Philanthropic Interventions For Clean Energy

Strategies To Accelerate The Decarbonization Of The U.S Electric Power Sector Acknowledgments

A number of individuals made significant contributions to the development of this whitepaper by lending their perspective in a roundtable dialogue or in individual conversations. In addition to Lukas Walton, these contributors include:

• Ellen Alberding • Lisa Frantzis • Michael Northrop The Joyce Foundation Advanced Energy Rockefeller Brothers Fund Economy • Lauren Azar • Hannah Polikov Azar Law; Former • Ben Gaddy Advanced Energy Commissioner, Wisconsin Clean Energy Trust Economy Public Utility Commission • Jonah Goldman • Bill Ritter • Hayes Barnard Breakthrough Energy Center for the New Energy Give Power Foundation Coalition Economy at Colorado State University; Former • Norman Bay • Zach Greenberg Governor, Colorado Willkie Farr & Gallagher; Zoma Capital Former Chairman, FERC • Bill Roberts • Hal Harvey Corridor Partners • Peter Bryant Energy Innovation: Policy Walton Family Foundation and Technology • Sharon Schneider Walton Family Foundation • Melissa Cheong • Paul Kaleta Zoma Capital First Solar • Doug Scott Great Plains Institute; • Josh Cohen • Shayle Kann Former Chairman, Illinois City Lights Capital GTM Research Public Utility Commission • Mark Cupta • Richard Kauffman • Nat Simons Prelude Ventures Office of New York Prelude Ventures Governor Andrew Cuomo • Dave Danielson • Ryan Smith Breakthrough Energy • Susan Kennedy Zoma Capital Ventures Advanced Microgrid Solutions • James and Dominique • Cisco Devries Walton Renew Finance • Danny Kennedy California Clean Energy Fund • Kevin Vilkin • Amy Francetic Give Power Foundation Invenergy Future Fund • Ed Miller The Joyce Foundation • Greg Wetstone ACORE

Clean Energy Trust, a 501(c)3 not-for-profit based in Chicago, works to advance clean energy innovation and adoption in the Midwest. Clean Energy Trust organized the roundtable, moderated the discussion and produced this white paper on behalf of Lukas Walton.

page 2 Philanthropic Interventions For Clean Energy Introduction

Clean Energy Trust convened a two-day progress towards limiting global temperature roundtable in Chicago on April 11 and April 12, increases to no more than 2°C above pre- 2017, on behalf of Lukas Walton. The goal of the industrial levels, the critical threshold articulated meeting was to identify strategies to accelerate by scientists and adopted by countries within the decarbonization of the U.S. electric power the United Nations Framework Convention on sector, with emphasis placed on identifying Climate Change.1 Given that the United States is interventions appropriate for engagement and the world’s second largest emitter of CO2 after funding by philanthropic organizations, large China (see Figure 1), and that the electric power donors, and private investors. Roundtable sector represents the greatest share of U.S. CO2 participants included a mix of industry leaders, emissions (see figure 2), this sector should cut policymakers, philanthropists, investors and the deepest and the fastest. The electric power other key stakeholders. sector has the most realistic pathways to meeting our emissions targets and strong potential for Fundamental to this dialog was the recognition coordinated action amongst the private sector, that deep decarbonization of the world’s electric stakeholders, and government. power sector is required to continue to make

2014 Global CO2 Emissions from Fossil Fuel Combustion Total US. Greenhouse Gas Emissions and Some Industrial Proocesses by Economic Sector in 2015

Japan

Russian Federation Agriculture Other India 4% Electricity 5% Commercial 9 & Residential 7% EU 28 30% 12% 29% 9%

15% 21%

United States Industry 27% 30% Transportation

China Figure 1: Figure 2: Global Emissions by Country (2014) Source: U.S. EPA U.S. Emissions by Sector (2015)

Further, while the transportation sector approaches the electric power sector in terms of emissions, most decarbonization solutions for the transportation sector hinge on electrification, which ties back to prioritizing the need to decarbonize electric power generation. Collectively, the electricity and transportation sectors account for more than half of U.S. emissions.

