Power generation projects require large capital expenditures, which must be amortized over long periods of time, usually in accordance with regulatory frameworks that govern public utilities and transmission networks. These can differ dramatically within different countries and at state and local levels. When tapping renewable energy sources, these projects can be even more complicated, despite their vast potential. To learn about how GE is combining its expertise as a leading developer of thermal and renewable power generation and transmission facilities with its experience as a global provider of infrastructure and project finance, KWR International speaks with Chris Kratky, a Managing Director at GE Energy Financial Services.
This interview was originally prepared by KWR International for the Japan External Trade Organization's Green Innovations Program and is published with its permission.
Interview by Keith W. Rabin
Thank you, Chris, for speaking with us today. Before we begin, can you tell us about your background and GE's efforts in alternative energy development and finance?
I've been with GE for 28 years, most of the time focusing on financial services in the power market. I currently run the equity capital markets team, in an area that combines the power and renewable energy space. What is especially interesting about our work is that it combines both technical and financial expertise, so we understand both the science and operations side, as well as what is needed to put a deal into place.
GE has been in the power market for over 40 years and currently we have over $6bn in the renewable space, primarily in wind and solar, but also hydro and biomass
Recently I spoke with an Asian government official who noted he was focusing on the smart grid, electric vehicles and nuclear power, believing all the other technologies were not yet viable without subsidies and it would be very hard to maintain those expenditures in the current environment. What do you make of this thinking?
Speaking for GE, we are involved in all of those areas - whether they receive subsidies or not. For wind and solar, we recognize that subsidies are needed to make those technologies viable, and we remain committed to them. Several factors affect the overall economics of these technologies, which in turn determine whether subsidies are required. Location is important. If baseline power prices are set on gas- and coal-fired plants, one needs to carefully understand the existing market to assess the viability of renewable alternatives. In addition, some technologies will do better in certain places. For example, solar does well in areas of sunshine and hydro where there are the right water conditions.
It is also important to keep in mind that technology is evolving quickly and prices are coming down rapidly. In many cases, as scale is reached, we cross the line to profitability. So a lot of this technology is becoming more viable, and over the past five years you have seen dramatic decreases in a technology's price. This will lead to a continuing decrease in the need for incentives such as subsidies.
Related to this are improvements that result from scaling up, moving to larger size and therefore more cost-efficient technology. For example, there is a trend toward larger wind turbines, which can be located offshore and entail a higher capital cost but greater capacity and power output.
There is generally a clear recognition of the potential need and demand for alternative energy, an area of almost unlimited potential. At the same time, however, it has not taken off, or demonstrated the performance one might have imagined, and capital for projects is not always easy to come by. What is the problem? Is it more technical, financial, regulatory or just a question of time? How big an opportunity does this represent? What must be done to realize its promise?
A stable regulatory environment is needed, and that is still in formation. Additionally, a lot of the government support has time limits attached to it. These need to be renewed, especially given that these projects must be amortized over long periods. Technological innovation is also a factor. The more of this we do, the more the technology and our expertise advance. This brings prices down and allows these industries to move freely without support and achieve greater adoption rates.
Electricity Consumption Per Country
Broader economic and market forces are also at play. Recessionary conditions in the US and much of the world have led to major declines in electricity usage. That has lowered demand and is one factor slowing things down. At the same time, gas prices have remained low. This also increases the economic gap relative to alternative energy.
Developing new energy technologies and infrastructure requires enormous capital investment combined with long development times, and technologies can become dated even before a project becomes operational. This can make projects hard to justify. As an energy-focused financial institution seeking to develop large-scale projects, how do you view and deal with this problem?
A project developer usually wants to use state-of-the art technology to fulfill current power needs. Having long-term power purchase agreements in place where you can sell the output is important because that provides the security needed to justify these investments over time.
Developing the smart grid is trickier, however, because this is newer technology, and it is evolving rapidly. So one wants to develop a system that can absorb these changes.
Additionally, one of the great things about our investing business is that GE has both operational and technical as well as financial expertise. We have also been active in the development of renewables for over 100 years, since Thomas Edison supplied equipment for the Niagara Falls Hydroelectric Power and Manufacturing Company in the late 1800s and have since been instrumental in developing many of these technologies, as well as the machinery and processes used to make them commercially viable. As a result, we are able to understand all facets of these projects and to deploy this equipment in the most cost-efficient and productive manner. For example, in the Sheperds Flat wind farm under construction in Oregon, we were able to both finance and utilize our machinery, and it was state-of-the-art giant 2.5-megawatt wind turbines, marking their introduction to the US market.
How important are subsidies and incentives to your projects, and do you look at alternative energy more as a highly integrated global business or a loose confederation of national markets? If the former, how you balance the need to address national differences, and if the latter, how do you achieve global scale and synergies?
We do have a global view toward renewable and power investing because the technologies are viable and important around the world. At the same time, you must know the markets you are operating in. That means you need to factor in the dynamics of local conditions, how you operate, which part of the grid are you operating in, what the market requires, whether it is a good time to enter or launch a particular project, what are the local incentives, demand and growth projections and whether there are any unique variables that need to be accounted for. This is something we are able to provide given our global reach and GE's long operating history around the world.
