Bret Kugelmass
So we are here with Keith Martin, who is probably the most highly respected project finance attorney in the country, in the world, I don't know, but everyone seems to know you. So Keith, thank you so much for hopping on the show.

Keith Martin
Well, it's my pleasure. And thank you for that introduction.

Bret Kugelmass
Yeah, absolutely. Maybe you could start off by, you know, you've been at Norton Rose Fulbright, probably for the last 40 years or so. Can you tell us how you got into the sector to begin with?

Keith Martin
You know, I started at a law firm called Chadbourne & Parke in New York, which merged into Norton Rose in 2017. So, I've been in these two firms for 37 years. And before that, I worked on Capitol Hill. I was counsel to Daniel Patrick Moynihan, former Harvard professor and New York Senator. And then before that, legislative assistant to Scoop Jackson, who was chairman of the Senate Energy Committee. So I got into this area, number one, by working on tax issues on Capitol Hill, I was Moynihan's tax counsel. And then when I got to Chadbourne, it was right after the Arab oil embargo. The firm represented the paper industry and the paper companies were big electricity generators. They made their own power. When PURPA was enacted in 1978, to encourage independent generators to get into the market and require utilities to buy the output, the paper industry was the first industry to knock on utility doors. We ended up litigating against utilities in 20 states to open markets and taking a key case to the Supreme Court.

Bret Kugelmass
Wow.

Keith Martin
That's how I got into it, really on the ground floor.

Bret Kugelmass
Amazing. And can I push you to go back even a little further in your personal history? What got you interested in DC at all? You know, that's a different beast altogether.

Keith Martin
My dad moved us here. My dad was a journalist and when Edward R. Murrow became head of the US Information Agency under President Kennedy - Edward R. Murrow is the legendary CBS newsman - he invited various journalists to come and work at USIA. My dad had grown up in the Middle East and Murrow put him in charge of the Near East and South Asia division. So we ended up here in the Kennedy administration. As a kid, I was always interested in politics in Washington, and my ambition was either to be a journalist or a politician. And in 1969, when I was in high school, I went up to volunteer to work on Capitol Hill. I wanted to work for Hubert Humphrey, or Fritz Mondale. I was originally from Minnesota. But I walked into Jackson's office and the people were just so nice. And that's where I got started.

Bret Kugelmass
That's awesome. And, you know, so I guess the DC element has been kind of woven throughout your career as well. You know, it's not just energy that you're an expert on, but also how it interweaves with policy. Is that right?

Keith Martin
Yes, I've noticed this in the project finance market, particularly among tax lawyers, that there are two ways of approaching tax law. One is to read the words very carefully, and just see how you can parse them to get where you want to go. And the other is more a Washington approach of what exactly was the policy people were trying to implement? And what makes the most sense as in interpretation, in light of that policy? Tension in the market between, I would say, the New York tax lawyers and the Washington tax lawyers that comes out that way.

Bret Kugelmass
So that's kind of like the like the originalist interpretation versus-

Keith Martin
In a way, that's true.

Bret Kugelmass
And, so yeah, because at the end of the day, right, we have these like, big goals. And that's why we change policy is to actually accomplish something at the end of the day. With renewable energy, were you around and part of it when it was first taking off? And like, did you understand like, really what the goals were and and was that properly being translated through policy? Or was there a long journey to actually make that a reality?

Keith Martin
I think what's happened here is, there have been two runways in the US, where we've tried to get the renewable energy plane to take off, the first one was from 1978 to 1985. By then people had lost interest in it, and the plane never really got in the air. And the second started in 1992, and production tax credits were re-enacted, or enacted, and that runway has been much longer obviously and has allowed the industry to get to scale.

Bret Kugelmass
'92 what was going on then? I mean, I understand, you know, clean air is always a concern. But you know, I didn't remember. I mean, I was too young, but I haven't even heard about people really considering climate too much back in the early 90s.

Keith Martin
No, that's a very interesting question. Why was Congress interested in this? I think it was more geopolitical it was an interest in freeing ourselves from having to be drawn into Middle Eastern wars.

Bret Kugelmass
Ah, that makes a lot more sense.

Keith Martin
I remember that in the early 80s. We worked with the solar companies - really, solar companies tended to be aligned with oil companies. They were among the first movers interest in solar - I remember going out to a Solarex plant where solar panels were made, and they were just tables like you'd find in elementary school with Vietnamese women, who had emigrated from Vietnam after the war, were just individually soldering together panels. Amazing how much the industry has changed?

Bret Kugelmass
Yeah, no wonder it was too expensive back then.

Keith Martin
Right.

