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Good Energies

By Richard L. Kauffman, Julia Taylor Kennedy | September 24, 2009

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JULIA KENNEDY: Welcome to the Carnegie Council's Global Ethics Forum. I'm Julia Kennedy.

Today's guest is Richard Kauffman, CEO of Good Energies. His company invests in renewable energy and energy efficiency firms at all stages of development. Good Energies has more than $2 billion invested in solar and wind assets. The company's foundation supports projects that bring renewable energy to the core, with an emphasis on communities who are receiving electricity for the first time.

Richard Kauffman has a long history in finance. Before coming to Good Energies, he was a partner at Goldman Sachs and, prior to that, a longtime executive at Morgan Stanley. Kauffman's education includes graduate degrees in international relations and management from Yale University. He currently serves on the advisory board for Yale's Center for Business and the Environment, in addition to a number of other board positions.

Kauffman began by telling me about the origin of Good Energies.

RICHARD KAUFFMAN: Good Energies was founded as a family business—not my family business, but the Brenninkmeijer family, which is a prominent European family in its sixth generation. I always say that if you're a family business, by definition, and you made to the sixth generation, you're in the sustainability business. The core family business was in retailing. One of the family members, Marcel Brenninkmeijer, was very interested in sustainability issues, and he was worried about everything from the number of plastic hangers being used in department stores to the quantity of energy used. He was the one who founded Good Energies in 2001.

JULIA KENNEDY: I see. And then how did you come to the company?

RICHARD KAUFFMAN: I was on the supervisory board of the parent company, and I heard about Good Energies. That's how I got involved, because the family business felt that this was an area that fit them and they wanted to expand the commitment to renewable energy and asked if I could come on board and help build the effort. So we went from investing 50 million euros a year to 350 million euros a year. We have built our staff so that now we have five offices and we're a global company.

JULIA KENNEDY: Wow. Now, did you have experience working with renewable energy before coming here?

RICHARD KAUFFMAN: This goes back to a long time ago. My first year in university was the year of the first energy crisis. It really informed the educational background that you described. It was the reason why I went into international relations and thought, at least initially, that my career was going to be working in economic development. When I graduated from graduate school, I went to work for a consulting firm in Washington, where I did a lot of work on science and technology transfer policy to the developing world. I was also involved in energy issues.

Then, in my long career in finance, from time to time—I was a generalist, but I worked on a number of energy-related projects, everything from the IPO of Conoco to royalty trusts, British Petroleum. I worked on the restructurings of several oilfield service companies after the collapse, after the second oil crisis.

So on and off, I've watched, unfortunately, over the last 35 years, booms and busts in renewable energy, and the fact that over the last 35 years we've really made no material progress in the United States in reducing our dependency on foreign oil. So even aside from climate issues, even aside from the fact that more than half the world has no access to energy, if you just look at it purely from an energy security issue, things have only gotten worse.

JULIA KENNEDY: Energy security issues and renewable energy issues—why do you think you keep being attracted to these issues?

RICHARD KAUFFMAN: There is really nothing quite as essential, both in the developed and the developing world, as energy. You literally cannot have economic development without energy.

Our foundation, for example, has a project in Ethiopia that brings solar electricity to a remote part of Ethiopia that will literally never get the grid. Just the small amount of electricity allows for schooling, because kids have to work in the fields during the day, so having light allows for education. The small amount of energy allows women to build some businesses and men to have also other kinds of businesses, because these businesses can now operate in the evening. Health care—just the small amount of electricity allows for refrigeration that can keep medicine cold. It doesn't take much, but without it, there is literally no economic development.

What we're seeing in the developing world is a huge migration from rural areas to urban areas, but in many cases this is not associated with increases in economic development. Where usually urbanization has been associated with economic development, in fact, we have quite a number of large cities that are developing where economic growth is declining. This is a kind of human disaster occurring.

Environmentally, the more that we create bigger and bigger cities, that requires greater and greater centralization of power. That, in many cases, is going to mean coal. The environmental problems associated with bigger and bigger cities mean that trying to solve climate change becomes more and more challenging as well.

