Matt Hopkins and William Lazonick University of Massachusetts Lowell

1. Innovation versus Financialization in Renewable Energy Matt Hopkins and William Lazonick University of Massachusetts Lowell The Academic Industry Research Network (AIRNET) Ford Foundation Conference on Finance, Business Models, And Sustainable Prosperity December 6 and 7, 2012

2. The Cause of Climate Change is the Emission of Greenhouse Gases (GHG), and CO2 Emissions are the Major GHG of the World Total Carbon Dioxide Emissions from the Consumption of Energy (Million Metric Tons), Selected Countries, 1980-2009 Source: “Total Carbon Dioxide Emissions from the Consumption of Energy (Million Metric Tons)” eia.gov. Energy Information Administration. International Energy Statistics Data. Accessed 13 Apr 2011.

3. The World (Still) Runs on Fossil Fuels Total Primary Energy Supply, World and OECD, 1973 and 2009 Source: “Key World Energy Statistics 2011.” International Energy Agency. According to the IEA “Other” includes geothermal, solar, wind, tide / wave / ocean energy, electricity, and heat. There were 34 members of the OECD in 2010, and 24 in 1973. 34 Members exist currently. According to the IEA “Total Primary Energy Supply” (TPES) is made up of production + imports – exports – international marine bunkers – international aviation bunkers ± stock changes. For the world total, international marine bunkers and international aviation bunkers are not subtracted from TPES.

4. Clean Technology Development as a Response to Multiple “Missions” • Clean Technology is expected to address three issues: the need for GHG reduction, Energy Independence, and Job Creation • GHG reduction in response to the threat of climate change, energy independence in response to Fossil Energy dominated economies (Including coal power, U.S. is also the top consumer of petroleum, Top 4 producer), and . . . • In the wake of the recent global economic crisis, a means to spur economic growth • $194 billion in 2009 funding worldwide, lead by the U.S. ($67 billion) and China ($47 billion). • Given the “Mission Requirements” Policy Makers must focus on three core activities, which are R&D, Manufacturing, and Deployment of Clean Technology

5. Clean Technology Development as a Response to Multiple “Missions” • Clean technology spans many different economic sectors, such as transportation, energy, energy efficiency, energy storage, and smart grid. What does “all of the above mean?” • Making these investments requires attention to the Theory of the Innovative Enterprise – which provides an explanation as to how policy makers and business enterprises can overcome uncertainties as they seek to generate disruptive energy technologies • The Expectation that Innovation will occur as a result of public and business investments requires that each will provide and sustain the patient capital required to develop the technologies, firms, and markets that make up clean technology sectors and which are full of uncertainty and risk • What are the commitments of the U.S. government and Business Community, and what have been some of the outcomes?

6. The Headlines Suggest that Clean Tech Development is Not Easy

7. Clean Tech Needs “Patient Capital” Clean Technology Innovation requires Patient Capital because it requires huge capital investments made over long periods of time in the face of uncertainty which include: • Costs of developing new technologies • Large-scale plants and sites for commercializing new technologies • The need to gain large market shares in order to drive down unit costs • Technological uncertainty: can/will superior technologies be developed before we can generate returns? • Market uncertainty: what is the extent of the market that will be available, especially given legacy grids and legacy technology? • Competitive uncertainty: will other firms (or nations) develop higher quality, lower cost products faster, better, cheaper than we can?

8. A Few Nations Generate the Majority of Global Wind and Solar Energy Top 10 Wind and Solar Electric Power Producers, 2010* Source: Authors' calculations, Energy Information Administration, International Energy Statistics. Accessed 8 Nov 2012.. Yellow highlighted countries have top 10 representation in both solar and wind power. *Solar is based on the EIA's solar, tide, and wave data, in billions of kWhs generated). Nation output is output as a percent of total output in that category. There is virtually no tidal or wave energy power being produced on the planet at this time, so the figures are meaningful for showing leadership in solar power.

