1. In India, there is a drought. This year’s poor monsoon is likely to lead to the third drought in 10 years. But two-thirds of the water India receives is wasted because of inadequate storage and management.
2. India just had a power outage affecting 650 million people, a population twice as large at the U.S.  Most cities in the state of Punjab faced an acute water shortage due to lack of proper co-ordination between the power and the municipal corporations.
3. Water tensions are increasing between countries like India and Pakistan.
4. Before the power grid outage India was “staring at a water drinking shortage.”
5. There is a race to tap India’s coal resources to fuel a whopping 519 GW – nearly 500 power plants – leaving behind massive deforestation and water contamination that could have a ripple effect on the environment and health inside the world’s second most-populous country and neighboring Bangladesh.  Despite places like coal mining in the Jaintia Hills of India being one of the wettest places on earth, much of the water from the Ummutha River that flows through it is no longer drinkable.

According to Andrew Revkin, The New York Times blogger: “It’d be great to think that renewable energy sources and distributed electricity generation could solve such problems, and they’re great where they work. (And India is ramping up an ambitious effort to expand solar energy.) But the reality is that grids and central power plants are a mainstay of increasingly urbanized economies. In India, that means coal will be an economic keystone for decades.”

Leaving aside the flat out failure of grid extension in India, let’s focus on a more stark reality.  The World Bank estimates that 21 percent of communicable diseases in India are water related. In India, diarrhea alone causes more than 1,600 deaths daily.

So, India’s power outage underscores a larger problem facing us.  If you had to choose between power and water, what would you choose?

Revkin’s blog might suggest he chooses power. I would choose water. But, instead, can’t we deploy solutions where we have both?

Albert Einstein said, “We can’t solve problems by using the same kind of thinking we used when we created them.”

Power grid Old Delhi

The most amazing part of the Indian blackout story is that the country’s infrastructure did not grind to a halt. A key reason is that most of India’s most important infrastructure is backed up by diesel generators – at a cost of over US$0.45/kWh (4X what most Indian’s pay for electricity). This is by definition distributed generation. India citizens depend upon diesel because the Indian central grid is a failure. The added problem is that diesel-distributed generation is very expensive, noisy, and bad for people’s health.  Most importantly diesel subsidies in India are expected to cost the country over $24 billion this year.

This choice for distributed generation is simply the only solution that individual consumers can choose without relying on the oft-maligned Indian bureaucracy.  In the past, Indian consumers chose diesel because of their low upfront costs.   But today, the improvements in financing are allowing consumers to switch to clean energy –  gasified biomass, wind, solar and other distributed approaches at a 50 percent discount to the cost of diesel.

Regarding coal as a solution, it was reported this year that India has overtaken China as the World’s largest importer of coal.  India is building coal generation facilities as fast as it can.   But, if history is any guide, India never meets its goals on coal generation.  This is not because Indians don’t know how to build coal or because they can’t afford new coal (though costs are skyrocketing); it’s because building large new infrastructure is hard in India based on topography alone. So Andrew Revkin and others insist on poking India in the eye when they suggest that India’s solution to the recent blackouts are new coal plants.

But clearly, Revkin also misses the point on water. Water is literally killing India.

The power grid in Old Delhi

In India, like in the United States, the power sector is the single largest user of water – more than agriculture. Presuming that India could solve its problems and build more coal, they would run out of fresh water even faster.

Ten years from now, writers like Revkin will be publishing an article about how climate change and coal led to water shortages in India.  As a result, India needs to buy expensive desalinization plants. In fact, today, The World Resources Institute has a report on growing water scarcity and declining water quality, on thermal and hydroelectric power generation plants in Asia.

The sad reality is that “Utility 1.0” is more than 100 years old.  The model was a good one and gave us the economy that we enjoy today, but it has its problems. Coal is much more expensive today than it was 20 years ago, so much so that Ratan Tata, chairman of the Tata companies, recently admitted that new coal power from the proposed Tata Mundra project is coming in at roughly the same cost as new solar today in India.

Worse the Tata Mundra project is in such bad shape financially from skyrocketing coal costs, he has described it as a ‘non performing asset.’ Plus, practically speaking, India simply cannot afford to pay for the infrastructure necessary to provide 100 percent household electrification using the command and control practices of the last 100 years.

Revkin is using 20^th century thinking to solve 21^st century problems. If India, and other industrialized countries had a comprehensive energy plan that included installing the least cost renewables, perhaps our choice will not come down to water or electricity.  I think we could have water and electricity – but that is not that plan that is being executed.  Others are suggesting that India execute a plan that could execute itself.

