Lesson 3 Overview

MARK: Hi Elise, It's great to chat with you about energy markets and the importance of project finance in the clean energy space. We really appreciate you taking the time to help our students understand this very important topic. May I ask you to tell us a little bit about your background?

ELISE: Sure. But first, I'm going to start by saying it's an honor and pleasure to be here. And there's no one that I'd rather talk about this stuff with than you. Thank you. My background is I'm a lawyer, I am middle aged, have worked in law exclusively in the sustainability space for more than two decades. I went back to school, that's a family thing, and I also have my MBA.

MARK: Great, actually, so, how did you end up choosing the law as a profession?

ELISE: For me, when I started practicing law, there were a number of new laws that were transformational about how we approach our economy and our collective prosperity. And I thought that these new laws were going to alter the way that we decide to move money in the world. And I really believed that if we were going to design a better economic structure worldwide, that we all had to participate and show up and figure out how to do that right... Right. So I was a big fan of these new ways of thinking of integrating sustainability, of integrating carbon and new currencies and integrating diversity and equity. And I'm a small woman, middle aged, Italian. I could see that if we were going to have a more prosperous, more fair economy, that we had to do things differently. And I was excited to be part of the team thinking about that. Right. Great. You're at Wilson Sonsini now, what are your current duties there? Yeah. Wilson Sonsini is somewhat of a unique law firm. It was created for the new economy. We help entrepreneurs, founders and innovators make the great leap forward. And it was a natural place for me to be... because we work shoulder to shoulder with people who are thinking about how to design the new world. And that's the form of service and support I like to provide.

MARK: Tell us about some of the kinds of projects you work on for WS.

ELISE: Yeah, I'm a little bit of a different critter. Like I said, I'm granola, crunchy. I've only worked in the sustainability space, but I have worked in forms of clean energy that maybe are broader than many people think of them. I've worked in Fission. I've worked in Fusion. I've worked in regenerative farming. I've worked in advanced forms of fuels. Okay. Particularly hydrogen. And I've worked in ways of thinking about how we structure waste and water more than the average bear. And so I think I view energy in the real physics sense of the term, right? Any caloric flux is really important to me. And I'm going to encourage you and your students in this conversation to think broadly about what we mean by energy. Right. And I think that's what's good for their careers.

MARK: Right. Well, it's interesting because one of the things that we show at the very beginning of, of the course is a, a graph that shows 67% of the energy being rejected. And that's something that's near and dear to both of us, really appreciate you bringing that up and how the caloric flux, that's a great way to talk about it.

ELISE: Exactly Right. And I think that I'm going to talk about, in very particular terms, what I do, which is principally to move money. But I think it's really important that we start to get people to think differently about energy and how it's used. And my daughter is 12, my son is 19, and one of the things you can see in their eyes and the way they behave and the way they think about the world is that my daughter grew up with plug-ins, hybrid vehicles and electric vehicles as the norm. And my son grew up with internal combustion engines. For my daughter, she really doesn't understand why people would want to leave their house to fuel their cars. She doesn't understand why public infrastructure is necessary. That all seems illogical to her, right, because she's used to this intrinsic convenience of why would you leave your home to go fuel your vehicle to come back home. That way of thinking she doesn't understand. And one of the things that I really encourage people to do is as they're thinking about the future, try not to see it so much with the constraints we currently have, but really see it in the way that you can help be part of that innovation team that's designing for something different. Right. That means, I think necessarily seeing the things that Bill Gates and Stephen Jobs and all of these extraordinary people who looked at the way that we shared information and said oh, we can do this better and faster. Right. We have to do that with energy. If we do that with energy, I think we're all going to be exactly where we want to be.

MARK: All right. That's great stuff. Tell us a little bit about the work you do for the Stimpson Center.

