Can the U.S. Energy Sector Be Mostly Green in 10 Years?

A quiet revolution in alternative energy is underway that has the potential to wean the United States off most carbon-based fuels in just 10 years, says Reed Hundt, CEO of the nonprofit Coalition for Green Capital, former chairman of the Federal Communications Commission under President Bill Clinton, and a member of several corporate and nonprofit boards, including Intel’s.

The first key factor supporting this potential revolution is the plummeting cost of solar panels — down 80% over the last four years alone. The second key, says Hundt, will be setting up state-backed “green banks.”

As he explains, “If I went to anybody in the United States and said, ‘Could I just give you electricity that is cleaner?’ [They’re] going to say, ‘Yes, but is it going to cost more?’ Suppose I say, ‘It is cleaner and cheaper.’ Who is going to say no to this?”

In this Knowledge@Wharton interview, Hundt explains the nuts and bolts of green bank programs he claims could change the face of energy in the U.S. almost overnight. An edited transcript appears below.

Knowledge@Wharton: Let’s start with your e-book, which is titled Zero Hour: Time to Build the Clean Power Platform. You write an interesting, provocative first sentence: “Modern life rests on two electromagnetic wave platforms – knowledge and power. The power platform is where the knowledge platform was in 1993.” Are you are suggesting that where we were with computer technology back in the early 1990s is where we are with the power platform or green energy?

Hundt: That is exactly right. Let’s go on a little time travel trip, at least in our imaginations. Take with you on this trip your phone or your computer or your television set, and go back 20 years, and it will not work. That is because the communications platform of 20 years ago has been completely overhauled.

Germany made a big mistake [by deciding] that the way to grow a solar industry was to have a guaranteed price that was very, very high.

Knowledge@Wharton: Analog to digital.

Hundt: Everything that was analog is now digital. That is true for television. That is true for cellular phones — all the standards for all the communications equipment — everything is completely different. How did that happen? $1 trillion of investment in the U.S. in about 10 years — roughly 1995 to 2005. We completely rebuilt as an economy, and as a society, the knowledge platform.

Knowledge@Wharton: Who made those investments?

Hundt: Those investments were made by lots of different people. Some of them become very, very rich. Some of them lost all of their money. One thing we know is that that tremendous wave of investment increased the average income for every quintile in the American economy. It is the only decade since the 1950s in which every quintile in the American economic ladder has seen its income go up. So economically, it was a very good thing. And, of course, for productivity gains and for changing life, as we know it, it was very, very good. What I am saying is that we are at the exact same starting point with respect to the other electromagnetic waves — those that give us electricity.

Knowledge@Wharton: One of the key things that you talk about in the book, and one of the key ideas about how to get from here to there, is this idea of a “green bank.”

Hundt: Yes. You know, what is a bank? A bank takes deposits and it makes loans. A green bank would be a bank that gets money from somebody and then loans money out to clean energy projects.

Knowledge@Wharton: Who would that somebody be?

Hundt: Well, in the case of the states where our nonprofit is now working — Connecticut, New York, California, Vermont – the state is contributing capital or planning to contribute capital to a green bank. And then the money is being loaned out. In the state of New York, they just loaned out several hundred million dollars to private investors who are putting in even more money for a total of about a $1 billion of capital to go into clean energy markets.

Knowledge@Wharton: So the idea is that the state — which I guess could be on the federal level, but right now we are talking on the state level — would invest money, and it would either make money or break even in this bank presumably?

Hundt: That’s it.

Knowledge@Wharton: So there is, at least over the long-term, no cost to taxpayers — perhaps something initially, but that the money would be paid back?

Hundt: That’s exactly right.

Knowledge@Wharton: But why does it take the government to participate? Is it because there are no profits at first, and so there is no interest by existing financial institutions to do something like this?

Hundt: Not quite. But here are the reasons. Reason No. 1 is that most clean energy projects are unfamiliar to most commercial banks. They are not in the business already of loaning to people for putting solar panels on their roof. They are not in the business of loaning to a community to build a community solar farm that maybe is not very big but would serve a town or a small city.

Knowledge@Wharton: So they aren’t adept at evaluating what the risks might be?