Jigar Shah is CEO of Jigar Shah Consulting and a partner with Inerjys. Shah founded SunEdison in 2003 with a new business model, the solar power services agreement business (SPSA). SunEdison now has more solar energy systems and megawatts under management than any other company.

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Some folks, like my friend Sunil Paul, are pushing the CleanWeb. This is an asset-light investor play that is an offshoot of what Sand Hill Road VCs like to do, companies like Sidecar and Opower.  Given that 20 percent plus of all energy can be offset with ICT (Internet Communications Technologies) this is a very plausible way to go.  However, this is unsatisfying for me.

Fundamentally, energy efficiency and asset light approaches are essential, but not a sufficient solution set to bring us to 80 percent or more emissions reductions necessary to get us on the right path for climate change. We have to be able to deploy advanced technologies in vehicles, electricity generation, agriculture, water, building retrofits, and other core sectors.

Since 2010, I have been experimenting with a new approach in a small fund I helped start with Bernie Zahern called “Clean Feet”.  This fund takes, as a given, that there are hundreds of VC-backed cleantech companies since 2000 that have hit their technology milestones, and hundreds more since the R&D boom of the 1970s that are ready for deployment. However, they are experiencing a valley of death around raising non-dilutive capital for project deployment.

One company we supported, Skyline Innovations, has developed a new monitoring system for solar thermal projects to enable them to be sold using a ”heat purchase agreement” similar to the solar power purchase agreement we developed at SunEdison. We invested $3 million in project equity into their first projects and are receiving quarterly distributions that allow us to pay a current cash yield to investors every quarter.  We also received a small amount of warrants in the company since the company wanted to align our interests beyond the project investments and pay us for the hundreds of hours of “free” consulting we provided on standard contracts and customer approaches.

The measure of our success is that the company was so well prepared after our efforts that they landed a $30 million non-dilutive investment commitment from Washington Gas.  Our net return on the project financing is above 13 percent after tax unleveraged and the warrants are already doing so well that we have a chance of reaching 20 percent returns after 9 years.

We have been able to replicate a version of this model for two other companies and have just identified three more candidates. The trouble is that we do not neatly fit into any investor buckets. We are certainly not a VC, since we are not taking any technology risk and are not investing into companies.

We are not strictly project finance because our companies require more hand-holding, and in any case, most project investors don’t want to invest small amounts like $3 million because it is just too much paperwork. We are probably closest to “real estate” since we provide a current return and then upside on the value of the company. The cash distributions are much higher than real estate though and our projects are naturally depreciating unlike the land in a real estate investment.

Not fitting neatly in a bucket is confusing for folks — so raising money has been slow and steady — not what I am used to after the rocket ship I experienced at SunEdison.

A lesson for me, though, is that I do think that the Clean Feet model is a game changer.  Companies need non-dilutive project capital to reduce the amount of money they raise into the company that reduces returns. At SunEdison if we had more non-dilutive capital in 2007-08 we would have easily returned 10X to investors when we sold the company in 2009.  More importantly, the Clean Feet model recognizes that there are hundreds of technologies across multiple sectors that are sitting under-appreciated that need some VC money but mostly need non-dilutive deployment capital.

More recently, I was approached by an entrepreneur, Stephan Ouaknine, who has started a fund similar to Clean Feet called Inerjys. It is structured a bit differently with both a growth equity and project finance side to the house, but the concept is the same – we have to stop loading cleantech entrepreneurs with so much money they are destined to ‘fail’ from a 10X point of view. We have to help these companies attract non-dilutive capital.

Another way to say this is that there was over $200 billion invested in cleantech deployment last year. Most of that was non-dilutive capital for wind and solar.  What Clean Feet does at a small scale and Inerjys hopes to do at a $1 billion scale is to help prepare companies to attract non-dilutive investment from this very conservative $200 billion stream of money. The more diversity of technologies we can fit into that stream the more likely that stream can grow and the more likely we can achieve our climate change goals.

The technologies are ready, are the traditional investors in VC and project finance willing to change their approach?

Jigar Shah is CEO of Jigar Shah Consulting and a partner with Inerjys. Shah founded SunEdison in 2003 with a new business model, the solar power services agreement business (SPSA). The SPSA uses mature technologies and required no new legislative action. The SPSA model launched solar services into a multibillion dollar industry. SunEdison now has more solar energy systems and megawatts under management than any other company.