ELISE: At the Stimson Center, I'm on the board of directors. I'm always going to encourage people to think about participating in the not for profit side of the world, as well as the for profit as we build this new economy. You're going to see there's a blending of those. Heat is a perfect example, Right. Under the new EPA program to allocate $27,000,000,000 to national not for profits to be able to drive the finance of the new economy, right? There's this belief structure that not for profits should be the recipient of these funds. That's not the way we thought about things a decade ago. Right. No one stood up and said, yeah, let's give our money to not for profits or NGOs or to states. But what we've learned based on great data is that allocation of federal and state capital makes a huge difference. So getting a DOE grant makes a huge difference to your future. And that non dilutive capital, that capital that doesn't have to be repaid in the same way as a traditional loan or traditional equity investment would have to be paid, is transformational of how companies and how entrepreneurs advance and succeed. The Stimson Center is a not for profit, nonpartisan think tank that focuses on advancing a safer, more peaceful, more prosperous future. I'm part of the Stimson Center and a co founder of the Alliance for a Climate Resilient Earth. Which is designed to allow some of the leading institutions on earth, the national labs, universities, and corporations, to come together and talk about strategies for advancing a sustainable supply chain, better technology and ESG thinking into their systems and structures. We do that because we believe that convening makes a difference. We believe that if you don't give people a place to talk about how they're working together, you don't spread the ideas as fast as you otherwise could. That's my reason for being at the Stimson Center. The underpinnings of that and my decision to participate at the Stimson Center came from work that's being done at Brookings. I'm going to encourage everyone if they haven't, some of my favorite science out there, If you haven't looked at the geography of prosperity, the Hamilton project at Brookings, I'm going to encourage you to go there and take a look at what, and how we build prosperous communities. That places that you'd want to live and that your students want to live and raise their children, rear their children. And I think it's really important to see what the fundamental underpinnings of prosperity are. And they're education, innovation, diversity. That's an oversimplification, but only slightly, and that's where we need to get to.

MARK: Right. Great, thank you. So take it down a little bit to the blood and guts of this. Can you give students a glimpse into how a simple structured finance transaction might work?

ELISE: Yeah, so let's talk about capital stacks, right? And just money, how does money help you advance? Ten years ago and 20 years ago, if you were a new company, you went out and got equity. And you built your first things and then you built your second things and your third things. And hopefully they worked and then maybe you went to a different bank and you got some working capital or line of credit to fund your business. And then you went out to a third bank to get project finance. And that was mostly blended equity and debt, but much larger than what you started with with your venture capital. Today, many of those lines are blurred. They just are, and particularly for clean energy, climate solutions, climate tech, and clean tech companies. It's very rare that they're building a company and then going out and having a project. Usually, the company's success depends on their having a project that works, right? And that's particularly true for fusion and fission, right? If you don't have a reactor, if you don't have a Tokamak, you don't exist. Right now what we've started to do, and some of this is as recent as a year ago, some of it's as recent as seven years ago, is we've started to redesign the capital allocation to better suit the companies, as opposed to forcing the companies to go out and do different things. Right. And now, there are absolutely great groups of investors out there. I'm going to give some examples. They are not meant to be talismenic, they're not meant to say you must look to these entities, But they are examples of enterprises that are investors that are providing the full capital stack in a different way. So today we would tend to have blended finance, where you go out and you get from the same investor some equity for your corporation and then some finance for your first project all at once. Okay. And in Boston, you know, that looks like Creo Syndicate or Spring Lane Capitol. Any number of great investors out there that are really focused on climate solutions and understand you've got to provide both. It often looks like great family offices who are really focused on both allocating the capital but also making sure that the sustainability metrics, the carbon reductions, the emissions reductions, the waste reductions, all of those alternative currencies are all being met as well, Right? Right. So today I think that the thing that if I were an entrepreneur I'd want to know most and best is that you get to design your own capital stack and you're going to fall within the traditional norms of the last 25, 50 years, but you also can cross those norms as an early stage company. Then I'm going to suggest as well that every single early stage company in our space is looking at the capital that's afforded by the federal government. In the United States, under the IRA and BIL, state governments like California, New York, and Illinois. The green banks that are out there. There are 21 green banks in 16 states and NDC. And trying to think about new forms of relationships to be able to move their company forward with aligned capital. Does that help?

MARK: Immensely. That's just great stuff for the students. When Elise says capital stack, we're talking about capital structure for your project. That's important and to the extent that you're doing your project and students are... they do a project, that's the whole course, that this is a very important piece of how it all fits together and what that capital structure looks like. So feel free to not necessarily stay in that debt / equity realm, but you can fuse them as Elise is saying and if you want to, you can even say that the ... the investment tax credit, is a form of capital, If you're so inclined to look at it that way.