Although there is concern about anticipated clean energy policy changes and funding cuts by the Trump Administration, the impetus for the Roundtable was not political. Rather, it was driven by the recognition that critical efforts need to be initiated today so that sound policy, market, and technology foundations can

page 3 Philanthropic Interventions For Clean Energy be established to support the accelerated transformation of the U.S. electric power sector in the years and decades ahead. The luxury of time is not on our side as the impacts of climate change are increasingly felt and the risk of long-term “lock-in” of fossil fuel infrastructure is high. The size, scope, and alacrity of the transformation required argues for large-scale and proactive engagement as opposed to organic and incremental evolution.

The format of the Roundtable involved subject matter experts presenting perspectives on key issues followed by discussion and debate between Roundtable participants. This process highlighted a number of facts, themes, and findings for which there was broad agreement among participants. The themes and framework laid out below draw on the discussion at the Roundtable, as well as subsequent conversations with participants and other thought leaders.

Themes Emerging From The Roundtable Dialog

• The clean energy transformation is underway. • Failing to think holistically can result in In 2015, non-hydro renewables were 66% of inefficient or counterproductive outcomes; i.e., all new capacity additions in the U.S.2 reducing emissions at one location (ex: solar) and inadvertently being required to add • Despite renewables representing the vast emissions elsewhere (ex: spinning reserves). majority of new capacity additions, clean energy is just getting started with non-hydro • While we can add renewable and distributed renewables representing less than 10% of energy solutions onto the legacy energy total U.S. generation capacity in 2015.3 system, this is not a strategy that is smart, efficient, or cost-effective long-term. • Continued deployment of renewable energy under the current framework (technology, • Significant modernization of the policy, infrastructure, regulation) will eventually regulatory, market, and utility business model create significant challenges such as those paradigm is necessary to enable the grid to as witnessed in California tied to solar power be modernized and for new technologies to (challenges begin to surface at approximately be deployed cost-effectively at large scale. 10% penetration, and expand significantly at • Federal policies are important and crucial penetrations of 25% or higher).4 policies remain at risk; at the same time • Flexible and responsive capacity is essential significant impact can be achieved at the but strategies for driving renewable energy regional, state, and city levels (and in deployment must also seek to optimize the collaboration with corporations), particularly overall system; the system is only as healthy working with targeted public utility commissions as the sum of its parts (electricity generation, (PUCs); for example, efforts in New York have transmission, distribution, storage, and demand demonstrated that a tremendous amount side efficiency solutions). can be accomplished at the state level, often under existing state authorities.

page 4 Philanthropic Interventions For Clean Energy Framework For Targeting Intervention Strategies

The decarbonization challenge is particularly well suited for philanthropy given that it is a tough, intractable societal challenge that is not well served by either the government or private sector. Much important and impactful work is already underway supported by philanthropic capital, and many more discrete intervention opportunities exist that can deliver significant impact. However, true, deep decarbonization will require greater coordination of interventions across a spectrum of issue areas. These interventions will also require dedicated and increased resources across a timeframe that spans years if not decades.

Recognizing the importance of distinct but parallel intervention approaches, as well as the fact that funders will have varied interest areas, resources, and timeframes, this paper presents a framework that organizes relevant decarbonization issues into three critical “Waves” to be pursued simultaneously. While certain technologies and topics undoubtedly cut across multiple Waves (e.g., storage), the goal of this framework is to highlight leverage points that provide optionality for funders while not losing sight of the totality of the work and the coordination required. These three Waves are described below, followed by a discussion of meaningful interventions to address the challenges of each Wave.

The First Wave: Protect, Embrace And Extend Clean Energy Policies

The tremendous gains clean energy has achieved are due to the tireless and innovative work by countless policymakers, advocates, and industry stakeholders. Much of this success is rooted in the “stacking” of federal and state-level incentives, mandates, and goals, which, in turn, have helped bring about technological performance improvements, reduced costs, and new technologies. It is clear that these efforts must continue unabated and that First Wave interventions must both protect existing regulations and policies as well as embrace and extend those regulations and policies into markets and regions that have yet to adopt them. Executed well, First Wave interventions can drive renewable energy deployment to upwards of 30% of the total U.S. generation mix while reducing overall energy demand and intensity, as witnessed in the numerous states on track to meet Renewable Portfolio Standard (RPS) policies mandating a 30% or greater share of renewables by 2020 (including California, Colorado, Hawaii, and New York). Inherent in these efforts, and all interventions considered, is the unequivocal need for universal access to electricity while maintaining just and reasonable rates as well as reliability and service. page 5 Philanthropic Interventions For Clean Energy The Second Wave: Invention And Redesign Of Regulatory And Utility Business Models