Bret Kugelmass
And so how did you see things evolve over time? And what were some of the other key policies that were changed, that actually allowed for the right type of market to be created? That as you know, I guess in recent years, I say recent, last decade or so, really allowed the industry to take off?

Keith Martin
I think there were two policies, one at the federal level, one at state. The federal policy has been the tax subsidies. The federal government right now pays on average 44 cents per dollar of capital cost for a solar or wind project. That's a lot of money. And it's inefficient because none of these developers can use the tax benefits, so they have to barter them in the market, they get back less than full value. So that was one thing. An adjunct to that was the Treasury Cash-Grab program. After the bottom fell out of the tax equity market in late 2008, the Treasury stepped in as a tax equity investor of last resort. That program is the most efficient program I've ever seen in 40 years, 40 plus years in Washington. It's run by two women who just were extraordinarily efficient. You could send them a question and you would get back an answer in writing by email within three minutes sometimes

Bret Kugelmass
Take a step back, what is tax equity, exactly?

Keith Martin
If Congress wanted to encourage renewables, one way to do so would be to spend money, give money to developers to pay part of the cost. However, the 1974 Budget Act makes it impossible really to spend money in the politics and Congress make it impossible. So everything's done through the tax code in this country. There was a book called "Showdown at Gucci Gulch" written by a Wall Street Journal reporter years ago, about the hallway in on the second floor in the Dirksen senate office building, where all the lobbyists hang out outside the senate tax writing committee. So the tax equity is the core financing tool for renewables. If you have tax benefits, amounting to 44 cents per dollar of capital costs, it's like Monopoly money, you can't you can't get anything for it. So you try to give it to someone who can use it, in exchange for part of the capital. Tax equity tends to come from banks and insurance companies who are providing some of the financing, but instead of being repaid entirely in cash, they're willing to be repaid partly in tax benefits.

Bret Kugelmass
Hmm. And how is a tax benefit actually transferred? Is there like a certificate that says you can save this much, you can save this much on taxes, how is it done?

Keith Martin
You can't actually sell tax benefits. So anyone claiming them has to be a owner or part owner of the project. And that has made these very complicated transactions, because you if you're a developer, you bring in one of these banks or insurance companies as a partner to own the project with you. And then you specially allocate the tax benefits within the partnership to that person. Like anything else in the structure finance market, people tend to keep pushing the envelope until the market marches inexorably off a cliff. The government in 2007 came out with some guidelines for how to structure these. I think, interestingly, the market has pretty much adhered to them.

Bret Kugelmass
And, you know, okay, so it's complicated. It's over my head, what actually is happening, but as the industry of the smart people, the bankers, the insurance companies, the lawyers, everyone's involved in these transactions. Have they just gotten so good at this point, that for a developer, it's actually not that big a deal, you just hire the right team? And it says, if you're getting that tax coupon, where you don't have to, like think about all the work or is it like complicated through and through no matter what, just because every deal is a little bit different.

Keith Martin
It's appallingly complicated. It's also very hard for anyone other than the top tier players to find tax equity these days. Things are improving a bit. But the tax equity market was a 17 to $18 billion market last year is highly concentrated. Two banks, JP Morgan and Bank of America each did more than 4.5 billion, so they were half the market at least, possibly more. It's complicated. Even if you find tax equity, there's no standard set of documents. And as more developers come into the market, whatever was worked out as standard market turns tends to evolve. It never seems to settle.

Bret Kugelmass
And does that mean, since it's complicated, that that forces up the transaction size that, you know, you'd even look at to consider tax benefits? And is that then why it only goes to the top top banks, because they're the ones dealing with like the larger transaction sizes?

Keith Martin
That's a smart question. I think the complexity makes it hard to do smaller deals, because the issues are the same as in a large deal. The transaction costs just are too great. We've seen nine new tax equity investors come into the market since September, so the market is getting better. There were more than 40 in total, before the pandemic hit. There are also a lot of smaller players dabbling in it, some of them just don't belong there. Wealthy individuals, NASCAR racers, NBA players, hockey players, you know, it's very hard for individuals to claim these tax benefits under the tax laws. Congress doesn't really want individual tax shelters. And so some of them are in these deals, and they're not really entitled tax benefit.

Bret Kugelmass
And how come it can't be, you know, simplified or packaged up in some way? How come you know, a company with a big tax burden, can't just create a subsidiary that has a lot of its liability, and then just sell that subsidiary to the developer like that? Why isn't it easier?