9. Government as a Source of Patient Capital? • Nations that lead in Renewable Energy development tend to have policies supporting R&D, manufacturing, and deployment, and also policies that: • Define social goals and couple them to targets/goals for RE development • Define environmental goals and couple them to targets for emissions reductions • Regulate and standardize interconnection of new energy resources • Subsidize the cost of Renewable Energy technology development, manufacture, and deployment by providing and sustaining government support

10. Putting a Dollar Value on Government Support(R&D) • Advanced Research Projects Agency, Energy (ARPA-E) was the only new Government Agency created from the ARRA • ARPA-E founded under the 2007 America Competes Act but funded by the 2009 ARRA (Steven Chu helps author NAS report “inventing” the agency) – sole purpose is to disrupt and commercialize • Initial funding of $400 million, $850 million total through 2012, with request for $350 million FY13 • 21 billion ($2011) has supported Renewable Energy R&D between 1948-2010, out of 184 billion in U.S. R&D support overall • 17 billion for Energy Efficiency, 96 billion to Nuclear, 48 billion fossil, 9 billion Electric Systems • Virtually unfunded until creation of DOE in 1978 • Even over last decade, Fossil and nuclear receive more • 3.4 billion ($2011) allocated to solar PV, and 1.2 billion wind ($2011) 1990s to today

11. Putting a Dollar Value on Government Expend.(Manufacturing) • DOE Loan Guarantee Program created by 2005 Energy Policy Act, funded by 2009 ARRA to provide $35 billion through - • 1703 program: U.S.-located firms producing high risk, non-commercial new technology. $10 billion for Nuclear Power projects • 1705 program: RE Project funding and Manufacturing support $16 billion • (ATVM) Advanced Technology Vehicles Manufacturing: Finances Tesla, Fisker, Nissan, Ford, Vehicle Production Group. $8 billion • 1705 Program provided $1.3 billion in loan guarantees to solar manufacturers (Solyndra, 1366 Tech, SoloPower, Abound) • Examples of State/alternate funding: • $58 million to Evergreen from State of MA • $22 million from State of Ohio to First Solar, about $60 million from Germany • $32 million from State of NY to Spectrawatt

12. Putting a Dollar Value on Government Expend.(Government as a source of patient capital?) Putting a Dollar Value on Government Expend.(Deployment Support) • Government Production Tax Credit (PTC) cost $7.9 billion between 1994-2010 • PTC contributed to $56 billion in U.S. wind project asset financing between 2001 and 2010, is set to expire this Dec 2012 • Investment Tax Credit (available as grant under ARRA) cost $13 billion between 2009 and mar 2012, and is expected to cost $15 billion through expiration • For 2012-2016 ITC will be a 30% tax credit for solar projects • ITC-as-grant contributed $2.8 billion to over 44 thousand solar projects, and $9.2 billion to 748 wind projects • 1705 Program - $1.7 billion to wind, $12 billion to solar PV Projects • States generate demand for new RE projects with RPS law, set aside funding to promote deployment: • California's $2.2 billion, and New Jersey's $400 million Solar PV fund

13. Business as a Source of Patient Capital? • Business can provide patient capital: • Private equity (including venture capital) • Retained earnings • Public bond issues • Uses of patient capital: • Fund internal R&D • Knowledge transfer, such as through joint venture, licensing agreements, participation in government or university research collaboration • Merger & Acquisition

14. Interaction of Government and Business Finance: The presence of substantial public and business investment in innovation means that government finance will interact and are inseparable. “Patient” government capital encourages “risky” business investment: • Government investment in fundamental and applied R&D creates or supports creation of solution, then encourages firm formation and growth - VC and PE appear to finance the transition made between R&D, product prototyping, and commercialization - Financial support for manufacturing encourages scale, or the translation of high fixed costs into low unit costs - Meanwhile the promise of future returns creates “exit” opportunity for VC and PE investors via IPO or Merger/Acquisition • Meanwhile support for a strong RE development market encourages RE developers to purchase lots of wind turbines and solar panels (developers can be utilities, businesses, or homeowners), and allows 3rd party investors opportunity to cash in on tax credits But is an Abundance of Capital the Same as an Abundance of Patient Capital? Are we carrying out the missions?

