> Support infrastructure that can benefit a broader set of sectors; >>>> Engage a wide set of companies to help design the state’s strategy; and >>>> Support markets, not just specific businesses.
2 employ policies That affect supply of Clean energy Technology, products, or services Policies that help states address the supply side of the clean energy market include a variety of efforts to foster business growth. Those include providing resources and coordination to build
13 National Governors Association Center for Best Practices, “Webcast: Spurring Business Startups and Innovation in Clean Technology,” February 24, 2010, http://www.nga.org/cms/home/nga-center-for-best-practices/meeting--webcast-materials/page-eet-meetingswebcasts/col2-content/main-content-list/webcast-spurring-business-startu.html (accessed March 3, 2014). 14 Lester, 2009 (footnote 12). 15 Peter Rothstein, “Fostering Supply and Innovation in Clean Energy Markets” (paper presented to the National Governors Association Experts Roundtable on Clean Energy Economic Development, October 2011, Washington, DC, October 18, 2011), http://www.nga.org/files/live/sites/NGA/files/pdf/1110CLEANENERGYROTHSTEIN.PDF (accessed March 3, 2014). 16 See also Rob Atkinson, “Principles of Government Investment in Enterprises,” The Innovation Files, entry posted July 13, 2012, http://www.innovationfiles.org/principles-of-government-investment-in-enterprises (accessed March 3, 2014).
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>>>> figure 3. The New England Clean Energy Council’s Commercialization Gaps Assessment Matrix
new england Cleantech Commercialization gaps assessment no known resources/programs 1-2 known resources/programs challenge
Solution
Commercialization gap
Existing NE Commericialization programs
1
Defining business/ market problem
3-4 known resources/programs 5 or more known resources/programs
ct
Me
Ma
ri
nh
Vt
Multi State
corporate-research roundtables university project awards
Early stage research 2 & business concept
formation
Technology 3 development & demonstration
4
mentorship & team development
university-based entrepreneur support business plan competitions pilot support (funding) technology testbeds (physical infrastructure) general start-up assistance entrepreneur and executive education strategic partner & investor network formation support
Connecting with 5 corporate partners
& investors
seed funding/early stage investments later stage funding/ investments Source: New England Clean Energy Council
businesses’ capacity for innovation and commercialization, improving access to both working capital and export financing, and supporting the development of a skilled workforce. CulTivaTe innovaTion States play a key role in the work of research universities and institutions—
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the places from which, in addition to and often in partnership with federal labs, many of the technological breakthroughs required for the clean energy sector will emerge. State efforts to cultivate innovation include the following five processes: >>>> Basic research that increases the stock of scientific knowledge in
areas that might or might not be directly related to clean energy; >>>> Applied research to translate scientific knowledge into useful technology, products, processes, or services; >>>> Demonstration of a new technology; >>>> Development of new products, processes, and services; and >>>> Deployment of new products, processes, and services on a large-scale basis. In 2007, Colorado launched the Colorado Energy Research Collaboratory (the Collaboratory)—a partnership between the Colorado School of Mines, Colorado State University, University of Colorado Boulder and National Renewable Energy Laboratory. Through the Collaboratory, the four research institutions combine their faculties and researchers, laboratory facilities and networks of public and private partners to create and commercialize clean energy technologies and educate future scientists and engineers for industry, academia, and the public sector. Four collaboratory research centers exist and one is in development covering the following topics: biorefining and biofuels, revolutionary solar photoconversion, research and education in wind, carbon management, and energy systems integration. Colorado has invested $6.1 million in state funds for projects that involve one or more institution, as a way to incentiv-
ize collaboration. That investment has leveraged $50.3 million in federal and industry funds. Arizona supports a range of innovation activities using Science Foundation Arizona (SFAz), the public–private partnership through which the state channels R&D funding to its three primary public universities. To access R&D funding from SFAz, university researchers must partner across institutions, identify matching industry funding for their project, and have their project competitively selected by industry experts.17 SFAz’s research activities and related initiatives focus on several areas, including renewable energy and energy efficiency products; water management and environmental services; sustainable manufacturing (water, energy, and toxic material management); pollution prevention and recycling; and green construction and sustainable forest services and agriculture. Examples of SFAz’s investments include: a $2.4 million grant for Arizona scientists to work with private firms to design large underground systems that can provide solar energy storage efficiently and aesthetically; a $1.5 million grant to university and industry experts to work together to accelerate solar energy technology development to increase the potential of environmentally-friendly industries as a source of economic prosperity for the state; and a $1.5 million grant to bolster Arizona’s
17 Science Foundation Arizona, “Science Foundation Arizona Directs $1 Million to Solar Energy Research,” Press Release, December 20, 2010, http://s3.amazonaws.com/hoth.bizango/assets/10250/2010-12-08_SFAz_Stimulus___Angel.pdf (accessed March 3, 2014); Arizona State University Global Institute of Sustainability, “Science Foundation Arizona Launches New Solar Initiatives and the Solar Technology Institute,” Press Release, April 17, 2009, http://sustainability.asu.edu/news/archive/sciencefoundation-arizona-launches-new-solar-initiatives-and-the-solar-technology-institute (accessed March 3, 2014).
