Small Change, Big Gains

Reflections of an Energy Entrepreneur

Thomas Stoner

• Publisher: Greenleaf Book Group Press
• Year: 2013
• Print ISBN: 9781626340022
• eBook ISBN: 9781626340039
• Topic: Business
• Subtopic: Energy Industry
• Index: Business

Small Change, Big Gains: Reflections of an Energy Entrepreneur introduces climate change economics and provides recommendations on how to develop feasible pathways to a sustainable energy future. Mr. Stoner examines the global energy supply as if it was a single portfolio of assets, and shows it is possible to align the interests of energy investors, suppliers, users, and environmental stewards. He explains how we--as business professionals, students, consumers, and citizens--can transform our current energy system into a system that creates new business opportunities, promotes environmental health, and broadens our understanding of wealth. He illustrates clearly how climate change and resource use are not just economic and environmental issues, but also existential ones. He likens humanity's relative inaction to the climate crisis--a situation he terms 'environmental suicide'--to his own experience as a survivor of suicide. In a deeply personal account, Mr. Stoner shares his feelings of responsibility for another's self-destructive choice, asking, "What could I have done differently. " Today, he asserts that we must all seek to answer a different question to help humanity avoid environmental suicide: "What can we do differently?"Tom Stoner's appeal to a shared planetary fate is uniquely grounded in the author's extensive experience as an energy executive. Readers can expect to come away with a better understanding and new perspective on the energy debate, armed with an innovative problem-solving methodology to transform business models into promoters of energy sustainability and a better future for the planet.

PART I

• • •

THE CASE FOR TRANSFORMATION

You may delay, but time will not,
and lost time is never found again.
—Benjamin Franklin

CHAPTER 1

LOOKING FOR MONEY: CAN CAPITAL MARKETS CREATE SUSTAINABILITY?

On March 8, 2013, Capitol Hill heard the first public address in twenty years from George Shultz, secretary of state under President Ronald Reagan (1982–89) and a member of the Partnership for a Secure America. The topic he chose for this landmark occasion was the impact of energy and climate change on national security and economic sustainability. Secretary Schultz told Congress:

I think it’s essential that we apply the insurance policy, Ronald Reagan’s insurance policy concept, to our present circumstances … We want all forms of energy to bear their full cost so they can compete in the marketplace properly … My proposal is to have a revenue-neutral carbon tax … I want this to be justified and thought of solely and only as a way of leveling the playing field.⁷

His words were carefully chosen. They conveyed the same wisdom that was always heard in the words spoken by another great statesman, Benjamin Franklin.

• • •

Five years earlier, and three years before the Great Recession of 2008, I was in London, looking for money. At the time, I was CEO of Econergy International, a company that for ten years had provided technical assistance to international bankers and developers interested in clean energy. Econergy had assisted hundreds of projects throughout more than fifty countries worldwide. As a sideline business, the company had amassed a portfolio of carbon emissions credits in lieu of consulting fees, more so than any other company like it, which made Econergy a world leader in an uncertain and highly speculative carbon market.⁸ Now I was in London to find a way to either monetize our portfolio or finance the company so we could survive long enough to transition from a consultancy into an owner of our own clean energy assets. I was traveling with two of my partners, J. P. Moscarella and Marcelo Junqueira, both senior vice presidents of Econergy. Ultimately we wanted to solidify our market position. Raising money, we thought, was the key.

Back in the United States the recent dot-com crash had made it difficult to raise money from the venture capitalist community. The dot-com bubble had driven portfolio values for these venture funds to the moon before the burst sent everything crashing down. The subsequent failure of Enron and the legislation that followed it (the Sarbanes-Oxley Act of 2002) had put a further damper on any attempts to gain new capital for small businesses. In 2004 and 2005, when I came knocking on doors repeatedly in New York, San Francisco, and Houston, venture capitalists and other private equity investors from coast to coast were still licking their wounds.