15. Poor Government Commitment? • Wind Power: • $11 billion invested in wind projects in 2010 alone • Cumulative investment in wind power $78 billion for 40 GW between 1980s-2010 (not including manufacturing, R&D, or O&M costs) • Number of manufacturing facilities increasing, domestic content growing (Even as GE loses international market share) • Disruption in the availability of tax credits driving wind deployment has a negative impact on manufacturing (layoffs, canceled plans to enter U.S. market, etc)

16. Why is the U.S. Falling Behind in Clean Tech? Legislative History of the Production Tax Credit Sources: (1) Wiser, Bolinger, and Barbose. “Using the Federal Production Tax Credit to Build a Durable Market for Wind Power in the United States.” Lawrence Berkeley National Laboratory. Nov 2007. Web. 11 May 2011. (2) “Renewable Electricity Production Tax Credit.” Dsireusa.org. DSIRE. Web. 14 Jun 2011 (3) “Business Energy Investment Credit.” Dsireusa.org. DSIRE. Web. 12 Nov 2012.

17. Why is the U.S. Falling Behind in Clean Tech? • Cumulative Additions of Wind Capacity, Project Financing, 2000-2011* Sources: Earth Policy Institute. Department of Energy, Renewable Energy Data Book, 2011. *Red bars represent years impacted by PTC interruption

18. While the U.S. Struggles to regain domestic market momentum, China marches On. Percent of Total Installed World Wind Capacity, 2011* Sources: Authors' calculations, Earth Policy Institute, Global Wind Energy Council. *Shown are the top 10 ordered by total amount of total capacity installed as of 2011. Total capacity represents the aggregate generator value of all wind turbine installed globally. One wind turbine might equal 1.5 MW. The percent of total installed capacity represents that nation's share of the wind power capacity installed in 2011.

19. Who is Producing Wind Turbines? Who is Producing Wind Turbines? Who is Producing Wind Turbines? Wind Manufacturer Market Share, Selected Companies, 2006-2011 Sources:(1) Adapted from United States. International Trade Commission. “Wind turbines: Industry and Trade Summary.” June 2009. Web. 7 Apr 2011. (2) Wind Turbine Market Shares 2008-2011, Installed Capacity.” ekopolitan.com. 28 Mar 2012. Web. 30 Mar 2012. (3) BTM Consult. MAKE Consult. Various Years. *Estimates by MAKE and BTM do not have parity across years and by company so the data shown should be considered approximate. No data for Dongfang, 2011, who fell out of the top 10. We estimated 3.1 percent market share on news that they lost 3.9 percent of global market share compared to 2010.

20. Putting a Dollar Value on the Interaction of Government and Business Capital Clean Technology already creates substantial “exit” possibilities for investors: • $59 billion raised by 356 Clean Technology IPOs done between 2005-2011, $10 billion (92 IPOs) by North American Firms. • $132 billion in M&As in 1,700 deals between 2005-2011, $51 billion (892 deals) in North American deals. • U.S. leads in global VC/PE with appr. $31 billion invested in U.S. companies between 2004 and 2011 (compared to $50 billion for companies worldwide) • On the Deployment front, of the Approx. $1.2 trillion invested in clean technologies between 2001-2010, half is the asset financing which funds RE projects – aka Technology “Deployment” - mostly of wind turbines.

21. As Markets Grow U.S. is still VC King Global Clean-Energy Market Size and VC Spending, 2000-2011 Sources: (1) Pernick, Ron, et al. “Clean Energy Trends 2012.” Cleanedge. Mar 2012. Web. 15 Mar 2012. (2) “Who's Winning the Clean Energy Race?” Pew Charitable Trust. Various Years.