The nation’s regulatory schemes were designed for a world with local, central station generation, one-way power flows, and steady load growth. Further, today’s grid is oversized in order to handle infrequent peak loads, and very inefficient.5 Recognizing that the current grid infrastructure and regulatory schemas are outmoded, concurrent efforts must focus on next generation technologies, new regulatory and policy schemas, and systemic optimization of power generation, transmission, distribution, storage and demand side efficiency solutions in order to capture the value that exists in current and emerging technologies.

As witnessed by the infamous “duck curve” in California (driven largely by the rapid penetration of solar power), it is rarely practical, efficient, or cost-effective to continue to add new technologies onto legacy grid infrastructure, governed by outmoded policy and regulatory schemas New policies will be needed to acquire more flexible resources and ensure the grid continues to be reliably managed as the penetration of solar and other resources significantly increases.6 Second Wave interventions should focus on the creation and implementation of next generation policy, regulatory, market, and utility business model schemas to enable even greater renewable penetration and system efficiencies. Success in the Second Wave can be envisioned as the creation of a system that allows renewable penetration to expand from 30% to 70% or more, driven by smart policies and new technologies, without triggering systemic issues or compromised performance and reliability.

The Third Wave: Developing And Scaling Breakthrough Technologies

Although there is debate on just how much decarbonization can be achieved through the greater deployment of existing technologies and incremental technological advances, certain intractable issues persist that will require step-change technological advances to overcome; achieving these advancements will require appropriate financial support from Federal, private and philanthropic sources.

Given the decadal timeframes required for research and development, the validation of new technologies, and the development of industry supply chains to support broad commercialization, it is imperative that Third Wave interventions begin today so that breakthrough technologies can be deployed at wide-scale by 2050.

page 6 Philanthropic Interventions For Clean Energy Interventions

For each Wave there are different actors, issues, and possible interventions. This paper is not intended to be prescriptive and advocate for a single area of focus; a spectrum of interventions is necessary and these must be pursued in parallel. However, current efforts are heavily weighted towards the First Wave and increased emphasis must also be directed towards Second and Third Wave interventions. Indeed, gains achieved under the First Wave may be at risk of stalling out unless Second Wave issues are addressed.

One issue area that spans across all three Waves is the need for greater expansion of high voltage transmission infrastructure to move power from resource rich areas, often rural, to urban load centers. The lack of such robust infrastructure is currently a constraint, as many wind and solar-rich regions cannot be maximized. However, several specific changes can make our grid system more robust. These changes include:

• Developing a limited number of extra high • Expanding and strengthening regional voltage long haul transmission lines to bring transmission organizations. renewables from resource-rich areas into load centers;

• Implementing a targeted set of connections between the three interconnections in the US, and with the grids of Mexico and Canada; and,

These changes would not only help to bring online large amounts of renewable energy, but also would mitigate many of the intermittency and seasonal issues that can hinder broad adoption of renewables by enabling access to larger pools of resources to offset regional or local imbalances due to weather or other factors.7 However, the development of these robust transmission and interconnection assets is plagued by a myriad of challenges. Not only is it difficult to agree upon who should ultimately be responsible for planning such infrastructure, it is also unclear who should pay for such infrastructure. Moreover, securing regulatory approvals, the requisite permits, and easements is daunting and the uncertainty surrounding these requirements makes financing difficult to secure, as a result of a complex and overlapping regulatory framework designed for a prior era. This is an area where well-funded actors could advance efforts, both through advocacy as well as direct investments.

page 7 Philanthropic Interventions For Clean Energy A second issue that spans across all three Waves is the scarcity of funding to support clean energy innovation. As a recent Brookings report highlighted:

• Venture capital investment in clean • The investments that were made were heavily technology fell by 30% between 2011 and weighted to late-stage deals 2016, from $7.5 billion to $5.24 billion;8

