COMMENT DEUTSCHLAND ÜBER ALLES: WHY GERMAN REGULATIONS NEED TO CONQUER THE DIVIDED U.S.

RENEWABLEENERGY FRAMEWORK TO SAVE CLEAN TECH (AND THE WORLD)
BRAD A. KOPETSKY

The current U.S. renewable-energy regulatory framework does not adequately incentivize the clean-technology development needed to address global energy concerns. The United States’ fragmented, state-by-state approach creates an unacceptable level of uncertainty for clean-tech investors and innovators. This uncertainty has stifled U.S. clean-tech capital formation, a useful barometer for overall innovation, relative to nations with more progressive frameworks. This Comment proposes a comprehensive overhaul of the U.S. renewable-energy framework that includes elements of the the highly successful German Renewable Energy Act, along with pieces of various state programs, in a unified, demandpull approach. The proposed framework would encourage widespread adoption of clean tech in the United States, reduce investment risk to clean-tech investors, and foster the clean-tech innovation needed to address current and future energy concerns.

INTRODUCTION Global warming, threats to energy security, and rising energy costs have become unavoidable in today’s world of political turmoil and eco-awareness.1 Each day the
∗ JD, University of Wisconsin Law School, 2009. This Comment originally appeared in Issue 5, Volume 2008 of the Wisconsin Law Review. All citations should appear as 2008 WIS. L. REVIEW XXX (original pagination not retained by Scribd formatting). 1 . See, e.g., Chip Cummins et al., Over a Barrel: The Global Scramble for Energy Security, WALL ST. J., Jan. 25, 2007, at A12 (discussing energy security); Price Index Soars on Spike in Energy Costs, ST. PETERSBURG TIMES, Apr. 18, 2007, at 2D (discussing rising energy costs); Andrew C. Revkin, In Stark Shift, U.S. Warns of Global Warming; Drastic Impact Inevitable, It Says, CHI. TRIB., June 3, 2002, at 7 (discussing global warming). Admittedly, the cause (and even existence) of global warming is still hotly debated. See, e.g., Timothy Ball, Global Warming: The Cold, Hard Facts?, CANADAFREEPRESS.COM, Feb. 5, 2007, http://www.canadafree press.com/2007/global-warming020507.htm; Derek Cheng, Scientists Agree Global Warming is Killing the World, N.Z. HERALD, Nov. 19, 2007, available at http://www.nzherald.co.nz/category/story.cfm? c_id=68&objectid=10476904. The merits of this debate are beyond the scope of this Comment. Rather, this Comment presumes (1) that global

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world’s reliance on carbon-based fuels and waning natural resources causes further environmental damage and brings us closer to the day the (oil) wells literally run dry. 2 Frighteningly, the situation is only set to get worse as world energy demand grows rapidly into the foreseeable future, fueled by population increases and economic growth.3 While conservation was the tool of choice in dealing with past energy crises,4 the newfound demand explosion indicates a need for new solutions.5 As a result, technophiles and investors are increasingly teaming to solve today’s energy crisis through innovations in clean technologies (“clean tech”).6 Clean tech represents a
warming exists, and (2) that it is caused at least in part by carbon emissions stemming from fossil-fuel consumption. As such, this Comment further presumes renewable energy sources must be identified and propagated for a variety of reasons, not the least of which are the reduction of carbon emissions and the mitigation of global warming trends. 2 . Forty thousand gallons of oil are consumed every second worldwide. Geoff Colvin, The Price of Oil, FORTUNE, Dec. 10, 2007, at 163, 164. This means that by the time you finish reading this footnote, approximately a half-million gallons of oil will have been consumed. 3 . Calculations show worldwide energy use will rise 57 percent by 2030. ENERGY INFO. ADMIN., U.S. DEP’T OF ENERGY, DOE/EIA-0484, INTERNATIONAL ENERGY OUTLOOK 5 (2007), available at http://www.eia.doe.gov/oiaf/ieo/pdf/0484 (2007).pdf. 4 . See President Jimmy Carter, Presidential Address, Crisis of Confidence (July 15, 1979) (urging Americans to turn down the thermostat and obey the speed limit), available at http://millercenter.org/scripps/archive/speeches/detail/3402. 5 . See Mona Hymel, The United States’ Experience with Energy-Based Tax Incentives: The Evidence Supporting Tax Incentives for Renewable Energy, 38 LOY. U. CHI. L.J. 43, 45–46 (2006). Realistically, emerging countries are less likely to practice conservation to address energy concerns, as they are still on the upswing of their energy demand. See Mai Tian, Energy Conservation, Efficiency Highlighted, CHINA DAILY, Dec. 29, 2004, at 9, available at http://www.chinadaily.com.cn/ english/doc/2004-12/28/content_404062.htm (“It is not reasonable to require developing countries to share the responsibilities of developed countries.”). 6 . Loosely speaking, clean tech encompasses methods that “harness renewable materials and energy sources, dramatically reduce the use of natural resources, and significantly cut or eliminate emissions and wastes.” JOEL MAKOWER, GLOBAL BUS. NETWORK, THE CLEAN REVOLUTION: TECHNOLOGIES FROM THE LEADING EDGE 3 (2001), available at http://www.cleanedge.com/reports/gbn.pdf. While the term clean tech is therefore a bit broader than renewable energy, this Comment generally uses the terms interchangeably unless noted otherwise. The

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critical factor in solving the current crisis, as it alone can meet increasing energy demand without further environmental repercussions.7 Despite compelling evidence of their need, many clean technologies have not yet reached commercial viability to attract traditional financing.8 Venture capital9 has thus played a vital role in the industry’s inherently risky infancy.10 In fact, venture capital dollars have recently flowed heavily into clean tech as investors have been excited at its prospects.11 However, periods of
focus of this Comment tends to invoke renewable energy more frequently by virtue of its context, since energy-related investments make up the largest individual portion of venture capital deals in clean tech—about 44 percent. NICHOLAS PARKER & ANASTASIA O’ROURKE, CLEANTECH VENTURE NETWORK, THE CLEANTECH VENTURE CAPITAL REPORT 8 (2006). Renewable energy, of course, typically includes wind, solar, biomass, and geothermal energy. See, e.g., infra note 246 and accompanying text. 7 . See Energy for Development: Local Projects, Large Impacts, SUSTAIN, July 2007, at 4, available at http://www.wbcsd.org/DocRoot/gTxcmH87CXJNTR1 Nitxd/Sustain28.pdf. 8 . See Cleantechpartners.org, About Clean Tech Partners, http://www.cleantechpartners.org (last visited Nov. 4, 2008) (suggesting emerging clean-tech companies face barriers to financing when “making the leap from technological viability to commercial viability”). Funding for early-stage, inherently risky investments, such as clean tech, is often not available via traditional bank financing. See generally NAT’L VENTURE CAPITAL ASS’N, VENTURE IMPACT: THE ECONOMIC IMPORTANCE OF VENTURE CAPITAL BACKED COMPANIES TO THE U.S. ECONOMY 8–9 (4th ed. 2007); see also infra Part I.B. 9 . Venture capital is capital invested by sophisticated investors in early-stage, risky corporations. Nvca.org, The Venture Capital Industry—An Overview, http://www.nvca.org/def.html (last visited Oct. 26, 2008). Venture capital firms typically structure “funds” as limited partnerships, where they serve as the general partner and assume investment management duties, while passive investors, who serve as limited partners, put up most of the actual funding (venture capital firms typically supply only 1 percent of funding). Ronald J. Gilson, Engineering a Venture Capital Market: Lessons from the American Experience, 55 STAN. L. REV. 1067, 1070–71 (2003). The venture capitalist also charges an annual fee and retains a portion of investment returns—typically 2 percent of capital invested and 20 percent of returns. Adam Lashinsky, The Battle over Two and Twenty, FORTUNE, May 28, 2007, at 22, 22. 10 . Venture capital firms typically have a higher risk tolerance, allowing them to play a significant role in fledgling companies, which are inherently more risky than more established companies. See NAT’L VENTURE CAPITAL ASS’N, supra note 8, at 8–9; see also infra Part I.B. 11 . Clean tech brought in $883.6 million in venture capital financing in the second quarter of 2008 alone. Press Release, Nat’l Venture Capital Ass’n, Venture Capital Investment Holds Steady at

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widely accessible investment capital cannot last ad infinitum,12 and the capital flow faces an invisible headwind from the piecemeal U.S. renewable-energy framework. While governments across the globe have begun in earnest to create progressive energy policies,13 U.S. law in this area has generally been impractical, inefficient, and inconsistent. In fact, the Energy Policy Act of 2005 (“2005 Energy Act” or “the Act”) created the first true U.S. energy policy in more than a decade.14 A substantial part of the Act addressed the use and development of renewable energy through clean tech,15 but it stopped short of any strict, national requirements for alternativeenergy usage.16 As a result, states are left to make the majority of these decisions, and a Frankensteinian amalgamation of regulations now governs an increasingly national (and even global) energy market.17 This state-by-state framework significantly hampers innovation in the U.S. clean-tech space.18 Differing renewable-energy laws in each state fragment the market
$7.4 Billion in Q2 2008 According to the Moneytree Report (July 19, 2008), available at http://www.nvca.org/pdf/08Q2_ VCinvestMTReport.pdf. 12 . See generally Shawn Tully, Wall Street’s Money Machine Breaks Down, FORTUNE, Nov. 26, 2007, at 65. 13 . For example, the European Union has a goal to meet 20 percent of energy demand with renewable energy by 2020. EUR. PHOTOVOLTAIC INDUS. ASS’N, THE ANNOUNCED EUROPEAN FRAMEWORK DIRECTIVE ON RENEWABLE ENERGY SOURCES (2007), available at http://www.epia.org/fileadmin/EPIA_docs/publications/epia/EPIA_ PP_070521.pdf. India has also taken strides to provide for renewable energy, becoming the first country with an unconventional energy ministry. Kaushik Ray, Energy Secures a Sustainable Future, FIN. TIMES (London), Nov. 15, 2006, at 12. Perhaps most notably, even countries in the oil-rich Middle East have acted, as evidenced by the United Arab Emirates aspiring to produce 50 percent of its electricity through renewable means by 2050. In Oil-rich Gulf States, Governments Take Initial Steps to Develop Renewable Resources, PLATTS RENEWABLE ENERGY REP., Nov. 27, 2006, at 10. 14 . Brad Sherman, A Time to Act Anew: A Historical Perspective on the Energy Policy Act of 2005 and the Changing Electrical Energy Market, 31 WM. & MARY ENVTL. L. & POL’Y REV. 211, 211 (2006). 15 . See Energy Policy Act of 2005, Pub. L. No. 109-58, §§ 201–52, 1701–04, 119 Stat. 594, 650–83, 1117–22. 16 . See id. 17 . See infra Part IV. 18 . See Daniel C. Esty, Revitalizing Environmental Federalism, 95 MICH. L. REV. 570, 619–20 (1996).

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and create an undesirable level of uncertainty for investors and entrepreneurs.19 Furthermore, while the objectives of many states’ renewable-energy laws are admirable, their means oftentimes do not optimize the clean-tech capital development required to accomplish those goals. This Comment argues that the United States must follow the lead of other progressive nations by enacting a national, demand-pull,20 renewable-energy scheme to foster clean-tech capital formation and innovation. Without this stimulation, the prospects are dim for advancing clean tech to sufficiently meet the current energy concerns.21 Part I examines clean tech’s contributions to solving these issues and outlines venture capital’s role as a barometer of investment and innovation in such technologies. Part II illustrates the constraint on U.S. capital formation in the clean-tech area. Part III reviews federal regulatory responses to the energy crisis, and critiques their failure to incentivize clean-tech investment and innovation. Similarly, Part IV examines various state responses and the flaws of state autonomy in this area. Next, Part V provides a case study of two recently enacted Illinois statutes, which are timely examples of the problems present in many state laws. Finally, Part VI discusses the cohesive renewable-energy framework the United States should adopt. The proposal mirrors the German Renewable Energy Sources Act,22 which has been very successful and used as a model in many developing nations.23
19

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. Id. All else being equal, investors prefer certainty, as uncertainty means greater risk. See Tully, supra note 12, at 69–70. 20 . A demand-pull strategy is one that creates end-user demand, thereby “pulling” product development, innovation, and market development through the system. See Bernadette Del Chiaro & Rachel Gibson, Government’s Role in Creating a Vibrant Solar Power Market in California, 36 GOLDEN GATE U. L. REV. 347, 371–72 (2006). 21 . See infra text accompanying notes 49–50. 22 . Gesetz für den Vorrang Erneuerbarer Energien [Erneuerbare-Energien-Gesetz] [Renewable Energy Sources Act], Mar. 29, 2000, BGBI. I at 305, last amended by Gesetz, July 21, 2004, BGBI. I at 1918, translated at Renewable Energy Sources Act, http://www.erneuerbareenergien.de/files/pdfs/allgemein/application/pdf/ eeg_en.pdf (last visited Oct. 26, 2008) (outlining Renewable Energy Sources Act). 23 . See, e.g., Morocco to Fund Renewable Energy, EARTHTIMES.ORG, May 25, 2007, http://www.earthtimes.org/articles/show/66345.html (noting that

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I. TWO AMERICAN INSTITUTIONS REQUIRED

FOR A

RESCUE

The problems with traditional energy production are substantial. The world’s expanding population demands energy at exponentially increasing rates.24 In many countries, increasing populations create economic growth and higher living standards, requiring even more energy.25 The magnitude of this increasing demand precludes any single solution—be it conservation, hydrogen power, or the addition of Soylent Green26 to the menu—from being sufficient. Thankfully, two historic American staples—innovation and investment—provide an opportunity to develop a variety of solutions. A. Innovation Time and again American innovations have broken into unchartered territories to solve critical problems.27 Fittingly, much of today’s innovation is taking the form of greater efficiencies in clean tech, bringing it closer to broad-scale commercial viability.28 For example, while the first solar cell was only 1 percent efficient,29 energyconversion efficiencies for commercially available solar cells are now around 15 percent,30 and have reached more than 40 percent using experimental technologies.31 Innovations like this have also allowed for ever-increasing energy production from fewer and fewer raw-material
Morocco’s renewable-energy-sources law follows Germany’s model). 24 . See ENERGY INFO. ADMIN, supra note 3, at 5–6. 25 . See id. at 5. 26 . Soylent Green is a fictional food source used to feed the overpopulated Earth due to humanity’s failure to achieve sustainable development. See SOYLENT GREEN (Metro-Goldwyn-Mayer 1973). 27 . See generally MICHAEL BLOW, MEN OF SCIENCE AND INVENTION (1960). 28 . See, e.g., Ineke Malsch, Thin Films Seek a Solar Future, THE INDUS. PHYSICIST, Apr./May 2003, at 16, available at http://www.aip.org/tip/INPHFA/vol-9/iss-2/p16.html; Press Release, U.S. Dept. of Energy, New World Record Achieved in Solar Cell Technology (Dec. 5, 2006), available at http://www.energy.gov/ news/4503.htm. Efficiency in these terms is the actual amount of energy transferred relative to the maximum theoretically possible. DICTIONARY OF ENERGY 82–83 (Malcom Slesser ed., 1982). 29 . Wikipedia.org, Solar cell, http://en.wikipedia.org/wiki/Solar_cell (last visited Nov. 4, 2008). 30 . See Malsch, supra note 28. 31 . See Press Release, U.S. Dept. of Energy, supra note 28.