Keith Martin
Well, the Starkey answer is that the tax code is not written in plain English. There was one fellow, Ward Hussey, who was the legislative draftsman for the longest time in the house. And he could not write a simple declarative sentence. So I think we would have done better if we just hired an Associated Press or UPI wire service reporter who could write in plain English. The reason it's so complicated is you've got more than a billion words in the tax code, you've got regulations of up to 18 volumes. You've got probably 30,000 tax lawyers in this country, all very smart and trying to figure out ways to cut corners or find loopholes. It just gets more and more complicated as a consequence.

Bret Kugelmass
Tax equity: is this the main driver of renewable incentives now, or are there others that have come about to help encourage the growth of the industry?

Keith Martin
Yeah, the other piece, besides the tax element was the renewable portfolio standards at the state level, those have driven a lot of activity as well.

Bret Kugelmass
Tell me more about those. What are those?

Keith Martin
Those are programs in 29 states and the District of Columbia that require utilities to supply a certain percentage of their electricity from renewable sources. And in many of the states, the utilities that you're in have to turn in a certain number of renewable energy credits. They get them either by generating the electricity themselves for renewables, or by buying renewable energy credits from other generators. That's created a market and some value for another potential revenue stream for renewable generators.

Bret Kugelmass
Very interesting. And what counts as a renewable? Does it vary from state to state? Or is it just anything that doesn't emit CO2?

Keith Martin
It does vary from state to state, and some states have extra credits for solar, they're called SRECs. There's been discussion since the Obama administration about enacting a federal national clean energy standard. And Biden has one of those in his new infrastructure plan. But any move in that direction leads inevitably to a political settlement where natural gas, nuclear, these other things are considered clean energy, they may be given different weighting.

Bret Kugelmass
And, I guess, maybe this is too abstract to question. Like, why is this, at the end of the day, you know, if something is clean - and I get that there are different ways that are clean - but why can't it be more harmonized, our definitions? Like I think we all know what we want. We want clean air. We don't want CO2. Well, why isn't it just a simple calculation?

Keith Martin
I've always thought that debates in Washington are like a dinner party, with a lot of people around a table and table cloth that is too small to fit the entire table. So everybody's pulling in his direction. That's just the way in a large, complicated society like ours, laws are written.

Bret Kugelmass
Yep. Have you seen different industries become smarter about it than others, for instance... so solar's got this extra advantage, does that mean that they're just better than geothermal at putting together these types of deals?

Keith Martin
I think it means that they may be more effective in Washington or it may not just be the the trade associations, it may just be a function of how many more solar installations there are across the country. So they have a lot more political muscle.

Bret Kugelmass
I see, that makes sense. And, speaking about different technologies, what have you seen, you know, over the last couple decades in terms of renewables, and the growth of different industries and how they've either affected each other or what they've led to over time?

Keith Martin
That's a big question. We've, when I first started working in this industry, it was all coal fired power plants, and we went to gas. And then after the Carroll, California collapse - California market collapsed in 2000, Enron went bankrupt - there had been a drive to merchant gas projects where you had as many as four different gas projects in every corner in Texas. And then after that, it took a while for the market to pick itself back up off the ground. And that's when interest in renewables really started, 2004 or 2005. And since then, it's really been growing steadily. At first, the Europeans were the ones with the experience, but they were reluctant to dive into the US market, because it just seemed too complicated. I remember going and visiting with the CEO of Enel, Enel's US subsidiary, the Italian subsidiary, and he just said, you know, the US market's just too chaotic. And, my first reaction was, you know, Italy is known for chaos

Bret Kugelmass
Yeah, they've got like 23 political parties.

Keith Martin
Right. However, on reflection, I thought he was right, because we have a federal system. And then we have 50 different state systems. And sorting that out, plus, having to understand how people raise capital through tax equity is just a very tall wall to climb. However, what the Europeans realized after a while was the incumbents in this market had the same struggle. And so your original hits, staying out, and then they just bill them. I think over time, the technologies have changed, the economies of scale have given solar an edge in the last few years. Most wind and solar seemed to have reached grid parity, where they're able to compete now. But I think there's still a push to extend these tax subsidies, mainly because there's a feeling that we've lost four years in dealing with climate change. And we need now to pull out every tool available to make up for last time.

Bret Kugelmass
I was gonna ask, do you feel a sense of urgency, you know, in this last year or so, where we are making up for lost time, like and how is that manifested itself?

Keith Martin
I do think there's a growing sense of urgency just because of the increasing climate related problems. The insurance premiums have gone up 400% in the solar market in the last two years. Because of big payouts, it is impossible to find coverage for some renewable energy projects now, in areas with high convective storm risk. And which is an irony, this is where the private market starts to price out renewables on account of climate change. The irony is that the very thing that might help deal with it is priced out I think at some point the federal government may have to step in and be an insurer of last resort as it is with hurricane, flood damage risk along the Florida coast.