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In a statement Inerjys says Shah will focus on “international renewable energy project strategy,” and Pullan will focus on “growth equity investments in clean technology firms.” Shah previously led the Carbon War Room, founded and led SunEdison, and led M&A and corporate strategy for BP Alternative Energy. Pullman previously founded and led the New Energy and Clean Technology Ventures group for Nomura International.

Part of the fund’s strategy will be to use funds to project finance technologies, which its equity arm also invests in, says the WSJ. So basically the firm will provide funds all the way from development stage to commercialization — which sounds like it would require really solid bets and also a lot of money. Inerjys says it will invest in “wind, sun, marine and biofuel power generation, energy storage, transmission and distribution, and smart-grid systems.”

Note that the fund is in the process of raising the billion dollars. Silver Lake’s Kraftwerk was also looking to raise a similar size fund for later stage investing, but I’m not sure how far it’s gotten to meet that fund raising goal. It’s a difficult fund raising environment for cleantech right now.

Update: Shah tells me in a phone call: “We think that cleantech companies at their core are still good investments. We think the way that the investment community has been investing in cleantech has been causing these bad outcomes. We want to try a different approach to investing to get better outcomes. We don’t think the companies themselves are bad, but the model that has been applied to cleantech has been a bad fit.”

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The Brookings Institution published a paper, dated April 2012, authored by a collective of experts who I respect entitled, “Beyond Boom and Bust: Putting Clean Tech On a Path To Subsidy Independence.” It contends that “U.S. clean tech sectors could falter” based on the fall in U.S. Federal financial support from $44.3B in 2009 to $11B in 2014.

Separately, McKinsey just released a report dated Spring 2012 entitled, “Solar power: Darkest before dawn.” The McKinsey report notes: “Those who believe the potential of the solar industry has dimmed may be surprised. Companies that take the right steps now can position themselves for a bright future in the coming years.”

Clearly, these are opposing views. The view of the Brookings Institute is shaped by the need for continued renewable energy subsidies. The report notes:

“Without timely and targeted policy reform, several sectors are likely to experience more bankruptcies, consolidations, and market contraction ahead.  And yet the demise of the current clean tech subsidy system need not be disastrous.”

On the other hand, the McKinsey Report suggests “the unsubsidized economic potential for distributed residential and commercial solar photovoltaic (PV) in the United States is likely to reach 10 to 12 gigawatts (GW) by the end of 2012 – requiring $30B of new investment. “ This is the amount that could be installed at a profit because it would be competitive with retail rates charged by the local electric utility company.

As electricity prices continue to rise across the United States, more customers will be able to switch to solar PV – reaching almost 200 GW by 2020 –over $400B in new investment.

Two views

These two projects convey very different perspectives. One that shows that solar, and renewable energy for that matter, relies upon subsidies. Another that shows that technology and financial innovation will naturally take effect and solar will be deployed where it is profitable without subsidies.

I reject most of the findings from the Brookings Institute’s paper for maturing technologies like solar and the onshore wind industry. The reason? I believe it was written to evoke a response during a year of a Presidential election. Although it does note that the cost of solar is declining, it does not take into account the real cost increases caused by ever more complicated Federal policy.

Also, this report comes at a time when, according to Bloomberg New Energy Finance global investment in clean energy hit a record $260 billion in 2011, up 5 percent from 2010.

Rather than unwarranted concerns about investment in new energy solutions, it might be better for Brookings to uncover policy blocking a level playing field for energy investing.

Conversely, the McKinsey Report adds up demand from five customer segments sans subsidies:

• 1). off-grid
• 2). commercial and residential (good sunlight), commercial and residential (moderate sunlight)
• 3). isolated grids
• 4). peak capacity in growth markets
• 5). new large-scale power plants.

McKinsey estimates that the amount of PV that could be cost effectively deployed globally could exceed a terawatt (1,000 GW) by 2020 based on costs declining to below $2 per watt peak (Wp) for a fully installed system – in the process saving over a gigaton of Carbon. McKinsey notes that even in the conservative case “the industry is still likely to install an additional 400 to 600 GW of PV capacity between now and 2020.”

According to both reports, 2011 global installed capacity exceeded 65 gigawatts (GW).

So, this recent data suggests that we are entering a new era of rapid solar deployment globally because of falling solar prices and dwindling government funding.

Dropping prices

The price of installed solar systems declined nearly 60 percent since 2009 and another 5 percent per year through the end of the decade.  The fact that over 300 solar panel manufacturers in China have closed their doors or Qcells filed for bankruptcy is a sideshow to global solar deployment. Panels are a commodity like a computer circuit board and costs should come down. It is a component of a system, not the system.