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inputs.32 These developments are encouraging, as further innovation in clean tech represents the most realistic way to solve today’s brewing energy crisis.33 Despite this promise, however, further innovation is needed to remedy today’s crisis. Solar costs have generally declined, but rising material costs actually caused a price increase of 20 percent between 2004 and 2006—jeopardizing solar technology’s adoption.34 Additionally, renewable energy sources still account for a mere 2 percent of the world’s energy supply.35 The demand for resources from developing economies, the desire for cleaner products in developed nations, and the growing support of businesses have all created additional need for clean tech.36 Innovation must now supply it. Finally, stimulating clean-tech innovation in the United States is of particular concern. Statistics show that “[t]he United States is in a unique and powerful position to shape the energy market from both sides.”37 Although the United States comprises only 4.6 percent of the world’s population,38 it produces 15.2 percent of the world’s
32

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. For example, thin-film solar cells use little-to-no expensive materials, leading to a significant drop in price per quantity of energy produced. Michael Moyer, The New Dawn of Solar, POP. SCI., Dec. 2007, at 101, available at http://www.popsci.com/popsci/flat/bown/2007/green/item_59.html. 33 . See Energy for Development: Local Projects, Large Impacts, supra note 7, at 4. The advances made are also critical because many contend the driving force in clean tech’s adoption will be relative cost—that is, as fossil fuels’ costs rise, and clean tech’s costs fall, clean tech will become more prevalent. See The Next Big Thing; It’s Here Now, INSIDE GREEN BUS., June 27, 2007. This theory is supported by data showing advances in wind-energy technology have led to a fifteen-fold increase in its use over the past decade, see id., due to lower production costs and greater geographic versatility. More Efficient Wind Turbine Blade Designed, SCIENCEDAILY.COM, Mar. 20, 2007, http://www.sciencedaily.com/releases/2007/03/070319180042.htm. 34 . JOEL MAKOWER ET AL., CLEAN EDGE, CLEAN ENERGY TRENDS 2007, at 4 (2007), available at http://www.cleanedge.com/reports/Trends2007.pdf. 35 . UN Sees Clean Energy Growth, INT’L OIL DAILY, June 21, 2007. 36 . See The Next Big Thing: It’s Here Now, supra note 33. 37 . Kate Sims, Incentives and Regulation to Promote the Generation of Renewable Energy in Wisconsin 2 (Aug. 6, 2007) (unpublished comment) (on file with Professor Peter Carstensen, University of Wisconsin Law School). In this context, “both sides” refers to both the production and consumption of energy. See id. 38 . ENERGY INFO. ADMIN., U.S. DEP’T OF ENERGY, DOE/EIA-0384, ANNUAL ENERGY REVIEW 2007, at 377 tbl.D.1 (2008), available at

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energy,39 while devouring 21.8 percent of it.40 Moreover, the average U.S. citizen uses more than twice as much energy as the average European citizen.41 Since U.S. public opinion strongly favors solving energy problems with increased production rather than conservation, 42 there can be no doubt the country must drive innovation in clean tech. B. Investment Investment in clean tech is as important as innovation. In fact, American culture has traditionally encouraged entrepreneurship and investment, helping to nurture innovative products through their infancy to commercial practicality.43 Today, America’s entrepreneurial spirit is represented particularly well by the venture capital industry, which plays a unique role at the nexus of finance and innovation by supporting small innovators with both great potential and great risk.44
http://www.eia.doe.gov/aer/ pdf/pages/aer.pdf. 39 . See Energy Info. Admin., U.S Dept. of Energy, United States Energy Profile, TONTO.EIA.DOE.GOV, Oct. 14, 2008, http://tonto.eia.doe.gov/country/country_ energy_data.cfm?fips=US. 40 . Id. In the process, the United States also produces 21.1 percent of global carbon emissions. ENERGY INFO. ADMIN., U.S. DEP’T OF ENERGY, INTERNATIONAL ENERGY ANNUAL 2005, tbl.H.1co2 (2005). The bulk of these emissions come from electricity generation. See ENERGY INFO. ADMIN., U.S. DEP’T OF ENERGY, U.S. EMISSIONS DATA, tbl.2, available at http://www.eia.doe.gov/oiaf/1605/ggrpt/excel/tbl_ statesector.xls. 41 . ENERGY INFO. ADMIN., U.S. DEP’T OF ENERGY, INTERNATIONAL ENERGY ANNUAL 2005, supra note 40, at tbl.E.1c. The average U.S. citizen uses 340.5 million BTU annually, while the average European uses 146.4 million. Id. 42 . Valerie J. Faden, Comment, Net Metering of Renewable Energy: How Traditional Electricity Suppliers Fight to Keep You in the Dark, 10 WIDENER J. PUB. L. 109, 111 (2000). 43 . See REED HUNDT, IN CHINA’S SHADOW: THE CRISIS OF AMERICAN ENTREPRENEURSHIP 27–33 (2006). 44 . Gilson, supra note 9, at 1068, 1076–77. Venture capitalists are willing to take on added risk in exchange for a measure of control, which they hope to leverage into successful innovations through the use of various financial motivators. See id. passim. This arrangement has financed many recent, innovative breakthroughs, ranging from biotech blockbusters to the explosion of the Internet. Id. at 1068. In fact, some credit the technological, innovation, and economic booms of the late twentieth and early twenty-first centuries almost solely to venture capital. Michael Mandel, Remarks Regarding

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Fortunately, venture capital has recently started to play a larger role in clean tech.45 U.S. venture capital investments in energy technologies nearly tripled from just over $1 billion in 2005 to $2.7 billion in 2007,46 and over the last eight years have increased from less than 1 percent of total venture capital to nearly 10 percent.47 In fact, the majority of disclosed financing deals in clean tech are now made by professional venture capital firms.48 This type of growth must be sustained to further commercialize clean tech. The technology is not yet commercially viable on a broad scale, and additional investment is required to make a breakthrough. Government funding alone will likely not stimulate the necessary innovation, as renewable-energy programs are more attractive when implemented without public funding.49 Today economists, business leaders, and policy makers widely agree that “a vibrant venture capital industry is a cornerstone of America’s leadership in the commercialization of technological innovation.”50 As such, venture capital serves not only as a useful proxy for overall capital formation in clean tech, but also as a barometer of innovation itself.

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the E-Economy (Mar. 1, 2001), available at http://ec.europa.eu/enterprise/ events/e-economy/doc/speech_mandel.pdf. Others even go so far as to proclaim it “among the crown jewels of the American economy.” Gilson, supra note 9, at 1068. 45 . See JOEL MAKOWER ET AL., CLEAN EDGE, CLEAN ENERGY TRENDS 2008, at 6 (2008), available at http://www.cleanedge.com/reports/pdf/Trends2008.pdf; PARKER & O’ROURKE, supra note 6, at 7. 46 . MAKOWER, supra note 45, at 6. 47 . Id. 48 . See PARKER & O’ROURKE, supra note 6, at 8. 49 . Faden, supra note 42, at 123. From a policy standpoint, a program is presumably more favorable without public funding because the public does not perceive an additional cost to bear; they feel as though they are paying for a publicly financed project, yet do not feel a direct burden when it is privately financed. See generally YIHHUEI WAN & H. JAMES GREEN, CURRENT EXPERIENCE WITH NET METERING PROGRAMS 2 (1998), available at http://www.osti.gov/bridge/servlets/purl/654082EwC08R/web viewable/654082.pdf. 50 . Laura Bottazzi & Marco Da Rin, Venture Capital in Europe and the Financing of Innovative Companies, 34 ECON. POL’Y 231, 231 (2002).

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II. THE CONSTRAINT

OF

U.S. CLEAN-TECH DEVELOPMENT

Despite the deep need for further commercialization of clean-tech innovation in the United States, ample evidence shows the requisite capital formation is currently underwhelming.51 In dollar terms, U.S. clean-tech investments appear healthy relative to other nations.52 However, these measurements are skewed, as the ratio of venture capital to gross domestic product has historically been much higher in the United States than in other countries.53 The United States is also a late entrant to the clean-tech space, further skewing measurements since clean tech is more mature in other countries.54 Lastly, while the $2.7 billion flowing into U.S. clean tech in 2007 may appear impressive, it is less inspiring when juxtaposed with the staggering $148.4 billion in total global renewable-energy investment that year.55 In truth, clean tech is a relatively low priority for the U.S. investment community when compared to other countries. Investments in clean tech are approximately 9 percent of total U.S. venture capital—the highest ever and
51

. See MAKOWER, supra note 45, at 6; NAT’L SCI. BD., 1 SCIENCE ENGINEERING INDICATORS 2006, at 6-39 (2006) [hereinafter SEI 1], available at http://www.nsf.gov/statistics/seind06/pdf/volume1.pdf; NAT’L SCI. BD., 2 SCIENCE AND ENGINEERING INDICATORS 2006, at A6-62 tbl.6-18 (2006) [hereinafter SEI 2], available at http://www.nsf.gov/statistics/seind06/pdf/volume2.pdf; Industry Offers Clean-Energy Agenda Beyond Production Tax Credits, INSIDE GREEN BUS., Apr. 18, 2007; UK Dominates European Investment in Clean Energy, EUR. DAILY ELEC. MKTS., June 4, 2007. 52 . For instance, in 2006, $2.4 billion of clean-tech venture capital was raised in the United States. MAKOWER, supra note 34, at 4. In comparison, China raised only $420 million for the year, Michael Burnham, Clean-Tech Investments in China Approach $1B, E&E NEWS PM, July 19, 2007, and Europe raised only €2 billion over the entire 2003–06 period. See UK Dominates European Investment in Clean Energy, supra note 51. 53 . See LARISA V. SHAVININA, THE INTERNATIONAL HANDBOOK ON INNOVATION 643 (2003) (referencing a study showing the ratio of venture capital to gross domestic product was 8.7 times higher in the United States than in Asia, and 8.0 times higher than in continental Europe). 54 . Global Venture Capital Investments in Clean Technology Surge, AM. VENTURE MAG., Sept. 27, 2007 (suggesting the reason European clean-tech venture capital has not kept pace with the United States is because many European nations already have wind and solar bases installed that far surpass the United States’). 55 . NEW ENERGY FIN. LTD., GLOBAL TRENDS IN SUSTAINABLE ENERGY INVESTMENT 2008, at 1 (2008), available at http://sefi.unep.org/fileadmin/media/sefi/ docs/publications/Exec_summary.pdf.
AND

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up from just 1 percent a handful of years ago. 56 However, investments in clean tech represented 10 percent of all European venture funds for the 2003 to 2006 period—a period when such investment was receiving virtually no attention in the United States.57 Further, clean tech drew 19 percent of total Chinese venture capital in 2006,58 with approximately 40 percent growth in 2007.59 Clearly, investors in other nations see clean tech as a much higher priority than their U.S. counterparts.60 Not only does U.S. interest in clean-tech investing pale in comparison to foreign levels, it suffers in domestic comparisons as well. Historically the biotech, semiconductor, communications, medical, Internet, and software industries have all commanded commitments far in excess of the 9 percent of venture capital that clean tech has attracted.61 For example, software, communications, and healthcare companies each drew up to 21 percent of total capital in the 1990s.62 Further, when the Internet emerged as the “it” investment of the late nineties, it drew more than 40 percent of all venture capital.63 These figures indicate something is precluding

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56 57

. MAKOWER, supra note 45, at 6. . UK Dominates European Investment in Clean Energy, supra note 51; see also MAKOWER, supra note 45, at 6. 58 . Burnham, supra note 52. 59 . Li Huayu, China Has World’s Largest Cleantech Market, CHINADAILY.COM, Jan. 10, 2008, http://www.chinadaily.com.cn/energy/200801/10/ content_6384761.htm. 60 . The statistics are buttressed by congressional concern that renewable generation in the United States has become disconnected with job growth and manufacturing in the field— unmistakable signs of underinvestment. See Industry Offers CleanEnergy Agenda Beyond Production Tax Credits, supra note 51. In fact, while the largest U.S. clean-tech IPO in the first half of 2007 was a mere $92.6 million (EnerNOC, an energy management solutions provider), Europe produced history’s largest venture-backed clean-tech IPO (the $428.7 million offering of solar company Q-Cells in 2005), and a Chinese company earned the highest ever initial valuation for a clean-tech start-up (LDK Solar Hi-Tech was valued at $2.8 billion after its 2007 listing on the NYSE). See Global Venture Capital Investments in Clean Technology Surge, supra note 54. 61 . See SEI 2, supra note 51, at A6-62 tbl.6-18. 62 . See id. 63 . See SEI 1, supra note 51, at 6-39. In fact, even after the tech bubble popped in 2001 and 2002, Internet companies continued to receive up to 28 percent of funds. Id.

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investors from embracing clean-tech innovation with the same enthusiasm that accompanied past revolutions.64 III. THE FEDERAL FRAMEWORK
AS A

HURDLE

One factor precluding clean-tech development is the current federal renewable-energy framework. Clean techies and investment professionals do not exist in a vacuum, left to solve the nation’s problems on their own. Rather, the federal government has taken various measures in this regard as well.65 The following Sections provide an overview of selected federal responses to the energy crisis, followed by a critical analysis of the uninspiring approach taken to stimulate clean-tech innovation. A. The Energy Policy Act of 2005 After many years of wrangling, Congress passed the Energy Policy Act of 2005.66 While the Act covers a sweeping breadth of topics ranging from daylight savings time adjustments,67 to raising the ethanol content of gasoline,68 to a broad spectrum of tax implications for all energy producers,69 it also spends ample space addressing ways to diversify energy sources and develop clean tech.70 As one method of development, the Act makes cleantech financing less costly. In this vein, the Act created Clean Renewable Energy Bonds.71 These bonds provide
64

. A counter theory may be that investments in other areas have led to advancements applicable to clean tech, thereby reducing the need for extensive clean-tech investment. While clearly advancements in one field may have application in another, to claim this reduces investment in clean tech is contradicted by the fact that investment levels have remained high in many traditional technological fields. See supra text accompanying notes 62–63. 65 . See, e.g., Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594. 66 . Donna Block, Senate Passes Energy Bill, DAILY DEAL, Aug. 1, 2005. 67 . Energy Policy Act of 2005, Pub. L. No. 109-58, § 110, 119 Stat. at 615. 68 . Id. § 1501, 119 Stat. at 1067–76. 69 . See id. passim. 70 . See, e.g., id. §§ 201–52, 1701–04, 119 Stat. at 650–83, 1117–22. 71 . Id. § 1303, 119 Stat. at 992–97.

