In the early part of the 20^th Century physicists theorized that a mysterious force held the nucleus of an atom together.  When it was demonstrated that this force could be tapped, releasing tremendous amounts of energy, a wave of excitement swept the scientific world.  It took only a few short years before atomic energy theories were experimentally validated in the first nuclear weapon detonations.  Hiroshima and Nagasaki followed.  Most of us alive today were born under the mushroom cloud that has loomed over humanity ever since.  Accessing the power of the strong nuclear force has been a mixed blessing:  it has brought the possibility of energy beyond our wildest dreams but with nightmarish consequences that were literally unimaginable a generation ago.

That physicists would become enamored of the strong nuclear force is understandable:  the energy locked in the nucleus of the atom is potent, it is real, and the challenge of harnessing it for useful purposes has become the “holy grail” of scientific endeavor.

But could another, more subtle, “fundamental force” hold the key to our energy future?

The Fundamental Forces of Nature and the Weak Force

Of the four fundamental forces (gravity, electromagnetism, strong nuclear force and weak nuclear force), the “weak force” is the most enigmatic. Whereas the other three forces act through attraction/repulsion mechanisms, the weak force is responsible for transmutations – changing one element into another – and incremental shifts between mass and energy at the nuclear level.

Simply put, the weak force is the way Nature seeks stability.  Stability at the nuclear level permits elements to form, which make up all of the familiar stuff of our world.  Without the stabilizing action of the weak force, the material world, including our physical bodies, would not exist.  The weak force is responsible for the radioactive decay of heavy (radioactive) elements into their lighter, more stable forms.  But the weak force is also at work in the formation of the lightest of elements, hydrogen and helium, and all the elements in between.

A good way to understand the weak force is in comparison with the actions of the other forces at work in the center of the Sun.  The Sun, although extraordinarily hot (10 million degrees), is cool enough for the constituent parts of matter, quarks, to clump together to form protons.  A proton is necessary to form an element, which occurs when it attracts an electron – the simplest case being hydrogen, which is composed of a single proton and a single electron.  By the force of gravity, protons are pulled together until two of them touch – but because of the electrostatic repulsion of their two positive charges, their total energy becomes unstable and one of the protons undergoes a form of radioactive decay, turning it into a neutron and emitting a positron (the antiparticle of an electron) and a neutrino.  This action forms a deuteron (one proton and one neutron), which is more stable than the two repelling protons.  This transmutation of proton into neutron plus beta particles is mediated by the weak force.

A neutron is slightly heavier, and therefore less stable, than a proton.  So the normal action of the weak force causes a neutron to decay into a proton, an electron and a neutrino.  At any rate, at the center of the Sun, once a deuteron is formed, it will fuse with another free proton to form helium-3 (one neutron and two protons), releasing tremendous amounts of energy.  These helium-3 atoms then fuse to form helium-4 and releasing two more protons and more energy.  The release of energy in these fusion reactions from the strong force is what powers the Sun.  But the entire process is set in motion by the weak force.

Enter “Cold Fusion”

When in 1989 Pons and Fleishman stunned the world by reporting nuclear reaction signatures at room temperatures, physicists were understandably baffled and skeptical.  Given that virtually all nuclear physicists at the time were trained in the powerful energies of the strong force, table top fusion made no sense.  The fact that the phenomenon was dubbed “cold fusion” was unfortunate and likely contributed to almost universal rejection by the scientific community.  Standard theoretical models were not able to explain how cold fusion might even be possible and unless it could be understood it was pointless and a waste of time.  A comment attributed to Wolfgang Pauli describes the reaction of most physicists at the time: “its not right; its not even wrong”.  Without a coherent theory to explain it, it wasn’t even science at all.

This all changed in 2006 with the publication of a paper in the peer-reviewed The European Physical Journal by Allan Widom and Louis Larsen titled “Ultra low momentum neutron catalyzed nuclear reactions on metallic hydride surfaces”.

In this paper for the first time a theoretical basis was put forth that explained many of the anomalous results being reported by experimentalists in the new field of Low Energy Nuclear Reactions (LENR) – and the common explanatory action was the weak force.

As explained by Dennis Bushnell, Chief Scientist at NASA Langley Research Center in his article “Low Energy Nuclear Reactions, the Realism and the Outlook”:

“The Strong Force Particle physicists have evidently been correct all along. “Cold Fusion” is not possible. However, via collective effects/ condensed matter quantum nuclear physics, LENR is allowable without any “miracles.” The theory states that once some energy is added to surfaces loaded with hydrogen/protons, if the surface morphology enables high localized voltage gradients, then heavy electrons leading to ultra low energy neutrons will form– neutrons that never leave the surface. The neutrons set up isotope cascades which result in beta decay, heat and transmutations with the heavy electrons converting the beta decay gamma into heat.”

Brief Description of Widom-Larsen Theory

Not everyone agrees that the Widom-Larsen Theory (“WLT”) accurately explains all, or even most, of the observed phenomenon in LENR experiments.  But it is worth a brief look at what WLT proposes.

In the first step of WLT, a proton captures a charged lepton (an electron) and produces a neutron and a neutrino.  No Coulomb barrier inhibits the reaction.  In fact, a strong Coulomb attraction that can exist between an electron and a nucleus helps the nuclear transmutation proceed.

This process is well known to occur with muons, a type of lepton that can be thought of as very heavy electrons – the increased mass is what pulls the lepton into the nucleus.  For this to occur with electrons in a condensed matter hydrogen system, local electromagnetic field fluctuations are induced to increase the mass of the electron.  Thus, a “mass modified” hydrogen atom can decay into a neutron and a neutrino.  These neutrons are born with ultra low momentum and, because of their long wavelength, get caught in the cavity formed by oscillating protons in the metal lattice.

These ultra low momentum neutrons, which do not escape the immediate vicinity of the cavity and are therefore difficult to detect, yield interesting reaction sequences.  For example, helium-3 and helium-4 are produced often yielding large quantities of heat.  WLT refers to these as neutron catalyzed nuclear reactions.  As Dennis Bushnell explains:  “the neutrons set up isotope cascades which result in beta decay, heat and transmutations.”  Nuclear fusion does not occur and therefore there is no Coulomb barrier obstruction to the resulting neutron catalyzed nuclear reaction.

Brief Description of Brillouin Theory

Robert Godes of Brillouin Energy Corp., claims that WLT explains some, but not all, of the observed LENR phenomena.  As Godes understands the process, metal hydrides stimulated with precise, narrow, high voltage, bipolar pulse frequencies (“Q-pulse”) cause protons or deuterons to undergo electron capture.  The metal lattice stimulation by the Q-pulse reverses the natural decay of neutrons to protons, plus beta particles, catalyzing an electron capture in a first endothermic step.  When the initial proton (or deuteron) is confined in the metal lattice and the total Hamiltonian (total energy of the system) reaches a certain threshold level by means of the Q-pulse stimulation, an ultra cold neutron is formed.  This ultra cold neutron occupies a position in the lattice where dissolved hydrogen tunnels and undergoes transmutation, forming a cascade of transmutations – deuteron, triton, quadrium – by capturing the cold neutron and releasing binding energy.  Such a cascading reaction will result in a beta decay transmutation to helium-4, plus heat.

The Q pulse causes a dramatic increase of the phonon activity, driving the system far out of equilibrium.  When this energy reaches a threshold level, neutron production via electron capture becomes a natural path to bring the system back to stability.

Theory and Experiment

Other well-known LENR theorists have implicated the weak force, including Peter Hagelstein, Tadahiko Mizuno, Yasuhiro Iwamura and Mitchell Swartz.  The project now, as with all scientific endeavor, is to match experimental evidence to theory.  The hope is that the electron capture/weak force theories will help guide new, even more successful experiments.  This process will also allow theorists to add refinement and new thinking to their models.  I am reminded of the two “laws” of physicists proposed by an early weak force pioneer:

1. Without experimentalists, theorists tend to drift.

2. Without theorists, experimentalists tend to falter.

(T.D. Lee, as quoted in “The Weak Force: From Fermi to Feynman” by A. Lesov).

Experimentalists have been reporting anomalous heat from metal hydrides since before Pons and Fleischmann.  But without a cogent theory, they have had to rely on ad hoc, trial and error methods.  Given this state of affairs, the progress made in the LENR field in the last twenty years is remarkable.  Perhaps we are now at the beginning of a new era in which theoretical models will guide a rapid transformation of the science.