Second, whether by design, austerity, or political pressure government funding is dwindling.  This is good by forcing solar market players to become more efficient with their operations and to focus only on solar deployments that make financial sense on their own.

So, the Brookings Institute report was perhaps written to solicit a response for those who are perceived to “against” renewables.

The McKinsey report was written estimating real market demand. But it also does not address policy like phasing out all permanent subsidies that block a level playing field.

While the energy industry will always ask for more subsidies (natural gas, oil, and coal first in line), phasing out solar subsidies by 2017 is just fine. I believe that their end marks the beginning of a new era for solar power.  What we need now is more financial innovation to unlock free flow funding based on the best ROI for energy investments.

So, in the tale of two reports, may the market forces be with us.

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Chevron, BrightSource solar oil plant, the tower and the mirrors

The article this weekend on the front page of The New York Times, “A Gold Rush of Subsidies in the Search for Clean Energy,” clearly underscores why the U.S. should phase-out all permanent and long-term subsidies for energy. When slow moving utilities start chasing solar and wind you know that we are ready to create a level playing field for all.

The article pointed out that subsidies were intended to “help renewable-energy plants that were jumbo-sized or used innovative technology,” which are “both potential obstacles to getting private financing.” But subsidizing jumbo-sized solar is deeply flawed. This shows the limitations of the government’s knowledge and ability to choose winners – in this case Fortune 500 companies.

My knowledge comes from having founded and successfully launched the largest solar services company, SunEdison.

Solar photovoltaic technology, at its core, is about distributed energy generation; each module is less than 400 Watts.  It is not about building massive arrays to feed the GRID. It is about getting off the GRID. Proven, effective solar PV installations are anti-jumbo.

That is why companies like WalMart, Kohl’s, Staples and others put solar energy on their rooftops.  The energy is at the same price, or lower cost, than retail electricity from the current GRID and gives these companies energy independence: an American ideal.

With the government focus on jumbo-sized plants, we are prone to making jumbo-sized mistakes.

Big energy companies are stepping up and proposing jumbo solar projects that make no economic sense.  Rooftops projects can be built in 90 days as opposed to three years. This saves working capital, planning costs, permits, environmental studies, and more importantly can be developed by hundreds of firms – not just the 1 percent.  Southern California Edison’s latest RFP showed that these smaller projects today are cheaper than new high-efficiency natural gas plants – even with today’s low gas prices.

Understand that a large energy company is like a carpenter with one tool: a hammer. Every problem looks like a nail. They are jumbo-sizing a technology that is most efficiently deployed in small projects that are stand-alone.  In the end, the people who are getting nailed are the ratepayers.

If the government wants to incentivize a move to American energy independence it should focus on three criteria:

• 1) Helping solar achieve GRID parity within three years
• 2) Make solar fully scalable for residential to industrial size
• 3) Show how solar can improve security by becoming GRID independent

Instead of starting with 20^th century assumptions of “bigger is better” we need to move to “small is beautiful”.  In short, as the new SMART car commercials assert, thinking “big” is thinking dumb.

I agree with Satya Kumar, an analyst at Credit Suisse who said, “… the industry could have done a lot more solar for a lot less price, in terms of subsidy.”

Lets hope America uses it God-given sunlight to help deploy cost effective renewables within our borders and continue to significantly increase our exports – it is already the fastest growing industry in the USA.  Now that is THINK SMART.

Jigar Shah is the CEO of the Carbon War Room, a nonprofit that harnesses the power of entrepreneurs to implement market-driven solutions to climate change and create a post-carbon economy. By bringing project finance and growth capital together with infrastructure entrepreneurs, corporations, governments and nongovernmental organizations (NGOs), he identifies and eliminates market barriers, driving environmental improvements alongside economic growth.

Shah founded SunEdison in 2003 with a new business model, the solar power services agreement business (SPSA). The SPSA uses mature technologies and required no new legislative action. The SPSA model launched solar services into a multibillion dollar industry. SunEdison now has more solar energy systems and megawatts under management than any other company.

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He suggested the opposite may be happening when he said; “There is no correlation between the amount of corporate tax that companies pay and whether they’re creating jobs in America. The countries that are doing great have a partnership between government and business.”

Hard to disagree.