I'm talking now purely about the developing world. In terms of energy security when we think about the United States, I don't know how much of the Defense budget is associated with trying to keep the sea lanes open and trying to worry about stability in the Middle East for oil, but we have that financial burden and the burden in lives and resources. But in addition to that, we have a persistent balance-of-trade problem. Again, the problem has only gotten worse over the last 35 years. It's a very substantial tax on the economy.

Security issues are real, and it's a problem that we're going to face sooner or later. The sooner we do it, the better.

JULIA KENNEDY: What is the role of the private sector in combating these issues that you've just brought up? I think a lot of people, when they hear that, go, "Okay, that's a problem to be solved by government or by individual concerned citizens or by NGOs." Where does the private sector come in in battling these problems?

Like a lot of other problems, these are quite complex and they require multiple actors. But I think that the private sector, at least in terms of renewable energy and energy efficiency, can play an enormous role. The problem may be less the private sector and actually problems associated with things where there have been some failures in government policy. We tend to think in the United States, when we think about renewable energy, that there must be some fundamental problem with the technology or there must be a problem with the amount of money that's available. I actually don't think that that's the problem. I think the problem that we face in the United States really relates to some what I'll call bad price signals and some bad regulations. Let me give you some examples about that.

First, when I talk about price signals, we don't have yet—although maybe it's coming—a cost of carbon. Everybody says, "Boy, solar energy or wind energy, isn't that awfully expensive?" Well, it would be a lot less expensive if the cost of carbon was included in that.

Another example is that it's actually very expensive for utilities to deliver peak power. Think about the middle of summer. Everybody has their air conditioning on. That's when there are brownouts. It's really expensive. Utilities can't store electricity. What they have to do is, they have to turn on more and more expensive generation to satisfy peak power. In the United States, the demand for peak electricity has been growing twice as fast as the demand for electricity as a whole. Solar is actually a pretty good solution for peak power, because the sun, obviously, shines during the day.

The problem here, and the reason why I focus on this point of pricing and regulation, is that most utilities charge consumers based upon the average cost of power. They're not charging consumers based upon what it costs to add new peak power, which is where the demand is coming from. If they were to do that, it would certainly show how expensive that power is. It would make solar much more competitive. It would also create a dynamic where utilities could charge consumers what it costs for peak power, which might lead to greater conservation, but it could also allow for consumers to install solar and have the ability to sell that power back to the utility.

We only see the slightest bits of utility innovation permitting that. In many states it's very difficult to hook up to the grid. There is not the infrastructure yet to permit what are called smart grids or smart meters to allow for utilities to have what's called time-of-use pricing or to allow for the ability for consumers to sell their power back to the grid. All this requires more regulatory intervention and reform.

JULIA KENNEDY: Do you have hope that that's coming? There's so much buzz in the news now, with Copenhagen approaching and the G8 summit that we recently heard about and commitments made there. What's your outlook on these kinds of policies in the United States?

RICHARD KAUFFMAN: I'm certainly much more hopeful than I have been. In my darker moments, what I'm concerned about is that, while we're headed in the right direction, the scope of the problem is very large. But the irony is that what we have to do, in the aggregate, doesn't really cost very much. The energy problem that we have really represents a failure in many parts of economics. One problem is that you're talking about something which doesn't cost very much. It's not even a Starbucks a day. There have been recent reports that say we could solve the problem of greenhouse gases in the United States, and it won't cost very much and it might even actually create jobs and might be a net benefit.


RICHARD KAUFFMAN: But we're not doing it. This is a failure in economics. We think maybe we need some kind of Manhattan Project for renewables, when really the problem isn't about more production; the problem has to be about efficiency. So there are problems of incentives. In cases of commercial buildings, the landlord is different from the tenants. That's what the economists call an agency problem.

What I'm trying to say is, in my dark moments, I get concerned because we may just sort of stagger across the finish with some type of cap-and-trade, but what we need are more substantial and continuing steps. I talked about utility regulation. Trying to create space for renewables and space for energy efficiency in the context of a regulatory system, which has grown up over decades, that is state, local, and federal is extremely complicated. There is not adequate incentive alignment.