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interest-free financing for renewable-energy projects by paying the holder with an accrual against his or her federal income tax.72 The Act also aids in financing clean tech through loan guarantees for projects using new technologies to avoid or reduce environmental impacts.73 The government may guarantee up to the entire value of a loan,74 with repayment due within thirty years.75 Another provision in the Act established a Renewable Energy Production Incentive (“production incentive”) to provide renewable-energy generators with incentive payments for electricity produced.76 Qualifying producers are eligible for incentives of 1.5 cents per kilowatt-hour in their first ten years of operation.77 These incentives have been successful in the past, leading to substantial growth in the targeted industries.78 However, Congress let them lapse many times, causing sharp declines in investment and a lag in U.S. clean-tech development.79 Finally, the Act also put flat subsidies80 and research grants in place.81 Flat subsidies granted by the Act include a 30 percent rebate on solar-energy equipment purchases82 and a 25 percent rebate to consumers for the installation of renewable-energy systems at home.83 Research funds are allocated to provisions such as Title IX
72 73

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. Id. . Id. §§ 1701–04, 119 Stat. at 1117–22. 74 . See id. The guarantee is capped at 80 percent of an eligible project’s total cost, however. Id. § 1702(c), 119 Stat. at 1118. 75 . Id. § 1702(f), 119 Stat. at 1118. Alternatively, the time limit for repayment is 90 percent of the project’s useful life, if this results in earlier repayment. Id. 76 . Id. § 202, 119 Stat. at 651–52. The provision was initially enacted in the Energy Policy Act of 1992, Pub. L. No. 102-486, § 1212, 106 Stat. 2776, 2969–70, was reaffirmed in the Energy Policy Act of 2005, and ultimately received $2.7 billion in funding. Sims, supra note 37, at 10. 77 . Energy Policy Act of 1992, § 1212, 106 Stat. at 2969– 70; Energy Policy Act of 2005, § 202, 119 Stat. at 651–52. This figure is inflation indexed, and was actually 1.9 cents in 2005. Hymel, supra note 5, at 56. 78 . Hymel, supra note 5, at 75–76. 79 . Id. Encouragingly, some estimate a five-year extension would grant enough certainty to spur innovation capable of cutting renewable-energy production costs by 25 percent. Id. at 76. 80 . The term flat subsidy will be used to refer to subsidies of a fixed or formulaic amount tied to a single action rather than being contingent on continued performance. 81 . See, e.g., Energy Policy Act of 2005, § 902(a), 119 Stat. at 856. 82 . Id. § 1337, 119 Stat. at 1038.

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of the Act, which seeks to stimulate research in diversity of the energy supply, reduce dependence on foreign supply, improve energy security, and reduce 84 environmental impact. The Office of Energy Efficiency and Renewable Energy also issues various forms of financial assistance for research through a competitive process.85 B. Flaws in the Federal Response Inhibit Clean-Tech Development While the federal government’s approach toward renewable energy provides some incentive for investors, it is also a large factor in discouraging clean-tech development. The government generally relied on uninspiring means of financing and the stale tax-andspend solutions of flat subsidies and research grants.86 The approach failed to include any cohesive, national incentive for innovation or investment.87

83

. Id. § 206(c), 119 Stat. at 655–56. The amount is capped at $3,000, however. Id. Congress also allocated only $1 billion for this incentive through 2010. See id. This is roughly equal to a single quarter’s worth of clean-tech venture capital! See Press Release, Nat’l Venture Capital Ass’n, supra note 11. 84 . Energy Policy Act of 2005, § 902(a), 119 Stat. at 856. Congress appropriated $2.2 billion for fiscal years 2007–09 for projects in this regard. Id. § 931(b), 119 Stat. at 869. 85 . See Eere.energy.gov, EERE Financial Opportunities, http://www1 .eere.energy.gov/financing (last visited Oct. 27, 2008). In 2007, the Office dispensed $574 million in grants. Id. 86 . See supra Part III.A. They are “stale” because these measures have been used for ninety years to support the U.S. energy industry with arguable ineffectiveness. See Hymel, supra note 5, at 43. Flat grants are also potentially ineffective, as they tend to be susceptible to pork-barrel provisions that increase the benefits bestowed upon politically favorable groups without meaningfully addressing the legislation’s goals. See Bernard S. Friedman, Subsidies, in THE MCGRAW-HILL ENCYCLOPEDIA OF ECONOMICS 964, 966 (Douglas Greenwald ed., 2d ed. 1994). 87 . Some argue market investment—without any subsidies —could support the development of renewable energy if the government would only take action to reduce existing uncertainties. See Renewable Energy to Be a Priority for Nation, CHINAGATE.COM.CN, Sept. 15, 2007, http://en.chinagate.com.cn/news/2007-09/15/ content_8888744.htm.

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1.

Deutschland Über Alles
FLAWS IN FEDERAL FINANCING ASSISTANCE

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Two notable flaws exist in the Clean Renewable Energy Bond and guaranteed loan provisions of the 2005 Energy Act. First, the $800 million earmarked for taxcredit bonds is only for state and local governments or cooperative companies.88 These entities tend to purchase capital equipment—helping establish a clean-tech market and attract investment—but they are not innovators.89 As a result, the bonds create no direct stimulus to innovate. Second, the lengthy payback period for federally guaranteed loans90 raises motivational concerns, as it fosters no sense of urgency in the debtor. 91 Consequently, projects may limp along over unnecessarily long development cycles.92 While these provisions are unlikely to significantly hurt clean-tech capital formation, they also offer little in the way of help.93
88

. See IRS Tech. Info. Rel. 2006-181 (Nov. 20, 2006), available at http://www.irs.gov/newsroom/article/0,,id=164423,00.html. 89 . Compare with supra note 44 and accompanying text. 90 . See supra text accompanying notes 73–75. 91 . This potential for innovative lethargy is even more apparent when juxtaposed with the urgency inherent in a typical venture capital arrangement. See Gilson, supra note 9, at 1074–83. For example, venture capital investments are usually made in stages, leaving the investor to decide if a project will continue. Id. at 1074, 1079. This feature makes the entrepreneur perform quickly if he wishes to receive successive cash inflows. Investors also typically retain the power to remove ineffective entrepreneurs, keeping them in line, and potentially saving successful innovations from ineffective champions. Id. at 1082–83. Another temporal incentive in the arrangement is that funds ordinarily have a limited duration—typically ten years. Id. at 1074–75. Given that venture capitalism is a business, if a firm wishes to attract capital for its next fund, it must produce quick results in its current funds. Id. This pressure to succeed trickles down to the underlying investment. Id. 92 . An additional criticism of the loan guarantees is that the Department of Energy sought a mere $9 billion in funding for the program. DOE Issues Final Loan Guarantee Rule, Invites 16 Project Applications, FOSTER ELEC. REP., Oct. 10, 2007, at 9. When considering the scale of the problem, and the fact that the Department received requests for $27 billion in guarantees during August 2006 alone, the amount appears marginal at best. See id. 93 . In actuality, these provisions could do some harm to capital formation if capable entrepreneurs are discouraged from developing a new concept because a federally supported entrepreneur of marginal skill is already occupying the space. Despite the many flaws of federal financing measures, however, it should be noted there may be room for federal programs in specific instances. For example, the availability of venture funding can sometimes be extremely

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2.

FLAWS IN FLAT FEDERAL SUBSIDIES

Federal subsidies have long been used to incentivize activities with the assumption that money alone will be sufficient to solve a problem.94 Direct subsidies are the opposite of a tax, providing funds to encourage transactions that might not otherwise occur and keeping industries afloat when their economics would not otherwise sustain them.95 However, history has shown more than unconditional subsidies are required.96 Most studies show previous subsidies in energy were not cost effective and had little-to-no impact on production.97 A common flaw of direct subsidies is that they create no sustainable demand, and instead create interest only to the maximum subsidized level.98 In granting a flat subsidy for clean-tech equipment there is no continuing motivation for future innovation.99 This flaw is evidenced in the significant lags in clean-tech development caused by the uncertainty and risk of past subsidy expirations.100 Another flaw of flat subsidies is that politically made energy policy rarely follows economic theory.101 Thus, past flat subsidies have often compounded existing distortions
sensitive to external market forces and consumer sentiment, potentially limiting available capital unnecessarily. See Rebecca Buckman, Venture Activity Hit by U.S. Slowdown, WALL ST. J., Apr. 2, 2008, at C5. In specific instances such as this, government programs may play a valuable role in providing liquidity in an otherwise constrained market. 94 . See Hymel, supra note 5. 95 . See Friedman, supra note 86, at 964–65. 96 . See, e.g., More Heat than Light, ECONOMIST, May 26, 2007, at 60, 60 (discussing Britian’s difficulties in effectively implementing subsidies in its energy policy to achieve desired results). 97 . Hymel, supra note 5, at 53. For example, since 1978, the United States has spent over $30 billion on alternative-fuel subsidies, yet today has little to show for it. Id. at 73. 98 . Cf. Friedman, supra note 86, at 965 (discussing how only “matching” subsidies (similar to production-oriented subsidies in this Comment’s context), and not flat grants, can encourage long-term changes to the market for a good). 99 . Compare with infra Part VI. Further, these incentives discourage the purchase of larger systems to produce and sell excess generation since there is no incentive to actually generate renewable energy. This dampens the overall market for clean tech, reducing investment potential. See infra Part IV.A.1. 100 . See Barry Rabe, Race to the Top: The Expanding Role of U.S. State Renewable Portfolio Standards, 7 SUSTAINABLE DEV. L. & POL’Y 10, 15–16 (2007). 101 . Hymel, supra note 5, at 67.

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rather than reduce them.102 Subsidies frequently promote a broad goal through overly narrow means, not accounting for unintended consequences.103 Notably, the research grants and production tax credits in the 2005 Energy Act are for a narrow selection of industries104 with no guarantee they will be the best means to promote the Act’s goals. A better approach is to encourage a broad scope of activities and let the market decide—through investment decisions and natural selection—which will work and which will not.105 A final flaw of flat subsidies is that they inject no commercial expertise into the development process.106 With a subsidy there is little incentive to monitor an investment directly, and those that do are subject to political pressure.107 Subsidies also leave innovators to struggle without guidance because subsidies fail to provide the noncapital inputs that other funding arrangements can provide.108 Most frightening in this vein, flat-subsidy programs may altogether conflict with innovation under other forms of investment. Since there is less oversight with a subsidy, innovators may be drawn to
102

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. See David Crump, Game Theory, Legislation, and the Multiple Meanings of Equality, 38 HARV. J. ON LEGIS. 331, 342–43 (2001). Many argue that the granting of subsidies encourages posturing by those hoping to receive them. See id. This situation is doubly dangerous as not only is the subsidy then misplaced, but the subsidized group has expended resources that could have been used to solve the problem, merely to secure the benefit. See Friedman, supra note 86, at 966. 103 . See Crump, supra note 102, at 339–44. 104 . See Energy Policy Act of 2005, Pub. L. No. 109-58, §§ 202, 902(a), 119 Stat. 594, 651, 856. 105 . See Del Chiaro & Gibson, supra note 20, at 371–72. 106 . Cf. Gilson, supra note 9, at 1100 (discussing the flaws of various government programs designed to foster developmental capital when they, among other things, fail to incorporate the skills of experienced industry executives like venture capital does). 107 . Id. 108 . Id. For example, venture capitalists tend to facilitate innovation by providing noncash contributions, most notably the expertise of the venture capitalist himself. See id. at 1088. Venture capitalists typically have a great deal of industry experience and a broad network of talent to draw on, which greatly aids in bringing technology to market. Id. As a result, venture-funded firms tend to be more innovative and successful than firms financed by other means. See Mandel, supra note 44. Research indicates a dollar of venture capital produces three to five times as many patents as a dollar of research-and-development spending. Id.

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those funds rather than to other forms of financing that are more conducive to innovation.109 Without expert assistance, the innovator is more likely to fail, stifling innovation both through the technology’s failure and the dilution of subsequent investment opportunities.110

IV. STATE RESPONSES: ALL OVER THE MAP IN MORE WAYS THAN ONE
The relatively hands-off approach of the 2005 Energy Act has allowed individual states to legislate on renewable-energy use as well. Not surprisingly, states have taken a wide variety of approaches in drafting this legislation, with the priorities of each particular state giving shape to the framework enacted. The following Sections analyze various state measures and the consequences inherent in state autonomy. A. Two Common State Approaches Described While individual state measures vary considerably, two methods have become prevalent and stand out as departures from traditional tax-and-spend measures. The method currently receiving the most attention is the renewable portfolio standard,111 as it tends to be easy to administrate, flexible, and relatively predictable.112 The other significant state measure gaining traction of late— albeit with somewhat less fanfare—is net-metering.113 1.
RENEWABLE PORTFOLIO STANDARDS

Several states have recently enacted renewable portfolio standards (“portfolio standards”).114 Portfolio
109 110

Mandel, supra note 44. Id. Here again, however, it should be noted that while federal subsidies may have several flaws relative to private investment, they may prove beneficial in specific instances where normal capital markets are constrained. See supra note 93. 111 . See infra note 141. But compare infra note 114, with infra note 142. 112 . R. Wiser et al., Evaluating Experience with Renewables Portfolio Standards in the United States, in FRED BOSSELMAN ET AL., ENERGY, ECONOMICS, AND THE ENVIRONMENT 1078, 1079 (2d ed. 2006). 113 . See infra note 142. 114 . There are currently twenty-four states (and the District of Columbia) with binding portfolio standards in place, and an additional four with voluntary standards. Eere.energy.gov, States with

. .

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standards are supply-side mechanisms115 that ensure inclusion of renewable energy sources in a state’s energy portfolio.116 Under a portfolio standard, electric utilities must derive a specific portion of their energy sales from renewable energy.117 The requirement oftentimes starts low and escalates gradually over time, causing a steady increase in the renewable-energy supply.118 Many jurisdictions develop a renewable-energy credit program to provide flexibility in complying with the standard.119 Under these programs, a power generator earns a credit for each unit of renewable energy generated.120 Then, at the end of a regulatory period, each utility must provide the state with enough energy credits to demonstrate it complied with the standard. 121 Under an energy-credit system, a utility may opt to either produce renewable energy itself, or—if it is more cost effective—to simply purchase the credit from another generator who has produced in excess of its requirement.122
Renewable Portfolio Standards, http://apps1.eere.en ergy.gov/states/maps/renewable_portfolio_states.cfm (last visited Oct. 27, 2008). 115 . “Supply-side” tactics seek to create markets by fostering demand indirectly. Traditionally, the government takes action to lower a product’s costs and increase its availability, thus fostering a self-perpetuating demand cycle. See generally Paul Craig Roberts, Supply-Side Economics, in THE MCGRAW-HILL ENCYCLOPEDIA OF ECONOMICS, supra note 86, at 969–72. 116 . Sims, supra note 37, at 17. 117 . BOSSELMAN ET AL., supra note 112, at 1078. 118 . Wiser et al., supra note 112, at 1078. As an example, assume that state X enacts a portfolio standard requiring each utility to generate 1 percent of its energy sales from renewable energy this year, increasing 1 percent each year for the next ten years. Utilicorp is an electric utility that supplies 10,000 mwh of energy in state X each year. Therefore, Utilicorp must sell 100 mwh of renewable energy to comply with the standard this year. This amount will rise to 200 mwh in the following year, 300 mwh in the year after that, and so on. 119 . Id. 120 . Id. 121 . Id. at 1078–79. 122 . Id. at 1078. For example, suppose Utility A and Utility B are both required to produce 100 mwh of renewable energy. As the year comes to an end, Utility A realizes it has produced only 50 mwh of renewable energy, while Utility B has already produced 150 mwh. Under an energy-credit system, Utility A now has the choice of producing 50 mwh of renewable energy before year end or simply purchasing enough of Utility B’s extra energy credits to bring it into compliance.