Bret Kugelmass
Yep. Wow. Okay. Yeah. So there's already a precedent for that in Florida. But one might say that that encourages people to build risky projects in Florida. One might say that maybe there should be a reason that the market prices that out.

Keith Martin
Yeah, that is certainly a legitimate view that maybe the renewable projects should be pushed inland or out, offshore wind where maybe the risks aren't as great.

Bret Kugelmass
Yeah, cuz at the end of day, it doesn't do anyone any good if you invest in a solar project, and then tornado tears it up or something. But then maybe that would kind of force the market to come up with other solutions, like locating them in better areas and maybe investing in transmission technology or something like that.

Keith Martin
Yeah, I've noticed two broad trends in the market just over decades. One is, I keep telling the people in my group, imagine what life would be like if people wanted more of a product that we're producing electricity. The demand for electricity has been pretty stagnant in the US for for two decades. The way renewables have gotten traction in that sort of market is by retirements of coal and nuclear, those are accelerating right now. And that's why you're seeing some acceleration of renewables. The other broad trend is just the push and pull between the regulated utilities, and the independent generators for market share. And then, more recently, last 10 years, the solar rooftop market has stepped in, and also sort of tried to take a piece of market share so you can view the market through those two lenses.

Bret Kugelmass
Do you do much work internationally? Are we kind of like an America we're like a, like a sandbox for experimentation in this regard? And then do we see the similar structures being adopted elsewhere? Or are countries that maybe don't have enough power to begin with just a totally different ballgame because, you know, they just, they just have to build and so they're not kind of like peeking around the edges.

Keith Martin
We do a lot of work internationally.We did 145 billion in deals, 331 transactions in the last three years, 33 countries. The firm Norton Rose goes back to 1794. I think what we've seen is just an ebb and flow. The US, just speaking as a lawyer, the US tends to be a first mover in different types of deal structures where we have a lot more capital to deploy and a lot of very smart people on Wall Street who come up with, you know, there's a new structure it seems every year, SPACs, and exchanging information with our people in Australia or China or Germany, Holland, UK, so on. I just find that we tend to be the first movers here on deals, build types, ways to do deals. Beyond that, Europe was a lot more advanced on renewables than the US was. I think we've largely caught up. The way we've encouraged things has been different. In Europe, it was through feed-in tariffs, where utilities were forced to pay more for renewables. In a way, that was a less stable system because, you've seen in Spain and Czech Republic and others when the feed-in tariff stopped all the sudden, people were caught flat footed. Here we've not had that problem. The technologies, you know, are developing the same: green hydrogen, storage, offshore wind. Offshore wind, Europe was more advanced, we're catching up.

Bret Kugelmass
One thing though, that I feel like I don't see that much - and correct me if I'm just totally off base on this - is, I don't see many like American utilities investing and building assets, like generating assets, internationally. Is that right? Or no?

Keith Martin
That's true, but that's because the the American companies, pushed offshore in the 1990s, and PG&E, PSEG, Entergy, many of these utilities bought - and Florida Power and Light - have bought assets outside the US. They bought distribution companies. They developed projects. And then when the California market collapse when Enron collapsed, everybody came home all of a sudden,

Bret Kugelmass
Why?

Keith Martin
It's a good question. I think maybe they took a closer look and weren't earning as much as they wanted. I remember Bob Hemphill, who was one of the founders of the AES corporation and then-CEO of their solar subsidiary said they had a saying at AES, every time they go into a new country, it would send an executive with a briefcase full of cash, and tell him to drop it at the airport and come home immediately. He said, it has the same effect as working 10 years on a project, but it saves time.

Bret Kugelmass
Unbelievable. So tell me more, where do you see this going now? I mean, do we see any of these trends, you know, reversing in terms of- I mean, I guess it's American capital that's still able to go abroad, even if not the utilities themselves. Do we see the world becoming just more connected in this way, or people still try to mostly still be experts in their own backyard?

Keith Martin
I think we're pretty much staying home here in the US. We're seeing A lot of capital come into the US, typically from Canada, typically Canadian pension funds. We're seeing European investment funds, European utilities still putting capital in here, Koreans, Japanese, are the main sources of it. So the returns in the US market are just a lot better than they are outside, the opportunities here are greater.

Bret Kugelmass
And how did they get access to the deals? If we have capital sources domestically? And let's say a Korean bank wants to come in, how did they beat out the American bank?