• Clean technology investments as a share of total venture capital investments fell from 16.8% in 2011 to 7.6% in 2016; and

Indications are that Federal support of clean energy innovation is at risk of significant cuts under the Trump Administration given the Administration’s proposed budget.9 Regardless of the outcome of the current budget debate, the data indicate that philanthropic capital has yet to engage meaningfully to support clean energy innovation. For instance, of the $82 billion in philanthropic grants made in the U.S. in 2015, less than 0.01% went to energy innovation.10 Although the Third Wave targets breakthrough, step-change innovation, incremental innovations to existing technologies remain necessary and deserve funding and support. Such innovations include, among others, energy storage with greater densities, photovoltaics with greater efficiencies, and operational hardware and software to better manage the flow of electricity on the grid. Solving these technological challenges would significantly advance progress towards decarbonizing the electricity sector.

Further, technological change and adoption can drive policy rather than policy driving technology – for example, the rapidly declining costs of grid scale energy storage is driving conversations around the value of a state storage mandates, rather than state storage mandates driving down the costs of energy storage. While RPS policies served as an early incentive for investment in solar and wind power, the 100% renewables debate underway in California and other locations would not be under discussion without the technological and business model innovations that have made the technology cost-competitive and practical to deploy at large scale.

There is clear opportunity for philanthropic capital to engage on energy innovation through either grants or direct investments to innovators and startups, which frequently face a series of “valleys of death” as they work to commercialize and deploy emerging technologies at scale11. Also, it is important to recognize that capital alone is not sufficient and that organizations providing support to entrepreneurs and developing ecosystems are important actors in the decarbonization fight. As such, the best-in-class organizations that are accelerating young companies and developing ecosystems provide important leverage to advance solutions relevant to all three Waves and deserve consideration for funding support.

page 8 Philanthropic Interventions For Clean Energy Current efforts are heavily weighted towards the First Wave and increased emphasis must also be directed towards Second and Third Wave interventions

Philanthropic Interventions: Clean Energy First Wave Interventions

The fact that renewables dominate new capacity additions is due in large part to supportive policy, regulatory and tax mechanisms. Key mechanisms include emissions regulations, production and investment tax credits, renewable portfolio standards, net metering policies, and feed-in tariffs. Significant progress has also been achieved by financial and business model innovations such as power purchase agreements (PPAs), commercial property assessed clean energy (PACE) programs, mechanisms for direct corporate procurement of renewables, models for community aggregation (e.g. community solar), as well as investments in energy efficiency propelled by energy efficiency resource standards and programs such as ENERGY STAR. 12 13 It is too early to declare victory as (1) all of these mechanisms are under attack by opposing constituencies and in danger of being rolled-back and (2) they are not ubiquitous across all 50 states. Nearly twenty states lack binding renewable portfolio standards, and recent debates and policy changes in Ohio and Nevada show these policies continue to be under threat.14

Meaningful First Wave interventions include:

• Creating financing mechanisms for projects that • Funding efforts to maintain and expand currently lack access to affordable capital: federal clean energy policies small (less than $5 million) projects and projects deploying technologies which have yet to be • Preventing roll-backs of Federally mandated proven to be “bankable” emissions regulations such as the Clean Power Plan and the Mercury Air Toxics Standards (MATS) • Funding continued engagement at the local and State level to protect and advance clean • Protecting impactful programs such as energy policies, with an increased focus ENERGY STAR on building coalitions of local, targeted • Maintaining consistency in tax policies messengers, such as conservative clean to ensure stability in renewable project energy advocates and corporations financing (protecting the Investment Tax • Advocacy for a carbon tax Credit and Production Tax Credit)

As stated above, success in the First Wave can drive renewable energy deployment to upwards of 30% of the total U.S. generation mix while reducing overall energy demand and intensity. page 10 Philanthropic Interventions For Clean Energy First Wave interventions must both protect existing clean energy regulations and policies as well as embrace and extend those policies into markets and regions that have yet to adopt them

First Wave interventions can drive clean and renewable energy deployment to upwards of 30% of the total U.S. generation mix

Philanthropic Interventions: Clean Energy Second Wave Interventions

Second Wave interventions require greater focus and attention moving forward to prevent an artificial ceiling being placed on renewable and clean energy deployment. Such Second Wave efforts must apply a systemic perspective and consider generation, transmission, distribution, and flexibility (such as storage and demand response), incentives, and financing.