ELISE: I absolutely agree with you. I think that LC, the California Systems for Supporting Innovative technologies and projects, the federal systems are critically important and they are forms of capital. And let's just call capital what it is. We're just talking about money here, right? And what we're really talking about is when you build your first project, who is willing to come in and give you money to be able to do it? Right. And if you think about the different spaces, in the nuclear space, that almost can't be done without the Department of Energy. Right. In the solar space, that really shouldn't be done, without, if you're doing it on farms, the USDA. If you're doing it in a traditional industrial context, Department of Energy, or the tax incentive systems. If you're doing it in California without the LCFS system, right? If you start to think about those forms of capital, of money and/ or incentives which are surrogates for capital, then all of a sudden you can start to get to a capital stack, or a money stack that is more than 50 to 70% of what you need to be able to do your first project. If you can do that with government money, which is customarily given to you without an expectation of a return on that investment, then that allows you to build a project with a lower risk of failure, a higher return to your investors seeking returns on investment. And object to, so it should go more easily, better and faster. And in fact my experiences, they do. Right, right. It's, the term we use is leverage, straight, straight, straight, straight, straight and simple. Right? And that's, that allows us to lever things up and get the returns on the equity higher. But I also would say that in this world, it is now reasonable to expect that the private capital is more reasonable in their expectations about a return on investment. So the wealth transfer from the federal government should be in part to the company and in part to their investors. I would not ordinarily want to see 100% of the non dilutive capital that the US government or states are providing, going 100% to investors, right? Because that's too much, right? Right. Agreed. Part of the reason we have project finance is because it should be a lower IRR, right? A lower return on investment, right, than for traditional equity at the venture high risk stage, right? Does that make sense? Or is that too much a level of detail? No, no, that's perfect. This is all great stuff. You mentioned project finance. Why is project finance such an important concept when it comes to funding energy projects? Yeah. Essentially it's the whole ball of wax, right? It is the center of energy projects. And it's because in order to be able to finance projects, we have to come up with both a structure, committed line of capital and a repayment system that allow people to believe that they will, that their money is not being thrown away. It's that simple. And project finance does that by providing a security or a right, a legal right with respect to some of the equipment. Right. That's being constructed. And if you think about solar, for instance, 70% of the typical cost of a solar installation is an equipment that can be repurposed. Right? Right. And so there's downside projection for the investors. Right? And that's why much of the solar agreements that you'll see talk about rights in case the project does not go forward. Right, right. And part of the complexity of project finance and part of the fun of it from our perspective. Is that a lot of what you think about is how you get the electrons out. Get the electrons paid for at the right price. And then how that allows you to return value to your investors, right, while reducing risk. That's the whole ball of wax, right? And when for all of your students that are going to structure these transactions, if you can reduce them to their most simplistic formula, then it becomes much easier to design them to get people aligned and stop. A little bit of the complexity that I think sometimes turns these agreements into something less efficient than they could be.

MARK: Right, right. Exactly. So really appreciate that. Very enlightening I think, so. Do you think there are any policy levers you'd like to see pulled to move along the transition in your mind either at the state level or federal level?

ELISE: You know. So I don't litigate very often, but I have litigated including in the United States Supreme Court in favor of a new economy, and carbon. Accurate calculation of adverse impacts is the way I'd really say it and a way of reducing impacts. Because if innovation means anything, it means doing more with less, right? Right. Not doing less with more. We have hit our ecological limits and less with more is no longer an option, right? And so the question is, how do we have a consensus discussion about what doing more with less looks like? And I'm open to many and different ways of doing that, but while we have the dollar in the United States as our fundamental currency, it seems to me that we should put a price on impacts. Right? Right. So I like all forms of carbon tax. I think they work fairly reasonably. There is something called an internal carbon price and most large corporations actually already do this internally, right? And so there are surrogates that are in place because we don't have, you know, a national mandatory carbon markets, a carbon tax, or another system for assessing, valuing projects, particularly clean energy projects that outperform their peers by having lower impacts. As a consideration. So, from my perspective, I would set up three forms of values. The first, I would have a capacity factor, installed capacity value nationwide. Are you there? Are you reliable? Can you provide power when needed? And I would put a price on that. Secondarily, I would put a price on the reduced impacts associated with your project. Third, while no one talks about this, and it's probably slightly out there, I would put a security framework around the energy resource and what it's providing, so that, to the extent that, it's likely to experience much lower supply chain disruption. To the extent that it can work, um, outside, and readily integrate its electrons within the grid, or sell its fuels into an existing system for transporting fuels. I would put a high premium on that because I think we as a globe, have begun to experience significant disruptions, both extreme weather and now, pandemics and also armed conflicts that we didn't expect. Right. And I think we have to prepare better for all of those. And that means that we have to start thinking in terms of security.

MARK: Yes. And I mean, resiliency of the supply chain is, obviously, I think that's what you're getting at there.

ELISE: Resiliency of the supply chains, ability to be deployed in isolation. Distributed power has an enormously high value, right? Redundancy, which we don't value at all, to me has an enormously high value, and so I think that what Europe has learned. And thankfully with a very warm winter, is that you can't have overdependence on a single source of fuel.