Keith Martin
There is a lot of competition, there are 50 to 70 banks and grey market lenders trying to finance projects here. Many of them are outside the US. And it's just a competition, they have kept interest rates low. And, although interest rates have been going up lately - if you look at the 10 year treasury bond yield, which is a an indication of where the yield curve is moving - the bottom end of the yield curve is a two year rate. It's becoming steeper and steeper. And yet in the project finance market, we're not seeing that translate here. There's still downward pressure, because of all the money looking for a place in this market.

Bret Kugelmass
Let's keep on this international topic..Are there any, like national security strategic concerns? Like would we ever want to invest in, you know, a country that is energy reliant on one of our enemies as a way to kind of, you know, keep the enemy subdued, but also create a little opportunity for independence? Do we do this type of stuff?

Keith Martin
I don't think so. I think the biggest national security issues are just a fear that our grid is vulnerable to software attacks. I think the Biden administration is trying to move to fix that. Trump had a ham-handed approach, the executive order he issued in May last year that just made it illegal immediately, buying equipment that might affect the grid from foreign adversary companies, without identifying what foreign adversaries are or identify what exactly was prescribed. So that's one area on national security.

Bret Kugelmass
Yeah the cyber attacks. Yeah, I've heard a lot about that as well. So maybe, switching gears for a second, since you've seen new technologies being able to grow in terms of their maturity of project finance allocation over the years, what's it like at the beginning of a new technology? So I'm seeing a lot of interest in storage, or batteries, or even, you know, stuff like solar thermal, which never really kind of became that, you know, standardized or worked out? How did these new types of power assets acquire project financing when the technology itself still has questions about it?

Keith Martin
The market will not finance projects with technology risk. So you have a problem that Obama called the valley of death: you can build a pilot scale project, but then you won't get financed. The technology won't, until you prove it on a commercial scale.

Bret Kugelmass
And when you say it won't get financed, do you mean that it won't get debt financed? Or do you mean you won't even get equity financed?

Keith Martin
It may be able to raise venture capital, but not beyond that. You won't get to the mainstream sources of finance for these big projects.

Bret Kugelmass
Okay, so not project equity.

Keith Martin
Yeah, so I think the loan guarantee program that was run through DOE was originally conceived of as a way of pushing things through the valley of death. But it ended up without a clear direction, where he was just providing finance for things that could be financed in the private market. Take storage as an example, it's a good one. Storage is, just as recently as three years ago, I've remember a CEO telling us that storage is getting traction in parts of the solar market where people don't do math. So it was getting traction in the rooftop solar market, but not in the big utility scale where you have more sophisticated buyers. But now, EIA, the Energy Information Administration, is forecasting 81% of new capacity additions this year will be wind, solar and storage. Storage is 11% of that. In just the space of three years, think of where we've come from. In February, we closed the first merchant storage portfolio. It took wind years to get to a point where people would finance those projects without locked-in long term power contracts with utilities or corporations. Then solar was a couple years after that. Now all of a sudden, here we are in storage, barely a year after- a year and a half, two years after solar.

Bret Kugelmass
But is it possible that it's actually wind and solar that's created- the high variability from wind and solar has created this arbitrage opportunity, that the batteries and that storage are able to take advantage of to make themselves you know, worthwhile.

Keith Martin
Partly, I think the solar and wind people have realized that they can get a higher price for their electricity, if it's shaped. They can promise that they'll deliver it when the buyer wants it, not when it's generated.

Bret Kugelmass
And when you say shape, do you mean like- a lot of people have heard of the duck curve, the duck curve is like the natural production of solar, you know, overlaid on top of demand and doesn't really match up. But when you're seeing shaped is, maybe making a shorter dock or a duck with a fatter butt or something,

Keith Martin
No duck at all, a flat duck, maybe, you know, somebody has stamped it and flattened it out. I think the trouble with the non-shaped electricity is, you're getting places like California where generators have to pay the grid to take their electricity during certain times of the day. This is one of the the potential attractions of green hydrogen with storage right now you can shift electricity to a different time of day with green hydrogen shifted to an entirely different season.

Bret Kugelmass
And I love I love ideas like this. Does green hydrogen require new generating infrastructure, though? Or could you just pump it into the same natural gas plants and run it through those turbines?

Keith Martin
I'm not sure. That's better asked of an engineer. I think what I've noticed about green hydrogen, though, is there's a conflicting narrative in the press right now. There's one narrative that this is great for renewables. This is the way to control carbon. There's another that is more cynical, and says that this is just the oil and gas industry, trying to find a longer role for itself, producing blue or gray hydrogen. So I don't know where that will settle. I know, I have a good friend who was CEO of a hydrogen company 10 years ago that was trying to strip hydrogen out of natural gas pipelines, and they couldn't make a go of it. So just, the natural trend in this market is to think hydrogen isn't it.

