Sustaining Growth

Monday, October 8, 2018 - 10:40

 

When it comes to innovation in the clean energy and water sectors, says Elise Zoli of Jones Day, now is the time for investment opportunities that optimize public-private models.

CCBJ: What is the focus of your energy practice?

Elise Zoli: I have worked in the clean energy sector – from batteries through nuclear to wind – for almost two decades. The arc of my professional career has followed this sector as it has developed and continues to do so. Because of the overlap and similarities in energy and water usage, regulation and privatization, my work also includes aspects of the water sector.

Why clean energy and water?

My focus on clean energy and water reflects my interest in advancing investment in critical emergent sectors, my love of science and my commitment to sustainability.

I’m fortunate that this is a superb time for accelerated clean energy and pioneering water investment.

First, the industry’s focus is squarely on financial innovation. The electric and water sectors began as subsidized, government-sponsored monopolies by design. This critical infrastructure providing essential services – the systems that power our public health standards and enviable economies – advanced because of these models, paired with technological innovation, e.g., turbines and alternating current transformers. As valuable as these historic models have been, the sector’s evolution is toward creative, strategic, private investment in alternative technologies and systems, not to mention the quantitative metrics needed to measure the benefits of those investments.

The scale of current financial investment allows diversity of opportunity: One in every five dollars invested targets sustainable investments, i.e., $9 trillion in U.S. or $23 trillion in global markets. The opportunities are there for a “big tent” philosophy: Every participant from impact investors to our pioneering utilities has a role to play.

On the personal side of the equation, I am an Italian from a long line of inventors. My heart, mind – and DNA – are with our innovation economy, and I want to continue to bring financial and transactional innovation into the mix.

What changes do you expect to see in the clean energy sector in the next two to five years?

Whether we are counting dollars invested or electrons generated, clean energy is growing in a manner that makes it an essential part of our collective futures. A couple of metrics underscore the point.

The 2016 global annual clean energy market exceeded $1.4 trillion, twice the size of the global airline, and on par with the global apparel, industries. Growth is expected to continue to accelerate.

Renewables have dominated annual global net capacity additions on a comparative technology basis since 2010, and they now contribute more than 50 percent of global net capacity additions in total. This trend is also likely to continue, with several utilities recently announcing a shift away from natural gas turbines and major electricity consumers electing to go their own way and renewable.

Given this growth, what is your focus over the next two to five years?

The list is long, but my focus is on a handful of opportunities particularly suited for the mix of investors, entrepreneurs and strategic partners that make up our client base at Jones Day and who will achieve the most transformational change.

Investment in water is one focus. The essential fact is sobering: Fresh water is a nominal percentage of available water resources (approximately 1 percent), with an even smaller percentage in a liquid state and potable (0.003 percent).

Despite that scarcity, water and wastewater innovation has lagged. Legacy thinking, localized ownership, the burden of water and wastewater consent orders are among the factors customarily identified as having impeded financial, technical and rate innovation. Indeed, the term of art “wastewater” is revealingly anachronistic in 2018.

Whatever the case, all of this can and likely will change, quickly. Resource and consumer pressures are escalating, while investor confidence grows as a result of early exploratory efforts in system privatization.

There is certainly room for new investment. Water and sewer rates have not risen, as cable, cellphone and energy rates have, over the last several decades. This rate lag creates an opportunity for new investment. We should welcome investment in a new class of sustainably-driven operators, compensated based on water-use savings and sensible water rates, e.g., block pricing, that encourage reduced consumption and reuse. We should welcome resource-focused investors, particularly impact investors, committed to financial, technological and operational innovation, e.g., reducing water losses, smart metering, drought-based rate adjustments and aggregated technology purchasing across watersheds.

The early money has been in the monetization of private water or riparian rights. However, the public and industrial water sectors remain to be transformed, and for many of us with an interest in this sector, the time is now.

The automobile, as we know it, is changing. We are poised for a shift in the automotive sector well beyond the widely reported advances of autonomous driving, and that shift is one that overlaps the clean energy sector.

In 2018, the milestones began adding up. Global electric vehicle sales exceeded a million units, and trajectories predict five million units a year by 2020. Major automotive companies announced an end to diesel models in the near term, as major European cities rolled out future bans on diesel vehicles within metropolitan centers. Leading auto executives offered their consensus, in a well-regarded annual state of the industry report, that fuel cell vehicles are the number one key trend until 2025, when such vehicles are predicted to achieve a market share comparable to battery-electric vehicles (25 percent/26 percent). Shared drivetrains and long haul capabilities, as well as a shift to solar-based hydrolysis, likely will contribute to this technology’s rise. And one in three drivers in Norway drives a hybrid or battery electric vehicle, providing a bird’s-eye – and quiet – view of a brave new world.

The transition from internal combustion engines holds promising capital markets and innovation opportunities. Industry cooperation and standardization, evolution in public and private charging and hydrogen-fueling infrastructure, and remanufacturing remain key trends to watch.

Word of the nuclear sector’s demise is, again, premature. As of July 2018, there are 450 existing nuclear reactors operating in 30 countries worldwide, meeting 11 percent of the world’s electricity needs, with 50 additional reactors currently being constructed, 160 on order or planned and an additional 300 proposed.

Concern about development hurdles, particularly delays and cost overruns, is routine, but not entirely apropos. Nuclear project lags are real, but not unique. Nuclear project lags are comparable to those experienced by other mega-projects worldwide, including hydro-power and large-scale renewables projects. In the final analysis, whether we look to the current leaders in nuclear reactor development, or look back to the 1980s, when 218 power reactors commenced operation – or one approximately every 17 days – the notion that nuclear projects cannot advance is not borne out.

What is borne out is that Asia, particularly China, is expected to continue to dominate nuclear growth worldwide through 2040. That is not an accident, and U.S. leadership in nuclear technologies has not persisted. What should we do? In 2014, Ed Kee of NERA Economic Consulting and I suggested a nuanced form of power purchase agreement, called a contract for difference, to provide price security for the existing and new entries to the nuclear fleet. The motivating principle is that valuing electrons solely as a commodity can be as short-sighted as valuing food based on price alone. Marshmallows are cheap, but the cost of obesity is too high for us as a nation to continue to pretend that “cheapness” is an intrinsic, or the only, value. Recognizing the multifaceted value of the nuclear sector’s contribution to reliable base-load, carbon-free energy supply may be as important as advancing renewables and various forms of storage technology.

For these reasons, I remain focused on continued global nuclear development and, where decommissioning is inevitable, optimizing that process to accelerate secure interim storage of spent fuel and site reuse for clean energy deployment at scale.

Government support for clean energy innovation is an overlooked value proposition and should amp up. The U.S. Department of Energy’s $40 billion loan program success rate through 2017 is reportedly 98 percent. Government investment, whether directly in R&D or in the deployment of advanced technologies in pilot projects, matters, because leading assessments have shown that innovation is correlated to prosperity across this nation, particularly when that innovation is U.S. funded.

My professional experience with government support of innovation, from ARPA-E to loan guarantees, underscores that such funding that advances innovation advances the new and successful businesses or ventures that underpin the economy and are essential to a more sustainable future.

For these reasons, I will continue to focus on investment models that optimize public-private partnerships, particularly the use of loan guarantees and concessionary capital at scale.

The views and opinions set forth herein are the personal views or opinions of the interviewee; they do not necessarily reflect views or opinions of the law firm with which she is associated.


Elise N. Zoli is a partner at Jones Day. Her experience focuses on the development, financing and operation of clean energy, water and related infrastructure projects and services. Reach her at ezoli@jonesday.com.