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opportunity to be at the forefront of producing jet fuel from algae. Kentucky established the KentuckyArgonne Battery Manufacturing Research and Development Center to support research that will help enable collaborations between a variety of users and foster innovation in accelerating advanced battery technologies. The center is a partnership between Argonne National Laboratory, the Commonwealth of Kentucky, the University of Kentucky, and the University of Louisville that uses their combined research expertise to create new local jobs and enhance manufacturing capacities. The initiative includes an “open access” component that allows industrial users to contract to use the lab or have the center’s experts conduct research for them, while protecting the intellectual property rights of the industrial partners. New York recently launched three clean energy proof-of-concept centers focused on turning university research on clean energy technology into a viable base for new businesses. Each center will receive $5 million in seed funding over five years. The centers aim to support the proofof-concept stage of product development by funding universities, scientists, and research organizations to partner with business experts and early-stage investors to test or “prove” the market for a new technology, product, service or business model. The idea behind so called “proof of concept” centers, which have been established at various universities over the past decade, is to help research faculty and entrepreneurs in the very early stages of starting-up, when they are working to attract investors and
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may be too young even to have angel investors or be part of a business incubator. Alaska has an Emerging Energy Technology Fund, established by the legislature and administered by the Alaska Energy Authority, to fund technology demonstration projects that have a reasonable expectation of commercialization within five years. The projects are designed to test emerging energy technologies or methods that conserve energy, improve an existing energy technology, or deploy an existing technology that has not been widely used in Alaska. The fund supports technology related to renewable sources of energy, conservation of energy, as well as efficient and effective uses of hydrocarbons. Funding comes from a combination of state, federal and matching industry funds. It has awarded $8.9 million to 26 projects. A seven-member advisory committee, appointed by the governor, advises the Alaska Energy Authority on the grant awards. Washington created a clean energy fund to support utility and corporate investments in energy storage and interconnection efforts. The effort is aimed at developing in-state expertise that can help commercialize the technology for eventual export to other states. The fund covers 50 percent of the cost, and the utility pays the other half to ensure utility “skin in the game” and encourage its vetting of technology readiness. The fund gives a slight preference to technologies developed in the state. BoosT enTrepreneurship States have many programs that encourage and support entrepreneurship.18
Some states have included the clean energy sector as a focus area in a broad entrepreneurship initiative. Others have learned that certain aspects of entrepreneurship—training and financing, in particular—have attributes particular to the industry and have created programs that address the specific challenges of becoming a clean energy entrepreneur. States provide support to the entrepreneurs who lead startup and maturing companies through different mechanisms variously called incubators or accelerators. Although precise definitions are elusive, incubators are more exclusively focused on startups and provide basic services and mentoring for entrepreneurs. Accelerators can overlap those functions but extend support to growing companies as well as startups. They provide access to capital and investors and link newer businesses to networks of expertise and resources needed to grow beyond the startup phase. The Green Technology Entrepreneurship Academy at the University of California, Davis, supports university professors and graduate students in their efforts to move clean energy research out of their labs and into the marketplace. A five-day boot camp provides access to seasoned entrepreneurs and national experts on everything from intellectual property and market validation to building a team and fundraising. The academy also connects would-be entrepreneurs to an entire network of people and institutions that are essential to market success in the clean energy space.
In 2009, the New Hampshire Office of Energy and Planning partnered with the University of New Hampshire to start the Green Launching Pad, an accelerator that connects entrepreneurs and private industry with technical, scientific, and business faculty and students at the university to launch new businesses focusing on energy efficiency, renewable energy, emission reduction and green manufacturing. Entrepreneurs are selected to participate in the program by a panel of expert judges, and then have access to funding and assistance from University of New Hampshire interns, university staff, and mentors. Once a firm is chosen to take part in the Green Launching Pad, it receives a grant (awards have ranged from $20,000 to roughly $90,000 so far). Of the 14 companies the u.s. Department of Defense Green Launching Pad spending on clean energy has supported, Revoluis projected to grow to tion Energy and EnerTrac $2.25 billion annually by 2015. are among the Big Four, along with Therma-HEXX and SustainX that have taken off quickly, are adding jobs, and are getting big publicity. The other ten startups are more mixed. Some are doing well, but growing more slowly; some have closed. The program was originally launched with $1.5 million from the American Recovery and Reinvestment Act. Private sector funds are being raised for continued support.19
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Oregon’s Built Environment and Sustainable Technologies Center (Oregon BEST)
18 National Governors Association Chair’s Initiative, “Growing State Economies: Twelve Actions” (Washington, DC: NGA, undated), http://www.nga.org/files/live/sites/NGA/files/pdf/11HEINEMAN12ACTIONS.PDF (accessed March 3, 2014). 19 Amanda Loder, “Green Business Initiative Sees Rewards, But Faces Challenges,” New Hampshire Public Radio, March 6, 2013, http://www.nhpr.org/post/green-business-initiative-sees-rewards-faces-challenges (accessed March 3, 2014).