Bret Kugelmass
And then, when it comes to these new technologies, like hydrogen, or you mentioned how quickly batteries got there, I'd still like to piece apart though how you cross that valley of death? You know, what are what are the tools? And does it just take like one or two - yeah, I understand how venture capital can to come in and just fund the plant outright, though that's difficult if it's a bigger facility. So how do they do it? How does someone come up with a new technology and actually get it implemented to the point where it's not a technology risk anymore?

Keith Martin
Well, I think there are two ways. One is, you find someone who would benefit if the technology took off, and you get that person and maybe a manufacturer to commit to buy the output from a pilot scale plant first and then from a commercial scale plant, just prove it that way. Another is, manufacturers sometimes develop their own projects using their own equipment. And do that over and over again. A clear example of that is the market won't finance new wind turbines. We know, if it's a different model, until it's been proven - Goldwind, the world's largest turbine manufacturer is Chinese, it struggled to be able to finance its projects in the US market because it's turbines weren't considered proven in this market - and developed its own projects using its own turbines until they could get past that that marker.

Bret Kugelmass
Just bigger turbines, not like we're saying, like a new material or new kind of motor inside or anything like that, just like a new next generation bigger turbine or something?

Keith Martin
Yeah, so I moderated a panel discussion a few years ago at a WWEA convention with the CEOs of the wind turbine manufacturers, they all said they could make much larger turbines, higher towers, all this, but but they're constrained by the market, the market won't finance a much different turbine until it is proven.

Bret Kugelmass
What's the risk? Why did these financial players see risk if it's an established company just coming out with their latest model? I mean, is it that these things do fail? I mean, where do they see the risk?

Keith Martin
Well, I guess it's experience. And then second, they don't have to take the risk. There are just so many people, there are so many other things that don't present the risk.

Bret Kugelmass
Have there emerged a new class of investment firms that sit somewhere between venture capital and private equity, project equity that can kind of help smooth over this as well?

Keith Martin
No, there is a clear need in the market for development capital that is beyond venture, but not, you know, your mainstream capital and it just hasn't been there. I think the SPACs, they may end up that. A SPAC is a blank check company is called a special purpose acquisition vehicle. The SPAC craze has gotten absolutely silly at this point where rap artists and professional athletes have their own SPACs. But these promoters raise capital, billions and billions of dollars on the stock exchange, and then go in search of a target to acquire. If they acquire it, they generally have warrants that they can buy more shares and they get a 20% of the capital raised as a fee. So those folks will be ever more desperate for things to take public. To your limit approaches, they can only hold on to money for two years, before they have to turn it back to the ambassadors.

Bret Kugelmass
I still don't know, like how- I mean, like, I don't have a problem with SPACs. But I don't know how they're allowed. Like, I thought the whole point of public markets was to protect like your average Joe investor, and that the government set up a series of rules, so they wouldn't get screwed by the riskier investments. And it seems that they're being used as a tool for a riskier class of investment. So what's going on there?

Keith Martin
I think the SEC is looking into that. I know it is. I think that is the crazy side of the market. And Andrew Ross Sorkin has been writing about this effectively in the New York Times about a misalignment of interests between the organizers and the investors. The organizers, as the two year mark approaches, they just want to find anything, so they have to get the money back. But on the other hand, SPACs address the real problem, which is the IPO process is just so tortured. Another route to that. So somehow they have to find a balance.

Bret Kugelmass
Yeah, though, I kind of always figured that- yeah, the IPO process... Yeah, I guess that's right. That it's a bandaid for the IPO process being so difficult. Alright, so what we're saying is, it's tough. So SPACs are maybe okay for this valley of death.

Keith Martin
I know there are SPACs looking at all sorts of newer technologies and almost as venture capital plays, so that that could be an answer to a source of capital. There used to be Heller Financial was a bank in Chicago that provided developer loans. There may be a few people playing in that space, but they're not that many.

Bret Kugelmass
And so you mentioned loans. And I think before maybe we kind of got off topic, but we're talking a little bit about maybe Department of Energy loans as well, government backed loans. Has the government ever tried to step in? I mean, it seems like it's in the government's best interest. You can, you know virtually launch a new industry, a new economy, you can clean the air, you can address your climate goals. It seems that the the government itself, you know, not that I'm a big proponent of you know, government subsidies, being thrown all over the place. But it does seem like this is a uniquely good place that the government can maybe step in to, to solve some of these problems. What's going on there?