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Portfolio standards are popular among the states, often receiving bipartisan support despite their stark break from past regulatory measures.123 This support comes from the fact that portfolio standards are easy to administrate, provide a known quantity of renewableenergy output, allow for flexibility, and encourage the least-cost method of renewable-energy production.124 Portfolio standards are also popular as a means of economic development, with economic factors often eclipsing the environmental rationale.125 One theoretical criticism of portfolio standards, however, is that the precise costs of the required production cannot be known upfront.126 Additionally, since there is an incentive to produce at the lowest cost possible, portfolio standards do not encourage productionmethod diversity or widely disbursed generation.127 Finally, energy-credit systems can actually jeopardize compliance with the standard, as utilities may rely on their peers’ nonexistent excess generation to compensate for their own underinvestment in clean tech.128
123 124

. Rabe, supra note 100, at 10. . Wiser et al., supra note 112, at 1079. 125 . See Rabe, supra note 100, at 10–11. 126 . See Wiser et al., supra note 112, at 1079. Cost uncertainty may hinder portfolio-standard acceptance if decision makers fear overruns. Additionally, outsized initial goals may force officials to choose between crushing the regulated community with unexpected costs or granting leniency and failing to meet their goals. 127 . Id. 128 . See Rabe, supra note 100, at 12. Of course in an efficient market, rational actors would produce excess energy to the point where the energy-credit supply met total demand and no risk of noncompliance existed. See generally James M. Henderson, Microeconomics, in THE MCGRAW-HILL ENCYCLOPEDIA OF ECONOMICS, supra note 86, at 689 (suggesting a rational producer will continue to increase supply so long as there is a profit to be had). There is some evidence the existing energy-credit market is not rational, however, and underinvestment is a threat. See Rabe, supra note 100, at 12. For example, the fears of underinvestment have come to fruition in Massachusetts where a portfolio standard has not triggered an explosion of renewable-energy growth. Id. In fact, the vast majority of Massachusetts utilities had to rely on energy credits purchased from other states, and a shortage ensued. Id. This situation illustrates another flaw of portfolio standards—the loophole created due to the requirement that a certain proportion of a utility’s energy sales be related to renewable energy, but not that the utility actually generate any renewable energy. This focus means a utility (or even an entire state) could purchase energy credits and meet its portfolio standard without generating any of its own renewable energy. See Sims, supra note 37, at 19. In a state-by-state framework, this means the economic

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Regardless, states must see the benefits of portfolio standards outweighing the costs, as standards are now quite prevalent.129 In fact, portfolio standards appear to have been fairly successful to date.130 The Union of Concerned Scientists projects that state standards will support 46,270 megawatts of new (nonhydroelectric) renewable power by 2020—an increase of 340 percent over total 1997 U.S. levels.131 This increase is enough to meet the electricity needs of 28.5 million homes.132 Additionally, new renewable-energy production from state standards will reduce annual carbon dioxide emissions by 108 million metric tons over the same period133—equivalent to taking 17.7 million cars off the road or planting 25.9 million acres of trees.134 Despite their growing prevalence and success, portfolio standards across the country hardly reflect a unified approach, as states often alter various provisions of the model.135 One factor often varying from state to state is the definition of renewable energy source,136
benefits of the standard may actually be exported to another state. See infra text accompanying notes 229–32. From a national standpoint, it creates the potential for a very concentrated clean-tech equipment market, precluding the benefits of a broad market. Cf. infra Part VI. 129 . See supra note 114. 130 . See UNION OF CONCERNED SCIENTISTS , RENEWABLE ELECTRICITY STANDARDS AT WORK IN THE STATES 1 (2007), available at http://www.ucsusa.org/ assets/documents/clean_energy/RES_in_the_States_Update.pdf. 131 . Id. 132 . Id. 133 . Id. 134 . Id. 135 . See Wiser et al., supra note 112, at 1080. 136 . See, e.g., infra text accompanying notes 163–68 (discussing Pennsylvania’s definition and problems therewith). This variance may appear trite, as each state presumably defines renewable energy to include those sources most likely to be practically used in the state. On deeper analysis, however, the variance is significant for two reasons. First, an overly broad definition of renewable energy by a state may include “unvirtuous” technologies that do not offer the same benefits as “true” clean energy. See, e.g., id. Energy producers may then take advantage of these unvirtuous technologies in a particular state at the expense of using true clean energy, hindering clean tech’s adoption rate. See id. Conversely, an overly narrow state definition may discourage use of certain clean technologies that are currently impractical in the state, but which may become practical with future technological advances. See More

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including where the power generation may come from.137 Another factor is what level of renewable-energy production is initially required, how quickly it rises, and where the final level lies.138 Still another is who, exactly, the standards even apply to.139 As a result of these “X factors,” innovators and investors are discouraged by a fragmented national market.140 2.
NET-METERING

Net-metering, while not nearly as well-publicized as portfolio standards,141 is another widespread state measure aimed at increasing investment in renewableenergy infrastructure.142 In net-metering, utilities allow
Efficient Wind Turbine Blade Designed, supra note 33. Consequently, the optimal solution would be a broad national standard including all legitimate clean technologies, while excluding the faux clean-tech methods inserted into some states’ definitions. See, e.g., infra notes 163–68 and accompanying text (discussing Pennsylvania’s overly broad definition of what qualifies as clean technology). 137 . See, e.g., infra notes 183–86, 229–32 and accompanying text (discussing Pennsylvania’s and Illinois’s provisions, respectively, on where renewable energy must be generated in order to qualify for each state’s portfolio standard). 138 . For example, of the states with portfolio standards in place, Wisconsin is on one end of the spectrum, merely requiring that utilities not decrease their renewable energy through 2009, and then requiring a modest 2 percentage point increase in 2010. WIS. STAT. § 196.378(2)(a) (2005–06). On the other end of the spectrum is California, which requires a 1 percent annual increase in renewable energy to meet a standard of 20 percent by 2010. CAL. PUB. UTIL. CODE § 399.15(b)(1) (West Supp. 2008). 139 . See, e.g., infra text accompanying notes 222–28 (explaining that in Illinois the portfolio standard in place applies only to investor-owned utilities). 140 . See Faden, supra note 42, at 129. Market fragmentation discourages investors indirectly, as the equipment producers they support face higher costs from their inability to produce a single, standardized product to comply with disparate states’ requirements. Id. 141 . For example, a Lexis search of the “News, Most Recent 90 Days” database conducted using each of the respective terms provided 289 hits for “net-metering” and 543 for “renewable portfolio standards” on September 1, 2008. 142 . Currently thirty-eight states have legislative netmetering policies in place. NETWORK FOR NEW ENERGY CHOICES, FREEING THE GRID, NO. 02-07, at 12 (Sept. 2007), available at http://www.newenergychoices.org/uploads/FreeingTheGrid2007 _report.pdf. Additionally, four states have utilities that offer it voluntarily. Dsireusa.org, Rules, Regulations, and Policies for Renewable Energy,

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customers to connect a renewable-energy system to their grid, drawing on the utility only when necessary and feeding any excess electricity generation into the grid.143 Net-metering helps defray renewable-energy equipment costs through lower utility bills, thus making renewable energy more economically feasible.144 Conceptually, this is a great mechanism to induce private investment in clean tech,145 as it creates opportunities for manufacturers and ultimately piques the interest of investors.146 Unfortunately, while governments have welcomed net-metering,147 customer-generators have not.148 As of 2006, only 34,469 customers had taken advantage of netmetering.149 While this figure may appear substantial, it is practically insignificant given that there were 150 139,095,636 registered electric-utility customers. One reason for this disconnect may be a lack of marketing, as utilities do not promote programs that dilute their retail market.151 Another reason may be that the net-metering
http://www.dsireusa.org/summarytables/financial.cfm? &CurrentPageID=7&EE=1&RE=1 (last visited Oct. 27, 2008). It will also surely continue to be implemented as utilities comply with the 2005 Energy Act, which requires each utility to consider offering some form of net-metering. Energy Policy Act of 2005, Pub. L. No. 109-58, § 1251, 119 Stat. 594, 962–63. 143 . See NETWORK FOR NEW ENERGY CHOICES, supra note 142, at 2. The concept presented is actually the fusion of two subcomponents. The first is interconnection, which is merely an independent customergenerator connecting to the utility’s grid. See id. The second is netmetering, whereby a customer-generator’s electricity used is offset by the electricity generated—netting out on the customer’s bill. See id. Since interconnection is a necessary component of net-metering, this Comment treats the two as one concept. 144 . Faden, supra note 42, at 109. 145 . Id. at 111. 146 . Id. 147 . See id. at 123; see also supra note 142. 148 . See ENERGY INFO. ADMIN., U.S. DEP’T OF ENERGY, DOE/EIA-0348, ELECTRIC POWER ANNUAL 2006, at 62 tbl.7.5 (2007) [hereinafter “EPA”], available at http://www.eia.doe.gov/cneaf/electricity/epa/epat7p5.html; ENERGY INFO. ADMIN., U.S. DEP’T OF ENERGY, ELECTRIC SALES, REVENUE, AND AVERAGE PRICE 2006, EIA.DOE.GOV at tbl.10 (2007) [hereinafter “ESR”], available at http://www.eia.doe.gov/cneaf/electricity/esr/esr_sum.html. 149 . See EPA, supra note 148, at 62 tbl.7.5. 150 . See ESR, supra note 148, at tbl.10. This equates to a 0.02 percent participation rate. 151 . Faden, supra note 42, at 122. Arguably, utilities should not fear programs diluting their markets, as the actual use of clean tech by customer-generators is so small relative to traditional means of energy production. See ENERGY INFO. ADMIN., U.S. DEP’T

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contracts used in many states are burdensome remnants of prior-era152 agreements, which anticipated hundreds of megawatts of electricity production rather than the smallscale production of net-metering.153 There are also hidden fees in many states’ net-metering plans that deter customers.154 One final dispiriting note on net-metering is that, like portfolio standards, its conceptually simple arrangement is convoluted when customized by each state. For example, in some states utilities must pay for excess customer generation,155 while in others they do not.156 Additionally, some states credit excess generation to a customer’s account as a rollover for the next cycle,157 while others provide no such rollover.158 Connection costs
ENERGY, DOE/EIA-0384, ENERGY ANNUAL REVIEW 2006, at 7 tbl.1.2 (2007), available at http://www.eia.doe.gov/aer/pdf/pages/sec1_7.pdf. Regardless, utilities may recognize that if clean tech’s usage expands, the programs could actually deteriorate the utilities’ market base. See generally Faden, supra note 42, at 121–22. 152 . The “prior era” referenced is that under the Public Utility Regulatory Policies Act of 1978, enacted to stimulate renewableenergy growth by forcing utilities to purchase energy from certain “qualified facilities.” Pub. L. No. 95-617, 92 Stat. 3117 (codified as amended at 16 U.S.C. §§ 2601–45). The Act was generally ineffective, and was amended in the Energy Policy Act of 2005. Pub. L. No. 109-58, §§ 1251–54, 119 Stat. 594, 962–71. 153 . See Faden, supra note 42, at 128. 154 . Id. at 121. Utilities seek to maintain a steady revenue stream to whatever extent possible through connection costs, liability insurance, engineering fees, building fees, taxes, metering fees, and stand-by charges to compensate themselves for having electricity available when the customer needs it. Id. Finally, there are also technological and practical business reasons hindering the growth of net-metering, some of which would arguably be solved with national standards. See Travis Weller, Standardized Interconnection Standards —A Step Towards Realizing the Potential of U.S. Distributed Generation 13–15 (Aug. 2007) (unpublished comment) (on file with Professor Peter Carstensen, University of Wisconsin Law School). 155 . See, e.g., N.J. STAT. ANN. § 48:3-87(e)(1) (West 2007) (requiring generators ultimately be compensated for the value of their excess generation if not used to offset subsequent monthly bills). This Comment uses excess generation to mean the amount of electricity a customer produces over his or her own needs and subsequently feeds into the grid. 156 . See, e.g., 220 ILL. COMP. STAT. 5/16-107.5(d)(3) (2007) (allowing residential customers’ excess generation to simply be forfeited if not used to offset subsequent monthly bills). 157 . See, e.g., id. at 5/16-107.5(d)(2). 158 . For example, in Oklahoma, excess generation is sometimes granted to the utility free of charge. OKLA. ADMIN. CODE § 165:40-9-3(b) (2007).
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to the customer also vary significantly by state, depending on the strength of utilities’ lobbies or the state’s general sympathies for utility companies.159 As with portfolio standards, this fragmentation creates a cloudy market that discourages clean-tech development.160 B. Flaws in State Autonomy Inhibit Clean-Tech Development Ultimately, the biggest obstacle the U.S. renewableenergy framework places in clean tech’s path is the autonomy given at the state level. Individual state autonomy in renewable-energy policy allows states to act in their own self-interests rather than focusing on the greater goal, and also creates an unacceptable amount of risk and market fragmentation for clean-tech developers.161 1.
STATE MYOPIA AND SELF-INTEREST

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States’ private interests affect their renewable-energy incentives,162 in turn compromising clean-tech developers’ ability to calculate true national demand for clean-tech equipment. For example, despite Pennsylvania’s muchballyhooed renewable-energy policies, the state’s ties to the coal industry have posed “formidable challenges for any policies that might encroach on that resource.”163 The state’s portfolio standard reflects these challenges in its two “tiers” of renewable-energy production.164 Tier I includes sources commonly associated with clean tech, such as solar, wind, and fuel cells.165 Also included, however, is coal-mine methane.166 Tier II includes waste

159

. . . .

See NETWORK

FOR

NEW ENERGY CHOICES, supra note 142, at 6–

7.
160 161

See Faden, supra note 42, at 129. See id. 162 Interestingly, Texas is an exception to this theory. Despite its ties to the oil industry, the state is the nation’s leader in wind energy thanks to its portfolio standard (and thanks also to its abundance of wind, of course). See Rotary Club, FORTUNE, Oct. 29, 2007, at 178, 178. 163 . Rabe, supra note 100, at 13. 164 . See 73 PA. CONS. STAT. ANN. § 1648.2 (West 2008). 165 . Id.