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provides grants to support commercialization in the clean energy sector. Eligible projects must be a collaboration between a small business and at least one Oregon BEST partner university—the Oregon Institute of Technology, Oregon State University, Portland State University, or the University of Oregon. During the program’s first six years, each dollar of state support was turned into more than $10 of revenue for clean technology research and startups.20 Tennessee’s Jobs4TN plan, launched in 2011, focuses on creating high-wage jobs through a regional approach. The Jobs4TN Regional Accelerators program awarded a $250,000 competitive grant to entrepreneurial accelerators that serve as the “front doors for entrepreneurs” in each of the state’s nine economic development regions. The programs provide startup ventures with seed investment, educational programming, mentorship, and access to potential investors to help them grow into viable companies.21 Two of the accelerators in the program include a focus on clean energy.22 Manufacturing of solar panels and electric vehicles were areas identified for future growth.23
fosTer The growTh of exisTing Businesses States can accelerate the growth of businesses in the clean energy sector through a range of supporting programs. Those programs include a broad portfolio of supports such as enhancing the availability of finance options, facilitating business networks and collaborations, and building connections to global opportunities. Kentucky Governor Steve Beshear launched Kentucky New Energy Ventures in 2008, a state program to administer $5 million in public funds for investment in promising renewable and alternative energy companies in the commonwealth.24 The Kentucky New Energy Venture Fund supports the development and commercialization of alternative fuel and renewable energy products, processes, and services across the state through grants of $30,000 and investments ranging from $250,000 to more than $750,000.25 In its first three years, the fund awarded $2.85 million to 25 companies engaged in biofuels, wind energy, solar, clean coal, and natural gas technologies, stimulating $9 million in private investment.26
20 Oregon BEST, “Transforming Research Discoveries into Cleantech Jobs and Economic Prosperity,” undated, http://oregonbest.org/fileadmin/media/publication_files/ORBEST_Overview_2014_Links.pdf (accessed March 3, 2014). 21 Jared Konczal, “Evaluating the Effects of Accelerators? Not So Fast,” Entrepreneurs, entry posted August 8, 2012, http://www. forbes.com/sites/kauffman/2012/08/08/evaluating-the-effects-of-accelerators-not-so-fast (accessed March 3, 2014). 22 The two incubators that include a focus on clean energy are the Southern Middle Tennessee Entrepreneur Centers (green energy technology) and CO.LAB (smart grid). 23 Jobs4TN, Tennessee’s Green Job Opportunities, https://www.jobs4tn.gov/admin/gsipub/htmlarea/uploads/TN%20GJ%20 Brochure%20Packet.pdf (accessed March 3, 2014). 24 Kentucky Office of the Governor, “Kentucky Launches New Fund to Invest in Companies Developing Renewable and Alternative Energy Technologies,” Press Release, March 12, 2008. 25 Kentucky New Energy Ventures, Kentucky Science & Technology Corporation Web site, http://www.kstc.com/index. php?option=com_content&view=article&id=133&Itemid=283 (accessed March 6, 2014). Also see Startups@KSTC, http://startups.kstc.com. 26 Deborah L. Clayton, “Dept. of Commercialization & Innovation: Overview of Activities and Results” (paper presented to the Kentucky Cabinet for Economic Development, May 28, 2010), http://cpe.ky.gov/NR/rdonlyres/0EA0C4AA-157C-4674-B719F5E4126FC8A9/0/Research_Econ_Comp_SG_meeting_PP_Pres_5_28_10.pdf (accessed March 3, 2014).
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Additionally, the Governor’s Office of Agricultural Policy provides grants to help increase energy efficiency and renewable energy production on the state’s farms. Originally funded with federal ARRA funds, the Kentucky Agricultural Development Board has since approved $13 million to continue the program in recognition of its benefit to the state’s agricultural sector. Those funds were augmented with environmental mitigation funds. The Edison Innovation Green Growth Fund raises capital to improve the prospects of renewable and energy efficiency technologies becoming competitive with traditional sources of electricity generation. The program, administered by the New Jersey Economic Development Authority, provides loans of up to $2 million, with a performance grant component to support technology companies that have renewable energy or energy efficiency products or systems. Eligible companies must have started to generate commercial revenues to receive one-to-one match funding by the time the loan is finalized. New Jersey also provides a Clean Energy Manufacturing Fund to help clean energy manufacturers identify a manufacturing site, support site improvements, construct a facility, or purchase equipment. Pennsylvania’s Innovation Works is a Pittsburgh-based accelerator that invests capital and provides business expertise and other resources to startup companies that are most likely to increase regional economic growth; the accelerator focuses on clean energy as one of several priority industries. It is one of Pennsylvania’s four centers for the Ben Franklin Technology Partners program, privately managed
as a nonprofit organization. In 2009, Innovation Works received a $10 million grant from the state’s Department of Community and Economic Development to encourage growth in the energy sector in southwestern Pennsylvania. Innovation Works invests in three areas that span the stages of business growth: translational research, seed funding for early-stage companies, and innovation adoption grants for manufacturers. It connects energy companies to each other for support through an EnergyMatch portal and EnergyMatch events, which bring together local entrepreneurs, researchers, and funders to connect, develop new products, form R&D teams, collaborate on grant opportunities, and seek investment capital. Wisconsin created a Clean Energy Manufacturing Revolving Loan program to benefit manufacturers that intend to use clean energy technologies, introduce a newly developed commercial technology into the supply chain for clean energy goods or services, or retool an existing product to serve the renewable energy or energy efficiency marketplace. Funding came from a federal grant to the state. The program has made 25 low-interest loans totaling $38 million; repayment of those loans will continue to be used to assist manufacturers in the state remain competitive and increase employment. Massachusetts has adopted a trade strategy that includes the Massachusetts–Israel Innovation Partnership (MIIP) between the State of Israel and the Commonwealth of Massachusetts to encourage and support innovation and entrepreneurship in the life sciences, water, clean energy, and technology for eConomiC developmenT