Conclusion

Scientists have focused on the strong nuclear force due to the immense power that can be released from breaking the nuclear bond.  Less attention has been paid to the weak force, which causes transmutations and the release of energy in more subtle ways.  Recent theories that explain many of the phenomena observed in low energy nuclear reactions (LENR) implicate the weak force.  We are now at the stage where theory and experiment begin to complement each other to allow for the rapid transformation of the new science of LENR.

Journalistic disclosure:  David Niebauer is general legal counsel to Brillouin Energy Corp.

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“In contrast to conventional experience based on using high energy to overcome the Coulomb barrier by brute force, the CANR [Chemically Assisted Nuclear Reaction] environment apparently uses a mechanism that can neutralize the barrier. This more subtle method apparently is obscured when high energy is applied, this situation being like the difference between a rape and a seduction.”

– Dr. Edmund Storms

The Future of Hydrogen

Hydrogen is the simplest, lightest and most abundant element in the known Universe.  In addition, it is the most potent carrier of energy known to Mankind.  It has a propensity to combine with other elements, such as oxygen to form water (H₂O) and carbon to form the familiar hydrocarbon fuels that we have been using for our energy needs for eons.

Burning hydrocarbons is easy, effective and relatively efficient.  Unfortunately, it also has its drawbacks.  The end products include nasty carbon and other residues that pollute the environment.  But even more fundamentally, there is only so much petroleum, coal and natural gas on the planet.  Eventually we will run out of the stuff, and at our increasing rate of consumption, this tipping point will come at an accelerating pace.

But burning compounds of hydrogen is not the only way to release the energy of hydrogen. In 1920, Arthur Stanley Eddington speculated that if the Sun generated its heat and warmth from burning hydrogen, or from some form of gravitational contraction, it would exhaust itself of the fuel in something like 20-30 million years.  But accurate calculations at the time put the age of the Earth considerably older – and the Sun had to be older than the Earth.  Something else had to be happening on the Sun.

That something else is nuclear fusion.

Hydrogen in its simplest form, called protium, consists of a single proton and a single electron.  It will also absorb neutrons into its nucleus:  one proton and one neutron gives us deuterium, one proton and two neutrons give us tritium.  The number of neutrons is important because when two hydrogen nuclei fuse, as they do in the center of the Sun, they form a new element with a nucleus of larger mass.  For example, when the nucleus of one deuterium atom fuses with that of a tritium atom, the result is helium-4, a new element with a nucleus containing two protons and two neutrons. A free neutron is also released in the process.  The mass of the nucleus of the helium-4 atom (plus neutron) is slightly less than the mass of the two hydrogen nuclei. The difference in mass is released as energy in the reaction, in accord with Einstein’s famous formula E=mc², where E (energy) is equal to mass times the speed of light squared.

Mass and energy are interchangeable at the nuclear level in truly amazing ways.  And the amount of energy released boggles the imagination.  The nuclear fusion reaction is millions of times more energetic than the chemical reaction of burning.

A Brief History of Brute Force – Storming the Coulomb Barrier

But of course, fusing hydrogen nuclei is easier said than done.  It became apparent that the strong nuclear force pulling protons and neutrons together to form an atom’s nucleus is counterbalanced by the electrostatic force of the positively charged protons in the nucleus.  This electrostatic force was first described by Charles-Augustin de Coulomb in 1784, and today is commonly referred to as the Coulomb barrier.  If the barrier can be overcome, as it is through the tremendous gravitational pressure and heat at the center of the Sun, nuclei will fuse and energy will be released.

The theoretical basis for the fusion reaction was worked out in the early years of the 20^th Century.  The result was the first thermonuclear weapon developed at the Los Alamos National Lab in Albequerque, New Mexico.  It did not take long for these scientists to speculate that the tremendous power of the nuclear reaction might be harnessed for productive use.  The first model envisioned was a magnetically confined fusion device in which powerful magnets could be used to hold a plasma in place while it is heated to high temperatures.  In 1946, a patent was filed for a contained fusion reactor following just this approach.

At the present time the International Thermonuclear Experimental Reactor (ITER) is being built in the south of France for the purpose of harnessing the thermonuclear process for useful energy.  The ITER Reactor is not expected to be completed until well after 2025 at a cost that will exceed $20 billion (15 billion euros).

A competing program, the National Ignition Facility at Lawrence Livermore National Laboratory uses the focusing power of lasers to concentrate a tremendous amount of energy on a very small hydrogen fuel pellet in an attempt to stimulate the nuclear reaction.

The bottom line on hot fusion: despite more than 50 years of effort, today’s nuclear-fusion reactors still require more power to run than they can produce.  Success at producing useful amounts of energy is estimated by those working in the field to be at least 15 – 20 years away.  The cost of the programs is astronomical.

New Energy Technologies and Theories

Interestingly, however, there are other, more subtle ways around the Coulomb barrier that have not received as much attention (or funding), but which I believe hold the promise of our hydrogen future.  A recent paper by Talbot A. Chubb (www.lenr-canr.org/acrobat/ChubbTAthreetypes.pdf) describes three types of dd fusion.  One is the familiar “hot” fusion described above.  The other two are catalytic processes that can occur at much lower temperatures.  Catalysis is generally understood as a chemical process.  However, Chubb is talking about nuclear reactions (not chemical) when he states that “catalytic processes usually use surface and interface science to reduce the temperature at which exothermic reactions can take place.”

One well-accepted method of catalyzing fusion is muon-catalyzed fusion.  First discovered in the 1950’s, the process has been demonstrated to produce excess heat on numerous occasions.  As I understand the theory, a muon, which is some 200 times the mass of an electron, takes the place of an electron in deuterium and tritium atoms, thereby pulling the nuclei close enough together to overcome the Coulomb barrier and cause fusion, releasing energy as heat.  Most observers believe it unlikely that the process will ever achieve commercially useful heat, although a company in Australia is working on it.

Robert Godes of Brillouin Energy Corp. proposes a different catalyzed fusion process that he calls “Quantum Fusion”.  In Quantum Fusion, it is not the protons of the hydrogen nuclei that fuse, but rather neutron accumulation in a metal lattice of the right geometry. Godes applies an electronic pulse to certain metals (palladium or nickel) loaded with hydrogen, which act as the catalyst of the reaction.  The electronic pulse creates stress points in the metal where the applied energy is focused into very small spaces.  This concentrated energy allows some of the protons in the hydrogen to capture an electron, and thus become a neutron. This step converts a small amount of energy into mass in the neutron. Further pulses both create more neutrons and allow neutrons to combine with some of the hydrogen to form deuterium (hydrogen with both a proton and a neutron in the nucleus).  This ‘combination’ step releases energy.  The process continues, again, with some neutrons combining with deuterium to form tritium (hydrogen with one proton and two neutrons).  This step actually releases still more energy.  The process continues with some neutrons combining with the tritium to form quadrium (hydrogen with one proton and three neutrons).  Since quadrium is not stable, it quickly turns into helium in a process that releases more energy than it took to create all the preceding steps. (2.4 units of energy go in and 24 units come out).  The released energy is initially absorbed by the metal element, and then made available as heat.

Another leading theory suggests that the Coulomb barrier is not overcome, but rather suppressed or cancelled out.  The generalized theory of Bose-Einstein condensation nuclear fusion has been proposed to explain the processes involved in Andrea Rossi’s Energy Catalyzer.  The nuclei of hydrogen and nickel are proposed to fuse through the creation of Bose-Einstein condensation of two species of Bosons.  I will not attempt to summarize the physics here, but readers are directed to the paper “Generalized Theory of Bose-Einstein Condensation Nuclear Fusion for Hydrogen-Metal System” by Yeong E. Kim of Purdue University.

My point is not to convince you that any one of these theories is correct, but to suggest that something very interesting is going on.  The reactions described in the theories are variously called Low Energy Nuclear Reactions (LENR), Chemically Assisted Nuclear Reactions (CANR), Controlled Electron Capture Reactions (CECR) or Cold Fusion.

