Achieving Energy Independence - A Lab of the Strategic Action Volunteer Effort (SAVE)


Glenn Yago of the Milken Institute, right, leads the SAVE Financial Innovations Lab discussion, which examined alternative-energy investment gaps and oppportunities.
The Milken Institute's Strategic Action Volunteer Effort (SAVE), which convenes a team of highly experienced volunteers willing to take on and solve complex problems, was launched in April 2006. Its maiden project, Achieving Energy Independence, tackles the urgent issue of our dependence on fossil fuels and the consequences of climate change.

On Nov. 9, 2006, the Milken Institute conducted its first Financial Innovations Lab for Achieving Energy Independence at the Bloomberg headquarters in New York City. Participants included a select group of high-level representatives from the worlds of finance and energy.

The hands-on workshop sought to clarify alternative-energy investment gaps and opportunities, with a particular focus on the transportation sector and the alternative fuels and technologies available today that will help us move away from oil and petroleum.

Two promising developments in the sector were given special consideration: bio-fuels and coal-to-liquid technology. Participants sought to identify and work through specific investment instruments designed to increase capital flows to the alternative-energy sector and produce financial returns.

While everyone agreed that there is an urgent need to increase investment in and accelerate adoption of alternative fuels and new technologies, much of the discussion revolved around asset and risk management in an industry that is perceived as young and uncertain.

Participants debated the issues of attracting long-term investors, scalability, the mechanisms required to hedge - or insure - against volatile oil prices, and the role of government and legislation in addressing both the supply and demand sides of the alternative-energy equation.

The discussion resulted in some creative financial solutions: an insurance policy against falling oil prices; green bonds and BTU-backed bonds; the creation of a fixed-income product or a futures market for alternative fuels; credit enhancement or a finance lease from the government; and, most importantly, the bifurcation of credit risk and equity risk to hedge against the long-term volatility of oil prices.