State not pushing clean energy markets

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Thursday, June 01, 2006

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A clean power revolution

So urgent. So necessary. So what's Oregon's problem

By Oakley Brooks

Nancy Floyd was in clean energy way before it was cool, before some of Silicon Valley’s heaviest hitting venture capitalists jumped in, before it became a key talking point in several Oregon gubernatorial campaigns this spring and, of course, well before the Bush Administration’s recent epiphany that “America is addicted to oil” and that fossil fuels are indeed responsible for the perils of global warming, the growing trade deficit and messy foreign entanglements.

In the early 1980s, Floyd helped build the pioneering Altamont Pass wind turbine project east of San Francisco. In the mid-1990s, she co-founded energy-focused venture capital firm Nth Power in San Francisco, wading through skeptical investors to scrape together the firm’s first $65 million. The Oregon-based Floyd now finds herself a guru in the burgeoning world of clean energy, traveling the globe looking for the next nonpolluting, efficient or renewable technology.

So hear this from Nancy Floyd, the observer with plenty of history: Oregon is a weakling on policies to drive clean energy development. Despite the state’s strong environmental ethic, a promising collection of companies, and natural resources, Oregon is rapidly falling behind other states in supporting the clean-energy sector and tapping an exploding global market.

The next generation of energy — solar, wind, wave, biomass, fuel cells, biofuels — has to overcome a deeply entrenched oil industry resistant to change and utilities that have long depended on cheap power from dams, coal and, more recently, natural gas. Federal policy has been backward, with Congress and the president more concerned about dwindling sources of fossil fuel than seeding a new generation of energy.

States across the country have stepped into the void, pushing forward their regulated utilities and oil companies with mandates for clean power and automobile fuel. And states are working hard to promote themselves as well. “It seems like every day there’s an announcement of another place calling itself the clean-energy leader,” says Ron Pernick of Clean Edge, a clean-energy market research firm.

But not Oregon.

As Floyd has been emphasizing at conferences around the state over the past year, Oregon does not require utilities and oil companies to provide clean electricity and fuels. And outreach efforts have been minimal. “I would like to invest in more companies here, but there’s just been no strong pro-clean-energy policy,” says Floyd, who has made only two of 34 company investments in Oregon. “Entrepreneurs want to locate in a state with policies that embrace what they’re doing.”

The potential reward in building a local clean-energy sector is huge. The market for clean-energy products and services is already at $40 billion worldwide and is expected to top $150 billion in 10 years. Last year, U.S. venture capitalists invested close to $1 billion in clean energy.

Broader job markets stand to benefit: If just one-fifth of America’s energy comes from clean sources by 2020, manufacturing and construction jobs nationwide could increase by 100,000, according to a 2004 report from University of California-Berkeley’s Renewable and Appropriate Energy Lab.

Business owners also benefit: Clean technologies tap renewable — thus less volatile — local energy sources, which helps create price stablity.

Oregon has enormous potential to profit from the growing national and international clean-energy movement. The state has world-class soils and climate to grow biofuels feedstock, first-rate wind and wave potential, universities deep in renewable energy research and utilities invested in clean-energy projects. There are dozens of companies and entrepreneurs with promising technologies — from electric vehicles in Portland to grid-monitoring software in Hillsboro to home solar power packages at Oregon Institute of Technology in Klamath Falls. And there is plenty of local angel and venture capital to support them.

Oregon leaders, including Gov. Ted Kulongoski, have started to talk more about supporting clean energy in the last few months. “I think the policy makers, locally and nationally, are starting to wake up,” says Floyd, referring as well to scrambling lawmakers on Capitol Hill.

But without strong, tangible policy, Oregon’s culture and natural potential can only carry it so far. The state gets less than 4% of its electricity from clean sources, hydroelectric power aside. And last summer, the state Legislature failed to pass even the modest beginnings of a policy, when a biofuels bill was derailed amid the partisanship plaguing the state.

Unless the political will in Oregon swings firmly behind the emerging energy sector, it will languish or go elsewhere. With gas prices spiking, oil production peaking and global warming making news, that couldn’t come at a worse time.

SEQUENTIAL BIOFUELS managing partner Tomas Endicott knows firsthand how politics can hold up clean energy’s growth. With a foothold in the biodiesel market — SeQuential has a facility in Salem converting used cooking oil into fuel that was cheaper than conventional diesel this spring — Endicott has plans for a plant with a capacity of 5 million to 10 million gallons a year that would get its raw oil from seed farmers in Eastern Oregon. It was contingent on a requirement, proposed to the Legislature last year, that all diesel at the pump include 5% biofuels by 2010.

Endicott thought he had a bone for legislators of all stripes: jobs, rural opportunities, a break from rising gas prices.

The biofuels legislation sponsored by environmental consultant Rep. Jackie Dingfelder (D-Portland) and grass seed farmer Rep. Jeff Kropf (R-Sublimity) also included incentives aimed at building the biofuels supply chain and was backed by colleagues from both parties. But oil industry lobbyists campaigned heavily against the bill and, in a move that drew fire from Democratic legislators, the state’s largest business group, Associated Oregon Industries (AOI), succeeded in extending tax credits in the bill intended for farmers to cover all companies installing pollution control equipment.