Keith Martin
Well, it is, in a way there are these ARPA agencies at the Pentagon. Biden is proposing to create a third one, ARPA-I for infrastructure. There's an ARPA-E for energy. And there's just a regular ARPA. So those are the government spending its own money to promote real hard research. As far as the private sector, the private sector sources venture capital.

Bret Kugelmass
Yeah, I've been involved with ARPA-E stuff for quite a while now. And it's good. It's grants, you know, comes with strings attached. You know, I wish there was a little bit more of kind of like market matching or market leading the way to help ARPA-E folks help make their investment decisions. But I was thinking something more like, you know, how like, what is it? There's like a venture capital firm sponsored by the CIA. And I was thinking maybe there'd be something like that where there's like an energy venture capital, or like, I mean, listen, sovereign wealth funds, kind of do this stuff for other governments. Do we have a sovereign wealth fund for the US that might do this?

Keith Martin
No, but there is talk about a Green Bank at the national level. There are state green banks in New York, Connecticut, maybe some other places.

Bret Kugelmass
Have those pioneered a good model? Has New York Green Bank, has it done well, do we like it?

Keith Martin
There's also NYSERDA at the state level. I think I you know, we're in the private sector end of this and the larger projects and the large rooftop companies. So we don't tend to see that as much. With the place we've seen the most of it is in syngas, where there have been big grants to get those going with strings attached. Offshore wind is another one with floating turbines, strings attached to make sure that the money is well used. In general, it's the private sector, if it can avoid going to the government generally tries to. It's just a long process. I know when the DOE loan guarantee era 2009 on, where it just became so painful to get through the program, that people just stopped applying, strictly with the Republicans calling attention to the Solyndra bankruptcy, and tarring everybody with the same brush. We even had one company that went all the way through the process, got his loan guarantee, approved and then declined to draw on any of the money. Jigar Shah who has taken control of that, I think it's an inspired choice. He'll make the industry take a fresh look at it. I think people admire Jigar and his energy.

Bret Kugelmass
Yeah, god, I hate the criticism based on Solyndra. Because, you know, I come from the Silicon Valley world, like failures are part of the successes, right? You want things to fail, because that means you're taking enough risk to pull off the bets that are going to yield, you know, orders of magnitude better returns. So I always saw Solyndra, you know, and I was actually working in the solar industry at that time. And so of course, we were shit-talking Solyndra because they had those tubes from a technical purpose, not from an investment purpose. But you know, I always thought it was a good thing. You know, that means we're taking risks, we're trying to make stuff happen.

Keith Martin
That's right. If the loan guarantee program worked the way it should, the government should take the big risks, leave the things that can be financed otherwise to the private sector. If you take the big risks, inevitably, some of them don't work.

Bret Kugelmass
So what's your wish list? You know, for the for the industry? What's your wish list from a policy perspective, from a financial perspective? Even a technology perspective. What do you want to see happen?

Keith Martin
Well, I'm more on the practical side of what can get through. So I'm watching as this infrastructure bill takes shape in Congress. I think this would be a huge boost to the industry. The three most likely things to get through are a tax credit for standalone storage; second, a direct pay alternative to the tax credits, where you get a check from the government; and then, the third is just a further extension of the tax credits for renewables to really drive renewables in help with climate change.

Bret Kugelmass
Okay, so that's the infrastructure plan. I get that you're a pragmatist. I'm still gonna, I'm still gonna make you pull out a wish list. When you're having a drink with your friends and saying, I wish the government would just do this if I could wave a magic wand. What would that be?

Keith Martin
I'm not sure, you know, honestly, I'm not sure I would add much to the list. Just because I'm a believer in the private sector, it allocates capital more effectively than the government can.

Bret Kugelmass
Okay. So what do you want to see from the private sector? That's equally valid? Do you want to see a new type of investment firm being started up, a new type of bank? And what do you see the private sector?

Keith Martin
I think the private sector is doing quite well, already. The one one thing is not where there is a shortage. There are two shortages right now. One is, there's not enough tax equity. And particularly, as these massive offshore wind projects coming to the tax equity market, these are three to $6 billion projects, in a 17 to 18 billion maximum tax equity market, there's just not going to be enough. So, I thought, at one point, the solution to this is all these retailers on the internet earning huge profits in the pandemic, maybe they'll be tax equity investors, that hasn't panned out. They earn higher returns putting their capital back into their own businesses. It's not like a bank or insurance companies alternative is to lend it at three or 4%. So that's one thing. The other is development capital for to help the smaller developers get get some traction.

Bret Kugelmass
And where does that development capital come from? Who's the originator of that capital?