Hundt: They … just do not have anyone on staff that does risk analysis. And, No. 2, since the Great Recession began … many banks have worried a great deal about their own balance sheets, and they have been averse to taking on risks in lending. So that has further inhibited their willingness to get into clean energy lending as a category.

A third problem is that many clean energy projects are kind of small. You want to put solar on your roof — that is a maybe a $20,000 project. A big commercial bank would say, “You know, that is a home improvement loan. That is not the kind of loan that we make. Go somewhere [that makes] home improvement loans.” But when you go [to a bank that makes] home improvement loans, they do not consider solar [panels] on the roof to be a home improvement.

All this can change. But if we want to get the clean energy markets growing quickly – and we do if we want to deal with climate change – then the state wants to step in and say, “Well, I will just kind of nudge it here at the beginning. But I am not going to do anything unless the private sector is going to join up with me and provide a lot of the money, too.” So think of the state or the government as being the leader, but not leading too much. Just basically getting in the water and saying to the commercial lenders that the water is fine, come on in.

That is what we have seen in Connecticut, which has the oldest state green bank. It is three years old. And we have found that for every $1 of state lending, we attract about $10 dollars of private sector lending.

Knowledge@Wharton: And how many dollars in projects have been committed so far?

Hundt: In Connecticut, which is not a very big state, it is almost $300 million. And that is for three million people in the state.

Knowledge@Wharton: And what kinds of projects is this green bank funding?

Hundt: Two things in particular. One is what we call the whole building overhaul. That might be a strip mall where they put solar on the roof and they exchange single-paned windows for double-paned windows. And maybe there is a fuel oil boiler that is replaced in some central location…. And then that lending is put on the tax bill by a provision in the state statute and, as I said, the Connecticut green bank will make the initial loan, but later, the private sector will come in and be part of the lending structure. So the building becomes more valuable and the occupants pay a lower amount for electricity, and eventually, the taxpayers are made whole.

Knowledge@Wharton: What is the break-even on something like that – when you pay back the loan and then after that you are actually making money by saving money on energy?

Hundt: The Connecticut green bank does not make any loan unless the net present value of the savings is greater than the amount of money invested. Everybody at Wharton knows what that means. It means you have a net present value positive number at the very beginning. Otherwise we do not put the money in. The payback will vary between four and seven years, meaning the cash out will have come back in that time period. And then after that time period, it is all gravy. I think that is a financial term – gravy. You asked me what projects. That is probably our No. 1 example. But the No. 2 example is distributed solar on residential rooftops.

If … the distributed solar industry today is about 1% market share of energy, it is reasonable to think that that can double every 12 months.

Knowledge@Wharton: Were other efforts taken to promote solar on rooftops? I am familiar with complaints about in the U.S. in general — compared to Germany, for example — that there is a lot of regulation here that slows down the ability to get these things rolling fast, which is what you are trying to do with the funding. Did they do anything about regulations in Connecticut?

Hundt: Yes. We have been trying to slim down the permitting process, which can take a long time and can cost a lot of money. And we do that through a project called Solarize. The Connecticut green bank goes to a town and it says to the mayor, “If you promise that you will expedite the permitting process, then we will loan money in bulk to everybody in your town.” And then the mayor says, “That sounds like a pretty good deal. If I cut the red tape, I get some of the green?” And we say that is absolutely right.

Knowledge@Wharton: In Germany, getting a permit can take two or three days, I think, and in the U.S. the average is months.

Hundt: Germany was ahead of the United States and pretty much every other country in the Western world in terms of expediting permitting. But Germany made – and I say this with respect for their motives – Germany made a big mistake in solar, which is that they decided that the way to grow a solar industry was to have a guaranteed price that was very, very high – called a feed-in tariff.

The problem with that is the government is buying the electricity and then giving it to the consumer at a lower price than the government is paying. That is a “buy high, sell low” strategy. That is … in governments and in business, a way to eventually go out of business. So that is not what we are talking about in Connecticut. We are talking about in Connecticut – and in the other states – what you said earlier: making the taxpayer whole, having the consumer getting cleaner and cheaper electricity.