Rather than focusing on any particular reaction or theory, Dr. Edmund Storms, a leading researcher in the field of New Energy Technologies, likes to talk about the “nuclear-active state” or “nuclear-active environment” and to focus on the similarities of all reported experiments and theories.  In the following quote, which was the inspiration for this blog, Dr. Storms explains his approach:

“The large number of nuclear reactions being reported and the types of required environments give a particular challenge to theoreticians. In contrast to conventional experience based on using high energy to overcome the Coulomb barrier by brute force, the CANR environment apparently uses a mechanism that can neutralize the barrier. This more subtle method apparently is obscured when high energy is applied, this situation being like the difference between a rape and a seduction. The problem is to identify the nature of these environments. Up to now, almost all effort has been focused on explaining how the nuclear reactions can take place once the environment is created. While this insight is important, it has not been much help in finding the best environments. This approach needs to change if commercial applications are to be achieved and if the skeptical attitude is to change.” (emphasis supplied)

Conclusion

One of the primary skeptical arguments in the face of experimental evidence of “cold fusion” or low energy nuclear reactions (LENR) is that it can’t work because tremendous amounts of energy are needed to overcome the Coulomb barrier.  Yet after more than 50 years and an exorbitant amount of money, “hot” fusion reactors that attempt to overcome the barrier by brute force still require more power to run than they produce – and commercially useful energy is not predicted for 15 – 20 years.  Perhaps its time to find other ways around this barrier.  Hydrogen is the key because of its simplicity and abundance.  Work in the field of New Energy Technologies has produced some intriguing theories on new ways to coax energy from hydrogen by working around the Coulomb barrier.  Its time that more attention – and funding – is directed at this promising new field.

(Journalistic disclosure:  David Niebauer is general legal counsel for Brillouin Energy Corp.)

© Copyright David Niebauer.  All rights reserved.

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In the tradition of starting off the New Year with a resolution, I have decided to go large this year.  I predict that 2012 will be the year that low energy nuclear reaction technology (LENR), also known as “cold fusion,” breaks out of the lab and into the commercial market. I hereby resolve to commit my energy and resources to advance the commercialization of any device that generates clean, inexpensive, safe, abundant energy.

I recently co-founded Fusion Catalyst, Inc., a public benefit 501(c)(3) corporation with Bastiaan Bergman for just that purpose.  While we wait for a working reactor, we intend to support cold fusion research in any way we can.  Our “Open Catalyst” project is one step in this direction.  As it states on our website (www.fusioncatalyst.org), Open Catalyst is

“a crowd science project where many scientists globally can contribute to the search for the catalyzing material that enables low energy nuclear reactions. We plan to design and build a simple calorimeter reactor vessel that is automated and connected to the web. Scientists all over the world are invited to use this calorimeter and scan through potentially LENR-active materials. In this process, data is uploaded and shared in a completely open database. Every scientist in the world can slice and dice the data anyway he wishes. We envision that the power of the crowd can speed up the daunting task of searching for the secret catalyst.”

As the New Year commences, I thought I would try to articulate my view of the future of LENR – the reason we formed Fusion Catalyst in the first place.

First, I believe there are a number of inventors in the world who are on the verge of commercializing LENR technology.  Granted, many of these inventors do not come from established universities or government research programs.  What they do offer, however, is the promise of commercially useful reactors.  Give us access to a working reactor and we will put it to use.

The likely path for commercial introduction of this technology is through industrial and utility applications.  The reason for this is primarily economic.  It is reasonable for inventors who are not primarily concerned with academic research to seek out the largest markets and customers with the deepest pockets.  In addition, safety and permitting issues will be more rapidly resolved in the industrial application environment.

However, it is important that this technology not be concentrated in too few hands.  Ultimately, we believe that cold fusion will be an ideal distributed energy generation technology.  The materials — hydrogen and nickel — are not scarce; in fact, they are some of the most abundant elements on the planet.  The only thing of value therefore, and the thing to be controlled and “made scarce”, is the technology and application know-how.  Our goal is to have the technology and know-how distributed and made available on the largest scale possible.  This requires many scientists and inventors working and sharing their research and experience openly.

I do not believe that anyone will emerge with a fundamental “uber-patent” in this field.  I believe there will be many different approaches using different catalysts and perhaps no catalysts at all.  Let those who have filed patents show the world how their device works.  We will be happy to pay a reasonable royalty for its use. We have considered a patent pool or some other open source approach, but this will depend upon the available intellectual property and contributors to the project.  At this stage, there is still much research to be done.

Assuming that a working device becomes available under a scenario where the “scarce technology” does not make it cost-prohibitive, the first thing a reasonable man will do is explore how much useful work he can get out of it.  Even if the first devices are unstable and/or unpredictable, if it is useful we will put it to work.

The first distributed applications will likely be “off-the-grid” heating and cooling, as well as irrigation and other farming applications.  There is a wide range of applications for steam at sufficient temperatures.  And if electricity can be generated, whole communities can be formed outside of the metropolitan power centers of the world.

Another obvious application is desalination of water.  A working, inexpensive device used to produce clean, potable water would not only aid the most poverty stricken areas of the world, it would end the so-called “water wars” in a single stroke.

Other distributed applications would directly address hunger and poverty.  With cheap irrigation, new crops can be successfully grown, manual labor can be reduced and, eventually, hunger can be eliminated on the planet.

I anticipate an objection that, if we eliminate poverty in the world, we will be faced with a global crisis of overpopulation.  Even ignoring the Hobbsian cynicism underlying this objection (i.e., that we need war, poverty and infant mortality to keep human population in check), I believe that overpopulation will resolve itself in a world of abundance.  For one thing, people will not need to crowd into metropolitan power centers.  People will be free to spread out and live in what are now inhospitable areas of the planet.  Some will choose to remain in cities, but it will be a choice and not an existential imperative, as it is for many today.

Conflict is conditioned upon scarcity.  We don’t know what an “economics of abundance” would even look like.  I’m not saying that this new technology won’t bring new problems of its own – it will not transform human nature overnight.  But I am saying that, before we scare ourselves with unfounded nightmares, we should be open to the positive impact that such a technology can have on the world.

If the devices can eventually generate electricity without noxious emissions, without dangerous radiation, and without significant capital expenditures, we are freed from toil for the sake of survival.  Farming is difficult in most parts of the world.  With unlimited, free power, even if only in the form of steam, most of the work can be done mechanically.  Work will take on a totally different meaning.  New ways of living and associating will be invented.  We may actually start to thrive as a species on this planet.

Is this all a utopian dream? I don’t think so.  I am talking about what is possible for the human being. No one knows how things will turn out in the future.  I am dedicated to the global propagation of clean, limitless, free energy.  Reactors that employ nickel and hydrogen appear to be close to achieving these difficult-to-imagine goals. Don’t let it be suppressed, demonized, denigrated or over-protected.  The best way to accomplish this is through many different approaches to fundamental technology and applications.

We don’t know what an economics of abundance looks like.  Give us a working reactor capable of generating useful heat and we will begin exploring that question.  We believe that when this device is finally manifested, it will advance the human spirit in beneficial ways.  Fusion Catalyst was formed for the purpose of forwarding the work necessary to realize this goal.  We seek others who are like-minded to join us.

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A recent decision by the California Public Utilities Commission (“CPUC”) has reinvigorated and expanded the Self-Generation Incentive Program (“SGIP”) by greatly expanding the technologies that are eligible for the program and creating up-front rebates plus performance-based incentives for developers and manufacturers working to install these technologies.

The impetus for the new expanded program was legislative action taken in October 2009 in Senate Bill 412.  That bill authorized the CPUC, in consultation with the California Air Resources Board, to expand eligible technologies based on greenhouse gas (“GHG”) emissions, and extended the expiration of the program to January 1, 2016.  In addition, on September 10, 2011, Assembly Bill 1150 allowed SGIP money to be raised by the state’s electric utilities for an additional three years through 2014. The program collects $83 million annually from ratepayers through their electricity bills.

The SGIP was established in 2001 as a peak-load reduction program seeking to encourage the development and commercialization of new distributed generation (DG) – generation installed on the customer’s side of the utility meter.  In 2007, the solar portion of the SGIP was replaced with the California Solar Initiative, a much larger program that has met with considerable success.  Originally funded with $2.167 billion to cover a 10-year period, the program is nearly out of cash, but has been instrumental in California leading the country in solar installations. A recent report by the Solar Electric Power Association (SEPA) shows all three of California’s investor owned utilities (IOUs) in the top ten utility solar rankings for 2010 – much of it DG.

From 2007 – 2010, the SGIP was only available for small wind turbines, fuel cells and advanced energy storage.  The expanded program now includes wind turbines, fuel cells, organic rankin cycle/waste heat capture, pressure reduction turbines, advanced energy storage, and combined heat and power gas turbines, micro-turbines, and internal combustion engines – provided they achieve reductions in GHG emissions.