22. The Sun Could Set on U.S. Solar PV Manufacturing • Solar Power: • $8.1 billion in Venture Capital and Private Equity flowed into solar companies between 2001 and 2010. • Rise of thin-film and C-Si solar manufacturers in part supported with at least $3.3 billion in public equity through IPOs conducted between 1980 and 2012 by U.S. Solar PV companies • Meanwhile, public support also helped make 2011 a historic year for the United States which installed 1,855 MWs of solar PV (albeit with growing share of Chinese solar panels), an $8.4 billion market • U.S. Manufacturers supplied just 7% of the 28 GW global market, however • U.S. companies develop advanced solar technologies and innovative solar development approaches – but do they have the patient capital to complete the missions?

23. The Sun Could Set on Solar PV Manufacturing (cont) Capital is flowing into the U.S. solar sector, but it seems impatient business interests, including Clean Technology executives, want returns that are too high too soon: • Critics point to Solyndra's $535 million loan guarantee – not the presence of $1.1 billion in “smart money” which fled the company when its prospect of completing an IPO was challenged by a shift in global markets • Spectrawatt was bankrupted for a batch of defective components and want of $40 million to continue operations • Evergreen lost $1.1 billion throughout its history and, despite government support to open a Devens, MA, plant, was lured to China by a superior public finance package

24. Who is Producing Solar Panels? Producers of Solar PV by Percent of Annual Total, Selected Nations, 1995-2010 Source: “Annual Solar Photovoltaics Production by Country, 1995-2010.” Earth Policy Institute. 27 Oct 2011. Accessed 14 May 2012.

25. Value Extraction: Picking Winners and Losers • At least 22 IPOs have produced $1.4 billion in U.S.-based Solar PV IPOs since the 1980s, two of the largest for GT Solar ($500 million) and First Solar ($400 million) • In the presence of a speculative stock market, coupled to firms which finance growth and compensation with equity produce value whether firms succeed or fail: A Perverse Incentive • The success of First Solar provided for the sale of $2.8 billion in stock between 2006 and 2012, from which Investor/CEO Michael Ahearn reaped $740 million. He has since renounced any additional equity compensation. Meanwhile, at least $42 million in non-stock compensation has flowed to top executives • GE has announced intentions to invest $600 million in CdTe thin-film solar PV manufacture in Colorado, but retracted this decision to spend more time improving on technologies absorbed through acquisition of Astrosolar (2004), and Primestar (2011), which developed record setting CdTe technology with government support

26. Value Extraction: Picking Winners and Losers First Solar's Net Income, ($Millions) 2002 – 3Q 2012 Source: Company 10-K Filings

27. Value Extraction: Continued • SunPower, an innovative C-Si producer, has seen $900 million in extraction between 2005 and 2012, and handed out $24 million in non-equity compensation to top executives • Astropower bankrupt in 2004, limited data shows $1.5 million for CEO Allen Barnett in 2000, $900k for Thomas Stiner in 2001 • Evergreen provided for the extraction of at least $25 million, and $10 million in non-equity compensation • This Value extraction occurs while the U.S. is failing to become a global leader in Solar PV

28. Value Extraction: Continued SunPower Corp. Net Income, ($Millions) 2000 – 3Q 2012 Source: Company 10-K Filings

29. Value Extraction: Picking Winners and Losers In 2007, Ahearn opined about the company's stock option plan: “The more the stock price goes up, the more people internally start thinking about the stock price and how you perpetuate that, and how we meet expectations . . . I think that can really take you out of your game . . . We need to spend a little more time internally making sure we keep our focus." ( as quoted in Gelsi, 2007). Ahearn is describing the need to resist temptation to focus on stock-price performance, rather than focusing on the innovation process which, with government support, helped establish First Solar's competitive lead in the first place. Missing from Ahearn's account however is about $2.8 billion in stock sales by First Solar's major equity investors (the estate of John Walton and JCL Holdings) as well as $740 million of his own stock sales. With his fortune in hand, Ahearn has since rejected any future equity-based compensation from the company.