But the deal crumbled for good at the last minute when the auto industry lobby convinced Republican House leaders to insert language that Kulongoski thought would prevent him from raising emissions standards on cars sold in the state. Kulongoski balked and Dingfelder and Kropf couldn’t work out a compromise.

Endicott was left to continue talking about biofuel’s potential.

“There’s definitely this opportunity to grow oilseed crops in Eastern Oregon and bring it west,” says Endicott. “There is capital there to fund it. The problem is that the market just isn’t big enough to justify ramping up production yet.”

The burgeoning wind energy sector may be farther along than biofuels, but it has also shown the need for stronger state policy in the face of weak federal support.

PacifiCorp and Portland General Electric, driven by customer demand, have supported large turbine projects near the blustery Columbia River Gorge. The upshot in business terms is that several wind developers and engineering outfits have set up shop in Portland, including Danish turbine manufacturer Vestas, which has its Americas headquarters here, and PPM Energy, PacificCorp’s development arm, which is becoming one of the biggest wind developers in the country. Wind projects have pumped millions into Eastern Oregon economies, including an estimated $15 million at the Stateline wind project, the region’s largest, for construction and maintenance work. That’s on top of annual property taxes and royalties to landowners who host the wind turbines.

But the Vestas turbines at Stateline — which account for the vast majority of the $300 million project cost — don’t come from Oregon. They are primarily built in Denmark.

Vestas was close to setting up a manufacturing facility in Portland in 2002 before federal energy policy tripped the company up: It couldn’t justify the investment without a long-term extension of a federal tax credit that covers wind production, which has made wind power competitive with new natural gas plants in the region.

The federal tax credit has been allowed to expire three times since 1999, and is set for a sunset again next year. Solar power incentives in last year’s energy bill are set to run out next year. Long-term incentives work in driving innovation and cost control — Japan’s 10-year-long solar incentive helped drive the price of solar power there from $16 per watt down to $6 — but they’ve rarely been given a chance to work here. “It’s pitiful,” Floyd says. “We need stable policy. Every other traditional energy source has had massive subsidies.”

With little federal help, states are trying to deliver market stability themselves. California is attempting to unleash itself from the soaring cost of natural gas by offering $3.2 billion of new incentives to solar energy over the next 10 years.

Other states and cities, though they may not be able to replicate a California-sized subsidy, are stepping in with their own brand of subsidies and startup funding.

Seed money is being used to grab entrepreneurs’ attention and foster companies’ growth. Austin, Texas, for instance, recently dedicated $500,000 toward a local clean-energy incubator, which is also backed by state energy grants.  Massachusetts has placed $15 million with a venture capital fund to invest in emerging local energy companies and awarded $1.5 million in seed money to startups this year.

State mandates for utilities to buy renewable electricity generation — 4% in Massachusetts and 5% in Texas by 2009, for instance — provide an early market for companies to deploy technologies and begin driving down cost.

Some agricultural states, including Washington, Idaho and Montana, have pushed ahead with fuels mandates and incentives. The Washington Legislature this year passed a 2% biofuels requirement for all gas sold at the pump by 2008, provided the state’s own biofuel suppliers can meet the target.

When state mandates, called renewable portfolio standards for electricity and renewable fuel standards for gasoline, are knitted together, they begin to form a broad market for clean energy nationwide.

“With 21 states with renewable portfolio standards, we may start to fund certain technologies selling in the U.S. because they now have an overwhelming market here,” Floyd says.

OREGON HAS SOME OF THE FUNDAMENTALS of good policy. The state’s decades-old business energy tax credit allows investors to write off up to 35% or $3.5 million per clean-energy project. Energy technology companies have also started to use the tax credit toward research and development costs. And then there is the utility-funded Oregon Energy Trust, which subsidizes efficiency efforts and some wind, solar and other energy installations. The City of Portland’s Green Investment Fund backs energy innovations in buildings.

But the state has lacked a real champion or industry movement in the past few years to push through dynamic policy. “You look at what happened in California. To a large extent it was Schwarzenegger who helped push the solar initiative through,” says Mike Eckhart, at the American Council on Renewable Energy. “The Legislature didn’t pass the initiative and he used the utilities commission to make it happen. When I think of other states with good plans, the governors are often the ones making it happen — Rendell in Pennsylvania, Richardson in New Mexico.”

Gov. Kulongoski has spoken about clean energy’s potential many times since a Western governors’ gathering on global warming in 2004, and last year his Department of Energy, led by Michael Grainey, released a 30-page document full of recommendations for how state government can boost its own use of renewables.

But it wasn’t until independent candidate for governor Ben Westlund tried to corner the clean-energy issue that Kulongoski’s efforts gained urgency. In January, Westlund and former Gov. John Kitzhaber co-sponsored a ballot measure from the nonprofit Oregon Apollo Alliance that pushed biofuels mandates and funding for energy research centers across the state. (It was later scuttled after a legal battle with oil lobbyists and AOI.)