The following chart shows each eligible technology with the incentive in dollars per watt:

Technology Type Incentive ($/W)

Renewable and Waste Heat Capture

Wind Turbine                                                                                                  $1.25                        Waste Heat to Power                                                                                     $1.25                   Pressure Reduction Turbine                                                                        $1.25

Conventional Fuel-Based CHP

Internal Combustion Engine – CHP                                                           $0.50         Microturbine – CHP                                                                                       $0.50                        Gas Turbine – CHP                                                                                         $0.50

Emerging Technologies

Advanced Energy Storage                                                                               $2.00                   Biogas                                                                                                                 $2.00                      Fuel Cell – CHP or Electric Only                                                                   $2.25

For projects under 30kW, the entire incentive will be paid up front.  For larger projects, the incentive will be paid 50% up front and the remainder over a five year period, based on capacity factors.

Size does matter, and the incentive will be tiered as follows:

0-1 MW = 100 %                                                                                                                                   1-2 MW = 50 %                                                                                                                                     2-3 MW = 25 %

Pointing to the CSI as its model, the CPUC has adopted a declining incentive structure to “gradually reduce the market’s reliance on a subsidy”.  The decline will apply a 10% annual reduction for emerging technologies and 5% annual reduction for all other technologies, with the first reduction starting on January 1, 2013.

The decision puts a 40% “concentration limit” on manufacturers (i.e., no one manufacturer can claim more than 40% of the incentive slated for any given year).  This concentration limit will not apply to project developers, however.

The funds collected each year will be allocated with 75% dedicated to the renewable and emerging technology bucket and 25% dedicated to the non-renewable bucket.

The new program will require a service warranty in addition to a parts warranty.  The CPUC has requested stakeholder input on the length of the warranty for the “reasonable expected useful life of a project”.

SB 412 also directed the CPUC to provide “an additional incentive of 20 percent from existing program funds for the installation of eligible distributed generation resources from a California supplier.” This additional incentive can be found in Section 3.5 of the 2009 SGIP Handbook.

At least one California manufacturer of natural gas fired microtrubines is touting the new CPUC decision as a boon to DG installations and energy efficiency.  Developers who deploy waste heat recovery systems should also be pleased by the decision.  More efficient use of on-site energy generation and storage will not only reduce GHG emissions, but also ease transmission and distribution infrastructure bottlenecks.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.  www.davidniebauer.com

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Although California has long supported renewable energy development and generation in the state, it is not entirely clear where the funds will come from to achieve its ambitious goals in the coming years. California already has one of the highest electricity rates in the country. Since most incentives are ultimately paid by rate-payers through increases in the rate structure, will rate payers be willing and able to foot the bill for the proposed increased use of renewables?

The Renewables Portfolio Standard (RPS), originally established by legislation enacted in 2002, was one of the first in the nation. California’s RPS initially required the state’s investor-owned utilities, electric service providers, and community choice aggregators to increase procurement from eligible renewable energy resources to 20% by 2017.  Senate Bill X1-2 (SBX1-2), signed in April 2011, made a number of changes to the program, significantly increasing the goal to 33% renewables by 2020 in step process:  20% by December 31, 2013, 25% by 2016 and 33% by 2020.

California is now recognized as having one of the highest RPS standards in the country

So how are we doing?

From 1998 to December 31, 2006, the Energy Commission’s Emerging Renewables Program funded grid-connected solar/photovoltaic electricity systems under 30 kilowatts on homes and businesses in the investor-owned utilities’ service areas, wind systems up to 50 kW in size, fuel cells (using a renewable fuel), and solar thermal electric. The California Public Utilities Commission (CPUC) funded larger self-generation projects for businesses.

In 2009, 11.6% of all electricity procured in California came from renewable resources such as wind, solar, geothermal, biomass and small hydroelectric facilities. According to the CPUC, that number had increased to 18%, by the end of 2010.  All indications are that the state can attain its aggressive RPS goals, provided the proper incentives are in place.

Of the RPS generation in 2010, the majority was composed of wind and biomass, although solar PV is expected to grow in importance over the coming years.  This is due primarily to the decreasing cost of solar PV, as well as aggressive solar programs sponsored by the state’s utilities.  The CPUC estimates that over 30% of all renewables will be solar PV by 2015, rising from just over 1% in 2010. This is based on contracts in place and California’s goals for solar PV.

Review of State Incentive Programs

The Database of State Incentives for Renewable Energy & Efficiency (DSIRE) website lists no fewer than 13 state, utility and regional incentive programs in California (including both renewables and energy efficiency). The following is a quick snapshot of some of the more popular renewables incentive programs.

The California Solar Initiative started in 2007 with a budget of $2 billion and had the goal to reach 1,940 MW of installed solar capacity by 2016.  This program provides most of the net metering for residences and businesses in the state.  By all accounts, the CSI is nearly out of funds.  As of the beginning of September 2011, the program had remaining capacity of only 440 MW, with a forecasted program short fall of approximately 375 MW.  It is not clear whether the CSI will be replenished, or replaced with other programs.

The Feed-in Tariff

The feed-in tariff (FIT), which offers long-term contracts to renewable energy producers at a fixed cost, is the most direct way to provide incentives to renewable power producers of all sizes.  Under the classic FIT, utilities are required to offer standard long-term contracts at favorable rates, spurring the development of renewable energy sources.  A recent study by the accounting firm of Ernst & Young concludes that feed-in tariffs are more effective than other incentive programs in that they bring on more renewable capacity at lower costs than other policies.

California’s history with feed-in tariffs is mixed.  The current program, administered through the CPUC, was amended by legislation in October 2009 (and amended again by SBX 1-2).  It requires the state’s public utilities to offer long-term contracts for small renewable energy systems (up to 3 MW) at a price based on the CPUC’s “market price referent” (MPR) – a price based on the cost to buy power from a very large gas-fired facility (“avoided cost”). The MPR for this program has proved to be too low to attract much renewable generation, especially solar PV, which tends to be more expensive to install. The CPUC now has guidance from the Federal Regulatory Energy Commission (FERC) to do a technology-specific cost-based approach, which should result in a higher MPR, representing the higher value of renewables to rate payers. The CPUC expects litigation from the state’s IOUs, which will likely delay implementation of the program.

Renewable Auction Mechanism (RAM)

The CPUC is in process of developing a renewable auction mechanism (RAM) as an alternative to the feed-in tariff, for renewable projects under 20 MW.  Under the program, energy producers compete for contracts with any of the three investor owned utilities.  Bids are selected by least-cost price first until the auction capacity is reached. The program is being hailed as a boon to renewables producers, especially companies developing solar PV projects.  Most industry observers believe the RAM will result in better-executed projects at prices that make economic sense for developers.  The first program announced by the CPUC will deliver 1 GW of renewable energy.

Renewable Energy Credits

In a number of jurisdictions, Renewable Energy Credits (RECs) are being used as a market-based approach to provide incentives for renewable energy development.  Especially where states have adopted a solar set-aside for use of RECS (identified as SRECs), a total of seven East Coast states as of this writing, the credits provide additional financing for solar PV projects.  A REC represents 1 MW/hour of electricity generated from a renewable source; a SREC is derived specifically from solar resources (primarily solar PV).  RECs are used by utilities to demonstrate compliance with the state’s RPS goals and can be purchased by utilities unbundled from the generation itself.  This system allows distributed generation (DG) to be included in a state’s RPS where it might not otherwise be counted.

Although California has implemented tradable RECs (called TRECs), they are currently of little use in providing incentive to renewable energy developers, especially DG.  First, the use of TRECs is capped at 25% of a utility’s RPS requirement (shrinking to 10% by 2017), and the price of a TREC is capped at $50.  Second, it appears that an unintended consequence of legacy definitions in the various rulings, and an attempt to limit the availability of TRECs for out-of-state generation, has placed a severe limit on the use of TRECs by in-state DG. The California Energy Commission (CEC) is expected to rule on the eligibility status of DG projects to satisfy the RPS later this year, and hopefully the disadvantages placed on DG will be rectified.

PACE

Property Assessed Clean Energy Financing (PACE) was getting pretty good traction a few years ago before the Federal Housing Finance Authority (FHFA) stopped it in its tracks.  That may now be changing.