He also noted that manufacturers all over the world want research and development to be near their manufacturing facilities. He said, “ We have a huge chance to do that.” To do so, the President “…would keep the research and development tax credit and eliminate the others.” He referenced Germany as an example of a country whose incentives has netted 300,000 jobs in clean tech and solar over the years.

President Clinton deduced that because the U.S. is four times the size and twice as sunny, we could implement the same program and create 2.5 million new jobs. He concluded the interview by saying, “…I don’t mind giving people tax credits, but it ought to be to generate jobs and opportunity in America.”

Manufacturing vs deployment

But, the reality is that there are two kinds of clean tech jobs: manufacturing and deployment.

While the U.S. remains the global leader in research and development, it has been unable to match the industrial policy of Germany, China, Malaysia, Taiwan, Japan, Vietnam, and others.  It means that the one-off tax incentives and grants deployed recently in the U.S. are unlikely to create massive American manufacturing jobs in clean tech.

Why? Once an R&D manufacturing facility has “perfected” a manufacturing method, the jobs will be filled in a country with a sustained effort around industrial policy — as they should. The cost is less.

This is much more than just incentives for the actual plant.  The incentives include training for labor, low-cost electricity and input costs, and low-cost debt for the rest of the plant financing. We can argue about whether this is a trade barrier, but the reality is that China is not the only country doing this – there are several.

On the other hand, service and deployment jobs continue to grow in America and are sustainable. These are the jobs, for example, where a solar facility is fabricated on site –- like a rooftop.  These jobs are needed in-country and cannot easily be outsourced to an overseas workforce.

Keep in mind, there is interdependence between the manufacturing jobs in China and the deployment jobs in the U.S.

To increase the number of deployment jobs, we actually need the manufacturing jobs to go to the lowest-cost producer to drive down the cost. The difference between solar panel costs of $1.10 and $1.40 per Watt is substantial. This can mean a 15 percent difference in the electricity price to the consumer – enough to make or break a deal.

It’s about deployment

This is why I am against a trade war with China.  It will cause hundreds of cost effective projects to become uncompetitive and cost thousands of job-years for solar project developers and installers.

I co-authored a recent opinion piece in Politico that “cost reduction has helped create a U.S. solar industry that employs more than 100,000 Americans, with growth rates that far outpace the general economy. The vast majority – about 75 percent – of solar’s job and value creation is in project development and installation.”

When we decided to pursue globalization many years ago, we agreed to let countries and private capital focus on their core competencies.  China shares our addiction to coal and is working with us to drastically reduce the costs of installing solar power so that we can achieve cleaner air and water.  With 7 billion people on the globe, we have to find ways of meeting our growing demand for electricity with cleaner sources at scale.

So the key question is, how do we deploy the lowest-cost, sustainable fuel sources to meet our energy needs?

And, how do we measure the cost on a level playing field?

I ask about a level playing field because, right now, the playing field is not level.  For example, U.S. government incentives for nuclear, oil, coal, gas and fossil fuels add up to more than $380 billion over the next five years, according to the bi-partisan Green Scissors report.

While we need incentives to incubate new technologies to reach the scale necessary to reduce costs, we do not need to incentivize proven existing technologies.

Smart government

So, I agree with President Clinton.  We need Smart Government.  But where I disagree is that we have limited funds for incentives, so we have to focus on our core strengths.  For us that is innovation and deployment.

So while I would love to get clean tech manufacturing jobs here near R&D facilities, I do not think these manufacturing jobs will have the staying power of deployment jobs.  With limited funds, over incentivizing manufacturing jobs for clean tech is not Smart Government for the U.S.  We can pursue both, but be realistic about the outcome.

Innovation and deployment will create millions of jobs in the US as we replace our 50-year old infrastructure with the best that American ingenuity has to offer.  We just need Smart Government to set up a level playing field and then let the most cost efficient energy fuel sources win.  It is how Americans can leverage their core competencies to meet our energy needs and win the future.

Jigar Shah is the CEO of the Carbon War Room, a nonprofit that harnesses the power of entrepreneurs to implement market-driven solutions to climate change and create a post-carbon economy. By bringing project finance and growth capital together with infrastructure entrepreneurs, corporations, governments and nongovernmental organizations (NGOs), he identifies and eliminates market barriers, driving environmental improvements alongside economic growth.

Shah founded SunEdison in 2003 with a new business model, the solar power services agreement business (SPSA). The SPSA uses mature technologies and required no new legislative action. The SPSA model launched solar services into a multibillion dollar industry. SunEdison now has more solar energy systems and megawatts under management than any other company.

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