A Jolt in the Arm

Washington state is on the cusp of another breakthrough.
Only this time the change isnt in aerospace, software or the internet. Its in
energy.

But theres a major caveat for those seeking to benefit from
this new gold rush: It has never been done before. And new federal spending is
going to change the landscape in ways we cant predict.

Thanks to the American Recovery and Reinvestment Act, the
massive three-quarter-trillion-dollar federal stimulus package, a lot of money
is going to be flooding the energy sector. Specifically, $41 billion, and that
doesnt take into account what might accrue as a result of a more favorable tax
climate for alternative energy programs.

Tony Usibelli thinks that might be another $20 billion in
tax benefits. As director of the Energy Policy Division of the state Department
of Community, Trade and Economic Development, hes watching the coming flood
with anticipation. His agency will administer about $176 million in new funding
as a result of the bill.

Of the $176 million, larger cities, towns and tribal
governments will receive about $46 million of their own to work with, but the
rest will be distributed through the states low-income weatherization program
(about $59 million), the State Energy Program ($60 million) and the Energy Efficiency
and Conservation Block Grant program ($11 million).

The Block Grant Program was established by Congress in 2007,
but has never been funded. The State Energy Program is usually funded to the
tune of about $1 million, while the best-capitalized program, weatherization,
usually clocks in at about $4 million to $5 million per year. So these programs
are getting 10-, 30- or 60-fold increases in funding. This is unique,
Usibelli says.

But how to tap into that cash flow is another question
entirely. As is how to make sure that money isnt wasted (it is government
spending, after all), and how it might be used to maximize its impact. And then
theres the accelerated timeline. The funds in the State Energy Program, for
example, must be committed by September 2010.

It makes it somewhat more difficult if someone is a startup
company, as opposed to those in the early commercialization stage, Usibelli
says.

Startups might
be better off targeting a much larger pot, the $30 billion or so that the
federal Department of Energy will distribute to various programs nationwide.
These funds are more tailored to research-and-development-oriented businesses,
but they come with a lot of strings attached.

Almost all those programs need matching dollars, says Rick
LeFaivre. It really almost only makes sense for a startup if youre going to
go that way anyway.

LeFaivre, managing director at OVP Venture Partners, has
been closely following the alternative energy field and sits on the boards of
several startups, including one, EnerG2, a University of Washington spinoff
backed by about $8 million in venture funding. Now applying for federal grant
money, EnerG2 originally developed materials technology to store natural gas or
hydrogen, but then shifted toward ultracapacitor battery technology.

The possibility for new federal funding, however, means that
EnerG2 has the ability to seek funding for projects using both of its
technological platforms, LeFaivre says.

To that end, the company has been working with a lobbyist in
Washington, D.C., to negotiate the process of applying for the grant money.
One of the keys in actually being successful here is to make contacts with
people that can help you, LeFaivre says.

Just sorting through the maze, I guess, is the biggest
challenge.

But between these two forks of the funding packagefederal
and statelies the central question: Will all that money do the job its
intended to?

There is a tension in the clean energy provisions between
the desire to spend the money soon to get jobs and to spend the money over the
long term to effect a change in our economy, says Daniel Malarkey, a
consultant who has worked with the nonprofit Climate Solutions in analyzing the
energy provisions of the package.

But the two different goals of the stimulus package need not
be contradictory, he adds, if the money is applied in ways that can be used to
leverage even greater amounts, such as seed capital for revolving funds. Many
energy efficiency projects pay for themselves, but there hasnt been capital available
yet, Malarkey says.

An Ideal Test Lab

Washington state has several strengths when it comes to
energy policy, not just its startup climate. Local utility companies have been
leaders in exploring alternative sources of energy, from the wind turbines that
now dot central and eastern Washington to technologies making electricity from
agricultural or timber waste. The Northwest power grid, too, with the nonprofit
Bonneville Power Administration at its nexus, is positioned to become a leader
in the smart grid of the future, which, as Usibelli points out, has more to
do with intelligent metering than anything else.

Perhaps one of the bigger indirect beneficiaries, then, will
be Itron, the Liberty Lake manufacturer of all sorts of electricity, gas and water
meters, which are sold to utilities around the world.

Itron CEO Malcolm Unsworth says there are a few projects
already in the works with some customers, namely San Diego Gas & Electric,
Houston-based Centerpoint Energy, Detroits DTE and Southern California Edison.
But, he notes, Its going to be a pretty big piece of our business going
forward.

Itrons growth depends on what its utility customers do, and
that response varies from company to company. [The funding] certainly will
help, but it depends on how they peanut butter it over the utilities in the
nation, Unsworth says.

In creating a smart grid, for example, the current
electrical utility model of small regional distribution hubs, essentially
unchanged since the days of Thomas Edison, becomes unwieldy, whether that
involves metering, getting more alternative energy sources onto the grid, or
even getting wind power east of the Cascades to its primary markets west of the
mountains.

The electric infrastructure on its own wasnt designed to
do all these things, says Mike Davis, the associate laboratory director at
Pacific Northwest National Laboratory (PNNL) in Richland. Building a new
transmission backbone for the country raises all sorts of questions with no
easy answers: Who pays? Who builds? Who operates? he asks.

The federal stimulus will give PNNL $124 million for capital
investments and upgrades. We are going to be in a position to do a little bit
more of what weve already been doing, Davis says.

At Puget Sound Energy (PSE), the states largest utility,
with 1.3 million electric and/or gas customers, the expectation is that most of
the federal money will go to parties with whom PSE does business, rather than
the utility itself. But any plan to upgrade the national electric grid will involve
PSE because it owns the grid in its service area.

Were going to be working, bottom line, to develop
partnerships that make sense, says Cal Shirley, PSEs vice president of energy
efficiency. He wouldnt specify whom the utility is currently working with on
various initiatives, but adds that, given all the unknowns, the utility has to
move cautiously. Its uncharted territory, he says.

There are countless technological challenges. For example,
if plug-in electric vehicles become the norm, will the grid be able to handle
the energy drain when everyone plugs in simultaneously after work at 6 p.m.?
What if the first vehicles off the line, the Chevy Volt, perhaps, cost $40,000
and no one buys them? What if the Chinese make a cheaper alternative? What if
Energy Department regulations prove too onerous?

Do we know what strings are going to be attached to [the
funding]? Are we going to go poor trying to get federal money? … Utilities
across the country are rushing forth, then holding back, Shirley says.

LeFaivre also takes a dim view of the federal bidding
process. Some relatively large percentage of this money is going to get
wasted. Its too haphazardly put together, he says.

PNNLs Davis adds that, despite the fast
rollout of money, results wont be known soon. I hope no one expects all these
problems solved in two years, he says. People should see these [programs] as
investments that will bear fruit after a long time.