Under the PACE program, up front capital is provided for clean energy retrofits on a property (primarily solar PV), and subsequently repaid through a special assessment on the participant’s property taxes.  The financing is tied to the property, not the property-owner, and is transferred easily when the property is sold.

In July 2010, the FHFA stated that PACE programs “pose unusual and difficult risk management challenges for lenders…” and restricted Fannie Mae and Freddie Mac loans in PACE districts.

A lawsuit initiated by then attorney general (now governor) Jerry Brown and new federal legislation, the PACE Assessment Protection Act of 2011, may unstick the process and pave the way to PACE assessments with some new restrictions, for residential solar installations.

Conclusion

California has one of the most ambitious renewable energy programs in the country.  These programs are supported by numerous incentive strategies throughout the entire utility system.  There is some question where funds will come from to continue to support the expansion of clean energy technologies in the state and whether rate-payers will bear the higher energy costs.  Given the political will, however, the state and its agencies are poised to develop and administer the programs necessary to achieve these goals.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.  www.davidniebauer.com

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There has been quite a bit of activity lately in the field that used to be referred to as “cold fusion” and is now generally called “low energy nuclear reactions (LENR).”   Many experiments over the last 22 years following the pioneering efforts of Pons and Fleischmann in 1989 have generated excess heat – but its still not clear that what is being observed is a nuclear reaction.  It is becoming clear, however, that scientists and engineers are closing in on generating significant and useful thermal energy from the reactions.  Given recent developments, I thought it would be useful to do a brief survey of companies that are moving this technology to commercialization.

Because the established scientific community confronts this field with a high degree of skepticism, the road to commercialization is particularly difficult.  The main hurdle appears to be finding a financing partner willing to step out in front of the developments while the theoretical underpinnings are still being worked out. At this stage, there appears to be no question that excess heat is being generated by the best experiments.  Whether these results can be translated into commercial success, however, is still to be seen.

Andrea Rossi/Leonardo Corporation

It is nearly impossible to gauge the actual stage of development of the Rossi Energy Catalyzer despite the concerted efforts of the inventor to bring his invention to market. Andrea Rossi made a splash early in the year with repeated demonstrations at the University of Bologna, Italy.  Credentialed physicists observed significant and consistent thermal energy generated by his device.  However, questions have been raised concerning how the measurements were taken (see the critique by Steven B. Krivit on the New Energy Times blog) and Rossi has refused to allow a third-party replication of his results due to an understandable reluctance to disclose commercial trade secrets.

Rossi responds to nearly every skeptical inquiry with the confident assertion that his customers will answer all questions when he delivers an operating 1 MW thermal power plant.  This facility was originally commissioned by a group of anonymous Greek investors incorporated under the name Defkalion Green Technologies.

Rossi now indicates that he has terminated his relationship with Defkalion, and that he is working with an undisclosed US firm that has apparently stepped into the shoes of Defkalion.  Rossi insists that his 1MW facility is on track and will be unveiled at the end of October somewhere in the US. To complicate matters, Dafkalion has vowed to continue work on its catalyzer product line, called Hyperion, with or without Rossi.

In the spirit of journalistic full disclosure, the reader should know that I have met with Andrea Rossi and his US commercialization partner, AmpEnergo, Inc. (not the undisclosed US firm).  The team is credible, earnest and working hard to transform Rossi’s experimental results into useful commercial products.

I want Rossi to succeed, so the recent setbacks are a personal disappointment to me.  I wish him luck and would love to see him finally vindicated.  But the jury is still out on the Rossi E-Cat Energy Catalyzer.

Robert Godes/Brillouin Energy Corporation

Robert Godes is an inventor and engineer who, unlike Rossi, has taken the tack of being totally open and transparent to the scientific community. Godes has a grasp on the theoretical basis of his device and has modeled his experiments on this theoretical understanding.  Godes employs hydrogen pressurized in a nickel lattice, similar to Rossi, but uses an electrical pulse as a catalyst. (Rossi has not disclosed his catalyst or the precise mechanism employed in his device.)  A voice-over Power Point on the Brillouin website explains in great detail what Godes believes to be the theory and mechanism of his thermal energy catalyzer, which he calls the “Brillouin Boiler.”

The significant breakthrough in the Godes experiments is that he claims to be able to control the energy output by turning the device on and off at will.  This is important because any commercialization of these devices will need to be controlled in this manner.

A drawback to early experiments in this field is that the energy output has been inconsistent and hard to replicate.  Early devices would sometimes take days, even weeks, to ignite a reaction.  Excess heat readings would spike and then be undetectable.  It was not unusual for devices to explode due to the reaction running out of control.

Knowing that a device would need to be properly controlled to allow for commercial application, Godes has focused his efforts on achieving consistent, controllable results – and he appears to have succeeded.

On July 7, 2011, Ruby Carat of Cold Fusion Now reported that Brillouin will be working with Los Alamos National Lab to replicate Godes’ work, and that commercial funding should follow successful results.  Godes has confirmed to me in a private conversation that Los Alamos replicated his results unsolicited by simply following his work in the voice-over PowerPoint on his Web site.  While Godes’ modest reactor is generating only 2X energy output, he believes that with additional work (and the funding required to do that work) he can greatly improve upon these results.  At 3X energy output, the device begins to be commercially viable.

Brillouin shows a clear and credible product evolution path on its Web site, from beaker test to commercial prototype to commercial boiler.  Brillouin intends to enter the US commercial boiler market, which is estimated to be $1.1 billion in size and growing.

It is not clear who will be first to step up as Robert Godes’ financial partner.  However, he appears to be well positioned and willing to provide whatever third-party validation might be required.  Godes has filed a US patent prepared by the well-known patent firm of Townsend, Townsend and Crew (now Kilpatrick Townsend), and is working daily to improve his results.

Energetics Technologies

For those who have watched the April 2009 60 Minutes episode, “Cold Fusion is Hot Again”, the name Energetics Technologies will be familiar.  At the time, it was a New Jersey company with a research facility in Omer, Israel that Robert Duncan of the University of Missouri visited as part of his investigation of the state of the art of LENR technology.   On the 60 Minutes episode, Duncan, speaking of Energetics Technologies, states:  “The work done was carefully done and the excess heat is quite real.”

Energetics Technologies is a pioneer in the waveform process of LENR profiled in the 60 Minutes episode and which has been successfully replicated by SRI International of Menlo Park, CA and ENEA, the Italian National Agency for New Technologies.

Duncan, who started out as a LENR skeptic, has apparently now become a supporter.  He was instrumental in moving Energetics Technologies research lab from Israel to a technology incubator at the University of Missouri. Energetics Technologies was originally supported by billionaire philanthropist Sidney Kimmel and has now been taken under the wing of Duncan and the University of Missouri.

Energetics Technologies has been successful at generating heat from their experiments using palladium and an electric pulse somewhat similar to that being employed by Brillouin.  However, because they have not achieved consistent, controllable results with their work, the road to commercialization for this company appears to be a long one.  I will watch for any updates coming out of the University of Missouri.

Star Scientific Limited

A recent entrant to the field is an Australian company named Star Scientific Limited. Star Scientific Limited employs a reaction referred to as “muon catalyzed fusion.”  According to its Web site, “muon catalysed fusion is a well known scientific process where a subatomic particle known as a muon captures two hydrogen atoms and forces them to fuse, resulting in energetic particle release and helium.” The problem has been getting the reaction to occur consistently and in sufficient volumes for the energy release to be useful.  In addition, given the present state of the technology, it takes more energy to produce a muon than the amount of energy they liberate in the fusion reaction.

Star Scientific Limited claims it is working toward “economically and constantly produc[ing] pions, which immediately decay into muons” and that, once accomplished, these fusion reactions will make sustained, controlled muon catalyzed fusion a reality.

Star Scientific Limited provides very few details on its Web site so it is difficult to gauge the likelihood of success.  In response to inquiries, the company has indicated that it is “a fully funded private company and seeking no investment,” so perhaps they will make significant strides in the near future.

Most people I have spoken to believe that Star Scientific Limited’s claims are not credible given the current state of understanding of muon catalyzed fusion.  But then again, the same thing has been said of LENR in general.  I will look for more details from the company to try and gauge the timeline for successful commercialization.

