Peter Davidson: Matchmaking capital with climate investments

November 10, 2015 Kim Chipman

As a former investment banker and overseer of the Energy Department’s loan programs office, Peter Davidson is used to facilitating big deals. But his latest gig comes with a sizable dose of urgency: helping unleash the financing needed to save the planet.

The International Energy Agency estimates it will require around $53 trillion in investment by 2035 if the world has a chance of avoiding the most catastrophic impacts of climate change. Aligned Intermediary, Davidson’s new group, is a matchmaker between pension funds and other long-term investors and clean-energy projects the world over. It already is working to match $1.2 billion in capital, including $500 million from the Regents of the University of California, with the right projects.

“We need an incredible amount of money over the next 20 years,” said Davidson, CEO of the recently formed nonprofit. These “are things we need to do to achieve the greenhouse-gas targets, but they also will be some of the fastest growing industries over the next 20 years.”

Last month, Davidson was among participants at Secretary of State John Kerry’s Climate & Clean Energy Investment Forum in Washington. He later talked to Bloomberg’s Kim Chipman about the role “patient equity” can play in reducing carbon pollution and creating the world’s next big surge of industry growth.

What is Aligned Intermediary and how does it tie in to your prior life and the Department of Energy?

Aligned Intermediary is 100 percent private sector. However, it’s all part of the same battle and effort that was going on within the Obama administration and my work at the Department of Energy loan-program office. I was executive director and left there last June.

What we were trying to do in that job is use government subsidized debt to work in conjunction with the private sector and private capital to bring new technology, innovative process technology, energy deals to market. It was all about the government lending a hand in the deployment of new forms of energy that were more efficient and that reduced greenhouse-gas emissions. We had a 180-person team, so it was the biggest project finance organization in the U.S., public or private. We we made loans that had to be paid back, use innovative technology, reduce greenhouse gases and work in conjunction with private capital. If all those conditions are met, the government made loans. We had a $32 billion portfolio and were 97 percent successful.

What we were trying to do at the Department of Energy, and what’s been key to whole Obama administration, is focus on how to achieve what we need to do on a climate scale if we want to have a shot at achieving the target of staying below a 2 degrees Celsius (3.6 degrees Fahrenheit) temperature rise.

How do you do this?

The estimate is that we will need over $2 trillion, with a T, a year of investment (for 20 years) to decarbonize our energy systems. That’s both fixing up current things by doing carbon capture and sequestration, retrofitting our nuclear fleet and also just building far more wind and solar and biomass.

It’s investment in areas that will be the real growth industries. You see the way wind and solar have been growing in the United States and they are going to continue to grow here and there are great opportunities for them to expand globally. The whole area of clean water, a very dramatic growth market with a lot of money to be made there; same with waste: waste-to-energy, waste-to-fuel, the whole way we deal with not putting stuff into landfills and instead having a beneficial reuse of waste. All these things are things we need to do to achieve the greenhouse-gas targets, but they also will be some of the fastest growing industries over the next 20 years.

Where does the money come from?

The only way we are going to be able to get that amount of capital is for it to come from the large institutional investors that exist in the world, and those are pension funds, endowments, family offices, insurance companies and sovereign wealth funds. There are massive amounts of capital in those institutions and the amount of investing they are doing, directly or through funds, into the area of low-carbon resources or low-carbon energy that also includes water and waste isn’t that large. We have to find way for these people to invest and earn market-based rates of return.

Where does your firm come in?

Aligned Intermediary is a bunch of these large institutions teaming together and saying “we would like to make these kinds of commitments to put money into low-carbon deals… if we could find the right deals that gives us a real return on our investment, whether it’s equity or debt, but also can be helpful in the battle of lowering greenhouse-gas emissions, then we want to participate.”

We need to find very straight forward, simple deal structures that these large institutions can invest in.

One of the areas I think we have great potential is you have people who are developing energy projects, whether it’s a wind farm, or a solar farm, or an offshore wind facility or a waste-to-energy project. All these projects have an average life of 30, 40, 50 years and they have contracts for people to buy their energy for at least 20 years. But all the lending that we do as a society into those deals is generally seven to 10 year loans.

There’s a very safe and prudent way these long-term investors could be essentially making loans to these big energy projects, but rather than the loans being eight years, they could be 12- to 18-year loans. We are talking multi generational investments. Some of these investors are prepared to “very happily” leave their money in a deal for 15 to 20 years.

So give us your take on the investment climate? Is it better or worse than six years ago when cap-and-trade was being debated?

A lot of people in the climate world put all their hopes on a government solution to the problem, which is what cap-and-trade is, which is what the expected international agreement in Paris is, and great work is being done there. We are at a far better time politically now then we have been.

There’s great progress on the policy side of doing things to limit greenhouse-gas emissions. What I’m most excited about is getting capital involved in this. Our point of view is that these industries, clean energy, clean water, clean waste are going to be fast growing, great industries; people in them now are making a lot of money. They are very profitable industries and they are growing industries and there are real opportunities.

The deals are there and the deals will be growing as we deploy solar and wind further in the U.S. and around the world. The whole area of CCS is a huge, important area that also has great economic potential.

Is carbon capture commercially viable?

I put CCS in same area as offshore wind. They are great ways to get to a low-carbon future but they are both industries at the beginning, so there are teething pains. Some projects aren’t going to work and there will be some fall out on the equity or debt side if you are an investor in them, but longer term, both of these things are going to happen.

How closely will you watch the upcoming climate talks in Paris?

I’m watching it very closely because my former colleagues at DoE are very involved. It’s important for the policy effort. But at Aligned we are trying to commit private capital. There is very little cross over. Our partners have said they want to put this money into this market regardless of what happens in Paris or elsewhere in the world.

How do the big fossil fuel companies fit in?

I don’t believe in the narrative that there are bad guys and bad companies out there. I think everybody is trying to do the right thing and everybody is trying to get to a lower carbon future.

There’s really no debate that we have to control greenhouse gas emissions except from some crazy people in Congress. Every other developed country in the world isn’t having this type of debate. There are no climate deniers anywhere in the world except the right wing of the Republican Party.

That said, we have a huge installed base of fossil fuels in the world, coal plants, oil plants and gas plants that aren’t going anywhere for the next 20, 30, 40 or even 50 years. So we have to find technologies that will lower the greenhouse-gas emissions. Those are going to be very successful companies that can figure out how to do that.

How far are we from a truly ‘smart’ grid?

I think technologically we are there. All the technology exists right now to have an incredibly vibrant, smart grid. Utilities are more than happy to make these investments. They just have to find a way to get paid for it and not lose money, and that’s all about state-based policy.

Is there a role for the federal government?

It’s tough. That’s one of the challenges we have with energy policy in the United States. It really is a state-by-state issue. That’s why if you look at solar deployment today, all rooftop solar really happening in 15 states where they have policies conducive to such growth; 35 other states lack it and as a result, there is very little commercial solar deployment in those states.

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