Moreover, raising money for international clean energy projects driven by the compliance requirements of new international agreements such as the Kyoto Protocol failed to capture the imagination of US investors. They were taking their cues from the sentiment forming in Washington, DC, that the United States should reject the Kyoto Protocol. In 2003 the Bush-Cheney White House had dismissed Kyoto out of hand in its communications to certain members of the US Senate. President George W. Bush thus reversed years of support for mitigating greenhouse gases and for the Kyoto process that dated back to his father’s administration and the Reagan-Bush White House before it. In contrast, London-based investors were confidently funding clean energy companies, betting that the Kyoto Protocol would eventually take hold. Econergy’s fiercest competitor, EcoSecurities, had recently completed a successful initial public offering (IPO) in London. Trading Emissions PLC, which had not even been on my radar screen, had just raised £135 million (the equivalent of $250 million).⁹ The market in London seemed very promising indeed in that fall of 2005.

I was suddenly feeling bullish. The Kyoto Protocol had just gone into full force and effect. Russia had provided the final ratification required to give the agreement a sufficient level of support among its signatories. Kyoto had become a binding international treaty, negating the importance of US ratification. The trading of carbon emissions credits was already under way in Europe, and prices for carbon credits were only going up. Moreover, London was attracting business from the emerging markets for all kinds of natural resource plays, including renewable energy. The London Stock Exchange’s Alternative Investment Market (AIM) was offering its investors early-stage opportunities with significant upside potential. London was creating a culture where emerging companies like ours could raise the capital they needed to build their clean energy businesses. Meanwhile, back home it was becoming increasingly difficult to raise money for any small company in the natural resource space.

The AIM looked as though it could be the opportunity Econergy had long been searching for. But I also knew that markets could be tricky and unpredictable. It seemed a little strange: We were an American company—headquartered in Colorado, registered in Delaware—developing renewable energy projects primarily in Latin America and looking for money in the United Kingdom. When I explained Econergy’s current strategy to friends and shareholders, I was often confronted with a raised eyebrow. In spite of this response, my partners and I realized that not only had capital markets gone global, but so, too, had the marketplace for specialized services. Looking for money in London wasn’t completely crazy—except when you considered the cost of airfare and the high price of a London hotel room. That we were a small and relatively unknown company asking for $100 million of fresh equity only added to the drama of our circumstances. We could only hope this wouldn’t be held against us. We were running out of options. In spite of my bullish feelings about the world, I was uncertain as to whether we had the cash reserves to complete an IPO without going back to our shareholders, hats in hand.

Nevertheless, we felt that we were uniquely positioned to finally take advantage of a shifting tide. Our actions followed our worldview, and our view was that the Europeans had already set up their trading system for a carbon-constrained world. European investment bankers were placing their bets on international agreements and national programs that would constrain greenhouse gas (GHG) emissions and develop new, cleaner alternatives to conventional power generation. Meanwhile, the US government was overly preoccupied with its two-war strategy for combating terrorism, and American capitalism seemed confused and out of sync with the rest of the world’s efforts. My partners and I saw a window of opportunity in London, and we knew that we needed to jump through it quickly—or risk missing the opportunity once and for all.

I realized that we were pinning our hopes on the fact that the trading of carbon credits could generate trillions of dollars in business transactions. The concept of trading carbon credits was appealing to European policy makers because it would enable countries to cap their GHG emissions and to reduce their carbon footprint through trading arrangements rather than force them to rely exclusively on mandatory investments in response to new regulations. Emissions trading provided the right kind of incentive to innovate technologies that would further reduce GHGs by encouraging the market to identify and build the most profitable clean energy projects first.

The European public media, including the Financial Times and the Economist, continued to quote scientists and environmental advocates who blamed the buildup of carbon emissions on coal-fired electric power generation and the burning of oil to fuel our global transportation system. Clean energy from renewable resources like solar and wind power was being promoted as the investment opportunity of a lifetime. Cap and trade systems offering new regulatory structures that promoted clean energy were seen as the preferred policy of nations to encourage private-sector investments in new clean energy, as aging conventional power-generation systems would eventually be taken off-line to meet global and national GHG reduction targets.