Conclusion

Are we at the dawn of a new era of clean, inexpensive renewable energy?  We appear to be approaching a critical mass of experimentation and understanding of fundamental theory to make such a question more than a pipe dream.  It is my personal commitment that, 20 years from now, it will seem absurd that we relied on burning fossil fuels for so long when technology was at hand for the transition to a genuine clean energy economy.  Perhaps one of the companies that I have profiled in this blog will be the first to break through to commercialization.  Or maybe work being done behind closed doors at government-funded labs and corporate R&D facilities will bear fruit.  The time is certainly ripe.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.  www.davidniebauer.com

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I recently listened to an astounding podcast of an interview with Dennis Bushnell, Chief Scientist at NASA’s Langley Research Center, talking about low energy nuclear reactions (LENR) and devices that are apparently generating significant energy in the form of heat, with very little input of raw material and no radioactive waste.

Bushnell credits Andrea Rossi, an Italian inventor, for the breakthrough. Rossi claims to have discovered a previously unknown source of energy, by extensive experimentation, using the early work of Pons and Fleischman as inspiration. Rossi has filed for international patent protection, but he is guarding the precise mechanism as a trade secret until the patent issues.

I first heard of Andrea Rossi in January of this year on the site Next Big Future where it was reported that Rossi had demonstrated his Energy Catalyzer (or E-Cat, for short) in Bologna, monitored by independent scientific representatives of Bologna University.  Ny Teknik, a Swedish technology magazine, reported that, “For about an hour it produced approximately 10 kilowatts of net power, loaded with one gram of nickel powder pressurized with hydrogen.” See Wikipedia entry for background.

Since that time Rossi has repeatedly demonstrated the device and it has received validation from the Swedish Skeptics Society, among others.  Demonstration devices have now been delivered to the University of Bologna, the University of Uppsala and the University of Stockholm for extended testing. Rossi has also entered into agreement with Defkalion Green Technologies, which anticipates having a 1 MW plant completed and operational at its facility in Greece by October 2011.

According to Bushnell, what is occurring in the Rossi device is a nuclear reaction, but it’s not cold fusion.  He claims it is a reaction of the Weak Nuclear Force.  Bushnell believes that heat is generated from beta decay of subatomic particles and that, applying quantum theory, physicists will soon explain the mechanism.  The physics is not well understood, which is fueling a certain amount of skepticism.

I recently met with Andrea Rossi and find him to be genuine and credible.  Rossi told me that he would like to have a 1MW plant operating in the United States by October of this year, in parallel with efforts in Greece with Defkalion.  Rossi is intent on moving his Energy Catalyzer from the testing lab into the field.  He recently entered into an agreement with a US company, Ampenergo, whose partners have links to the U.S. Department of Energy .

According to Rossi, Bushnell is on the wrong track, at least from a theoretical perspective.  “If beta decay explained the reactions in my device, I would have been killed already [by the radiation] and we would have found different isotopes,” Rossi told me.  He claims that he has a good handle on the theory, but he won’t disclose it until his patent is granted.

I don’t pretend to understand the physics, or to be in a position to know for certain whether the Rossi Energy Catalyzer is the breakthrough we have been waiting for.  Dennis Bushnell seems to think so. Here is how he summed up his interview with EVWorld: “I think we are almost over the “we do not understand it” problem. I think we are almost over the “this does not produce anything useful” problem. I think this will go forward fairly rapidly now. If it does, this is capable of, by itself, completely changing geo-economics, geo-politics, and solving climate issues.”

I want Andrea Rossi to succeed. Is his Energy Catalyzer the “New Fire”, as Rossi calls it? We don’t yet know for sure. But it is important that we forward a shared vision of a world with an abundant, inexpensive supply of clean energy.  Our future depends upon it.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.  www.davidniebauer.com

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With many states adopting renewables portfolio standards (RPS) and the prospect of a federal RPS somewhere on the horizon, more attention is being given to hydroelectric power generation.  Renewable resources such as sun, wind and water, are those that can be harvested in a sustainable manner to provide the electric power that our society depends on. Water (or gravity moving water) has received less attention from project developers than wind and solar.  But that may be changing.

Approximately 18% of the total world energy supply is hydroelectric. But of course, all hydro is not created equal.  The bulk is large hydro, which employs dams and weirs that disrupt the environment in unalterable ways.  Most hydroelectric facilities are not considered “renewable” – at least not by environmentalists.  Large man-made reservoirs change habitats forever and are often blights on the natural settings in which they are built.

Small hydro – facilities that generate up to 30 MW – can be developed without harming  the environment.  So called run-of-river facilities are designed to take advantage of flowing water in rivers and streams in such a way as to have minimal impact on fish habitats and natural settings.  Also, many of the dams in the US are not powered. These facilities, where the environmental impact of the dams cannot be undone, are ripe for small hydro development.  In September 2009, U.S. Energy Secretary Steven Chu said the hydro industry could add 70,000 MW of capacity by installing more efficient turbines at existing dams, increasing the use of pumped-storage projects and encouraging the use of run-of-river turbines. That capacity is equivalent to 70 nuclear plants or 100 coal-fired plants.

Until recently, the major impediment to the development of small hydro has been regulatory.  There are two major federal agencies responsible for hydroelectric power development – Federal Energy Regulatory Commission (FERC) and the US Army Corp of Engineers – neither of which are known for their nimble, user-friendly ways.  While wind and solar projects can often avoid federal regulation, relying instead on individual state authority, FERC is responsible for licensing all non-federal government hydroelectric projects that touch navigable waterways or affect interstate commerce (i.e., if the system is to be connected to a regional electric transmission grid).  Horror stories abound of FERC applying the same licensing and fee structure to a 500kW run-of-river system as it would to a 500MW hydroelectric dam project.  This appears to be changing.

FERC has been investigating ways to simplify the process of obtaining small hydropower licenses and exemptions and, on August 31, 2010, unveiled its Small/Low Impact Hydropower Program Internet site, explaining how developers can quickly and efficiently win FERC approval to build and operate small hydro projects.  The website is part of a FERC plan to expedite small hydro projects.  Another important component is an initiative to enter into memoranda of understanding with state governments to advance FERC exemptions for small hydro projects in those states.  In August 2010, FERC announced a pilot program with the State of Colorado, and has entered into similar MOUs with the states of Washington, Oregon, California and Maine.

Developers appear to be rising to the challenge.  FERC issued 50 preliminary permits to study small sites in 2009, compared to 15 in 2007.  There is money available at both the state and federal level, mostly untapped, in the form of low interest loans, and investors appear to be warming to the sector. An Internet search uncovered at least one developer engaged in a strategy of rolling-up small hydro assets, and undoubtedly more will follow.  A logical approach for a developer would be to acquire a portfolio of revenue-generating assets as a way to demonstrate satisfactory investor returns.  From this base, a developer should be able to build profitable projects at existing unpowered dam sites, and to pursue run-of-river and pumped storage opportunities.

Much attention has been paid to wind turbines and solar PV as ways to harness nature’s abundant energy resources.  Hydroelectric power has often been overlooked due primarily to its scale and the high regulatory hurdles facing developers.  That may be changing in regard to small hydro.  The country has countless unpowered dams that are ripe for development.  This, combined with the prospect of streamlined permitting and exemption processes at FERC for run-of-river and pumped storage facilities, has developers exploring ways to advance small hydro in the service of the nation’s renewable energy goals.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.  www.davidniebauer.com

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Now that the California Public Utilities Commission (CPUC) has lifted its moratorium on the use of renewable energy credits (RECs or TRECs) by investor owned electric utilities (IOUs) for compliance with the State’s renewable portfolio standard (RPS), observers may ask themselves this logical question:  what is the future of RECs under Assembly Bill 32?

Assembly Bill 32, the California Global Warming Solutions Act, authorizes the California Air Resources Board (CARB) to establish a cap-and-trade mechanism designed to reduce the State’s greenhouse gas (GHG) emissions.  How will RECs and GHG allowances and offsets relate to one another?  Will one mechanism obviate the other or is there a place for both in the State’s overarching environmental initiative?

To answer these questions, we need to review some history and understand the roles of the various State agencies that are tasked with implementing the sometimes-conflicting legislative and executive mandates.

California’s Renewables Portfolio Standard (RPS) was established by the State legislature in 2002.  After various amendments, the law resulted in a requirement for the State’s IOUs to increase their sales of eligible renewable-energy resources so that 20% of their retail sales are derived from such resources by December 31, 2010.  According to the CPUC website, 2009 renewable energy procurement for the three IOUs in the state were as follows:  PG&E – 14.4%; So Cal Ed – 17.4%; SDG&E – 10.5%.