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sectors. The strategy responses to the increasing importance of international trade and investment and servers as an example of how a state can help its companies make global connections and find new markets. MIIP was created as a direct result of Governor Deval Patrick’s Massachusetts Innovation Economy Partnership Mission trip in 2011, when a coalition of the state’s leading business executives and senior government officials explored growth opportunities of common interest for the innovation industries of Massachusetts and of Israel. The countries recently issued a joint solicitation to distribute $2 million to partnerships between companies based in Massachusetts and Israel.27 ensure a skilled workforCe Changes in markets and technologies create new demands for talent and skills. If education and job training policies and systems do not respond to and anticipate market demand, a talent shortage could constrain the growth of the clean energy sector. The involvement of employers—not just individual employers but employers who can represent the needs of an entire economic sector—can help workforce training and education programs meet that demand. States can play an important role in better connecting workforce training with industry demand. The Pacific Northwest Center of Excellence for Clean Energy, serving Idaho, Montana, Oregon, Utah, and Washington,
convenes a Power Generation Skills Panel that involves major power-generation companies covering coal, hydro, and wind resources; organized labor; workforce boards; and community [noTable colleges. The skills panel leads an numbers] ongoing development of skills, standards and manuals for critical in the program’s middle-skill occupations, includfirst six years, ing substation operators, power oregon’s built plant electricians, and combustion environment and sustainable turbine technicians. The Center of technologies Excellence conducts focus groups center took and surveys workers and employers to identify and verify the precise skills, knowledge, competencies, in sTaTe and work functions of critical supporT occupations. Employers use those standards to adjust job descriptions and turned it into and advancement requirements. Educators and apprenticeship programs also use them to create in revenue training that matches the jobs for clean technology available in the industry.28 research and
$1
$10
startups.
California designed a program that engages industry to help prepare high school students for jobs in clean technology and renewable energy. The Clean Technology and Renewable Energy California Partnership Academies Program provides grants to high schools to create “schools within schools” that combine traditional high school curricula with technical training and real-world work experience. Schools receiving grants are expected to form close partnerships with the private sector to best prepare
27 http://www.mass.gov/hed/massachusetts-and-israel-unveil-2-million.html 28 Pacific Northwest Center of Excellence for Clean Energy Web site, http://www.centralia.edu/coe/index.html (accessed March 3, 2014). 29 California Department of Education, “Clean Technology and Renewable Energy California Partnership Academies Program,” page updated January 30, 2013, http://www.cde.ca.gov/fg/fo/profile.asp?id=2348 (accessed March 3, 2014).
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students for careers in the clean energy industry.29 The Massachusetts Clean Energy Internship Program is a workforce development initiative offered through the MassCEC and New England Clean Energy Council (NECEC) that focuses on enhancing the talent pipeline for Massachusetts companies engaged in the clean energy industry. The program helps in its first three years, the place students and recent kentucky new energy graduates who are considerventure fund has awarded ing career opportunities in $2.85 million to 25 clean energy through paid companies engaged in internships across the state biofuels, wind energy, solar, and is designed to provide clean coal, and natural gas students and companies technologies, stimulating with the tools to connect. $9 million in private MassCEC will reimburse investment. eligible companies for intern stipends. In the 2012 summer program, 144 students were placed at 77 different companies. Nearly 30 percent of employers offered full- or part-time work to interns at the program’s conclusion and over 96 percent of hiring employers would consider rehiring their interns after the program.
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In South Carolina, Clemson University created the Energy Innovation Center, which focuses on building public–private partnerships that advance technology and research while preparing the workforce for the jobs created by such advances. The center’s workforce-development strategy has three main components, all of which are in development: online,
energy-related certification courses; a power systems engineering certification program; and a power systems engineering institute. The online certification programs will help companies train their incumbent workforce, while the power systems integration program will focus on training new talent. At the same time, the power systems engineering institute will work with private industry to develop new degrees, certificates, and training tailored to industry needs.30
3 employ policies That affect the demand for Clean energy State policy measures can help increase demand for clean energy by setting targets or addressing market barriers. Such policies can provide greater certainty of demand, thereby stimulating in-state economic activity, especially for businesses that benefit from geographic proximity to their markets.31 Although not every policy designed to increase demand is suitable for every context, states can adopt a variety of demand-side policies to enhance their attractiveness for private production and investment. To increase the demand for clean energy, states can: >>>> Support and enhance clean energy standards; >>>> Reorient utility regulatory structures to align incentives in support of clean energy; >>>> Enhance consumer access to
30 Clemson University SCE&G Energy Innovation Center Web site, http://clemsonenergy.com/why/workforce-development (accessed March 3, 2014). 31 Pew Center on Global Climate Change, Clean Energy Markets: Jobs and Opportunities (July 2011 Update), p. 1.