MARK: Very true.

ELISE: Or a single force of electricity. And I think it's time that we got our hands around that. In a more mathematical, I'm a mathematical being, we've got to get our hands around that in a more mathematical way.

MARK: Right. Right, exactly. To talk a little bit about that, maybe even take that conversation a step further, what about the notion of economic justice? Just transition for labor and capital and that kind of thing. I mean, do you think there's maybe maybe a place for a price tag on that as well? I'm just bringing that into the conversation because you got me thinking about that.

ELISE: I'm a huge believer in equity and of valuing equity. Some years ago, my team and I worked on and designed the first human health metric, to my knowledge, that valued clean energy production by showing the avoided morbidity, mortality, lost work days, healthcare costs associated with some forms of electricity. The idea was that if we're going to have a functional, prosperous, integrated society, you can't have disproportionate burden of certain forms of disease. And I think that increasingly that discussion is being rephrased. It's better, as equity. Right? Right. So I absolutely believe that a society that is healthier, on balance, will achieve more, right? For my, MBA, I did a significant amount of work looking at the effects of war on multigenerational effects of conflict. And in particular looked at epigenetics, which is where even though you and I fought in war wars, but our children did not, but nonetheless experience increased rates of depression and related conditions because of the effects that you and I experienced in battle. And if you start to think about epigenetic effects and you start to calculate, and this is a very early field, I don't want to suggest otherwise, and the science may prove out differently. But right now, what we believe is that conflict has a long tail. And what we mean by that is that living under extreme circumstances is... affects not only the generation that experiences it, but follow on generations, right? In material ways. So I believe we have to think about diversity as equity and inclusion, as building a better society. One that is able to participate in a meritocracy. And if you adversely affect some parts of the population disproportionately and significantly, then that has a serious cost directly, but also in a multi-generational way. Right? So I believe that it should affect whether we wage war. I feel like that should affect whether we have disproportionate negative impacts on certain portions of our population, and I believe we should do everything we can to remedy that.

MARK: Excellent, appreciate that. Are there any other markets or conditions that are affecting project finance in a manner that we might not have anticipated three to five years ago? Inflation.

ELISE: Absolutely. Absolutely. I'm going to say some of this is actually closer to home. I think that the shift to electric vehicles is having a significant multiplier effect. Not only on the way we drive and how we perceive that experience, but also how electrified our homes are, where we allocate electrons and what the future looks like. And I think that we, as a group, and I include myself in this, did not fully appreciate how quickly we would accelerate vehicle electrification for light vehicles. I think we have not fully appreciated how quickly we're going to need hydrogen for long haul trucking and heavy vehicles. And transformational... what a transformation that's going to be on the way we fuel things and how we produce fuel. Right? So if you're using electrolyzers that's not 3 mi below the ore surface, right? Right. All of a sudden now you're going to start to see fuel production around you. That's going to be a very different structure.

MARK: Right. Right.
ELISE: Then lastly, I think that we haven't begun to think hard about food production and in particular, you know, carbon capture utilization and sequestration. I think we're in what people refer to as hype cycle one, but version 1.0 you have many CCUS, that's the acronym, technologies, right? And I think that they are going to be extraordinary. Nothing short of extraordinary in the near term, in terms of how we manage for climate, for carbon and emissions, other air emissions. So it would not surprise me if three years from now we find that our ability to produce cementitious materials from CO2 two has transformed the way we think of cement production, right? And therefore, what we think about CO2. And I would not be surprised to find that we go from thinking of CO2 as a waste to be avoided or sequestered to a feedstock to be repurposed and used efficiently. That's what I'm hopeful for, right?

ELISE: Right. So what are the biggest challenges facing your business in today's energy markets?

MARK: I think, you know, we're gladiators. Mark, you know this better than anybody else, right? The difficulties of being in a new space, an emerging space is that often you have to explain yourself, you have to educate, you have to surmount the both lack of awareness, lack of understanding and fear people have about new things. And always remind myself that there must have been a moment, I know there was a moment, right, where the CEO and the Board of Smith Corona, the leading typewriter manufacturer of the '70s, were in a room, and a consultant accountant and a law firm and the boards on the CFO all got in the room and someone said, there are these two little companies. Should we buy Apple? One's called Apple or some fruit. One is called...does the stuff that's used to make apple thing work, and it's called Microsoft, and should we buy them? And the price on those guys was what? Maybe 5 million, ten million dollars, right? And the board of Smith Corona, which had a typewriter in every office and many homes decided on balance, they didn't need to. Right? And that means that somebody sat down in a room and thought about it and said we got auto-correct. Right. And I'm not criticizing in any way, shape or form. I think every single one of us makes those decisions every day. And we have to make fewer of them. And we have to be open and aware of what the possibilities for change are. I think the hardest thing is to get up every morning and think, how do we best advance something really novel and maybe a little scary? Because I work so much in nuclear and fission and fusion, I think it's easy to be more afraid than to be excited. Yeah, I feel for the Wright brothers and I feel for folks redesigning hydrogen pipelines. And the question is, how we come up with, with a nod Amos Tversky, the extraordinary Amos Tversky and Danny Khaneman... and how do we get better about behavioral economics? How do we get better at communicating probabilities to human beings? And how do we make more rational and informed decisions sooner? Right. Together.

