For Immediate Release
http://www.milkeninstitute.org/pdf/ElectricGridLab.pdf
Milken Institute Report Examines New Regulatory Models and
Financial Innovations to Fund U.S. Smart Grid and Energy Needs
LOS ANGELES – The U.S. electrical grid is suffering from more than 25 years of declining investment,
and although last year’s federal stimulus bill was a step in the right direction, the $11 billion in authorized
funding can’t begin to meet the estimated costs of overhauling this critical infrastructure, says a new
report from the Milken Institute.
Financial Innovations for Infrastructure Finance: The Grid, Renewables and Beyond proposes new
regulatory models and the implementation of financial innovation to harness the capital markets and
leverage private-sector investment to make up the difference.
“There is a lot of time and effort being wasted arguing about how much it will cost to update the grid,” said
Joel Kurtzman, head of the Milken Institute’s Center for a Sustainable Energy Future. “But we can agree
that what the government has to invest isn’t enough. So it’s time to engage the capital markets and
private investment to build the infrastructure we need for a more sustainable and secure economic
future.”
The report outlines several options for new regulatory models and financial innovations that could unlock
private investment to update transmission infrastructure, increase capacity to deliver renewable energy to
population centers and move toward tomorrow’s “smart” grid. “On one hand, the nation’s grid policies
must be clearly stated and designed for the long term,” the report notes. “On the other, the investment
and financial communities must see in those policies the opportunity to deploy capital profitably over the
long haul.”
The report includes a description and discussion on the following proposals:
Regulatory proposals:
·
Define and implement national sustainability standards. Such standards would allow the players to
better compare the social and environmental costs and benefits of various renewable energy projects,
energy-efficiency initiatives and transmission-network developments. This would aid in investment
decision-making and would help resolve issues over sites and permits.
·
One-stop shopping for regulation. Several models exist for a more simplified regulatory system,
including the natural gas model, established by the Federal Power Act of 1935; altering electricity
regulation to more closely resemble how highways are regulated; and the creation of a single regulatory
portal for the different aspects of regulation (e.g., land use, safety and finance), as used by many
developing nations.
·
Federally designate “competitive renewable energy zones ”/empowerment zones. Combining the
features of empowerment zones and competitive renewable energy zones (designated areas that are
identified as the best resource zones, include a transmission master plan, and have competitive bidding
for potential transmission projects) would provide renewable energy developers with incentives to invest
in source areas while ensuring that the infrastructure for transmission would be in place to deliver the
electricity to consumers.
Financial proposals:
·
Make more creative use of existing tax credits and loan guarantees. Existing tax credit and loan
guarantee programs are subject to irregular authorization and can sometimes be more costly and risky to
the government than regular financing. Instead, these funds could be used to support payments in lieu of
property taxes. Another option is aggregating smaller projects with similar characteristics into a portfolio,
which would be attractive to investors.
·
Allow grid operators to use business models like REITs. A structure similar to a real estate
investment trust – which reduces corporate income taxes for a corporation investing in real estate and
requires that 90 percent of its income be distributed to its investors – could be used to efficiently finance
and sustain electricity infrastructure projects on a tax-advantaged basis.
·
Establish a revolving fund for green transmission investment projects. Building on the highly
successful state revolving funds that address sewage and water-pollution programs, a revolving fund
uses government grants and state matches to serve as equity contributions for projects that can be
leveraged and then repaid with revenue from usage fees.
“The current infrastructure was essentially designed by Thomas Edison in the early part of the last
century,” Kurtzman said. “Not only is it ineffective at transmitting power generated from our current
system, it’s not capable of transmitting intermittent power from alternative sources such as wind and
solar. The current grid is a barrier to job creation and will be a stumbling block for the 21st century energy
economy.”
The report is the result of a Financial Innovations LabTM hosted by the Milken Institute with support from
the U.S. Department of Agriculture. The lab was held in Washington, D.C., and included economists,
authorities on energy policy, utility operators (privately owned and cooperatives), investors, real estate
developers, regulators, representatives from technology and infrastructure companies, researchers and
scholars.
Financial Innovations Labs are part of the Milken Institute’s continuing leadership in promoting financial
innovations to help solve ongoing social, economic and environmental challenges.
The full report is available at www.milkeninstitute.org.
Contact:
Jennifer Manfrè, Associate Director of Communications
(310) 570-4623, jmanfre@milkeninstitute.org
About the Institute: The Milken Institute is a nonprofit, independent economic think tank whose mission
is to improve the lives and economic conditions of diverse populations around the world by helping
business and public policy leaders identify and implement innovative ideas for creating broad-based
prosperity. It is based in Santa Monica, CA. (www.milkeninstitute.org)###