30. Where are the Biggest Solar Markets? Percent of Total World Solar PV Capacity, Cumulative and Installed, by Nation, 2011* Source: Authors' calculations. “Market Report 2011.” EPIA. Jan 2012. *Shown are the top 10 ordered by total amount of total capacity installed as of 2011. Total capacity represents the maximum aggregate generator value of all solar p/v generating equipment installed globally. The percent of total installed capacity, represents that nation's share of the 28 GWs of solar p/v capacity installed in 2011.

31. A Deployment Problem:European Dependency Leading Solar Companies and Evidence of European Dependency (millions of USD), 2010 Sources: Author's Calculations, 10-K filings, Published Company Annuals. Sorted by Revenue.

32. European Dependency (continued) Leading Solar Companies and Evidence of European Dependency (millions of USD), 2011 Sources: Author's Calculations, 10-K filings, Published Company Annuals. Sorted by Revenue.

33. Value Extraction in Clean Technology What if Value Extraction in Clean Technology is occurring in all it's major sectors? • No data on executive compensation exists for many clean technology companies as most are not a part of the S&P 1500 index • We have collected compensation data on 46 U.S. firms based upon our knowledge of how execucomp collects their data, for the years 1992 – 2011 • Sectors include wind, solar, storage, energy efficiency, biomass, tidal, and others • Dataset currently contains approximately 1,500 rows of data • Our compensation total reflects only compensation actually received (versus including estimated dollar value of stock and option awards such as done by execucomp)

34. Value Extraction in Clean Technology The Top 200 Clean Technology paychecks so far observed range in value from approximately $768 thousand to over $40 million • The Top 100 paychecks average $4 million and range between $3 and $40 million The average value derived from the exercise of stock options was $2.3 million among the top 200 paychecks • The value of stock-based pay for the Top 100 rises to $2.8 million Stock Options represent, on average approximately 41% of executive pay during those years in which they are exercised (with a range of 0.1% to 100%) • Among the Top 100 paychecks recorded, the average amount of compensation derived from stock options rises to 43% (range of 0% to 95%) • If not stock options, though, “other compensation” and bonuses provide millions to the top earners.

35. Value Extraction by Wind and Solar Companies Approximately 1/3rd of compensation data is devoted to solar and wind companies • Highest paid executives are found at First Solar, American Superconductor, GT Advanced Technologies, Evergreen, Kenetech • American Superconductor has accumulated losses of $507 million between 1992-2011, GT is lavishing larger paychecks on top executives each year. Kenetech was bankrupted in 1996, Evergreen in 2011. • First Solar is in fact the compensation leader across all clean technology companies observed so far • First Solar posted net losses leading up to its IPO, and has since posted a loss in 2011. The company competes for limited markets in the U.S. and Europe, and soon will face GE as a direct competitor

36. Value Extraction in Clean Technology A Glimpse of Executive Pay, All Sectors, 1992-2011

37. Value Extraction in Clean Technology A Glimpse of Executive Pay, All Sectors, 1992-2011

38. Challenges to U.S. Clean Tech(our early findings) The U.S. also faces numerous policy challenges: • How will industry momentum be sustained without “stimulus”? The U.S. must set energy priorities and sustain government support for disruptive R&D • Who will finance risky manufacturing expansion if neither government nor business is willing to do so? • The U.S. has achieved a fairly robust wind development market, but it is threatened frequently by loss of subsidy. Meanwhile the Solar market is overwhelmingly Europeanized

39. Why is the U.S. Falling Behind in Clean Tech? What we know about Clean Technology: Plenty of government and business money has flowed into the industry – but the industry has not been very successful, and is now losing out to the Chinese Is the problem a lack of patient capital? Clean Technology is already a global industry, not a domestic industry, and innovation will separate it's producers from its importers. How patient of committed finance is depends on the incentives and abilities of top executives who exercise strategic control to invest in innovation – the ability of top executives of clean tech companies to make huge stock market gains even when the company is not successful over the long run may undermine their incentives to ensure financial commitment to the innovation process How productive finance is depends on the organizational integration of the skills and efforts of employees into the organizational learning process that is the essence of innovation – organizational integration depends on strategic control and financial commitment