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coal and other coal-related production.167 The inclusion of these questionably-renewable sources highlights special interests’ influence in state capitols.168 This differential treatment of energy sources stifles clean-tech innovation, as special-interest projects divert capital and compete with legitimate projects. 2.
ADJUDICATORY UNCERTAINTY

State autonomy also creates legal risk and uncertainty, as fifty different states mean not only fifty different laws, but also fifty different court systems interpreting them.169 Consequently, potential clean-tech investors and innovators must contend with the judicial

166 167

. Id. . See id. These provisions are one reason that some call Pennsylvania’s the dirtiest portfolio standard in the nation. Rabe, supra note 100, at 14. 168 . Rabe, supra note 100, at 15. Another example of special interests in state politics comes from Colorado, where a political coalition led by coal-mining interests blocked the state’s portfolio standard in three consecutive legislative sessions until the state resorted to a referendum to get it passed. Id. at 14. Admittedly, special interests are prevalent on a federal level as well; thus, national legislation is not a panacea. See Thomas Stratmann, Can Special Interests Buy Congressional Votes?, 45 J.L. & ECON. 345, 367–68 (2002). Despite this, various procedural and practical considerations—such as accessibility of decision makers, greater diversity of constituent interests, federal lobbying rules, and the sheer cost of influence—add at least a few additional hurdles to special-interest groups at the federal level. Cf. Geoffrey P. Miller, Public Choice at the Dawn of the Special Interest State: The Story of Butter and Margarine, 77 CAL. L. REV. 83, 86–87, 98 (1989) (explaining the dairy industry’s difficulty in lobbying for federal antimargarine legislation). Thus, while national legislation does not eliminate special-interest concerns, it does at least pluck the problem’s low-hanging fruit. Since remedying special-interest influence is beyond the scope of this Comment, it is only relevant that a national framework removes at least one layer where corruption may take place. 169 . Similarly, this deterring effect was one of many motivators to the enactment of national regulations affecting commerce, such as the Uniform Commercial Code. See STEWART MACAULAY ET AL., 1 CONTRACTS: LAW IN ACTION 34–36 (2d ed. 2003). The existence of varying commercial laws across states acts as a serious roadblock to a nationalized economy. Id. But see Nccusl.org, Model Employment Termination Act, http://www.nccusl.org/Update/uniformact_factsheets/uniformacts-fsmeta.asp (last visited Oct. 27, 2008) (illustrating some model acts drafted with inter-state uniformity in mind languish and gain little legislative traction).

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interpretations of myriad differing laws.170 While no court system is predictable, forecasting the outcome of future cases becomes exponentially more difficult as the number of laws grows.171 Furthermore, constitutional issues may also arise in the interplay of such varied laws.172 While the variance in state case law is far too great to discuss exhaustively, four illustrations relating to net-metering and portfolio standards follow, along with a brief discussion of constitutional issues. Ohio’s case law is a perfect illustration of how states reduce the appeal of net-metering by narrowing the spread between its costs and benefits. In First Energy Corp. v. Public Utility Commission of Ohio,173 the Supreme Court of Ohio considered what constituted electricity when a utility pays customers for excess generation.174 The court held utilities must only reimburse a customer for the generation costs avoided, but not for other costs associated with electricity, such as transmission and distribution.175 Of course this decision makes net-metering less attractive for customers in Ohio, as they will receive lower rates of compensation for their excess generation than would have otherwise been possible. This lowered customer interest will theoretically lead to a diminished market for clean-tech equipment. New Jersey’s case law also diminishes demand for clean-tech equipment, as it allows utilities to satisfy portfolio standards without adding new renewable-energy capacity. In In re the Ownership of Renewable Energy Certificates,176 the appellate division of the New Jersey Superior Court addressed who owns the renewableenergy credits stemming from a generation agreement created before the state’s portfolio standard was enacted.177 The court ultimately held the credits belong to the purchasing utility,178 even though this grants an unexpected benefit for which it never bargained. In so holding, the court missed an opportunity to expand the
170 171 172 173 174 175 176 177 178

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. . . . . . . . .

See generally MACAULAY ET. AL., supra note 169, at 35. See generally id. Infra text accompanying notes 187–92. 95 Ohio St. 3d 401, 2002-Ohio-2430, 768 N.E.2d 648. See id. ¶ 13. Id. 913 A.2d 825 (N.J. Super. Ct. App. Div. 2007). See id. Id. at 832.

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generating capacity of renewable energy (and the market for clean-tech equipment), as the holding potentially allows utilities to avoid making clean-tech capital outlays of their own. Given the prevalence of portfolio standards, many more of these suits will follow, further casting a cloud over the industry.179 In juxtaposition to Ohio and New Jersey, New Mexico has actually induced renewable-energy generation through its case law by making it more costly for utilities to purchase energy credits from others. In New Mexico Industrial Energy Consumers v. New Mexico Public Regulation Commission,180 the Supreme Court of New Mexico considered the issue of utility reimbursement for purchases of unbundled energy credits.181 The court held a utility in that state could charge customers for the cost of open-market power purchases needed to meet consumer demand, but could not recoup the costs of energy credits purchased to comply with the state’s portfolio standard.182 This holding may make it more beneficial for a utility to generate renewable energy itself, as it can then recoup the full cost of complying with the state’s portfolio standard through its rate structure. Pennsylvania struck a similar blow for the clean-tech cause by checking the growth of otherwise rampant state protectionism. In Pennsylvania Power Co. v. Public Utility Commission,183 the Pennsylvania Commonwealth Court addressed both state protectionism and the uncertainty of where renewable power can be generated.184 The case centered on an order by Pennsylvania’s Public Utility Commission that stated a particular utility could satisfy portfolio standards only with renewable energy produced in the state so that economic benefits would not be transferred to other states at Pennsylvania’s expense.185
179

. Despite the prevalence of portfolio standards, only nine states have addressed the issue. Id. at 828. 180 . 2007-NMSC-053, 142 N.M. 533, 168 P.3d 105. 181 . See id. 182 . Id. ¶¶ 31–35. 183 . 932 A.2d 300 (Pa. Commw. Ct. 2007). 184 . See id. at 304–05, 308. 185 . See id. The standard states, “Energy derived only from . . . sources inside the geographical boundaries of this Commonwealth or within the service territory of any regional transmission organization that manages the transmission system in any part of this Commonwealth shall be eligible to meet the compliance requirements under this act.” 73 PA. CONST. STAT. ANN. § 1648.4 (West 2008).

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The court reversed the order, finding the utility could purchase power from either of Pennsylvania’s regional transmission systems, even though one of them predominantly covered other states.186 This finding provides a measure of certainty for clean-tech investors in Pennsylvania, as well as a small building block for a truly free market in renewable-energy production. These four illustrations show that not all state case law is harmful to clean-tech development. However, what is most troubling is not the specific case law of any one state, but rather the existence of such extreme variances between states. Such disparity has real implications as it creates unwanted risk for clean-tech investors and innovators. As a final note on adjudicatory uncertainty, constitutional issues are also present in the state-by-state system due to the dormant commerce187 and privileges and immunities188 clauses of the U.S. Constitution. Conceivably, any policy designed to minimize the role of out-of-state renewable-energy production could face a constitutional challenge.189 For example, since Pennsylvania lies partly in one regional transmission organization and partly in another,190 a number of states could feed renewable energy to the state if its portfolio standard had no protectionist limitation.191 Therefore, this limitation could be deemed unconstitutional because it regulates interstate commerce and discriminates against other states. This point underscores the need for a national framework to reduce needless uncertainties.192
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. Pa. Power Co., 932 A.2d at 308. . See generally Amy M. Petragnani, The Dormant Commerce Clause: On Its Last Leg, 57 ALB. L. REV. 1215 (1994). The dormant commerce clause suggests the power to regulate interstate commerce is Congress’s alone, and the states cannot act even if Congress has not. Id. at 1215. 188 . U.S. CONST. art. IV, § 2, cl. 1. The privileges and immunities clause prevents any state from discriminating against citizens of another state. See id. 189 . Rabe, supra note 100, at 15. 190 . See supra text accompanying notes 183–86. 191 . Of course, the courts have recently relaxed this limitation. See id. 192 . See Rabe, supra note 100, at 14–15. However, some argue that constitutional means of favoring in-state renewable-energy production do exist if carefully crafted. See Kristen H. Engel, The Dormant Commerce Clause Threat to Market-Based Environmental Regulation: The Case of Electricity Deregulation, in BOSSELMAN ET AL., supra note 112, at 1086, 1087–88 (2006). One method proposed is to

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3.

GAME THEORY AND THE PRISONER’S DILEMMA

Game theory193 offers an interesting way to frame the concepts of state myopia and illustrates the need for a national renewable-energy framework. A common gametheory concept is that of the collective-action problem, where the players’ self-interests forestall the optimal solution.194 One framing of this problem is the “prisoner’s dilemma,”195 where two partners in crime have been caught and must decide whether to confess.196 If one confesses and the other does not, the confessor will go free and the other will receive a lengthy sentence.197 If both confess, they will both receive a medium-length sentence.198 Finally, if neither confesses, both will receive minimal sentences since the evidence is only enough to prove a lesser crime.199 Therefore, the best scenario from the prisoners’ perspectives is for both to stay quiet and serve minimal sentences, as this minimizes their combined punishment.200 In practice, however, game theory predicts both will confess out of self-interest or distrust.201 Consequently, they do not achieve the optimal outcome.202
use the state’s taxation powers to incentivize in-state production. Id. at 1088. Another proposed method is to limit qualified renewable-energy credits to those sold to in-state customers, thereby ensuring renewable-energy production and its environmental benefits are not decoupled. Id. at 1088–89. Even proponents of such methods acknowledge they are not foolproof, however, and constitutional issues may remain. Id. at 1090–91. 193 . Game theory is the logical contemplation of strategic interactions. Crump, supra note 102, at 331. The theory is often used in analyzing legal problems. See Stephen W. Salant & Theodore S. Sims, Game Theory and the Law: Ready for Prime Time?, 94 MICH. L. REV. 1839, 1840 (1996) (book review). 194 . DOUGLAS G. BAIRD ET AL., GAME THEORY AND THE LAW, 31–35 (1998). 195 . Id. at 33–35. 196 . Id. at 33. 197 . Id. 198 . Id. 199 . Id. 200 . Crump, supra note 102, at 373–76. 201 . Id. 202 . Id. Note, when the players in a prisoner’s dilemma know the game will be repeated, they tend to develop a “tit for tat” mentality and begin to cooperate more readily. See id. at 375–81. Thus, in an iterative decision-making process, the result tends to be “more optimal” than with a one-time decision. Id.

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This dilemma is readily transferrable to the state-bystate renewable-energy regulatory scenario. While it is well recognized that optimal results come from collaboration, the pressure to maximize economic benefits within each state’s borders deters serious consideration of interstate collaboration.203 This pressure sets the stage for suboptimal, self-interested actions. Since traditional energy production is currently less expensive than clean-tech innovation,204 a state requiring clean-tech use risks losing constituents to other states where clean tech is not required and costs are lower. 205 The prisoner’s dilemma thus suggests a state will choose the less desirable outcome of traditional energy production.206 This decision stymies the clean-tech equipment market and thereby discourages further development in the area.207 One solution, of course, is centralized governmental action.208 A central decision maker is able to strip out short-term self-interests and create an optimal, unified law.209 A unified law means states may no longer act out of fear that their neighbors will violate the rules.210 In fact, unified national laws were used to solve many other dilemmas in U.S. history.211 Today, a national renewableenergy policy would encourage the use of clean-tech
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. Rabe, supra note 100, at 15. . See infra note 261. 205 . See Daniel P. Petrov, Prisoners No More: State Investment Relocation Incentives and the Prisoner’s Dilemma, 33 CASE W. RES. J. INT’L L. 71, 82–83 (2001). 206 . See id. Ironically, in making this short-term decision, the state ultimately sacrifices greater long-term gains. Id. at 82. 207 . One might ask, why does this need to be a race to the bottom? Rather than cheap energy being the benefit, could we not assume states would see a clean environment as the benefit, and compete to enact stronger clean-tech mandates? For more on this novel theory, see Rabe, supra note 100, at 11. In practice this interpretation has not come to fruition, however. See generally Petrov, supra note 205 (discussing how incentives for positive growth within a state-by-state framework are still subject to a prisoner’s dilemma, leaving states worse off). 208 . See BAIRD ET AL., supra note 194, at 34. 209 . Id. 210 . Id. 211 . See, e.g., United States v. Darby, 312 U.S. 100 (1941) (upholding the Fair Labor Standards Act of 1938, which created minimum wage and maximum hours for certain occupations); Steward Machine Co. v. Davis, 301 U.S. 548 (1937) (upholding a congressional act creating an unemployment tax);

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equipment, solidify demand in the area, remove unnecessary risk, and spur the requisite capital formation to finance innovation. V. A CASE STUDY IN STATE-LAW PROBLEMS: RECENT ILLINOIS LEGISLATION Another stumbling block for the development of clean tech is that some states simply enact laws ill suited for its growth. A good example comes from Illinois212—not because the legislation is particularly awful, but only because it was so recently enacted.213 In August 2007, the Illinois Power Agency Act became law.214 In addition to other measures, the Act created a new renewable portfolio standard to begin in 2008.215 Another bill, signed the same day, was an amendment to the Public Utilities Act,216 implementing net-metering in the state.217 The portfolio standard and net-metering amendment follow the molds discussed in Part IV, with minor variations.218 The following Sections discuss flaws in the regulations as adopted, and their effects on cleantech innovation. A. A Critique of Illinois’s Portfolio Standard Although portfolio standards have become quite popular among the states219 and are theoretically a sound means of encouraging renewable-energy use,220 states often dilute the model’s effectiveness through poor policy choices.221 Thus, while Illinois should generally be
212

. See 220 ILL. COMP. STAT. 5/1-101 to 5/70-503 (2007); ILL. P.A. 095-0481, 2007 Ill. Legis. Serv. 5085 (West). 213 . In reality, the law is not particularly awful relative to its brethren, but instead is rather pedestrian, making its status as a representative for the group even more worthy. 214 . ILL. P.A. 095-0481, 2007 Ill. Legis. Serv. 5085; Bob Matyi, Illinois Governor Finally Signs Electric Rate Relief/Power Procurement Bill, ELEC. UTIL. WEEK, Sept. 3, 2007, at 9. 215 . ILL. P.A. 095-0481, § 1-75(c)(1), 2007 Ill. Legis. Serv. 5096. 216 . 220 ILL. COMP. STAT. 5/1-101 to 5/70-503. 217 . ILL. P.A. 095-0420, 2007 Ill. Legis. Serv. 4855–58. 218 . See supra text accompanying notes 135–140, 155–160. 219 . See supra note 114 and accompanying text. 220 . See generally supra Part IV.A.1. 221 . See, e.g., ILL. P.A. 095-0481, § 1-75(c)(1), 2007 Ill. Legis. Serv. 5096 (requiring 75 percent of renewable energy to come from