On September 15, 2009, Governor Schwarzenegger signed Executive Order S-21-09, which directed an increased renewable energy standard (RES) to 33% by 2020, made the requirement apply to all electric utilities (not just the three IOUs) and shifted the responsibility for implementing and overseeing the RES to the CARB.

However, the 33% standard was mandated by executive order, not by the legislature, which failed to pass a 33% RPS bill at the end of 2010.  Influential voices within the legislature opposed the expansion of the RES and have argued that CARB lacks the authority to proceed with RES adoption.  A 33% RPS bill is still pending in the legislature (SB 23)  which, if adopted, could pre-empt and/or modify the current CARB regulatory framework.

CARB is required by the legislature under AB 32 to regulate sources of greenhouse gasses to meet the State’s goal of reducing emissions to 1990 levels by 2020, and an 80% reduction of 1990 levels by 2050.

Renewable Energy Credits

The use of renewable energy credits to track RPS requirements has significant momentum.  The Western Renewable Energy Generation Information System (WREGIS) began operation in June 2007.  It is designed to track renewable energy generation in 14 western states and two Canadian provinces.  It is a system for authenticating WREGIS certificates for each REC, which are used to demonstrate compliance with RPS goals. One REC represents one megawatt-hour (MWh) of electricity generated from a renewable resource.

On January 13, 2011, the CPUC published its final rules on the use of TRECs, lifting a moratorium on its earlier decision.  In the final ruling, the State’s IOUs can procure TRECs to satisfy up to 25% percent of their RPS, with a $50/REC price cap. Both of these provisions expire at the end of 2013, when the CPUC “will consider modifying or removing those limitations all together.”

AB 32 to trump TRECs?

CARB”s resolution adopting the RES regulations directed the agency”s Executive Officer to monitor the ongoing CPUC proceeding on TRECs and to institute a rulemaking no later than 30 days after the CPUC issues a decision on the use of TRECs “to ensure the continued harmonization of the [RPS and RES] programs, specifically incorporating provisions related to [TRECs] for all regulated parties under the RES regulation.”

But what would this “harmonization” look like?  To answer this question we must look at the current framework of the State’s cap-and-trade mechanism.

Cap-and-Trade on the Way

On December 16, 2010, CARB adopted Resolution 10-42, approving the California cap-and-trade program.  The program takes effect January 1, 2012.  In the first phase, covered entities will include electricity generation, large industrial facilities that emit 25,000 metric tons or more carbon dioxide equivalent (MTCO2e) of greenhouse gases (GHG) per year, such as petroleum refineries, cement production facilities and food processing plants.  Phase two will begin in 2015 and will expand to cover all commercial, residential and small sources.

CARB will begin the program by issuing allowances sufficient to meet the capped amount.  Allowances will be reduced during the course of the program with the goal of eventually auctioning 100% of the allowance.

A facility can meet up to 8 percent of its annual GHG compliance obligation through offsets. An offset is a reduction or removal of GHG emissions by an activity (or facility) not covered by the Cap and Trade Program that can be measured, quantified, verified and approved by CARB.

CARB has set a minimum reserve price of $10/MTCO₂e for auctioned allowances, but ultimately expects market prices for allowances to increase to $15-$30 by 2020.

What Might “Harmonization” Look Like?

First, it is important to understand the differences between a REC and a GHG allowance or offset.  RECs are designed specifically to encourage an increase in the use of renewable energy by electric utilities.  As noted above, one REC represents one megawatt-hour (MWh) of electricity generated from a renewable resource.  A GHG allowance or offset represents one MTCO2e.  Generating electricity from burning fossil fuels emits CO2e.  When coal is burnt, approximately one MTCO2e is produced for every MWh of electricity produced.  A combined cycle natural gas power plant will generate less than one-half the amount of MTCO2e for every MWh of electricity produced.

“Harmonization” will likely be governed by “ratepayer pain”.  Assuming that the State’s IOUs hit the 20% renewables mark established under the RPS, Executive Order S-21-09 will likely provide the framework to move to 33% by 2020.  RECs will be valuable in assisting energy generators to hit this mark.

When the GHG caps for the electricity generation sector are put into place, they will most likely take into account the “early adopter” status of the State’s IOUs.  In this way, we should avoid ratepayers from bearing an undue share of the burden of the environmental initiatives.  RECs will be used to satisfy the utilities’ new RES requirements while GHG allowances and offsets will be used to meet the emissions cap for the industry.  After 2020, when we have achieved our renewable energy goals, new goals can be implemented – whether they relate to renewable energy generation, GHG emissions or another achievable sustainability goal.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.  www.davidniebauer.com

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Founders who get their first term sheet proposal are sometimes mystified by the various terms and conditions proposed by their prospective investor.  This article assumes a general familiarity with the type of transaction involved and will put attention on the various provisions contained in the typical term sheet.  Some provisions are more negotiable, or more easily argued for, than others.  We will highlight these points, using the very useful open source legal document model term sheet prepared at the direction of the National Venture Capital Association.

A good starting point is to compare your term sheet with the NVCA’s model.  Click here to view the NVCA’s model, then follow along with my comments.  My headings track the headings of the NVCA model for easy reference.

OFFERING TERMS

Not much to say here.  This section points to one of the most important negotiations, which is price.  Oddly, though, if your company is well positioned in a growing field, price will be largely determined by the amount of capital you can realistically use in order to hit major milestone(s).  This will determine a) the amount of your raise and b) the type of investor you will need to solicit.  From here, it is not uncommon for Founders to negotiate the sale of 20%-30% of the company for the amount raised, and your pre- and post- money valuations flow from there.

CHARTER

Investors like Delaware corporations.  The Delaware General Corporation Law (the “DGCL”) is management-friendly and the Delaware courts hear more corporate issues by far than any other jurisdiction.  Keep this in mind when you start your company.  LLCs are fine for some businesses, but not if you plan to have investors.  Avoid Nevada unless you have a really good reason.  There are no franchise taxes in Nevada.  Other than that, I don’t see any advantage.

Dividends

Not a big negotiation point.  Early stage companies almost never pay them.  Dividends are a way for your investor to attempt to nickel and dime you, so resist putting an interest type percentage (e.g. “8% per annum, compounded”).  The counter argument to a dividend rate request is that the investor is going to make its return on the liquidity event, not from a few points of interest on the money.  If all else fails, allow non-cumulative dividends – it’s almost the same as no dividend at all.

Liquidation Preferences

This is probably the most important negotiation point a founder of a company has – and it should be decided up front:  will the investor be acquiring “participating” or “non-participating” Preferred stock.  “Participating” means that, on the sale of the company, the investor gets its money back, plus interest (if agreed to) and then participates with the Common for the remainder of the sale proceeds.  In a “non-participating” scenario, the investor gets to choose – either get its money back plus negotiated interest or convert to Common.  Participating Preferred is pretty common and has become the norm, in my experience, but it always strikes me as double dipping.  When an investor negotiates an equity position, you should project that into the future to a likely sale or other liquidity event.  You will want to know what percentage of the sales price will go to the investor.  With participating Preferred, this calculation is skewed.  You have to take the investor’s money off the top – the investor is basically getting a greater percentage of the company than its stock position warrants.

A cap is another way to go.  The argument here is “don’t get too greedy”.  At the end of the day, we will be partners, so let’s structure a deal that reflects that partnership without the financial imbalance.

Voting Rights

Uncontroversial.  Yes, the Preferred will vote with the Common and yes Preferred get special preferential voting by statute.  You should want a representative of the investor(s) on your Board – this is sometimes more valuable than the money.  Keep your Board small and manageable.

Protective Provisions

There are actually two separate protective provisions in this term sheet:  here and in the section titled: Matters Requiring Investor Director Approval in the INVESTOR RIGHTS AGREEMENT.  The difference is actually meaningful from both an administrative and substantive point of view.  This first set of protective provisions is designed to protect the Preferred stockholders as a class.  The set requiring investor director approval is focused on operational issues and how the invested money is being spent.

From the company’s point of view it is easier to get the investor director approval than it is to solicit a vote from the Preferred stockholders.  Most of the Preferred stockholder protections are afforded by the DGCL.  For example, you can’t alter the rights and preferences of the Preferred without stockholder approval.  Try to keep these as close to the statute and as relevant as possible.