Second Wave work needs to center on regulatory, market, and utility business model design. In particular, rate structure and tariff design are important: there are benefits to moving rates and tariffs beyond volumetric pricing and rate-base approaches and towards other alternatives such as performance-based ratemaking in which participants are rewarded on the basis of performance and amenity. Such schemas should allow new distributed energy resources (DERs) and demand-side resources to participate in both wholesale and retail markets; further, and the schemas must allow for new technologies such as energy storage to be properly compensated for the value provided, and to compensate resources based on time and locational value at the distribution level. The stakes for this work are high – a substantial percentage of the grid of the future has yet to be built, so it is important that regulatory, market, and business model paradigms ensure these investments are made intelligently, in a cost-effective and forward-looking manner.

Although such transformation may seem daunting, efforts can and are beginning to take place today at the state level. In some states, this can take place under existing authorities, while it may require legislation in others. Indeed, more than 30 states are engaged in grid modernization efforts at some level today. 15 Further, opportunities exist to leverage the work that has already been done to date in leading states to avoid having to reinvent the wheel on many activities – states can embrace what has worked well, and learn from others’ mistakes and experiences.

Focus should be put on state-level PUCs, as PUCs are highly targetable, operate with relative transparency, and are receptive to input given that they are generally under-resourced and under-staffed. Further, it is important to focus on a specific subset of PUCs that are mosty likely to take action and be open to input, including leaders like New York and California, as well as states that have expressed interest in or have begun grid modernization proceedings such as Minnesota, Rhode Island, Michigan,

page 12 Philanthropic Interventions For Clean Energy Illinois, and others. While engagement opportunities with PUCs in certain target states present high leverage opportunities, activity in certain other states would be much less fruitful. It is important to understand that engaging PUCs on regulatory redesign and “utility of the future” policymaking requires persistent, long-term effort and that it is not a “game for amateurs.” Incumbent actors maintain longstanding relationships with PUCs and deploy substantial resources for regulatory affairs work that needs to be matched, if not overcome. PUC engagement further demands local market presence, leveraging individuals with existing relationships at the PUC.

In addition to engaging at the PUC level, opportunities may exist to engage at the Federal level at the Federal Energy Regulatory Commission (FERC) and at the regional level with Regional Transmission Organizations (RTOs) who manage electricity markets for large parts of the country. RTOs are important entities that already help operate the grid more efficiently and reduce costs for customers, but they can be further strengthened. There are opportunities to modernize market rules, in order to properly value newer technologies such as energy storage and to support long-term transmission and generation planning.

In states where PUCs are unlikely to be leaders in this space, opportunities may also exist to collaborate with collectives of communities, municipal utilities, and rural electric co-operatives. In many states, these stakeholders are interested in clean energy solutions but may lack the scale and expertise to effectuate change. Subject matter experts could be paired with these consortia to help develop and implement their plans, such as identifying economical locations for microgrids. Further, when dynamics do eventually change at the PUC level in these states, these stakeholders would be primed to be advocates for positive change.

Meaningful Second Wave interventions include:

• Funding the creation of mechanisms for on traditional clean energy policy debates, knowledge sharing (e.g., models for valuing but who are often less experienced in topics DERs), exchange of best practices, the related to regulatory reform and utility coordination between PUCs and other state business model redesign officials, and leveraging the work that has • Funding patient and persistent PUC already been done to date in leading states engagement within a targeted set of states • Funding the education and activation of a where interventions can have the best broader array of advocates to play in the leverage, as well as with FERC and the RTOs Second Wave, many of which are experts

Success in the Second Wave can be envisioned as the creation of a structure to allow renewable penetration to expand efficiently from 30% to 70% or more without triggering systemic issues or compromised performance and reliability.

page 13 Philanthropic Interventions For Clean Energy Second Wave work needs to center on regulator, market and utility business model redesign to enable even greater renewable penetration and system efficiencies

Opportunities exist to leverage the work that has already been done to date in leading states to avoid having to reinvent the wheel on many activities