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commended for enacting its portfolio standard, the provision does contain several flaws if viewed solely as a means of encouraging clean-tech development. The first flaw of the Illinois portfolio standard is that it applies only to investor-owned utilities.222 This provision leaves out rural electric cooperatives, small utilities, and municipal power-generation facilities.223 While investorowned utilities cover the majority of customers and electricity sold in Illinois—approximately 90 percent of each224—the standard still leaves a significant gap. Troublingly, no compelling rationale supports this gap other than that municipalities and community-owned generators are simply more politically sympathetic than investor-owned corporations.225 Moreover, the standard is further limited to utilities with more than 100,000 customers.226 This additional limitation carves out another 112,297 customers who use a total of 2,606,356 megawatt-hours of electricity annually.227 These gaps in the portfolio standard eliminate a significant market for clean-tech equipment, making the area less appealing to investors and innovators alike.228
wind generation). 222 . See id. The portfolio standards apply to public utilities, defined in the Public Utilities Act. 220 ILL. COMP. STAT. 5/3-105 (2007). 223 . See ILL. P.A. 095-0481, § 1-75(c)(1), 2007 Ill. Legis. Serv. 5096. 224 . See ESR, supra note 148. Investor-owned utilities serve approximately 5,054,009 customers, compared to 530,470 municipal and cooperative customers. Id. Investor-owned utility generation is 106,797,900 mwh, while municipal/cooperative production is 11,983,546 mhw. Id. 225 . E-mail from Peter Carstensen, Professor of Law, University of Wisconsin Law School, to Brad Kopetsky, author (Nov. 19, 2007) (on file with author). See generally Paul A. Meyer, The Municipally Owned Electric Company’s Exemption from Utility Commission Regulation: The Consumer’s Perspective, 33 CASE W. RES. L. REV. 294 (1983) (concluding the costs of lax regulation of municipally owned utilities outweigh any justifications for them). 226 . ILL. P.A. 095-0481, § 1-20(a)(1), 2007 Ill. Legis. Serv. 5087. 227 . See ESR, supra note 148. 228 . The justification for limits based on ownership type is that municipal and other smaller utilities are typically nonprofit entities existing solely for local interests, and state regulation will needlessly raise their costs. See Meyer, supra note 225, at 295–96. While there may be merit to this argument, in the present concern of solving the nation’s energy and environmental crises, the rationale for such loopholes seems questionable. Illinois is not alone in these limits, but other states have begun to close the gap. Oregon, for example, does

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Another flaw is that the standard further limits qualifying production to Illinois producers.229 The justification for this limitation is purely political and protectionist, as state policy makers do not want utilities —reluctant to invest in clean tech—simply purchasing energy credits from other states.230 Many economists would argue Illinois’s utilities should simply sink or swim in the marketplace,231 encouraging utilities to innovate and develop cost-effective clean tech. The current provision blatantly hinders the natural market by sealing it off and allowing the perpetuation of inefficient technologies.232 The protectionist provision also compounds another flaw in the Illinois portfolio standard—a cost-containment clause. The clause limits qualifying energy to “costeffective resources,” and caps annual electricity-rate increases.233 If the cost increases more than those minimal amounts, utilities may reduce the renewable
not exclude entities by ownership but does scale down the requirement based on capacity. See S.B. 838, § 7, 74th Leg. (Or. 2007). 229 . ILL. P.A. 095-0481, § 1-75(c)(3), 2007 Ill. Legis. Serv. 5097. Through 2011, eligible producers must be located in state unless a shortage of cost-effective, in-state production necessitates the purchase of energy from neighboring states. Id. If there is still not enough available from neighboring states, utilities may purchase energy from other regions of the country as well. Id. After 2011, equal consideration will be given to power generated within Illinois and neighboring states, with production from other regions allowed only as needed. Id. 230 . Cf. supra note 128 and accompanying text. 231 . See generally ANDREW SCHOTTER, FREE MARKET ECONOMICS 1–15 (1985). 232 . Cf. id. at 5. Some argue such protectionist measures ensure that the state’s citizens benefit from their own legislation and any additional costs they must bear. See Engel, supra note 192, at 926–27. Another theoretical argument may be that the measures guarantee a market for in-state production, making it easier for producers to sell their production (as opposed to competing with outside concerns) and therefore encouraging clean-tech development. Cf. BOSSELMAN ET AL., supra note 112, at 52–53 (discussing natural monopolies). However, one can foresee additional dangers in the protectionist measures. If Illinois’s provision causes other states to enact similar provisions, inefficiencies may develop in each market. See supra Part IV.B.3. This would inflate clean-tech costs nationwide, reducing acceptance and thus making capital inflows unlikely. 233 . ILL. P.A. 095-0481 § 1-75(c)(2)(A), 2007 Ill. Legis. Serv. 5096. The cost to customers attributable to the standard cannot increase more than 0.5 percent in 2008. Id. The cap changes each year through 2011, when the retail price cannot exceed 0.5 percent of the 2010 cost, or 2 percent over 2007 levels. Id.

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energy produced to bring costs down.234 Troublingly, the aforementioned protectionist provision creates slack in the market, where Illinois producers operate less efficiently than competitors.235 This slack could lead to higher energy costs and potentially trigger the costcontainment clause unnecessarily. The cost-containment clause is obviously counterintuitive, as the more widely dispersed clean-tech equipment becomes, the more likely technological advances and economies of scale will reduce its costs.236 Another flaw of the cost-containment clause is that it creates unnecessary risk for investors. As a result of the clause, investors can never be sure what the end market for their projects will be. Why develop a clean-tech project only to find cost increases have triggered the costcontainment clause and made your investment worthless? While the clause was drafted to protect consumers from runaway inflation,237 it is clearly poorly conceived and will prematurely stymie the outgrowth of clean-tech investment and innovation.238 A final critique of the Illinois standard is that it requires 75 percent of renewable energy to come from wind power.239 This requirement is presumably tied to the “cost-effective” language of the Act, since wind power is one of the lower-cost forms of clean tech. 240 However, the mandate is just another unnecessary constraint on the
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. Id. . Cf. supra text accompanying note 231. 236 . See Del Chiaro & Gibson, supra note 20, passim. The response to this critique is that the goal of the overall legislation was to protect consumers from excessive rate increases. See Matyi, supra note 214. This response may prove shortsighted, however, if the scarcity of natural resources drives the cost of traditional production well above the costs of renewable means. See, e.g., Price Index Soars on Spike in Energy Costs, supra note 1. 237 . See Matyi, supra note 214. 238 . The logical solution is to allow larger price increases now, with stricter tolerances in the future when innovation has reduced costs. Again, the shortsighted counterargument is that the primary goal of the legislation was rate relief. See supra note 236. 239 . ILL. P.A. 095-0481, § 1-75(c)(1), 2007 Ill. Legis. Serv. 5096. 240 . See Solarbuzz.com, Photovoltaic Industry Statistics: Costs, http://www.solarbuzz.com/StatsCosts.htm (last visited Oct. 27, 2008). Wind energy is up to five times less costly than solar. See id. Illinois is also a flat state, giving geographical support to wind power. See City-data.com, Illinois Topography, http://www.city-

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free market.241 The provision willingly accepts lower energy costs today at the risk of capping clean tech’s long-term potential.242 State provisions such as this generally discourage innovation and investment by restricting free choice.243 B. A Critique of Illinois’s Net-Metering Amendment Unlike portfolio standards, net-metering leaves little room for criticism if implemented effectively. Netmetering creates renewable-energy demand with the end user, pulling clean-tech equipment development through the system.244 This is extremely appealing for prospective investors as it creates a broad end market for clean tech.245 Illinois’s net-metering amendment is a mixed bag, however. One positive note is that the amendment defines renewable energy broadly enough to encourage proliferation of a variety of energy sources, reducing the risks of a narrow focus.246 The amendment’s “connection fee” provisions are investor friendly as well because they prohibit any additional fees to net-metering customers.247 Utilities must also supply a meter equipped for netmetering to any nonresidential customers with a capacity of more than forty kilowatt-hours at the utility’s cost. 248 These provisions are generally favorable to prospective customer-generators, and avoid the pitfalls of many other states, where restrictive definitions of renewable energy

data.com/states/Illinois-Topography.html (last visited Oct. 27, 2008). 241 . See supra text accompanying notes 103–05. 242 . See id. 243 . Cf. Del Chiaro & Gibson, supra note 20, passim. 244 . See infra Part VI. 245 . See id. 246 . Compare with supra text accompanying notes 103–05. The definition of renewable energy in Illinois includes anything “powered by solar electric energy, wind, dedicated crops grown for electricity generation, anaerobic digestion of livestock or food processing waste, fuel cells or microturbines powered by renewable fuels, or hydroelectric energy.” 220 ILL. COMP. STAT. 5/16-107.5(b)(iii) (2007). 247 . 220 ILL. COMP. STAT. 5/16-107.5(e). 248 . Id. at 5/16-107.5(c). It should be noted, however that the cost of meters to residential customers, and nonresidential customers with generating capacity of less than forty kilowatt-hours,

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and exorbitant interconnection fees reduce the appeal of net-metering programs.249 Another credit to the amendment is that any renewable-energy credits associated with customer production remain the property of the customer. 250 This provision reduces ownership uncertainty.251 It also further encourages customers to purchase clean-tech equipment and participate in net-metering, as the certificate is effectively additional compensation for doing so.252 The provision regarding energy-credit ownership could be improved, however, as the added value given to customer-generators comes with additional burdens. Individuals participating in net-metering may be unaware of the complexities of energy credits, creating a potentially unfair transaction between a utility—whose business it is to market and trade power—and a “regular Joe,” who likely knows little about an energy credit’s value.253 A more fair approach would be to grant the credit to the purchasing utility and compensate the customergenerator through higher rates for their renewable energy. The generator would then receive guaranteed, hassle-free value for production via clean tech. Another area of mixed results within the amendment is the treatment of customer-generators that are net producers of electricity. Any electricity generated by residential customers in excess of monthly needs is credited at the current market rate to their accounts for the following month.254 This approach encourages customers to purchase larger renewable-energy systems
are still the responsibility of the customer-generator. Id. 249 . See NETWORK FOR NEW ENERGY CHOICES , supra 142, at 7. Reportedly, “[i]n some cases, standby charges are equal to or even exceed rates for full electrical service, in effect creating an economic disincentive for customers to install renewable energy systems.” Id. at 6. 250 . 220 ILL. COMP. STAT. 5/16-107.5(g). 251 . See supra text accompanying notes 176–79. 252 . The credit can theoretically be sold to a utility subject to a portfolio standard. 253 . Admittedly, renewable-energy credits typically represent one megawatt-hour of production. See, e.g., DEL. CODE. ANN. tit. 26, § 352(16) (2007). Consequently, those parties in a position to sell credits are likely to be larger, nonresidential customers with presumably more business sense than the average citizen. Nonetheless, a utility is still likely to be in a better bargaining position than the typical industrial customer-generator. 254 . 220 ILL. COMP. STAT. 5/16-107.5(d)(2).

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—taking advantage of economies of scale—without fear of wasting productive capacity.255 This benefit is mitigated, however, since the rollover credit expires at year end. 256 Customers are thus effectively forced to purchase systems that underserve their annual electricity needs to avoid waste.257 Consequently, customer-generators provide less renewable energy, the market for highcapacity equipment is constrained, and investors’ interest in the area is similarly limited.258 Conversely, nonresidential customers receive no rollover credits, but are reimbursed monthly for their power at the utility’s avoided cost.259 An overarching problem of this avoided-cost compensation structure is that it makes net-metering more attractive only as the energy crisis worsens and utilities’ energy costs rise.260
255 256

. See NETWORK FOR NEW ENERGY CHOICES, supra note 142, at 3. . 220 ILL. COMP. STAT. 5/16-107.5(d)(3). 257 . See NETWORK FOR NEW ENERGY CHOICES, supra note 142, at 3. 258 . In comparison, some states compensate generators for rollover credits at the end of the annual period. See, e.g., N.J. STAT. ANN. § 48:3-87(e)(1) (West 2008). This sensible approach does not force customers to underserve their needs for fear of “wasting” excess production; however, such provisions may hurt utility buy in to the program, and simply lead utilities to extract fees from customers via other avenues. See supra note 154. 259 . 220 ILL. COMP. STAT. 5/16-107.5(f)(2). This means nonresidential customers are compensated less handsomely than residential customers (who receive credit for the retail rate of their excess production), since the avoided cost to the utility is less than the retail rate of electricity. See Awea.org, Frequently Asked Questions about Net-Metering, http://www.awea.org/pubs/factsheets/netmetfin_fs.PDF (last visited Oct. 27, 2008). At the same time, however, the monthly payment at the utility’s avoided cost is more favorable than having credit for excess generation expire, and therefore mitigates the negative effect. An obvious compromise would be to extend the period over which excess generation is calculated from a month to a year. See, e.g., N.J. STAT. ANN. § 48:3-87(e)(1). This would grant nonresidential customers the benefit of a rollover period, while maintaining compensation for excess generation, and encouraging purchases of larger clean-tech equipment. 260 . It is to say, as the energy crisis worsens, the cost of energy to utilities will rise, thus raising the rates paid to customergenerators. Admittedly, utilities’ costs should decline over the long term and mitigate this concern if they invest in cleaner, cheaper forms of renewable energy in the future. Nonetheless, the avoided-cost structure is damaging in the short term, as we need to encourage clean-tech investment now, rather than incentivizing the market to withhold capital so as to collect the higher avoided-cost compensation as rates rise. Remember, the fundamental objective here is not the absolute lowest energy cost, but the total positive externality package

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Additionally, the avoided cost of electricity a utility must pay a customer-generator is less than the cost of generating that energy, since the customer-generator’s renewable energy is more expensive than the utility’s traditional production.261 The utility is thus able to purchase renewable energy from customers without any economic incentive to generate its own.262 This scenario diminishes the demand for clean-tech equipment, and further reduces the market’s appeal to innovators and investors.263 Perhaps the amendment’s biggest flaws are the limits restricting its own reach: a customer-generator is limited to two megawatt-hours of production capacity, 264 the total
of clean tech. 261 . In 2007, electricity generated from coal and nuclear plants cost 2.47 cents/kwh and 1.76 cents/kwh, respectively. Nei.org, U.S. Electricity Production Costs (1995–2007), http://www.nei.org/resourcesandstats/documentlibrary/reliableandaffor da bleenergy/graphicsandcharts/uselectricityproductioncosts (last visited Oct. 28, 2008). By comparison, typical renewable-energy costs were 4– 50 cents/kwh. See Photovoltaic Industry Statistics: Costs, supra note 240. 262 . In fact, one study calculated that “when distribution system savings and environmental externalities are incorporated, netmetered customers . . . actually subsidize other utility customers.” CHRISTOPHER COOK & JONATHAN CROSS, THE ECONOMIC COST OF NET METERING IN MARYLAND: WHO BEARS THE ECONOMIC BURDEN? 1 (1997), available at www.e3energy.com/netmeter.pdf. 263 . The remedy is an alternative payment method, requiring a utility to pay customer-generators a premium for renewable energy rather than merely their avoided costs of traditional production. See infra Part VI. This would incentivize (1) customer-generators to produce more, since they will be compensated at higher rates, and (2) utilities to look for ways to lower the costs of renewable energy. Both of which would stimulate market-driven innovation in clean tech as markets would expand. See id. In fact, incentives fixing a static premium on retail energy rates have worked elsewhere. For example, a price-cap regulation enacted in the United Kingdom spurred innovation and cost reduction, because any reduction of costs below the capped rate translated into pure profit for the utilities. Brian J. Miretzky, The Implications of Restructuring of the Electricity Market in Reference to Consumer Price and Choice 9–10 (Aug. 2007) (unpublished comment) (on file with Professor Peter Carstensen, University of Wisconsin Law School). Ultimately, prices fell by 30 percent, yet the industry continued to profit. Id. at 10–11. 264 . 220 ILL. COMP. STAT. 5/16-107.5(b). Admittedly, this is becoming the new consensus among states. See NETWORK FOR NEW ENERGY CHOICES, supra note 142, at 3. However, the cap certainly precludes at least the possibility for customers to make use of net-metering through systems of more substantial size.