As for the management protections, you want as few as possible, but from a practical standpoint, you will want your financial partner on board with most management decisions anyway, so don’t worry too much about these.  That being said, one thing to be careful of is agreeing to onerous information requirements.  See Management and Information Rights in the INVESTOR RIGHTS AGREEMENT section, below.

Conversion and Anti-Dilution Protection

Preferred stock has substantial rights, preferences and privileges over Common stock.  The company would be better off with one class of Common and no Preferred.  So optional conversion is not an issue.  It is also typical for all Preferred to convert at an IPO and if a certain percentage of Preferred holders want to convert.  Keep the percentage as close to a majority as possible.

Anti-dilution protections are built in to the conversion ratio of the Preferred.  Initially it’s 1:1.  This can (and should) adjust if the company sells its equity at a valuation lower than agreed to with the investor.  Try to stick with a “typical” weighted-average adjustment.  The formula is probably not necessary in the term sheet.  A “full-ratchet” adjustment will adjust the conversion ratio down to the lower price and will result in the investor receiving more shares when the Preferred is converted to Common.

One pitfall I often see Founders run into is making agreements with co-founders, employees, investors and others based on a percentage of the company.  The problem with this approach is that the percentage changes based on what shares are counted.  The term “fully diluted” attempts to take into account all options, warrants and agreements to issue shares in the future, but this is misleading because many options and warrants are never exercised.

An anti-dilution feature that is pegged on a percentage will get everyone in trouble, so avoid it.  Stick with a weighted average adjustment and then work to increase the value of the company.

Pay-to-Play

Conceptually, a pay-to-play provision benefits both the company and the investor group.  It encourages investors to step up and support the company and works to counter-balance the effects of some investors refusing to participate in a down round.

No one likes to think that the company will lose value so there is often a disinclination to include such a provision.  Unless an investor sees itself as a strong lead, willing to support the company through thick and thin, an investor may only focus on the chance of losing rights and therefore opt to omit a pay-to-play.

In the end, pay-to-play was created by sophisticated investors wanting to exert some control over a disparate investor group.  If your investor doesn’t want it, it’s probably not something to fall on your sword about.

Redemption

Avoid it.  The investment is not a loan and it shouldn’t be treated like a loan.  The argument against redemption is that you, as Founder, are looking for a financial partner – someone who will work with the company to and through a liquidity event, where everyone prospers.  A redemption provision pits the investor and the company against one another and starts the relationship off on the wrong dynamic.

If you are forced into a redemption provision, put it out as far as possible in the future.  Also, use it to trade on some other rights, such as the protective provisions and/or make the Preferred non-participating (see above).

STOCK PURCHASE AGREEMENT

Much of the Stock Purchase Agreement is boiler-plate, so don’t sweat the language too much.  Avoid giving personal representations and warranties unless you are taking cash out of the deal.

Start working on your exceptions to the representations and warranties.  I can’t emphasize this enough.  For liability purposes, you want to disclose EVERYTHING, and the way to do it is in a detailed Schedule of Exceptions (sometimes called a Disclosure Schedule).  Memories fade very quickly, so put everything in writing.  This is where Founders should focus most of their work in the time between signing the term sheet to the closing.

Ah, yes, legal fees.  The company nearly always pays legal fees for a deal that closes.  It doesn’t seem to make sense because in every other way your investor will be urging you to cut expenses.  The reason for the attorney fee provision is the way investment funds are structured and the way investor’s compensation is calculated.

The amount of fees should be limited, however.  At this writing, I would say never go over $15,000 for investors’ counsel, and expect to pay about that for company counsel.  Agree to use the NVCA open source legal documents as a starting place and have company counsel prepare the first set of documents, using the term sheet as a guide.  If company counsel is worth their salt, there should be few changes to the documents after the initial drafting and therefore little time and effort wasted.

INVESTOR RIGHTS AGREEMENT

Registration Rights

Back in the day when there was an IPO market, the registration rights provisions had more meaning.  Make sure the investors’ demand rights are triggered after the company’s IPO: the decision to go public should be made by the Board, not the investors.

The anticipated size of the company will help determine what dollar amounts trigger which registrations.  Founders should be included in any piggy-back rights.

Management and Information Rights

Be careful about the information rights being too onerous.  I have seen founders saddled with monthly budget and financial statement obligations, which make it very hard for them to get other work done.  Yes, management should report to the board in an ongoing fashion and the reports should be formal enough to allow for real planning.  Think through what it will take to comply with the information rights and carve them back where necessary.

Right to Participate Pro Rata in Future Rounds

This is a standard provision and should be the investors’ primary anti-dilution protection.  If the company sells more stock, each investor must buy in to protect its equity position.  Expect all stockholders to be made a party to this agreement unless you have an unusually large number of stockolders.

Matters Requiring Investor Director Approval

We discussed these provisions in the context of the protective provisions contained in the company’s Charter.  Keep the matters requiring investor director approval focused on management issues and how proceeds of the financing are going to be spent.  To the extent that you can move protective provisions from the Charter to the Investor Rights Agreement, you will be better off.  Its easier to get a board member to approve than to have to solicit votes from each and every holder of Preferred stock.  Restrictions are restrictions, so try to eliminate ones that seem to be over-reaching.

The remaining provisions in the Investor Rights Agreement are non-controversial.  Non-competes are generally not enforceable in California and other states, except in limited circumstances, so you can push back on that.  You will want confidentiality and assignment of invention agreements with all employees and consultants, especially if your company has meaningful intellectual property.  D&O insurance can get expensive, so you might want to get a price quote to help decide whether and when it becomes necessary.

The option pool, assuming you intend to use options to incent employees, should be set at around 25%-30% on a fully-diluted basis.  It’s good to have uniform vesting.  Resist attempts to force company buy-back of shares of terminated employees. It lessens the value of the options and could be seen as bad faith on the part of the company – once an option has vested, the employee is entitled to the shares, including any upside after employment is terminated.

RIGHT OF FIRST REFUSAL/RIGHT OF CO-SALE

These are standard restrictions on founders’ shares and should probably be accepted.  As a practical matter, it will be difficult if not impossible for a Founder to sell shares to a third party with these restrictions in place, and that is the point.  Founders should view their investors as partners – everyone gets paid on a liquidity event; no one gets paid before then.

VOTING AGREEMENT

Its important to have an agreement on how the Board is composed and how directors are elected.  I have no problem with that.

On the other hand, the Drag Along and Sale Right should be eliminated.  The reason for the investors attempting to include Drag Along provisions is to force an exit on terms that satisfy their requirements.  However, such an exit may be premature for the company, and there may be only enough money to pay back the investors, not enough for the Founders and the Common holders.  If investors have 50% of the voting power, they can force a sale under the DGCL, but the company will have to provide appraisal rights to any objecting shareholder and pay the fair value for shares under the procedures established by the statute.  My argument here is that, if the price if fair, most Founders and Common holders will go along with the deal.  If the price is not fair, they should be afforded the basic right to make it fair under the DGCL.  In either case, insisting on Drag Along rights seems like bullying to me, so I try to resist it.

As for the investors’ ability to force a sale, same arguments apply.  If the deal is only good for the goose and not good for the gander, it is not a good deal.  The DGCL has certain minimum minority stockholder protections.  Let’s not eliminate even those basic protections on the alter of investor returns.

OTHER MATTERS

Founders’ Stock

The investor wants Founders’ stock to vest, and there is good reason for this.  One of the worst things for a start-up company is to have a number of stockholders who are not actively involved in building the business.  From the company’s point of view, ALL employees and Founders should vest in.

Founders might argue that they have already contributed significant value by forming the company and by achieving other significant milestones, and these arguments should shorten the vesting term.

At a minimum, Founders should insist on acceleration of vesting in the event of termination without cause.

No Shop/Confidentiality

Obviously, it would be better not to have a No Shop provision.  The best position to be in is to have multiple investors bidding for the right to invest in your company.  If you have legitimate other leads, you might soften this provision by agreeing to work in good faith to close the transaction, but giving yourself the freedom to speak with other potential investors until the deal is done.  On the other hand, if you have a high level of confidence that your investor will come through, it would be bad form to be soliciting others while finalizing the terms.  No one wants to be stood up at the alter.

Breakup fees are unusual and I would not attempt to negotiate them unless you have a legitimate competing offer that you believe is likely.

As for confidentiality provisions – same points.  No one wants to be a stalking horse.  If you can avoid them, all the better, but its best to keep things close to the vest until the deal is done.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.  www.davidniebauer.com

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