MARK: Right. All right, great stuff. So what do you think the major roadblocks are in the transition? At this point?

ELISE: I think, I think it's easy for people to talk about the companies. I don't really see that. I really think it's us. I really do. And I think that we have to, it's so clear when we vote with our dollars and with our preferences, how quickly we can transform things. Going from Ma Bell to an iPhone is a non trivial change in human development, right? And human preferences. I think that we have to get better about working together and being less fearful about the new world. And I don't think we have 30 years to do it. That means that we have to get excited about solar on our roofs and we have to get excited about better use of water in our homes. I think if we could change one thing, I would eliminate planned obsolescence. That I think would be most transformational if we could get a government that says to hell with crap, when you buy something that you plug in, it has to work for a generation, right? It has to be, we can no longer afford white good waste, tire waste, all of those things that are readily fungible, fast fashion, all of that stuff should have a significant tax associated with it. And then, can you imagine you would start to focus on the companies that actually do more with less make better product. I think when people join my team, I make them spend an hour at least with en-Roads. If you haven't done Mit's en-Roads, if you haven't taken the time to simulate and solve climate change for yourself, what you really see when you work in en-Roads is that it is an entire economy contribution. That it's not just about electrons or just about fuels, or just about food, or just about carbon capture utilization and sequestration. And I think if you start to see that, then you start to look around yourself and say, okay, I'm not going to use plastics anymore, okay, I am going to work to reduce my footprint. Okay, I'm going to make sure that I demand better products that are more efficient. And as you start to make those decisions, I think you really start to see amplification around change.

MARK: Right. Right. So what do you think are the most important things our students should take away from this discussion?

ELISE: I think they are at this extraordinary moment, I can liken it only to the 1920s and the beginnings of the automotive and age of flight, the 1970s and late '60s and '70s. And really the publicity around space travel and the beginnings of the computing age, right? We are in this transformational age around our impacts and reducing our impacts in a way that allows us to have more equitable, more functional, longer lived prosperity. And I believe that every person's thought needs to be, to come into play -- if you have a great idea, I don't care whether it's B to B or B to C, business to business or business to consumer. I don't care whether it's in food, fuel, electrons; I don't care whether it's on the policy side, the money side or the technology side. We need every great brain thinking about how to do this better. And I believe in this economy, there is a place for everybody to be able to, on the basis of excellence, advance reasonably, and that there's an open possibility to really change the world around you. And Mark, you know, I don't know where you're from, but like again, I'm a small, middle-aged Italian woman. Right. And I was to some degree, the first in my generation of families to go to private school, to be able to be a lawyer, to go get my MBA, to work in a highly technical field. And I know there's a tendency to focus on barriers...and the best advice that I can give is to the extent that you can... recognizing that economics matter, experience matters, and role models matter. They all matter. And we agree. I'm not trivializing how high the burdens are, but I think if you can every morning, sort of ignore all of the barriers and get up with that belief that the world is your oyster, as they say, I'm vegan, I don't particularly like that metaphor. But if you could say I'm going to look at the world and ignore the barriers that I think... being a little hard-headed, being a little resilient, being a little immune to criticism and limits is the best advice that I can give anybody. And forge ahead.

MARK: Really appreciate that. Anything else you'd like to add, Elise?

MARK: No, I always say the same thing, which is where you and I are always happy to talk with anybody who wants to make their way forward in this space. They can reach out to you, they can Google and find me. Our mission and obligation is to be able to enable the next generation. And that's when I say obligation, I really mean obligation. Folks should treat us as ready, willing, and able to spend the time to talk. We welcome that.

MARK: Yes, exactly. Thank you for that, Elise, and really, really appreciate your time today. Thank you.

ELISE: It's an honor and a pleasure. Be well. Thank you.