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clean energy by advancing funding and financing measures and streamlining permitting and market incentives; >>>> Use state procurement directives that support clean energy; and >>>> Examine the potential for setting a price on carbon emissions to build market demand and a potential funding stream for clean energy. supporT and enhanCe Clean energy sTandards Clean energy portfolio standards, in the form of RPSs, goals, or energy efficiency portfolio standards (EEPSs), require retail electric suppliers operating in the state to supply a minimum percentage or quantity of clean energy. By creating demand for clean energy suppliers, such standards have had a strong effect on drawing forth additional production of clean energy. State economic development leaders surveyed in 48 states said that of the policy tools available to stimulate growth in the market for renewable energy, an RPS was the most significant factor.32 Of all the new non-hydro renewable energy added in the United States from 1998 to 2011, 63 percent occurred in states with RPS policies.33
One or more standards in 42 states promote renewables, energy efficiency, or other categories of clean energy. Renewable portfolio standards are in effect in 30 states, and seven more states have set nonbinding renewable goals. In addition, 24 states have put in place separate EEPSs.34 Many states have refined their standards to help promote local economic development through technology carve-outs or set-asides or by granting a “multiplier” (extra credit) to power produced by particular technology that is suited to in-state generation. Despite potential legal and cost concerns, about half of U.S. states employ some mechanism promoting in-state investments within their clean energy policies. The legality of some provisions has been questioned on the basis of the Commerce Clause or international free-trade agreements, which generally are viewed as prohibiting location-based commercial preferences.35 To address free-trade concerns, states might avoid using explicit criteria that discriminate against out-of-state businesses and use qualifications based on in-state consumption or technology types as well as state environmental goals.36 Another concern is that purchasing power from in-state facilities
32 “Powering Up: State Assets & Barriers to Renewable Energy Growth” (A Survey of Economic Development Leaders, International Economic Development Council, 2011). 33 Galen Barbose and Ryan Wiser, “Renewable Portfolio Standards in the United States: A Status Update” (Lawrence Berkeley National Laboratory, 54th Annual Regulatory Studies Program, Michigan State University, Institute of Public Utilities, August 14, 2012). 34 The National Governors Association use of states covers the 55 states, territories, and commonwealths of the United States. 35 The most relevant here is Article 1, Section 8, Clause 3 of the U.S. Constitution, which empowers Congress “to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” Known as the Commerce Clause, this section has been interpreted to prohibit states from unjustifiably burdening out-of-state competitors to benefit in-state economic interests. 36 For more information, see Clean Energy States Alliance, “The Commerce Clause and Implications for State Renewable Portfolio Standard Programs” (March 2011), and Richard Lehfeldt, Woody N. Peterson, and David T. Schur, “Commerce Clause Conflict: In-state Green Mandates Face Constitutional Challenges,” Public Utilities Fortnightly (December 2010), http://www. fortnightly.com/fortnightly/2010/12/commerce-clause-conflict (accessed March 3, 2014).
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could increase costs, because that power might not be purchased from least-cost providers. To address those concerns most states include mechanisms to cap costs within policies that encourage in-state investments.
ing regulators’ economic considerations, realigning utilities’ financial incentives, clarifying regulations for third-party ownership of solar PV, guiding long-term planning, and considering long-term contracts to increase market stability.
Missouri passed a ballot initiative in 2008 establishing an RPS in which 2 percent of the compliance targets must be solar electric power, equaling 0.3 percent of all sales by 2021.
A 2008 California law clarified that thirdparty solar PV companies would not be regulated as utilities, thereby enabling new businesses to invest in solar installations. That law opened a financing option that led to demand for third-party systems more than quadrupling between 2009 and 2011, growing from 9 percent of residential PV installations to 36 percent.37
[fasT faCT] new Jersey and Maryland governors signed bills authorizing subsides for offshore wind power contingent on projects demonstrating positive net economic benefit to the state.
Nevada has a 2.4 multiplier for solar PV power, meaning that for every kilowatt-hour (kWh) generated, electric generators qualify for 2.4 credits. Customer-sited PV has a 2.45 multiplier, energy efficiency has a 1.05 multiplier, and energy efficiency during peak demand periods has a multiplier of 2. reorienT uTiliTy regulaTory sTruCTure To supporT more Clean energy Under most traditional utility regulatory models, state regulators are not authorized to consider in-state economic effects beyond those on customers, creating a disincentive for utilities to pursue many forms of clean energy. Yet state regulators and utilities are the actors that largely determine the size of the clean energy markets. Some states are reorienting utility procurement and planning methods to help build a clean energy sector. Those measures include broaden-
Kansas allows utilities to secure a rate of return of one-half of 1 percent to 2 percent on top of the rate of return authorized for capital investments for energy efficiency investments. The Kansas state regulators are also authorized to consider providing utilities with a performance incentive in the form of a share of the savings accrued to rate payers from an energy efficiency program. Thirty states are executing similar types of utility shareholder incentives for energy efficiency.38 New Jersey Governor Christie and Maryland Governor O’Malley promoted and signed bills authorizing subsidies for offshore wind power contingent on projects demonstrating positive net economic benefit to the state. The New Jersey Offshore Wind Economic Development Act requires a detailed input–output analysis, including income, wages, indirect business taxes, state
37 California Solar Initiative dataset (2011) and Solar Energy Industries Association and Greentech Media Research, “U.S. Solar Market Insight,” 1st Quarter 2011. 38 Ten Trends to Track, NGA, 2012.