Keith Martin
It could be private equity funds. I remember Energy Investors Funds, one of the founders of that telling me that they had you know, it's so hard for them to find a project to move the needle if you have a multi billion dollar fund. So they can afford to throw 10 million here, 12 million there just to plant a number of seeds in the garden and see if they'll grow. So you need more private equity funds that take that approach, I

Bret Kugelmass
Things like that.

Keith Martin
Yeah, that's that's probably the main thing.

Bret Kugelmass
Yeah, private equity funds that almost act a little bit more in the venture capital side to get access to deal flow.

Keith Martin
Exactly.

Bret Kugelmass
Yeah. And maybe even create markets, maybe create bigger opportunities for themselves.

Keith Martin
But they're not they're not funding unproven technologies as much as just helping smaller companies get get a foothold.

Bret Kugelmass
I see, do you want them to get involved in more unproven technologies?

Keith Martin
You know, I think it helps the country long term, but I think there is a vibrant venture capital market for that. I don't think there's any shortage of venture capital firms to go knock on the door and try to raise money. Then there was a wonderful cartoon of Christopher Columbus landing on Hispaniola, the island, and being met with Indians and with their lawyers with briefcases. Sometimes the law is just like a spider web. It's just hard to maneuver through and I think we need to pay attention to how to free up some of these technologies to grow. Yeah, I don't know if you read Superpower by Russell Gold, The Wall Street Journal reporter, the story of Michael Skelly's effort to build transmission lines. And they focused on one and he couldn't get it built. Ultimately, one determined Arkansas local politician was determined to kill this and he didn't have another route through Arkansas. So, it just is so hard for people to pull these things off sometimes.

Bret Kugelmass
Wow

Keith Martin
Offshore wind, now we're finally getting traction. We're working on 12 offshore wind projects off the Atlantic. We worked on 60 globally at this point. But there used to be an expression, not my backyard, NIMBY, for the land. But on offshore wind, it seemed like it was Nope, not on planet Earth.

Bret Kugelmass
It's so funny. I grew up on Long Island. And I remember even when I was a kid, they were like voting down offshore wind, and I'm like, What is the problem? They're tiny when there's that far off.

Keith Martin
Yes, that's right. Well there's a political dispute with the fisherman at this point, once you get past the view. We worked on Cape Wind, poor Jim Gordon spent 85 million of his own money over 12 years, nine or 12 years, I've forgotten which, trying to develop that, but it just came down to you know, just the opponents on Martha's Vineyard just had endless money to litigate, and it just sucked you dry.

Bret Kugelmass
Okay, well, I want to spin this around, because we always like to end things on an optimistic note. So just tell me, you know, in general, what are you optimistic about? What do you see coming in the future that you like?

Keith Martin
Well, we see three big inflection points this year. I think investors like inflection points, any change in the market offers opportunity. So number one is, if Congress enacts a tax credit for standalone storage, I expect that market really to boom, we're already at a point where every solar project of any scale is being bid with storage. But there's so many more potential uses of it. The second inflection point is carbon capture. There's a tax credit right now that's $50 a metric ton for capturing carbon. If you have 3 million tons of carbon emissions, you're talking about 150 million a year. There are so many owners of natural gas fired power plants, coal fired lignite, syngas plants, fertilizer, ethanol, you name it, oil refineries, all looking to tap into this. Biden is talking about increasing the amount of the credit to try to encourage direct air capture. Elon Musk has offered $100 million prize to advance the technology like the British Geographic Society offered in 18th century, any scientists who come up with a way to to measure longitude well on the high seas. So that's second inflection point. Third is just, if Congress extends the tax credits for solar, and they've already done so for offshore wind, those two are big winners from this drive for infrastructure, you're going to see some major, major attraction there. If you're if you're sitting on a solar company, you've got the infrastructure already, the people. It's almost like having put a chip on the right number of the roulette wheel. It's it those people are going to do quite well.

Bret Kugelmass
Yeah. Any final notes, I'll give you the last word, Keith.

Keith Martin
I you know, I feel like, I keep telling my group. If we were a stock on the stock exchange, we've been working on renewables now since the early 80s. We do quite well because this is the golden era for renewables about to take off. I thought all the people working in renewables were working on a treadmill that had been turned off to warp speed in 2009, when Obama first came in, but the politics shifted within 18 months. Now I just sense that the market is driving this. Senator Moynihan used to say, You'd win debates by labeling them. So if you call a win big wind, it's hard for wind to get an extension on the tax credit. You have to fight that label. Right now, I see the oil companies all talking about the energy transition. Once that happens, I think the battle has been won.

Bret Kugelmass
Keith Martin, thank you so much for your time, your expertise. It's awesome to have you on the show.

Keith Martin
Well, thank you. It's a pleasure.