There are things that are very prosaic which relate to infrastructure. We talked about the smart grid. There are the issues of transmission. Wouldn't it be fantastic to think about having all the solar power in the Southwest? Half of the cost of solar is its installation. While the cost of the equipment has come down, there haven't been yet the real efficiency gains that could happen from installation. Imagine an environment where we say, in the Southwest there are all these great sun resources; let's put a lot of solar in that one area where we know that we can get a lot of efficiency from installation. Then you think about the fact that in the western part of the United States, in the summer that power at 4:00 in the afternoon in the West—it's 7:00 when people are coming home in New York and turning on their air conditioning. Isn't that fantastic?

The problem is that the grid literally does not connect from the Southwest to either Chicago or the Northeast. This isn't about underlying fundamental technology. This is about making the commitment to build that kind of grid.

Yes, the administration has made a down payment on grid, but we're talking about literally billions and billions of dollars that need to be spent. How is that going to happen?

JULIA KENNEDY: Here at Good Energies, you have quite a title of your company to live up to. How do you zero in on the investments that will fit the kinds of priorities that will work towards the kinds of goals you were just talking about?

RICHARD KAUFFMAN: Some of it is literally being very focused. Our mission is to really move the needle in terms of energy transition. That's why we have focused on solar. All the fossil fuels that we enjoy today have come from the sun. It's really the source of most of the energy that we have, one way or another. We do think that solar is going to represent a very large portion of our energy future. In the United States we don't see much solar, but in Germany solar represents many times greater than the power generated in the United States, even though Germany doesn't have much sun. That really represented a concerted effort by the German government to build a solar industry. We are invested in all parts and all different kinds of technologies in solar.

The other area that we've been focused on has been wind. The reason why we've been focused on wind is that that's also a very abundant energy resource. There's more than twice as much wind available to produce all the power in the United States. Again, the problem is not the underlying technology. The cost of wind has come down very consistently as the industry has come to scale. The problem now is really much more about grid access.

The last area that we've been most focused on has been in the green buildings area. The reason, of course, that's important is that we tend to not appreciate how a major problem in terms of energy consumption and greenhouse gases comes from our built environment and that buildings represent more than 40 percent of energy consumption in the United States and in Europe, and therefore more than 40 percent of greenhouse gases. And more than 90 percent of the energy is wasted by the time it's converted to electricity, transferred through the transmission lines, and usefully used in a building.

Therefore, anything that we can do to improve the energy efficiency in buildings has a huge multiplier effect. Given the fact that renewable energy, in the aggregate, is about 7 percent in the United States—much of which is hydro that was built many years ago—the answer is not going to be much more production; it has to be much more about efficiency.

The problem of energy is really about electricity. In the United States we tend to think about electricity as being something which is clean, and we're remote from it, because most electricity is produced far away from population centers. In fact, we focus a lot on cars. I'll come to that in a second. But let's not forget electricity.

One of the things that I find immensely irritating, living in New York City, in the summer, is that a lot of restaurants and stores have their doors wide open. That, to me, reflects some fundamental problem, that storeowners and consumers somehow have not made the connection between electricity and global warming. That's why we're focused on electricity.

The other point about transportation is that ultimately we think that we do need to migrate transportation to electricity. The plug-in electric hybrid is very important, for a few reasons. One is, we use petroleum mostly for transportation, but we can produce electricity from multiple sources. So the ability to have a plug-in car means that we can separate out petroleum for transportation and use a variety of sources for transportation because of electricity.

The other point is that the internal combustion engine is much less efficient than an electric motor.

JULIA KENNEDY: There's a lot, and it's great to talk to you, because you're clearly very passionate about these issues. Has it been a relief for you professionally to be doing this in and out every day? Coming from Goldman Sachs, is this something that really gets you going?

RICHARD KAUFFMAN: I don't know if that's a comment about Goldman Sachs or not—

JULIA KENNEDY: No, no, it wasn't meant to be.