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economic output, and employment, with a focus on manufacturing employment in the state. Rhode Island passed legislation requiring utilities to pursue all cost-effective efficiency measures before considering generation options. In 2010 alone, consumers in the state saved an estimated $14.5 million in electric and gas bills because of the resulting investments in efficiency.39 A 2005 Washington law allows utilities to offer a fixed-price incentive for clean energy known as a feed-in-tariff (FIT). The incentive ranges from 12 to 54 cents per kWh, depending on the technology type, with an annual payment cap of $5,000 per project. Although some governments fund FITs through customer rates, Washington finances it through the utilities’ in-state tax liability.40 The tariff is paid on all kWh generated, or “gross metering,” whereas net metering pays only for the electricity not used by the facility and put on the grid. A Wisconsin planning effort called the Strategic Energy Assessment occurs every two years. It assesses the demand for electricity and the availability and reliability of resources to meet that demand. Opportunities for energy efficiency are generally identified through the statewide Focus on Energy program. That program considers economic development strategies that include improving
the energy efficiency of existing businesses, reducing spending on out-of-state energy, attracting new employers, and encouraging new business formation. By using local installers to deliver the programs, the state helps support job creation and retention. enhanCe Consumer aCCess To Clean energy Potential consumers of clean energy face several market and regulatory barriers to accessing clean energy. The high upfront cost of residential systems that generate clean energy is a prominent market barrier. Uncertainty associated with the time and conditions needed to gain permits for distributed generation (for example, rooftop solar panels) is a leading regulatory barrier. In addition, consumers can face regulatory challenges in connecting distributed generation with the transmission grid.41 States have been addressing those challenges in a variety of ways, including various funding and financing mechanisms as well as adjustments to regulatory procedures, such as streamlining renewable energy permitting and enhancing net metering, which allows owners of small commercial and residential solar energy systems to sell their net-excess generation back to the grid at the average retail rate. Connecticut established a Clean Energy Finance and Investment Authority to transition from providing traditional
39 For more information on all cost-effective efficiency, see National Governors Association, “Ten Trends to Track: State Policy Innovations to Advance Energy Efficiency and Renewable Energy,” Issue Brief (Washington, DC: NGA, 2012), http://www.nga. org/files/live/sites/NGA/files/pdf/TenTrendsToTrack_IssueBrief.pdf (accessed March 3, 2014). 40 Toby Couture and Karlynn Cory, “State Clean Energy Policies Analysis (SCEPA): An Analysis of Renewable Energy Feed-in Tariffs in the United States” (Golden, CO: National Renewable Energy Laboratory, 2009). 41 Distributed generation is electricity generated from many small energy sources, such as solar power or geothermal power installed at residential houses, rather than large, centralized power plants.
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grants and rebates to low-cost financing in support of renewable energy and energy efficiency projects. Funding comes from a variety of public and private sources, including an existing utility rate payer surcharge, federal funds, proceeds from the state’s carbon dioxide emissions trading program, bond issuances, and contracts with private capital. Hawaii is developing an innovative financing program called GEMS (Green Energy Market Securitization) to make clean energy investments, such as solar photovoltaic systems, more affordable and accessible to underserved markets, including low- to moderate-income homeowners, nonprofits and renters. GEMS will utilize a traditional utility financing structure to provide low-cost capital for consumers, bringing together two different existing financing mechanisms in a new way. GEMS will give consumers the opportunity to benefit from energy cost savings by eliminating common barriers, such as Hawaii’s high cost of renewable energy improvements and limited financing options. The program will also contribute to the state’s commitment to meet and exceed its mandated goal of 70 percent clean energy by 2030. Iowa exempts the value added by any new or retrofitted construction or installation of a geothermal heating or cooling system on residential property from state property tax for 10 years. The state also provides financial support to wind and solar power by providing exemptions
from replacement generation tax, sales and use tax, and property tax on the market value added. Kansas’s net metering law allows owners of small commercial and residential distributed generation systems to receive payments at the average retail electricity rate for net excess generation. To address concerns about reliability and raising sufficient revenue to support the maintenance of the distribution network, the incentive program is capped at 1 percent of a utility’s peak demand from the previous year and limited to commercial systems of less than 200 kW capacity and residential systems smaller than 25 kW.42 The U.S. Virgin Islands’ (USVI) Wise Investments Save Energy grant program helps small business owners perform energy efficiency retrofits. To be eligible, buildings must be located within the USVI and use 30,000kwh or less per month, and owners must be able to pay for 60 percent of the project cost or the energy assessment cost if they are not committed to a project within 30 days of the assessment. The building owner must document a reduction in energy consumption of at least 15 percent, based on a comprehensive energy assessment, and must continue to monitor the reduction for 12 months after the retrofit. Utah has adopted legislation that enables a Property Assessed Clean Energy Program (CPACE) for commercial properties.43 Under this voluntary
42 Freeing the Grid, “Best Practices in State Net Metering Policies and Interconnection Procedures,” http://freeingthegrid.org (accessed March 3, 2014). 43 A focus on commercial Property Assessed Clean Energy Programs has developed in many states to replace a previous residential focus that was not supported by the Federal Housing Finance Agency.