My team and I figured we had perhaps six months, and certainly no more than nine, to pull off an IPO—assuming our shareholders back home would support us. During that time period, we met with investment bankers in London, including ABN AMRO, Nomura Securities, and Numis Securities. We landed with a lead banker by the name of Amer Khan from Numis Securities. Khan had a reputation for taking on smaller but promising companies, and we felt the chemistry was right. We just needed the support of our board and shareholders.

As part of our engagement, Numis wanted Econergy to first create a London-based relationship that would provide third-party validation of our market position. Khan sent us to visit the CEO of Trading Emissions PLC, Simon Shaw, who had recently taken his own company public on the London AIM. Trading Emissions was in the business of “investing in environmental and emissions assets”—in other words, carbon.¹⁰ Over the next thirty days, we jetted back and forth from Denver to London, often holding contentious board meetings on the fly. Asking for more money from friends and family is never a fun process, especially when you are on your third or fourth round of promising them future riches.

We were entering the final stretch, but nevertheless I was growing tired and uncertain of our ability to make this deal happen. I was living out of a suitcase, traveling between Latin America and London, and taking sink showers in the lavatory at Heathrow before meeting with investment bankers. Eventually, with longtime associate and Econergy board member Richard Perl at my side, our team pulled off a small miracle by entering into an $8 million financing agreement with Trading Emissions. The deal included $4 million of working capital and a commitment to participate in our IPO for an additional $4 million. The working capital was collateralized with carbon credits from Econergy’s portfolio of renewable energy projects. Demonstrating the nascent power of the carbon market, it was the largest carbon futures contract of its kind and put us squarely on a path to launch our IPO. We had the full support of our board before the ink dried, and we started working with Numis Securities to prepare for the IPO just after 2006 arrived.

THE ELEPHANT IN THE ROOM

When scientists, physicists, or economists write their stories about global warming and how to address it, the solution they commonly propose goes something like this: “Shut down coal-fired power plants, close off oil pipelines, and build wind, solar, and nuclear power plants to replace them.” It sounds simple. Unfortunately, it is not. The issue still outstanding—the elephant in the room—is this: Who will lead and fund this transformation? Do we get the government to fund it, or can we tap the capital markets? The amount of capital needed to fund this transformation is not trivial.

I believe that building small energy companies is a key part of any solution. My story about Econergy presents a microcosm of how to structure access to capital for the global energy market as a whole. For example, before any energy project can be launched, the company sponsoring a project or new technology needs to become a player in the industry and to develop alliances to attract institutional funding. The same is true if we are to make a big enough difference in our global energy mix to address the threat of climate change. Global alliances will need to be struck, and international funding sources will need to be made readily available. Once they are in place, the marketplace will do the rest.

In Econergy’s case, in order for the company to be launched as an IPO, the board of directors had to be altered to include players known inside London’s financial circles. So Econergy recruited Neil Eckert, the chairman of Trading Emissions (and later CEO of the freshly formed Climate Exchange PLC), to serve as its new chairman. Because of our focus on the carbon market, we asked Jed Jones, a consultant to the UK government on climate change, to join the board. In addition, we were required to have a resident from the Isle of Man (a small island that lies between the United Kingdom and Ireland, which was to be our new corporate domicile to avoid double taxation by the UK government), so we recruited a former public accountant, Peter Vanderpump. To finalize the makeup of the board and clinch the IPO, we recruited Wayne Keast, who represented the interests of investor Vincent Tchenguiz. Vincent, the owner of Consensus Business Group and one of London’s more colorful elite investors, was trying to accumulate everything in energy that was “clean.”

As part of the IPO process, Econergy also had to select securities counsel. We chose Giles Beale from Reed Smith, an international law firm headquartered in the United States but with a strong presence in London. His firm would provide the legal bridge between US shareholders and the London capital markets. Beale was an unusual lawyer by London standards. His boyish looks and frequent stammer disguised his penchant for negotiating the better end of a deal. When we ended our business tenure together, I called him “the only gentleman in London.” How does the old saying go? Keep your friends close and your enemies closer. Well, I would now complete the sentence with: and keep your lawyer even closer.

The lessons I learned in the process were many, but the one that truly stands out is what raising real money actually looks like. In our early days in London, my Brazilian partner, Marcelo Junqueira, would say, “Never put your briefcase on the floor. It is a bad omen. You always put your briefcase on a chair. That way it can be easily opened in order to put the money in it.”

