A Very Smart Plan for Federal Smart Grid Grants

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In mid-February President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA), a massive spending bill that spawned gigabytes of analysis and comment from bloggers like me. Unlike many, I’ve tried to stay politically agnostic and focus solely on the economic impact of ARRA on companies that manufacture batteries and other energy storage devices. From that limited perspective, everything is wonderful!

The principal energy storage appropriations included in the ARRA were:

  • $4,500,000,000 for grants for “Electricity Delivery and Energy Reliability” including activities to modernize the electric grid, include demand response equipment, enhance security and reliability of the energy infrastructure, energy storage research, development, demonstration and deployment, and facilitate recovery from disruptions to the energy supply;
  • $2,000,000,000 for grants to manufacturers of advanced battery systems and vehicle batteries that are produced in the United States, including advanced lithium ion batteries, hybrid electrical systems, component manufacturers, and software designers;
  • $500,000,000 for research, labor exchange and job training projects that prepare workers for careers in energy efficiency and renewable energy; and
  • $300,000,000 to purchase high fuel economy motor vehicles including: hybrid vehicles; neighborhood electric vehicles; electric vehicles; and commercially available, plug-in hybrid vehicles.
In a February 22nd article about why I believed energy storage stocks could easily double as a direct result of ARRA spending, I cautiously speculated that a large number of $100 to $200 million grants seemed more likely than a handful of mega-project grants. In response, many readers expressed concerns that the ARRA funding would be hijacked by the utility industry or wasted. While we’ve all been eagerly awaiting clarification, I’m very impressed with the direction the Administration’s policies seem to be heading.

In his early remarks on ARRA policy objectives, President Obama seemed inclined toward an egalitarian approach that would use ARRA funding for a wide variety of projects in a concerted effort to create new jobs, explore reasonable alternatives and rely on market mechanisms rather than policy-wonks. I was particularly impressed by remarks President Obama made at the Southern California Edison Electric Vehicle Technical Center last month when he said:

“Show us that your idea or your company is best-suited to meet America’s challenges, and we will give you a chance to prove it. And just because I’m here today doesn’t exempt all of you from that challenge – every company that wants a shot at these tax dollars has to prove their worth.”

While we all know the opera ain’t over ’til the fat lady sings, an April 16th press release from the DOE has spurred my optimism to new heights and given me reason to believe the DOE’s plans for smart grid grants will take a very reasonable and pragmatic approach. In discussing their plans for financing smart grid projects, the DOE press release said:

“$3.375 billion for Smart Grid Investment Grant Program"

DOE’s Smart Grid Investment Grant Program will provide grants ranging from $500,000 to $20 million for smart grid technology deployments. It will also provide grants of $100,000 to $5 million for the deployment of grid monitoring devices. This program provides matching grants of up to 50 percent for investments planned by electric utilities and other entities to deploy smart grid technologies. The program will use a competitive, merit-based process to select qualified projects to receive funding.

Eligible applicants include, but are not limited to, electric utilities, companies that distribute or sell electricity, organizations that coordinate or control grid operations, appliance and equipment manufacturers, and firms that wish to install smart grid technology. There will be a 20-day public comment period on the Notice of Intent; the Department will use feedback to finalize the grant program structure and subsequent solicitation.

$615 million for Smart Grid Demonstration Projects

The draft Funding Opportunity Announcement is for smart grid demonstrations in three areas:

  • Smart Grid Regional Demonstrations will quantify smart grid costs and benefits, verify technology viability, and examine new business models.
  • Utility-Scale Energy Storage Demonstrations can include technologies such as advanced battery systems, ultra-capacitors, flywheels, and compressed air energy systems, and applications such as wind and photovoltaic integration and grid congestion relief.
  • Grid Monitoring Demonstrations will support the installation and networking of multiple high-resolution, time-synchronized grid monitoring devices, called phasor measurement units, that allow transmission system operators to see, and therefore influence, electric flows in real-time.

Each demonstration project must be carried out in collaboration with the electric utility that owns the grid facilities. An integrated team approach that includes, for example, products and services suppliers, end users, and state and municipal governments, is encouraged. The projects require a cost share of at least 50 percent of non-federal funds.”

Frankly, the DOE’s goals are more ambitious, reasonable and broad-based than I had hoped they would be. Instead of a relatively small number of $100 to $200 million grants that would provide immense boosts to a small number of companies, the DOE is talking about hundreds of more modest grants that will benefit a much larger number of companies and probably be spent more wisely.

If the policy objectives defined by President Obama and clarified by the DOE flow through the entire ARRA grant allocation process, we may be entering a golden age for investors in companies that are developing batteries, energy storage devices and other smart grid technologies; a tidal wave of public and private funding that will lift all boats in the sector rather than a select few.

The overriding policy objectives I’ve been able to glean from the statements to date are:

  • The DOE will spread the wealth across a broad range of technologies and companies; and
  • The DOE will not finance technologies or companies that cannot attract the bulk of the required funding from non-government sources.

The result is a true public-private partnership where generous government support is available for companies that the market is willing to support as stand-alone business ventures, but the market holds the ultimate trump card. It’s a structure that’s simple in its genius and recognizes that the job of government is to enable the market process rather than supplant it.

I’ve written more than a few unkind words about publicly announced applications under the DOE’s Advanced Vehicle Technology Manufacturing Loan Program because many applicants including A123 Systems, Ener1 (HEV), Tesla Motors and Th!nk are underfunded and the amount of the requested loans is disproportionate to the established value of the advanced vehicle technologies they want to manufacture. My basic question has always been “What if they build their proposed factories and nobody wants their products?” That question, in turn, led to the inescapable conclusion that the ATVM loans are a ‘heads I win tails you lose’ proposition that can be nothing but good for successful applicants and nothing but bad for the government.

We may indeed end up with a wasteful outcome from the ATVM loan program because it takes a lot of money to build manufacturing capacity from the dirt up and the process has been politicized. My sense, however, is that the ARRA grants will be another story altogether. Carefully administered ARRA grants can double the available funding for grid-connected energy storage partnerships like the ones that A123 Systems, Altair Nanotechnologies (ALTI), Axion Power International (AXPW.OB), SAFT Batteries (SGPEF.PK) and ZBB Energy (ZBB) have negotiated with counterparties including AES Corporation (AES), ABB Limited (ABB), Eaton Corporation (ETN) and NYSERDA. If similar policies flow control the ARRA grant policies for advanced battery manufacturing, the impact on the entire energy storage sector can be huge.

I frequently criticize the bloated market capitalizations of Li-ion battery developers, but it’s important that readers understand that my criticisms relate to stock market factors rather than an assessment of the underlying technology. We need Li-ion, lead-acid, lead-carbon and flow batteries, and a host of other technologies that haven’t even been invented yet if we want to break our addiction to imported oil and pave the way for cleantech, the sixth industrial revolution.

While I’ve always believed that good things happen in America in spite of government, the evolving policies of the Obama Administration may well change my views. At least for now, I believe the Administration’s plans for distributing the ARRA smart grid grants are very smart indeed because they rely on the capital markets and sound business judgment as a counter weight to idealism that frequently drives government action.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds a small long position in ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.


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