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program, local governments can issue bonds to create a loan fund for commercial building owners. Building owners can finance approved energy improvement projects, including energy efficiency upgrades and renewable energy systems that are permanently affixed to their properties. The building owner repays the assessment through an additional line item on his or her property tax bill for a period of up to 20 years. Notably, the program requires lenders to provide consent to subordinating an existing mortgage to the CPACE assessment. Vermont streamlined the registration process for solar energy systems up to 5 kW in 2011. The new process eliminates permitting and authorizes solar energy customers to install their system 10 days after completing a registration form and obtaining a certificate of compliance with interconnection requirements. If the customer’s utility does not raise any interconnection concerns during the 10day waiting period, the state authorizes project installation. use sTaTe proCuremenT of Clean energy Governors can use their state’s procurements to advance the use of clean energy in state buildings and fleets, thereby stimulating the market for clean energy. Most often through executive orders, governors have required state buildings
to meet new energy efficiency standards, install renewable energy, use energy performance contracts, and improve fleet efficiency. Those measures improve state operations and also increase capacity in vendors that deliver the services. That new vendor capacity could foster new business lines in private markets. In 2010, Delaware Governor Jack Markell issued an executive order calling for a 30 percent reduction in energy use by executive agencies by 2015 and requiramount of money ing agencies to meet at least Delaware’s state agencies will save by purchasing 30 percent of their annual 25 percent of their electricity demand from 44 electricity from renewable renewable sources by 2013. resources, over a threeThe motivation included the year contract period. state’s economic development strategy of fostering companies to seize market opportunities in the emerging clean energy economy and supporting the creation of clean energy jobs. Under the executive order, agencies have been able to reduce their energy use by 12 percent across 230 buildings and facilities. By aggregating its purchase contract, the state is buying 25 percent of its electricity from renewable resources at a savings of $13.2 million over a three-year contract period. Through expanded use of energy savings performance contracting and a new electricity purchase contract in 2013, the state expects the savings to grow.45 In
$13.2m
44 Executive Order 18, “Re: Leading by Example towards a Clean Energy Economy & Sustainable Natural Environment,” February 17, 2010, http://governor.delaware.gov/orders/exec_order_18.shtml (accessed March 3, 2014). Additional information on state financing approaches is included in National Governors Association Center for Best Practices, State Clean Energy Financing Guidebook (January 2011), http://www.nga.org/files/live/sites/NGA/files/pdf/1101CLEANENERGYFINANCING.PDF (accessed March 3, 2014) and at the State and Local Energy Efficiency Action Network Web site on financing solutions, http:// www1.eere.energy.gov/seeaction/financing_solutions.html (accessed March 3, 2014). 45 Rachel Emerson, Delaware Office of Management and Budget, personal communication with the author, January 8, 2013.
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addition, the state is helping to create certainty of demand for renewable and energy efficiency products and services. Governors of 16 states, led by Oklahoma Governor Mary Fallin and Colorado Governor John Hickenlooper, signed a memorandum of understanding (MOU) to increase the use of natural gas vehicles in state fleets. The MOU’s goal was to create a sufficient demand for natural gas vehicles (NGVs) to support a market for the design and manufacturing of NGVs in the United States. The MOU led to a multistate request for proposals (RFP) that aggregated the annual state fleet vehicle procurements of 22 states (other fleet managers participated in the RFP without the state signing the MOU). More than 100 dealers submitted bids in response to the RFP, all of which included contracts for a variety of dedicated and bi-fuel natural gas cars at prices as much as 17 percent lower than those prior to the joint solicitation. Oklahoma state agencies have since purchased more than 350 CNG vehicles and estimate potential vehicle lifetime cost savings of around $5 million dollars compared to conventional counterparts. examine CarBon priCing To Build markeT demand and a funding sTream for Clean energy The nation as a whole and many states are debating whether and how to address the risk of climate change associated with increased greenhouse gas emissions. Several states have taken steps to reduce greenhouse gas emissions, including adopting policies to restructure energy prices to incorporate the environmen-
tal costs of carbon emissions. Two mechanisms for pricing the environmental cost of carbon emissions are an emissions cap-and-trade system and a carbon tax. Cap-and-trade systems place an overall limit on the total emissions of affected producers (for example, within a state or region) and require them to buy permits (or allowances) for each unit of carbon emitted. The result is similar to placing a tax on carbon-based fuels in that both a cap-and-trade and a tax system increase the prices that consumers and producers pay for fuels that emit carbon dioxide when burned. As those higher prices work their way through the economy, they provide an incentive for innovation and investment in clean energy sources that produce fewer or no carbon emissions. Some utilities and their financiers have begun to include a cost of carbon emissions into their medium-term plans and financial risk analysis. For instance, an evaluation of 15 electric utilities plans and analyses found that 14 included carbon prices in their analysis and 11 accounted for those prices in their base-case scenario.46 Each of the nine states participating in the Regional Greenhouse Gas Initiative cap-and-trade program (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont) allocated power plants in their states a portion of a regional cap on carbon emissions. The RGGI states implemented a new cap in 2014 that is equivalent to 2012 emission levels, and the cap declines 2.5 percent each year from 2015 to 2020.