FIRING UP THE IMAGINATION OF THE INVESTOR

When you are raising money, you are always in the presence of an investment banker carrying a PowerPoint presentation. Your only job as the CEO or as an executive on the management team is to fire up the imagination of the equity investor. Firing up the imagination of the investor requires having unique visibility into the big picture and ensuring that you share the essential background of your project with your audience. You also need a command of the details so that, if necessary, you can reshape and summarize them in headline-style sentences. With these three things in hand—an inspiring presentation, a sense of the big picture, and a command of the details—you’ll increase the odds of money flowing into your briefcase.

Similarly, if the global society is to create a viable campaign to mitigate climate change, the energy industry needs to create a new investor presentation. This new presentation needs to show the big picture and establish a shared background. It needs to build the regional alliances. It needs to enlist the support of investment bankers. Then we need to fire up the world’s imagination with a new worldview.

The boardroom provides a unique place where the senior executive is encouraged by the directors to look at the forest—the big picture—and not the trees. An executive’s day-to-day management certainly involves looking beneath the bark of an individual tree as he or she interacts with other company managers. However, the navigation of any enterprise must start at the top by taking a broad view as a way to strategize and build consensus throughout the organization. The problem of addressing climate change is no different; we need to look at the forests before we examine the health of the individual trees.

In the introduction, I took this 30,000-foot perspective in summarizing the key findings of Project Butterfly: We need to stimulate capital markets to fund renewable energy. We need to invest in technologies that lower GHGs. And we need to create a regulatory environment that encourages the flow of new capital.

After more than two years of looking at the issues of climate change, the Project Butterfly team has assembled several executive-level questions and answers that helped us reach the above findings. They are the four fundamental principles that will help us form the new business case:

• What will it take to fire the imagination of investors so that we can change our global energy system into one that can sufficiently address the threats of a changing climate? Warnings of climate change have not fired up (and will not fire up) the imagination of our capital markets. Figuring out a way for suppliers and their bankers to make money will. And unless you can get investors fired up, they will be risk averse and capital will not flow.
• What are the social, economic, and political changes necessary to engage the capital markets? Our social, economic, and political institutions must evolve and respond to the bigger picture rather than negotiating exclusively from a place of self-interest. Incorporating elements of cooperation among stakeholders expands the game and can lead to mutual benefit and greater profitability.
• Will change only come about when there is clear consensus within the global society that we face an existential threat? Change is under way, but resistance to acknowledging the immediacy of the problem of climate change will persist until there is consensus on the solution, not just the problem.
• Will governments have to declare war on climate change in order to condemn the burning of fossil fuels, or is it possible to simply change the rules that govern our energy assets and unleash the power of capital markets? Sufficient precedent exists domestically and internationally to hold suppliers accountable for the transport of emissions, including CO₂, into the atmosphere. Simply implementing measures to tax what you burn and not what you earn would enforce these precedents and release market forces to counteract the largest threat that has ever faced humankind. That said, it will take a willful act by governments to align their energy policy with their economic interests.

The heart of the issue relating to all four of these principles is that energy is not just a commodity. Energy is a service, and this raises issues for certain stakeholders. Beyond working to create an efficient allocation of goods and services, the marketplace is affected by certain policy goals. Such policy goals can include working to enhance national security and to improve environmental safety. To achieve effective commerce, therefore, industry and regulators must work together to review policy goals and to establish the rules of the game. Such words may sound like heresy to market purists. But energy is a critical input to any economy. And policy makers often see markets as servants rather than as masters.

Allow me to illustrate. In any successful transition to a new transportation system using electric vehicles, “powering stations” ...

Table of contents

• Cover Page
• Title
• Copyright
• Dedication
• Contents
• List of Figures and Tables
• Foreword by D. Wayne Silby
• Foreword by David Schimel
• Preface
• Introduction
• Part I—The Case for Transformation
• Part II—Business as Usual
• Part III—The New Business Case
• Part IV—Recommendations
• Notes
• Glossary
• About the Author