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amount of energy a utility must accept via net-metering need not surpass 1 percent of its total capacity,265 and the number of users below forty kilowatt-hours of production is limited to a mere 200 through March 31, 2009.266 Together, these provisions severely cap both the potential amount of renewable energy produced through netmetering as well as the disbursement of clean-tech equipment throughout the public.267 These caps further hinder cost-reducing economies of scale, a viable market for clean tech, and ultimately clean-tech innovation.268 Taken collectively, then, Illinois’s portfolio standard and net-metering amendment are more-than-fair representations of the disappointing state efforts to propagate renewable energy. Interestingly, the acts illustrate not only the variance between states, but also the great potential for inconsistencies within a single state’s legislation.269 Of course, the ultimate result of this inadequate state-by-state arrangement is a dampened climate for clean-tech innovation. VI. THE SOLUTION
TO THE

CRISIS

If current federal subsidies only work to a certain point, and a state system of portfolio standards and netmetering is not working at full capacity, how can the United States maximize clean-tech innovation? The perceived success of state portfolio standards has led to a clamor for a federal portfolio standard. 270 The concept has
265

. 220 ILL. COMP. STAT. 5/16-107.5(j). The limit is presumably in place to protect existing utilities from market erosion; however, a number of other states have not found such protection necessary. See, e.g., N.J. STAT. ANN. § 48:3-87(e) (West 2008). That said, many states are admittedly worse, such as Utah, which caps net-metering at 0.1 percent of peak demand. UTAH CODE ANN. § 54-15-103(2) (2008). 266 . 220 ILL. COMP. STAT. 5/16-107.5(j). This limit is presumably for administrative purposes, however wide disbursement of clean tech is critical, so cutting it off at this formative stage is not optimal. See infra Part VI. 267 . Additionally, like the portfolio standard, net-metering applies only to public utilities, leaving a substantial portion of electricity customers without access to net-metering. 220 ILL. COMP. STAT. 5/16-107.5(b)(ii). 268 . See Del Chiaro & Gibson, supra note 20, passim ; infra Part VI. 269 . See, e.g., supra note 259. 270 . Diverse Group Seeks Federal RPS, INSIDE ENERGY EXTRA, May 25, 2007, at 1 (reporting that in May of 2007 nearly 200 corporations, unions, and environmental groups sent Congress a letter

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already expanded outside state borders into regional agreements, where portfolio standards treat whole regions as single markets.271 Many oppose the prospect of a national portfolio standard, however, since not all states have the same capacity for renewable-energy development, and a portfolio standard would reduce their flexibility.272 Rather than implementing a portfolio standard alone, this Comment contends the United States must (1) create a national renewable-energy policy to provide the clarity investors prefer, thereby stimulating capital infusion in clean tech; (2) abandon traditional forms of flat subsidies, as they have been ineffective in stimulating a sufficient market for clean tech; and (3) implement a demand-pull strategy through distributed generation273 to create a long-term, diverse end-market for clean tech. Together, these actions will provide a quantifiable clean-tech

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seeking a federal portfolio standard). However, some commentators have argued that a decentralized approach, in which state and local governments can adopt individualized programs, is superior to a federal standard. See Mary Ann Ralls, Congress Got It Right: There’s No Need to Mandate Renewable Portfolio Standards, 27 ENERGY L.J. 451 passim (2006). 271 . An example of such a regional market exists in the MidAtlantic states. See Rggi.org, About RGGI, http://www.rggi.org/about (last visited Oct. 27, 2008). 272 . Dawn Reeves, Utilities May Lose Bid for Veto Threat on Low-Carbon Rule in Energy Bill, CARBONCONTROLNEWS.COM, Oct. 11, 2007, http://carboncontrol news.com/index.php/ccn/show/utilities_may_lose_bid_for_veto_threat_o n_low_carbon_ rule_in_energy_bill. Considerable debate also exists as to whether this type of program would actually yield the results necessary to face today’s crisis. A portfolio standard of 15 percent on a national level would drive down electricity prices, but not lead to a significant reduction in greenhouse-gas emissions, according to consulting firm Wood Mackenzie. RPS Seen Cutting Gas, Power Prices, INSIDE ENERGY EXTRA, Mar. 6, 2007, at 2. Conversely, another study has indicated that if a portfolio standard of 25 percent by 2025 were employed, it would lead to higher electricity costs, a slight reduction in projected greenhouse-gas emissions (but still an increase from today’s levels), and an overall adverse effect on the country’s economy. Proposed Renewable Plans Assessed, INSIDE ENERGY EXTRA, Sept. 11, 2007, at 1. 273 . Distributed generation consists of “[s]mall, modular, decentralized . . . systems located in or near the place where energy is used.” Epa.gov, Green Power Partnership: Glossary, http://www.epa.gov/greenpower/pubs/glossary.htm (last visited Oct. 27, 2008).

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market, reduce excessive investment risk, and allow for economies of scale and innovation.274 The lynchpin of the U.S. policy must be distributed generation. While policy makers have long believed the electricity industry to be a natural monopoly,275 distributed generation is actually key to encouraging innovation and growth in the clean-tech equipment market.276 Distributed generation creates a bigger market, allows for economies of scale and innovation, and ultimately creates capital formation.277 The United States has already taken a step toward distributed generation with the 2005 Energy Act’s requirement for consideration of net-metering.278 The existing act is not enough, however, since state standards will still vary. 279 For the next step, the United States must look to Germany as a model. More than beer, more than fine engineering, even more than David Hasselhoff,280 if there is one thing the Germans appreciate, it is clean tech.281 A. The German Renewable Energy Act as a Model Germany’s successful renewable-energy regulatory framework is epitomized by the German Renewable
274

. Interestingly, these developments would also allow utilities to more easily meet their portfolio standards in states with such requirements. 275 . Richard D. Cudahy & William D. Henderson, From Insull to Enron: Corporate (Re)Regulation After the Rise and Fall of Two Energy Icons, 26 ENERGY L.J. 35, 46 (2005). 276 . Cf. Del Chiaro & Gibson, supra note 20, at 371–72 (discussing the success of several of California’s distributed-generation incentive programs in fostering clean-tech equipment adoption by end users). 277 . See id. This stimulation is also vital since electricity use in American homes is expected to increase by 39 percent over the next twenty-five years. See ENERGY INFO. ADMIN., U.S. DEP’T OF ENERGY, DOE/EIA0383, ANNUAL ENERGY OUTLOOK 2007, at 82 (2007), available at http://www.eia.doe.gov/oiaf/archive/ aeo07/pdf/0383(2007).pdf. 278 . Energy Policy Act of 2005, Pub. L. No. 109-58, § 1251, 119 Stat. 594, 961–63. 279 . See id. 119 Stat. at 963. 280 . Okay, not more than David Hasselhoff. 281 . This appreciation has borne out in venture capital as well, where clean tech fetched 14 percent of German venture capital from 2003–06. See UK Dominates European Investment in Clean Energy, supra note 51. As a reminder, this was a period during which it began at 3 percent, grew slowly, and then “exploded” to a mere 9 percent in the United States. See MAKOWER ET AL., supra note 34, at 4.

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Energy Act (“Renewable Energy Act”), which prominently illustrates the benefits of distributed generation. 282 In passing the Renewable Energy Act, Germany recognized renewable sources enjoyed no economies of scale, with low production leading to higher costs.283 The solution was a demand-pull strategy to create widespread demand for clean-tech equipment, thereby lowering production costs, energy prices, and ultimately the required tariffs. 284 This demand-pull strategy took the form of a feed-in tariff, which is basically a distributed-generation provision that allows customer-generators to sell renewable energy back to the grid at above-market rates.285

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282

. Gesetz für den Vorrang Erneuerbarer Energien [Erneuerbare-Energien-Gesetz] [Renewable Energy Sources Act], Mar. 29, 2000, BGBI. I at 305, last amended by Gesetz, July 21, 2004, BGBI. I at 1918, translated at Renewable Energy Sources Act, http://www.erneuerbareenergien.de/files/pdfs/allgemein/application/pdf/ eeg_en.pdf (last visited Oct. 26, 2008). The Renewable Energy Act was first implemented in 2000, and subsequently amended in 2004. See id. In actuality, however, Germany’s successful renewable-energy framework reaches as far back as 1990. See Gesetz über die Einspeisung von Strom aus Erneuerbaren Energien [Stromeinspeisungsgesetz] [Act on Feeding into the Grid Electricity Generated from Renewable Energy Sources], Dec. 7, 1990, BGBI. I at 2633, last amended by Gesetz, Apr. 24, 1998, BGBI. I. at 730, translated at Wind-works.org, The Original Electricity Feed Law in Germany, http://www.wind-works.org/FeedLaws/Germany/ ARTsDE.html (last visited Oct. 27, 2008). 283 . Gesetz für den Vorrang Erneuerbarer Energien [Erneuerbare Energien Gesetz] [EEG] [Renewable Energy Act], Mar. 29, 2000, BGBI. I at 305, explanatory memo, § A, translated at http://www.erneuerbare-energien.de/files/pdfs/allgemein/ application/pdf/res-act.pdf. Germany also recognized clean tech costs more because traditional energy production methods contain unconsidered, external costs to the environment and future generations. Id. 284 . See id. 285 . See generally id. This above-market price, is— admittedly—a subsidy; however, unlike flat subsidies in the United States, it is neither a one-shot effort to encourage equipment purchases, nor is it tied to generation by concentrated, utility-sized producers on the supply end of the energy equation. Today it is a common sentiment in the United States that “[w]ithout federal tax incentives . . . no markets would exist for alternative energy sources . . . and the result is no capital.” See Hymel, supra note 5, at 45. Taking this as a given, then, any incentive should be shifted to a more logical place in the chain—as the Renewable Energy Act has done—so innovation can eventually reduce the need for incentives altogether.

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Feed-in tariffs are not entirely novel,286 but the Renewable Energy Act’s specific provisions have led to astounding success. Specifically, the Renewable Energy Act applies to a wide array of renewable energy sources such as hydrodynamic, wind, solar radiation, and geothermal energies, as well as gas from landfills, sewage treatment plants, mines, or biomass.287 The law also requires each utility to connect an individual’s renewable energy source to the grid and to give priority to using that energy first, rather than producing its own. 288 This requirement ensures a market for a customer-generator’s production. Furthermore, fixed compensation rates are tiered to pay more at lower levels of production, encouraging the “little guy” to get involved and fostering widespread adoption.289 The rates also typically decline over a contract’s life to encourage efficiency and innovation.290 Together, these provisions encourage investment and growth because they give customergenerators certainty and an incentive to produce more efficiently over time.291 The results of the Renewable Energy Act have been phenomenal.292 The regulation is well on track to meet its
286

. For example, an Argentine law requires the purchase of wind energy. See Miretzky, supra note 263, at 14. The Chinese also followed the German model in their renewable-energy law, which is now being credited as the major driver of their renewable-energy growth. Renewable Energy Law Powering the Growth of the Chinese Renewable Energy Markets, NEWSWIRETODAY.COM, Apr. 30, 2007, http://www.newswiretoday.com/news/17331. 287 . BGBI. I at 305, last amended by Gesetz, July 21, 2004, BGBI. I at 1918, art. 3, ¶ 1. This broad definition allows for widespread development and market selection. See Del Chiaro & Gibson, supra note 20, at 371–72. 288 . BGBI. I at 305, last amended by Gesetz, July 21, 2004, BGBI. I at 1918, art. 4, ¶ 1. 289 . See id. BGBI. I at 1918, arts. 6–11. 290 . See id. 291 . The provisions are admittedly bolstered by other governmental support, such as favorable loan terms for solar equipment purchases and individual German state subsidies for solar installations. See Solarbuzz.com, Fast Solar Energy Facts: German PV Market, http://www.solarbuzz.com/FastFactsGermany.htm (last visited Oct. 27, 2008). 292 . See, e.g., Germans Offer Tech in Renewable Energy, FINANCIALEXPRESS.COM, Sept. 29, 2007, http://www.financialexpress.com/news/ Germans-offer-tech-in-renewable-energy/222395; Paul Gipe, Feed Law Powers Germany to New Renewable Energy Record, RENEWABLEENERGYWORLD.COM, Feb. 5, 2007, http://www.renewableenergy

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goal of doubling Germany’s renewable energy by 2010.293 In fact, Germans already led the world in electricity production from wind, solar, and biogas sources 294 when they installed an additional 100,000 solar systems295 and invested $10 billion in renewables in 2006.296 Today, Germany has almost twice the wind-generation capacity as the United States, even though it is one-fourth as populous and one-twentieth the geographic size.297 The Renewable Energy Act has also delivered remarkable economic benefits, refuting worries that clean tech’s costs outweigh its benefits.298 In 2006, 214,000 Germans worked in the renewable-energy industry—a creation of 57,000 jobs since 2004.299 The industry also contributed €22.9 billion to the German economy in
access.com/rea/news/story?id=47322. 293 . See Erneuerbare Energien Gesetz, BGBI. I at 305, last amended by Gesetz, July 21, 2004, BGBI. I at 1918, art. 1. The renewable sources of energy installed through the Renewable Energy Act so far produce approximately 10 percent of Germany’s electricity consumption. See Gipe, supra note 292. This is remarkable in comparison to the mere 6 percent that renewables generated in 1998. See Fast Solar Energy Facts: German PV Market, supra note 291. 294 . See Gipe, supra note 292. In fact, Germany currently produces nearly 30 percent of the renewable energy worldwide, excluding hydroelectricity. See Germans Offer Tech in Renewable Energy, supra note 292. 295 . Gipe, supra note 292. The photovoltaic collectors installed in 2006 alone span roughly 8 million sq/m. Erneuerbareenergien.de, General Information – Renewable Energy, http://www.erneuerbare-energien.de/inhalt/print/4306.php [hereinafter BMU] (last visited Oct. 28, 2008). It is also important to note 90 percent of these installations are tied into the grid, proving the Renewable Energy Act’s effectiveness. Fast Solar Energy Facts: German PV Market, supra note 291. 296 . Gipe, supra note 292. Furthermore, these investments alone have prevented the release of 101 million tons of CO2 gas. BMU, supra note 295. 297 . Gipe, supra note 292. To be fair, Germany is home to almost one-third of the world’s wind capacity. Wilson Rickerson, German Electricity Feed Law Policy Overview, WIND-WORKS.ORG, July 2002, http://www.wind-works.org/articles/fl_ Rickerson.html. 298 . See Roberta Mann, Waiting to Exhale?: Global Warming and Tax Policy, 51 AM. U. L. REV. 1135, 1148–50 (2002). 299 . BMU, supra note 295. Even more impressive is that the total clean-tech jobs created (not limited to renewable energy) was 250,000, with an additional 150,000 projected by 2020. Eric Reguly, Germany’s Green Example Could Be Revolutionary, GLOBE AND MAIL (Canada), Sept. 28, 2007, at B8. By then clean tech will employ more people than the German auto industry. Id.