46 Galen Barbose, Ryan Wiser, Amol Phadke, and Charles Goldman, “Reading the Tea Leaves: How Utilities in the West Are Managing Carbon Regulatory Risk in their Resource Plans” (2008).
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Power plants must purchase emissions allowances to cover their portion of the cap through quarterly auctions.47 The states use the auction proceeds to invest in energy efficiency, clean energy projects, or greenhouse gas reduction or mitigation programs or to alleviate state budget problems and provide rate relief to consumers. The state-guided investments are intended to be augmented by private investments made in response to a carbon price. An economic analysis of the first three years of the program, which began in 2009, found that the
region gained $1.6 billion in economic value and 16,000 jobs, net of extra costs to produce goods and services.48 Reduced demand for fossil fuels imported from out of state kept $765 million in the local economy. Furthermore, although energy prices rose slightly in the first three years (approximately 0.7 percent), consumers are estimated to save $1.1 billion on their utility bills over time as the investments in energy efficiency lower overall bills.49 The program is working to implement a cost-containment provision with alternative compliance payments.50
ConClusion
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overnors inCreasingly see oPPortUnities to marry policies that promote state economic development with policies aimed at the development of clean energy. Because the clean energy market is still emerging, investments in clean energy efforts should be evaluated against alternative uses of funds, the risks associated with emerging technologies, and industry-specific investments. However, by using well-crafted policies that recognize both supply and demand conditions, governors can develop strategies that address risks and yield net benefits.
47 Credits to nonelectric companies are called offsets. The Regional Greenhouse Gas Initiative allows offsets for up to 3.3 percent of credits or up to 10 percent in certain market-constrained circumstances. 48 Paul J. Hibbard, Susan F. Tierney, Andrea M. Okie, and Pavel G. Darling, The Economic Impacts of the Regional Greenhouse Gas Initiative on Ten Northeast and Mid-Atlantic States (November 15, 2011), http://www.analysisgroup.com/uploadedFiles/Publishing/Articles/Economic_Impact_RGGI_Report.pdf (accessed March 3, 2014). 49 Paul J. Hibbard et al., The Economic Impacts of the Regional Greenhouse Gas Initiative on Ten Northeast and Mid-Atlantic States. Energy efficiency investments were assumed to generate savings for 10 years. 50 Regional Greenhouse Gas Initiative (RGGI), “Summary of RGGI Model Rule Changes, February 2013,” http://www.rggi.org/ docs/ProgramReview/_FinalProgramReviewMaterials/Model_Rule_Summary.pdf (accessed March 3, 2014).
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[noTable number] nga CenTer divisions The NGA Center is organized into five divisions with some collaborative projects across all divisions. The NGA Center provides information, research, policy analysis, technical assistance and resource development for governors and their staff across a range of policy issues. • Economic, Human Services & Workforce covers workforce development focused on industry-based strategies; pathways to employment and populations with special needs; and human services for children, youth, low-income families and people with disabilities. • Education focuses on helping governors develop effective policy and support its implementation in the areas of early education, readiness, and quality; the Common Core State Standards, Science Technology Engineering and Math, and related assessments; teacher and leader effectiveness; competencybased learning; charter schools; data and accountability; and postsecondary (higher education and workforce training) access, success, productivity, accountability, and affordability. The division also works on policy issues related to bridging the system divides among the early childhood, K-12, postsecondary. and workforce systems.
• Environment, Energy & Transportation focuses on several issues, including improving energy efficiency, enhancing the use of both traditional and alternative fuels for electricity and transportation, developing a modern electricity grid, expanding economic development opportunities in the energy sector, protecting and cleaning up the environment, exploring innovative financing mechanisms for energy and infrastructure, and developing a transportation system that safely and efficiently moves people and goods. • Health covers issues in the areas of health care service delivery and reform, including payment reform, health workforce planning, quality improvement, and public health and behavioral health integration within the medical delivery system. Other focus areas include Medicaid cost containment, state employee and retiree health benefits, maternal and child health, prescription drug abuse prevention, and health insurance exchange planning. • Homeland Security & Public Safety focuses on emerging policy trends across a range of homeland security and public safety issues. Current issues include cybersecurity, prescription drug abuse, public safety broadband, sentencing and corrections reform, homeland security grant reform, justice information-sharing, and public health preparedness.
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naTional governors assoCiaTion for besT praCTiCes 444 North Capitol Street, Suite 267 Washington, D.C. 20001 202-624-5300 www.nga.org/center