Kulongoski then headed to an energy summit in Bend in March and laid out an ambitious plan for the 2007 Legislature. He proposes the state get 25% of its energy from clean sources by 2025, and he will ask the Legislature to pass Oregon’s first renewable portfolio standard and incentives for biofuels next year to help the state get there. He also plans to ask for an expansion of the state tax credit for clean-energy projects and research, and has moved up the date by which state government will use only clean energy from 2025 to 2010.

Grainey says the plan would spur huge investment in the state. “We would basically be getting all of Oregon’s new electricity load in the future from renewable sources to get to that 25%,” he says.

However, the potential stumbling block with Kulongoski’s plan is that it depends on the Legislature. Dingfelder admits that clean energy advocates have a lot of work to do building support in Salem before they can hope to get bills through both houses. Capitol observers say last session’s biofuels bill suffered because its main sponsor was the Oregon Environmental Council and it didn’t draw strong support from industry backers such as the Oregon Farm Bureau.

Kropf is slightly more optimistic about biofuels legislation next session. He says that by January the Oregon industry will have grown, with several more biofuels plants in development to supply other Western states and to back an increase in ethanol mandated by last summer’s federal energy bill. He also says there’s still time to form a well-organized lobbying group to counter oil companies.

Regardless, legislators and Kulongoski’s team have to overcome long odds in the midst of an election year if they want to be successful with energy policy starting in January.

“It’s true that we’re in danger of falling behind if nothing passes,” says David Van’t Hoff, the governor’s sustainability adviser. “But if this package passes I think we’d be in position to be the national leader.”

Some industry advocates aren’t waiting on the governor and the Legislature to boost Oregon’s clean energy stature.

In late April, a group including Floyd asked for funding for a research center from the state’s innovation council, Oregon InC. The center would coalesce the extensive clean-energy work throughout the university system and provide incubator space to spin out companies.

Floyd sees the successful Oregon Nanotechnology and Microtechnology Institute (ONAMI) in Corvallis, recently named a federal research center, as the model for a clean- energy center. She has promised to have a part-time office there to boost its stature and help speed ideas to market.

But even if it wins Oregon InC’s approval, the center would need funding from the Legislature. In theory, a research center backed by Oregon InC, the private sector and university leaders would rise above Salem politics as the concept for the ONAMI did when the Legislature approved its funding in 2003. But bipartisan support didn’t work on the energy legislation in the last session.

“It really comes down to what happens in Salem,” Floyd says. “Can they break the logjam in the next session?”

A STRONG CLEAN ENERGY SECTOR HERE might deliver more stable fuel prices for the business community and ease fears about foreign policy, but it also has the potential to reinvigorate Silicon Forest.


At ClearEdge Power, a fuel cell company in Hillsboro, the special sauce is substituting silicon wafers for graphite as the housing for the cell’s electricity-producing catalytic reactions. Silicon drops the material cost by more than half.

With up to 50 kilowatts of power in its fuel cell system and a fuel processor that turns natural gas or similar fuels into hydrogen, the company is targeting the $4 billion market in backup power for United Parcel Services’ computer rooms and main power for cell phone towers. ClearEdge already has raised more than $9 million in venture capital and is working on $15 million more to ramp up.

CEO Gregg Semler thinks an expansion of the energy tax credit to allow more of ClearEdge’s R&D to be covered and an inclusion of low-emission fuel cells as part of any state renewable portfolio standard would give the company a boost.

ClearEdge’s success in the heart of Silicon Forest could be infectious.

It’s sourcing its semiconductor grade wafers at Siltronic in Northwest Portland and it has converted an old Planar Systems display fab into a research lab, headquarters office and what it hopes will be its first manufacturing facility. The venture arm of Applied Materials, the Silicon Valley stalwart, has funded some of ClearEdge’s development because the company sees a new market for manufacturing tools Applied has traditionally sold to the semiconductor industry. Other companies, such as Shin-Etzu America, have been consulting with ClearEdge and watching its growth.

“ClearEdge may be the best bet in the whole state to do something revolutionary,” says Ted Bernhard, who is the founder of Stoel Rives' energy venture and finance group and an adviser to the state.

Already, related companies are starting to cluster here.

WiSPI.net, another Oregon startup, is working to power wireless devices with tiny fuel cells afixed to chips in the devices.

“If done right, a company like ClearEdge becomes an anchor for the whole clean-energy sector,” Bernhard says.

Oregon has seen the potential in other industries in the past and successfully supported them with targeted state policies — notably in the 1990s when it altered corporate tax structures to draw investment in the semiconductor industry. The clean-energy industry is potentially as important to the economy and arguably more so to society.

As Nancy Floyd notes, no state has a significant cluster of clean-energy companies yet. There is still time to get ahead of the curve.

The future, and Oregon’s place in it, is still up for grabs.

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