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How to Scale Up the Clean Economy

Great jobs, if only there were more of them. That, in a sentence, captures one of the main themes of our new report “Sizing the Clean Economy: A National and Regional Green Jobs Assessment.” And that’s why we need smart policies to overcome the financial barriers to scaling up the clean economy.

On the first part, it turns out that a disproportionate percentage of green jobs are in decent-paying occupations that employ high percentages of workers without college-degrees, at a time when many of them are out of work. Yet, while there are 2.7 million clean economy jobs, according to our estimate, only a small fraction, roughly 200,000, are in the new fast-growing “cleantech” segments (e.g. solar, biofuels, wind, smart grid, electric vehicle technologies) that hold the most promise. With the nation down roughly 7.6 million jobs since its peak employment in 2007, we have a problem of scale.

At least one U.S. company has overcome the scale problem, as it rapidly expands its cleantech business: General Electric. Our records show that the company employs over 20,000 U.S. workers in various clean economy activities ranging from wind energy to smart grid. With establishments around the country, a typical GE plant is a gigantic employer--with roughly 2,000 employees on average. To put this in perspective, if this country could nurture 135 more GEs, the size of the clean economy would double.

Unfortunately, this kind of size is quite rare. Out of the 57,000 establishments identified as part of the clean economy in the Brookings-Battelle database, only 164 are truly large, defined as employing 1000 or more workers. What’s more, many of these are either public-sector operations or focused on older environmental technologies. There are only 20 large establishments producing in new cleantech segments, and even though they are making new technologies, these large establishments are roughly 10 years older than the average cleantech establishment. That means that very few new establishments have been able to achieve large scale production in cleantech.

Why is GE such an anomaly? To help answer that question and others, we convened a panel on clean economy finance experts, including a representative from GE’s International Energy Policy department, the director of the exciting Department of Energy program ARPA-E, an investment banker from Lazard, and the founder of Nanosolar--a small but fast growing cleantech company--named Brian Sager. Around the15th minute of that discussion, Sager gives a clear and compelling analysis of the scale problem.

As he frames it, the breakthrough potential of a new technology is what attracts scientists and venture capitalists to it; this allows it to develop, become patented, commercialized, and receive early stage financing for a first small factory, but it is that same breakthrough potential that repels investment bankers when it comes time to finance a large scale-up. These investments--which often run in the hundreds of millions of dollars--are simply deemed too risky until a product has a well-established operating history that can be used to judge the probability of default. As Sager aptly illustrates in his comments, by definition, there is no operating history for new products, so obtaining financing is extremely difficult, even for the most promising technologies. Here, the lack of information creates a market failure that stymies investment.

One solution is for the government to directly guarantee loans. Partly, this is already done through the Department of Energy’s Loan Guarantee Program. Created under Title 17 of the Energy Policy Act of 2005, the section 1703 program self-finances its administration costs through fees and is designed to guarantee loans for commercial projects that use innovative carbon-reducing technologies.

Yet, the program does not entirely address the market failure, and in some ways, perpetuates it. Industry leaders and innovators say that the program requirements are so stringent that they effectively replicate private sector risk aversion.  For example, on the program website, candidates are told that the program requires extensive demonstrations and that performance guarantees or warrantees should be offered to mitigate technological risk.

As Sager points out, a complimentary policy (that would make the loan program far more effective) would provide federal product insurance--or a government warranty--for new technologies. The warranty would be temporary and last only long enough to establish an adequate operating history for private insurance providers. Again, this service could be fee-based and costless to tax payers, after an initial infusion of capital that would be quickly repaid to the U.S. Treasury.

This could be a simple but effective intervention. From nuclear power, to housing, banking, agriculture, and exporting, the federal government already plays a major role in risk mitigation so that private finance can flourish. Why not do the same with new technologies that hold the promise for major public benefits like clean energy?

And so the mystery surrounding GE’s cleantech scale is largely resolved when one considers GE Capital and the company’s massive access to internal finance. On project finance, GE Energy Financial Services can come in to lend money to the developers who want to install GE technologies. This occurred in the cases of the Pakini Nui wind farm in Hawaii and the Shepherds flat wind farm in Oregon; GE not only provided the wind turbines but financed the deal. In that sense, it is its own loan guarantee program, but it is also its own warranty program. A variety of operational guarantee options are available to GE wind energy customers, which effectively eliminates technological risk and serves as a magnet for investment.

Clearly not every cleantech company can become a major diversified corporate conglomerate with a huge pool of finance. It took over a century for GE to grow into what it is today. But GE’s success in massive cleantech manufacturing shows that presently small and mid-sized cleantech companies could scale up production in the United States and make a large dent in unemployment, if only the nation had the right financial tools in place.