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2006.300 These are clear indications that the model works and investment in clean tech pays dividends. The Renewable Energy Act has clearly encouraged innovation and investment in German clean tech. The Act’s demand-pull strategy more than adequately achieves its environmental goals, while simultaneously spurring technological and economic growth. The German model is therefore a solid base from which the United States can build when reforming its renewable-energy framework to encourage clean-tech innovation and meet national environmental goals. B. The Proposed U.S. Renewable-Energy Reforms Reforms to the U.S. renewable-energy framework should build on the prior success of both state portfolio standards and the German Renewable Energy Act. Specifically, the United States should first implement a feed-in tariff to expand clean-tech equipment distribution and allow for innovation and economies of scale. 301 The United States should then add a renewable portfolio standard. The cumulative effect of these measures will give both utilities and their customers an incentive to champion broad clean-tech development and therefore draw innovators and investors to the space. The feed-in tariff implemented in the United States must contain a broad definition of renewable energy. Specifically, the tariff should define renewable energy as those processes generating electricity from hydrodynamic, wind, solar radiation, or geothermal energies; or gas from landfills, sewage treatment plants, mines, or biomass; or any other means which (1) consumes no tangible resource as fuel, or (2) produces no waste product which itself is not a productive resource in contemporary commerce.302 This definition would be
300 301

. BMU, supra note 295. . See Del Chiaro & Gibson, supra note 20, passim. 302 . The tariff should also include a “reassessment provision,” allowing Congress to reassess acceptable technologies every five years to ensure all technologies implemented reflect the tariff’s goals. Technologies that technically meet the definition but do not advance the goals of the tariff should be excluded, while technologies that serve the goals of the tariff but do not fall under the definition should be included. Importantly, existing projects should be grandfathered, regardless of definitional changes. This grandfather provision will prevent amendments from interfering with the investment-based expectations of entrepreneurs and innovators, and

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broad enough to encompass all existing clean tech, as well as to leave the door open for significant future innovation.303 The broad definition would also allow for a maximum adoption rate304 and avoid the myopic favoring of one technology over another.305 Cumulatively, these factors make the clean-tech industry more attractive to investors, which is ultimately a boon for innovation. The feed-in tariff should also require utilities to provide customer-generators with meters that allow participation in the program. Customers would draw on a utility’s grid only when needed, and utilities should be required to give priority to purchasing customers’ renewable energy before generating their own.306 Customer-generators should receive above-market rates for any renewable energy they feed into the grid, with monthly excesses being rolled over to the next period, and annual excesses receiving cash compensation. 307 Again, each of these provisions makes using clean-tech equipment more attractive, which in turn will draw more capital to the clean-tech-equipment space and spur innovation. Furthermore, the compensation rate paid for customer generation should be tiered, with slightly higher rates paid at lower levels of production and slightly lower rates paid at higher levels.308 This tiered effect further incentivizes “the little guy” to get involved, encouraging broader adoption of clean-tech equipment.309 Finally, the rates paid would be subject to a stepped annual reduction

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therefore avoid discouraging investors from risk-taking behavior. Cf. supra note 19. 303 . See supra note 136. 304 . See id. 305 . See id.; see also supra text accompanying notes 103– 05. Admittedly, while national legislation and a broad definition may help mitigate concerns of special-interest influence, they do not eradicate all such concerns. See supra note 167. For the purposes of this Comment, however, what is pertinent is that a national framework removes at least one layer at which corruption may take place. See id. 306 . This provision is therefore substantially similar to the German Renewable Energy Act. See BGBI. I at 305, last amended by Gesetz, July 21, 2004, BGBI. I at 1918, art. 4, ¶ 1. 307 . See supra text accompanying notes 258–59. 308 . This provision is therefore substantially similar to the German Renewable Energy Act. See BGBI. I at 305, last amended by Gesetz, July 21, 2004, BGBI. I at 1918, arts. 6–11. 309 . See supra text accompanying note 289.

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each year for the first ten years of the tariff,310 after which Congress should reassess the program and adjust rate formulas accordingly. This stepped reduction would encourage investment in innovation, as customergenerators would seek lower-cost production means to preserve their profit margins.311 During the first two years of the feed-in tariff, the bulk of the costs should be borne by the federal government.312 The government should reimburse utilities for the premium paid to customer-generators, 313 as well as for the profits on energy they would have sold absent the tariff.314 This provision ensures utilities will be no worse off than before the tariff, which reduces their resistance to the program315 and also spreads the costs of the program across the country rather than concentrating costs on utilities in areas where the feed-in tariff makes the greatest inroads.316 While this period will therefore be costly, it will ultimately allow the feed-in tariff to develop
310

. This provision is therefore substantially similar to the German Renewable Energy Act. See BGBI. I at 305, last amended by Gesetz, July 21, 2004, BGBI. I at 1918, arts. 6–11. 311 . See generally supra text accompanying note 290. Under no circumstances would the rate drop below market rates, as this would unfairly disrupt the profit expectations of prior clean-tech purchasers. 312 . As will be discussed later, this funding obligation changes after the initial two-year period. See infra notes 326–28. 313 . Admittedly, this is effectively a subsidy. However, the subsidy is production based, helping to mitigate the common flaws of flat subsidies. Cf. Friedman, supra note 86, at 965 (discussing how only “matching” subsidies (similar to production-oriented subsidies in this Comment’s context), and not flat grants, can encourage long-term changes to the market for a good). 314 . This too is effectively a subsidy; however, this provision will likely reduce utility industry opposition to the tariff, and will also terminate after the initial two-year period. See infra notes 326–28. 315 . Reducing resistance from utilities is key, as resistance from utilities is a factor in net-metering’s low adoption rate. See supra text accompanying note 151. Note, utilities will bear the burden of supplying customer-generators with proper metering equipment. However, with the implementation of a national portfolio standard (to be discussed shortly), utilities receive the benefit of customergenerator renewable energy without making capital outlays. See infra notes 326–28. Consequently, the nominal meter expense will presumably be more than offset by savings on generating equipment. 316 . It is to say, in areas where the feed-in tariff is widely used by customer-generators, utilities will feel a disproportionate erosion of their revenue base. Spreading the costs across the nation for a period of time will prevent this phenomenon from immediately taking place and allow for solution analysis in the interim.

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and also provide a valuable reference point as to how much renewable energy will come online and from where.317 After the feed-in tariff has been in place for two years, the United States should introduce a national portfolio standard and energy-credit trading program.318 The portfolio standard should initially require 12 percent of a utility’s energy mix to be renewable energy (including hydroelectric), and increase by 1 percent each year until reaching a total of 20 percent.319 These targets represent ambitious, but achievable, goals from current levels.320 The portfolio standard should also contain a costcontainment provision to stave off unexpected costs and ease the minds of voters fearing cost overruns. 321 However, this provision should be tiered, with higher levels of inflation permitted early in the process in exchange for a subsequently lower tolerance when the technology becomes less expensive.322 As a result, there is a lesser likelihood of the cost-containment provision capping clean-tech equipment proliferation early in the

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317

. This data will be key in providing certainty for utilities making investments in renewable energy once the next phase of the reform sets in, as they will have an idea of distributed generation’s capacity, and therefore what their own capital requirements will be. Additionally, while the short-term monetary costs will be high, many other economic and noneconomic benefits will be generated in the future. See supra notes 298–300 and accompanying text. 318 . Two years is admittedly a somewhat arbitrary timeframe, selected to be long enough to provide market players with time for adjustment and to prevent an anomalous year from skewing any data collected, while simultaneously being short enough to avoid putting off reform for too long. 319 . Thereafter, the standard should be reassessed and adjusted as circumstances dictate. 320 . See ENERGY INFO. ADMIN., U.S. DEP’T OF ENERGY, supra note 151, at 7. In 2007, 9.5 percent of U.S. energy demand was met by renewable energy (including hydroelectric). Id. Based upon this figure, an initial requirement of 12 percent—starting at least two years out, if the statute were implemented today—represents a marked, but wholly achievable, increase in renewable-energy usage. If enacted today, the statute would place the portfolio standard at 20 percent by 2018, which is not dramatically out of line with many current state goals. See, e.g., MINN. STAT. § 216B.1691(2a) (2007) (requiring most utilities to meet a portfolio standard of 20 percent by 2020); S.B. 838, § 6(c), 74th Leg. (Or. 2007) (requiring large utilities to meet a portfolio standard of 20 percent by 2020). 321 . Cf. supra note 126. 322 . See supra notes 236–38 and accompanying text.

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process.323 Moreover, if the free market works, there is little reason to believe the cost-containment provision will ever be triggered, as a jump in energy prices will presumably cause customer-generators to generate more energy under the feed-in tariff, helping to reduce energy costs.324 Finally, with the addition of the national portfolio standard, the feed-in tariff’s provisions should be amended slightly to alleviate program costs to the federal government. Specifically, while the government should still support the premium rates for renewable energy paid to customer-generators,325 it should no longer reimburse utilities for foregone profits. Instead, the feed-in tariff should specify any energy credits generated under the tariff belong to the utility purchasing the power, rather than to the customer-generator.326 With the introduction of the national standard and energy-credit program, these credits would presumably have value and help compensate utilities for any market erosion,327 as well as giving them motivation to encourage the program.328 Again, these provisions would cut costs and reduce the utilities’ resistance to the widespread distribution of clean-tech equipment. The amendment to the feed-in tariff would also address concerns about the disparity of renewable-energy capacity in differing regions of the country.329 The portfolio standard should make no separate provision for these geographic differences because the combination of
323

. See id. It is important to note, if the cost-containment provision were triggered, utilities would still be required to purchase customer-generators’ excess generation. The provision only relieves utilities from adding their own clean-tech capacity or purchasing energy credits from other utilities. 324 . See generally Henderson, supra note 128. 325 . Although by this time the premiums will be slightly less than originally paid, due to the stepped reductions built into the tariff. See supra text accompanying notes 310–11. 326 . While this initially appears to take a benefit away from customer-generators, recall they are still in a better position relative to current conditions due to the premium paid for excess generation. 327 . Cf. supra note 151 and accompanying text. 328 . Id. The motivator is that the more renewable energy produced by customers, the more energy credits a utility accumulates —thereby inheriting economic return without capital outlays. 329 . See Reeves, supra note 272. With a national standard, the fear is that areas conducive to renewable energy (i.e., windy or sunny areas) will easily meet the standard, while other areas may struggle. See generally id.

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the feed-in tariff and energy-credit program should mitigate differences in renewable-energy capacity. Theoretically, in areas conducive to renewable energy, more citizens will take advantage of the feed-in tariff.330 For the utilities in these areas this means (1) they will be required to purchase more energy from customers, rather than supply it to them at a profit, and (2) utilities will accumulate an abundance of energy credits. In areas less conducive to renewable energy, the reverse will be true— the feed-in tariff will not be as lucrative for customergenerators, meaning utilities will sell more energy at a profit but have a harder time meeting the national portfolio standard. Consequently, utilities in one area will accumulate excess profits, while utilities in another area will accumulate excess energy credits. The establishment of an interregional energy-credit market—where the excess profits of one utility are traded for the excess renewable-energy generation of another—could provide economic parity, despite geographic differences in renewable-energy capacity.331 The combination of benefits from a feed-in tariff and a national portfolio standard is compelling. Properly drafted, the programs can encourage broad clean-tech equipment distribution. This distribution creates an end market for equipment manufacturers, entices investors, and ultimately allows for further clean-tech innovation.
330

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. Cf. Robert Frick, Solar Finally Pays Off, KIPLINGER’S PERSONAL FINANCE, Oct. 2007, at 68, 68 (suggesting citizens view geographical factors as the key to home power generation’s viability). 331 . Absent in this discussion is the renewable-energy generation of utilities themselves. A concern some may have is that utilities in areas with low feed-in tariff adoption will interfere with the parity discussed by simply generating their own renewable energy (rather than purchasing energy credits from other regions). This concern is likely unwarranted because where geographic constraints limit the feed-in tariff’s use, they also constrain the practicality of a utility’s renewable-energy production. Consequently, rational utilities would purchase energy credits from areas where they are generated at the lowest cost, rather than generating their own energy at a greater cost. See generally Henderson, supra note 128, at 689. Furthermore, most rational business enterprises prefer to operate with as little capital overhead as possible. See generally DOUGLAS J. WHALEY, PROBLEMS AND MATERIALS ON SECURED TRANSACTIONS 22 (7th ed. 2006) (suggesting businesses prefer to limit the amount of capital equipment on their balance sheets for financing purposes). Thus, purchasing extensive clean-tech equipment for their own generation will likely be less preferable than obtaining the generation from others if practical. See generally id.

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CONCLUSION

While the myriad problems surrounding traditional energy use are ominous, much hope lies in clean-tech innovation. The U.S. federal government and several states have each implemented measures in an effort to promote clean-tech development, but their fragmented approach has so far been inadequate. The measures taken by the federal government generally fail to adequately incentivize investment and innovation, and state measures leave much to be desired as well. Furthermore, the very nature of the fragmented stateby-state approach creates an unacceptable amount of investment risk, hindering capital formation and innovation in clean tech. In order to address its energy crisis adequately, the United States must adopt a unified, demand-pull strategy similar to German law. This will encourage widespread adoption of clean tech, reduce investment risk to clean-tech investors, and foster the requisite innovation in clean tech.

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