Development authorities and business associations around the world are all looking to alternative energy as a potential growth engine and source of employment. How important will alternative energy be in job creation? What characteristics are most important (low cost, strategic location, education, legal system, etc.) and what can be done to enhance the attractiveness of regions/governments to companies operating in this sector?
If we look at our renewable effort in the US -- where we have been most active -- our projects have played a critical part in job creation -- both in terms of developing and operating projects and the multiplier effect and additional facilities and services these projects support.
The specific attributes a region needs depend on the nature of the project and whether you are looking at this from the manufacturing side or as a generation/transmission project. The manufacturing side is more geared to factors such as education, skills, proximity to R&D -- and from a financial perspective, our focus at GE Energy Financial Services is more on developing and financing power generation and transmission projects.
For example, with wind and solar, the availability of those resources is critical. So we need to find locations where the wind blows with sufficient velocity or the sun shines with sufficient strength. At the same time, especially because many of our facilities are located in remote areas, you can have the best wind and strongest sun but no infrastructure to transmit the power to where it is needed.
As one example, we have used a federal government model to determine the jobs that were created on the Oregon wind farm I mentioned. Over 15,000 jobs for construction workers were created over the development cycle, and for the 21 years it will be operational we estimate there will be 1,100 people employed by this facility. That can have a real impact on communities of this kind.
GE has recently announced several interesting alternative energy-focused transactions that involve Japanese firms and financial institutions. Can you tell us about these projects? What about these companies made them attractive as business and financial partners? Do you see their involvement primarily due to their ability to provide capital and hedge risk on individual projects or are there other more fundamental/strategic reasons to seek their involvement both on these projects and as partners moving forward?
It's been a variety of things. First, it is helpful that Japanese companies have a low cost of capital and sometimes can take advantage of these projects through us for tax reasons. But these companies also have very important domain expertise, and they are important manufacturers of components and equipment in the sectors we are operating in. In addition, they possess extensive operational skills in these areas. So they have great technical depth, which can help us realize efficiencies in these projects. All of this supplements GE's already robust and deep skills and knowledge, so it can be a very complementary relationship. That helps us to develop contiguous and complementary structures that work well in developing projects in these sectors.
Three projects you have initiated with Japanese support include the Caithness Shepherds Flat wind project in Oregon, the CPV Keenan II wind farm in Oklahoma and Oyster Creek Cogeneration plant in Texas. Is your interest in Japanese companies limited to projects in the US or Japan or do you see this as a model that can be extended to developing and developed economies around the world? Does the ability to access support from Japanese government financial institutions such as NEXI, DBJ, JBIC, play any part in enhancing GE's desire to work with Japanese firms?
To date, our cooperation has been primarily in the US - but these are interesting questions, and as a global enterprise, we are starting to look at where we can identify new opportunities around the world not only based on GE's but our new partners' existing relationships.
For some time, we have been emphasizing the prospects of more interaction and cooperation between US and Japanese firms. What has been your experience putting these deals together? How does working with a Japanese firm differ from US or European firms? What have been the advantages and obstacles? What could be done to increase the potential for greater cooperation moving forward and what should Japanese firms keep in mind when working with, or seeking to attract the attention of, a US firm?
While there are cultural differences that can be addressed with understanding on both sides, and in our experience, it is not all that different from anyone else. Basically one has to know how to deal with large institutions and to get to know them and how they operate and what makes them happy. We are a big institution, as well, so that helps. You need to make sure you have links into these institutions on several levels and don't want to start at the bottom and work up without knowing if what is being proposed will be acceptable at the top. And that is where these projects need to go. As these deals move through the institutions, we need to make sure all levels buy in and are satisfied. And they need to understand that about us, as well. Once you have done a few deals, you get to know that about them, and it then becomes easier to expand our relationship.
One of the most important challenges for both US and Japanese firms is developing their capacity to focus their business and investment activities on the enormous demand that is emerging in developing economies. How active are you in these markets? What are the differences between developing projects in advanced vs. developing economies?
We are globally focused and involved heavily in emerging economies and opportunistically operate in these markets. In addition to Developing Asia, we have a long history working around the world in markets such as Turkey, Latin America, the Middle East and Africa. You have to understand these markets and that takes time and operating experience. Furthermore, you need markets that are creditworthy over a long period of time, because these projects are limited by the strength of their overall sovereign credit. This is something you need to get your arms around, so that one can determine the extent of risk are you taking, whether you are comfortable with it and how it must be incorporated into the overall financial structure. That is a challenge and requires a place-to-place analysis because every market is unique. Finally, as these markets are now being re-rated upwards given their growth and greater perceived stability, we need to determine if the trend will continue or the growth will moderate given the need to manage these projects over a long time.
Where do you see the biggest growth opportunities moving forward? Many of our readers are from small- and medium-sized companies as well as large multinationals such as GE and major Japanese trading and industrial firms. How can they best take advantage of this opportunity both within their domestic as well as foreign markets?
Our experience has mostly been with larger companies given the size of these projects, as well as our own size. We are exploring grouping smaller companies that are interested in participating in projects such as this but might not want to invest on their own on such a large scale. If they can provide other services to these projects, that is a plus. We are also interested in expanding our relationships with trading companies and larger industrial firms.
Thank you, Chris, for your time and attention.