Richard Kauffman had a rapt audience at the AGRION Energy and Sustainability Summit in New York City as he opened the event with a largely off-the-cuff speech. He is a man known in the industry for handing out (and making) serious sums of money in energy, and has just been handed one of the highest profile, but least understood, new positions in the New York state government.
It is only his second week on the job as Chairman of Energy Policy and Finance for the State of the New York, and he deliberately steered clear of some of the hot-button issues for the state’s energy sector (including a still-extant temporary ban on hydraulic fracturing in the state) and focused on what his audience of professionals was actually keen to hear – his theories on how and where and when the government, in this case a state government, should provide support for private businesses in the energy sector.
As the man in charge of a billion-dollar state “green bank” announced by Governor Cuomo in the opening weeks of this year, Kauffman’s presence is pure money for energy companies and energy entrepreneurs looking to play in what Kauffman called “frontier markets.” After a successful stint as a Goldman Sachs partner and CEO of renewable energy group Good Energies, he was a senior advisor to the Department of Energy Secretary Steven Chu. In the DOE role he steered the distribution of significant funds through substantial political headwinds that were lent unexpected economic weight by natural gas prices that cratered and owed demand that didn’t budge throughout his tenure.
He’s become accustomed to disruption occurring in the very markets he is trying to drive toward innovation, and noted the second stage of disruption that is currently in its early stages: a growing rush to distributed generation. “Increased adoption of combined heat and power [by companies] and dropping solar [prices] challenge the fundamental utility model of the collective being cheaper than the individual,” Kauffman said in his speech to the AGRION event.
Companies don’t necessarily need centralized power produced by a utility any longer. In eleven states it is now cheaper to produce their own electricity, and concerns about reliability and power quality for companies with heavy technology exposure provide a non-price incentive to install their own power systems, even as they rely on the centralized system for backup. That leaves utilities facing a shrinking customer base for their product, which in turn drives up prices for remaining customers and decreases reliability, accelerating the moves by customers that can afford it into distributed generation (DG).
“We need solutions beyond rate design,” Kauffman said in discussing the challenge. “We need to determine how to bring more value to more electricity customers.”
The Fine Print
He swiftly delved into the detailed ways governments could help private markets figure out solutions to the waves of disruption in the energy business without crowding out private capital or staying on the hook for huge sums, the mistake that was made in the Solyndra loan (which Kauffman was stuck defending but was cleared before his tenure. “Solyndra is not a place government wants to be,” he said).
State-level green banks can help private businesses while still generating a financial rate of return by standing behind some loans to reduce refit risk, can share risks in ways that convert capital expenditures into operating expenditures, and can broker partnerships that make up for the lack of capital market solutions – essentially stocks and bonds – that other technology and infrastructure sectors have access to. Market transformation requires partnerships with private sector intermediaries in the market, Kauffman said, including banks and insurance companies.
Kauffman would like state green banks to “stay at the frontier of establishing markets and then moving on” when the market solutions are established. Green banks should turn over their balance sheet to free up capital as markets mature, he said.
Acknowledging that confusion remained about the exact role of green banks, which have become increasingly popular at the state level and are regularly recommended for US federal energy policy, Kauffman’s role at AGRION was to challenge the sector’s leaders to be proactive rather than reactive. “It is going to be much better to be ahead of the trend” rather than rely on a crisis to force the government to step in, he told the audience.