Philanthropic Interventions: Clean Energy Third Wave Interventions

Worldwide population growth and economic development will result in significant increases in CO2 emissions by 2050 unless dramatic changes take place – an increase of more than 50% by 2050, to 16 80 gigatons of CO2 per year. Thus, targets for decarbonization must extend far beyond the scope of

today’s global emissions. Approximately 70 gigatons of annual CO2 emissions will need to be removed from the world’s economy if there is any hope of staying below the 2°C warming threshold [See Figure

5, below]. To highlight the enormity of these reductions, 1 gigaton of annual CO2 emissions is roughly equal to the emissions abated from the cumulative wind and solar capacity currently deployed globally. Broad deployment of existing renewable technologies, such as solar, wind, and short- duration energy storage, can result in significant emissions reductions, potentially on the order of 35 gigatons of annual reductions. However, given the trajectory of global emissions, breakthrough innovations will be required to overcome persistent challenges (such as flexible capacity and the seasonality of renewable generation, as well as low carbon solutions for sectors beyond energy generation such as carbon negative cement and other construction materials) that hinder achieving the second 35 gigatons of emission reductions. Examples of such breakthrough technologies include cost-effective long-duration storage, advanced nuclear, fusion, enhanced geothermal, carbon- negative thermal power, and methodologies for creating hydrogen from renewable resources. The United States is a leader in many of these research areas, and the nation’s economy can benefit substantially by continuing to invest in these R&D efforts, while also leading to new opportunities for the rest of the world.

page 15 Philanthropic Interventions For Clean Energy Meaningful Third Wave interventions include:

• Funding Federal engagement to protect • Funding the innovation ecosystem by basic and applied R&D budgets, including supporting the strengthening and build-out programs such as ARPA-E, funding for of best-in-class incubators and accelerators energy innovation hubs, Frontier Research • Deploying Mission Related Investments Centers, and National Labs (MRIs), Program Related Investments (PRIs) –– While a robust network of sophisticated and direct investments into high-potential actors exist and are funded to engage emerging companies on First Wave topics such as state renewable portfolio standards, energy innovation lacks this coordinated suite of advocates

The “70 Gton/Year Gap”

80

70 Scaling up existing technologies e 2 48 50 CO Gt 34 30 Breakthrough Energy Technology Gap

10

1990 2010 2050

Figure 3: Source: Breakthrough Energy Coalition

page 16 Philanthropic Interventions For Clean Energy Technological change and adoption can drive policy rather than policy driving technology

Certain intractable issues persist that will require step-change technological advances to overcome

Philanthropic Interventions: Clean Energy Conclusion

While clean energy has made robust progress, and while the march towards decarbonization is inexorable, this transformation cannot be left alone to progress at an organic pace.

The need for transformation is so significant, and our unr way of time to effect necessary changes is so short, that there is an imperative to act with alacrity and a deep sense of purpose. Addressing all three Waves is serious work that needs to be undertaken simultaneously by serious players with the patience and resources to work across years and possibly decades. For those funders willing to engage and support such work, there is an enormous opportunity to positively re-engineer the U.S. electric power sector, with benefits that have global impact on not only the environment but also sustainable economic development and new industry creation.

page 18 Philanthropic Interventions For Clean Energy References

1. UNFCC 10. Breakthrough Energy Coalition

2. US EIA 11. The Breakthrough Institute. Bridging the Clean Energy Valleys of Death 3. US EIA 12. Rocky Mountain Institute, Business 4. APS. Integrating Renewable Electricity on Renewables Center: Corporate Renewable the Grid IEA. Getting Wind and Sun onto the Deals, 2012-2017 Grid 13. PACENation. Commercial PACE Market 5. Greentech Media Overview 6. CAISO 14. National Conference of State Legislatures. 7. APS. Integrating Renewable Electricity on the State Renewable Portfolio Standards and Grid Goals.

8. Brookings. Cleantech Venture Capital: 15. Utility Dive. More Than 30 States Embrace Continued Declines and Narrow Geography Grid Modernization, New Policy Tracker Limit Prospects Finds.

9. Greentech Media. Trump’s 2018 Budget: 16. OECD. OECD Environmental Outlook to What’s on the Chopping Block for Clean 2050. Energy.