RICHARD KAUFFMAN: I went to the Yale School of Management, and the great thing about that institution is that it tries to find a space between doing good and doing well. At Good Energies, we have a 3-P objective: people, planet, and profits. As the CEO, I joke—but it's not completely a joke—not necessarily in that order. In other words, we're a business. This is certainly a space where one can make money, but also invest in things that are going to really make a difference. I think that it's extremely gratifying to be in this kind of business.

JULIA KENNEDY: A lot of people look at investments in renewable energy as a really risky sector. With that third P of profits, how do you select what will be less risky?

RICHARD KAUFFMAN: Look, in fairness, we've had a very rough year. We're not making many profits right now. The history of the last 35 years has been that after every boom in renewable energy, there has been a bust. I think we had thought that this time the combination of the fact that there's increasing demand for oil and that demand has been growing faster than supply—that, plus increased concerns about energy security and climate change—that this time it would be more sustainable. But, in fact, what has happened is that the financial crisis has deeply harmed renewable energy. The reason for that is that ultimately renewable energy in the areas where we are focused, which would be solar and wind projects, requires financing. It has been very difficult to get project financing for these projects.

Without getting into too much detail, but just to give you a little flavor of sometimes how strangely the world works, in the United States we tend to give support for renewables in the form of tax credits. What has happened in many projects over the years is that a developer that's developing, say, a wind park can't use the tax credits themselves in the project because the project doesn't generate any real taxable income. So the way that a project developer gets value for that tax equity has been to go to a bank to get the bank to act as a tax equity partner. The biggest providers of tax equity were Lehman Brothers, Wachovia, and AIG. That market is dead.

So while there has been a change that will allow developers to get a grant from the Department of Energy, that program is not yet sending out checks.

But this gives you a flavor, that the weakness in the financial sector has harmed the sector tremendously. Solar stocks are down more than 50 percent in a year.

JULIA KENNEDY: Given that situation, are you hoping that the cycle will turn around more quickly than usual, given the public interest in renewables at this time, which I feel like is sustained, even if the financial interest has bottomed out?

RICHARD KAUFFMAN: We're long-term investors. As I said, the family that helped set up and supports Good Energies is also long-term-oriented. So, yes, we still believe that the thesis for renewable energy is absolutely intact. But this is a difficult valley. I'm not going to predict how long it's going to last.

JULIA KENNEDY: What do you hope to see over the next year? We discussed some of the infrastructure that needs to come in. But more short-term, what are you hoping to see come out in this renewable energy area?

RICHARD KAUFFMAN: We're now in the United States going to be seeing more and more renewable energy. When you go to Europe, you actually see more renewable energy than in the United States. You see more windmills. You see more solar panels. That has been, as I said before, a conscious decision by European governments to support renewable energy. They generate a higher percentage of their power from renewable than the United States.

The United States clearly, from a policy standpoint, is taking steps—this is both at the federal and the state level—to encourage more renewables, and the global industry has increased its production. In the solar area, for example, there is now much more solar equipment that is available, so we're going to see more in the United States. As we see more, we're seeing utilities begin to buy solar. What could legitimize an industry more than utilities buying solar power?


RICHARD KAUFFMAN: The second element of something that's positive is that if you think about a solar park or a wind park as being not so much a renewable energy asset, but a long-term financial asset—because these assets last for 25 or 30 years—it's not hard to imagine an environment where individuals or institutional investors would actually think about investing financially in those assets. In the United States we have a shortage of long-term financial assets. The demographics in the United States—people need to think about retirement, and in saving for retirement, you need long-dated financial assets. The renewable energy industry is essentially creating a long-term financial asset. So it's not hard to imagine a future where we can kind of solve two problems at once. We can solve our energy problems by deploying more renewable energy assets and, at the same time, the people that are going to own those assets or finance those assets are going to get very stable returns for 25 years.

JULIA KENNEDY: These are fascinating issues, and I could talk to you for hours and hours about it, but our time is unfortunately up. So, Richard Kauffman, thanks so much for sitting down with me.


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