Knowledge@Wharton: So this is innovative financing in the positive sense.

Hundt: That is right. But it is not unusual. Governments play a big role in financing roads and bridges, and public schools, and a host of other facilities in the social landscape. So having governments extend their role to a modest degree into changing the energy platform of the United States from carbon and expensive to clean and cheaper, I do not think it is asking governments to do something unheard of.

Knowledge@Wharton: I cannot help noticing the parallel between what happened in the IT world, which is that it was actually the government that “invented” the Internet and provided the basic research that led to the Internet — as it does in lots of areas like medical research, pharmaceuticals, and all that. A lot of the basic research is paid for by the government, and then companies come in and figure out how to commercialize it.

Hundt: In the IT world, I would say that you can credit or blame the government for two big things. No. 1, as you said, the initial research into the technologies that ultimately gave birth to the Internet as a commercial phenomenon — that initial research was paid for by the taxpayer a long time ago.

Knowledge@Wharton: That was funded through the Defense Department, wasn’t it?

Hundt: Yes. And when the taxpayer was paying for that research, the taxpayer – you, me and everybody else – we did not really have any idea what would happen. And neither did the experimenters who were doing the work. That is the first of two things.

The second thing was done during the Clinton administration, and here is what it was: The government decided that the Internet could borrow the existing infrastructure – the telephone network – for free. And so the early days were that you would unplug your telephone line from the back of the device called the telephone and you would plug it into your computer at no charge. There were a bunch of other regulatory measures like that, but the collective decision in the Clinton administration was, let’s let the existing infrastructure be used by the usurpatious, revolutionary change-oriented new technology. That is what we need to do in energy. We need to have the grid be borrowed for free by the distributed solar people and the other new technologies.

Knowledge@Wharton: Let’s say we did that. You talked initially about how much change has happened in 20 years [in IT]. So let’s fast forward 10 or 20 or 30 years ahead. With clean energy, what percentage of U.S. energy do you think could be delivered via green methods – whether it is wind, solar, water or whatever it might be.

Hundt: Okay, well, hold on to your hat, because actually I have spent a lot of time crunching the numbers with people. If … distributed solar industry today is about 1% market share of energy, it is reasonable to think that that can double every 12 months Twitter . Doubling every twelve months gets you to a very big number in 10 or 20 years – a very, very big number. It is also reasonable that the wind sector in the United States can be ultimately about 20% to 25% of the total energy sector. You put those two things together and the majority of all electricity in the United States can be made by the sun and the wind.

Knowledge@Wharton: And that is within how many years?

Hundt: It depends on how fast-growing you actually [achieve]….

Knowledge@Wharton: Let’s say a mid-level scenario.

Hundt: I would say a decade.

Knowledge@Wharton: In a decade, [wind and solar] could make the majority of electricity?

Hundt: Right.

Knowledge@Wharton: And electricity provides what percentage of our power?

That is what happens in business. Somebody wins and somebody’s place is taken.

Hundt: Well, a good way to think about it is that transportation … [consumes] about a third, and all the rest is electricity used in some particular way. So, for example, electricity is used in industrial processes or it is used in lighting or it is used in some cases in heating. So there are lots of ways that electricity sneaks into the usage patterns, but more or less transportation … [uses] a third or 40% percent [of U.S. energy] and the rest is driven by electricity. [In 2013, about two-thirds of electricity generated in the U.S. came from fossil fuels, including 39% of the total from coal].

Knowledge@Wharton: And even transportation could become largely electric, right?

Hundt: If we really wanted to tell an optimistic story about electricity, which I think we should want to do, then the way to think about it is that in about two and a half years, when the electric vehicles that come into the market will be priced at around $40,000, then you will see a tremendous increase in the percentage of annual vehicle sales that is attributable to electric cars.

Knowledge@Wharton: This seems so much more optimistic than the numbers that you usually hear.

Hundt: It is time to be optimistic. A lot of things have changed in the last three or four years that have given rise to optimism. One is an 80% drop in the cost of solar panels. That should give rise to optimism. The other thing is the innovative business models [being used] by solar installers and by other clean energy companies. I do want to say this: There is one fundamental obstacle, which is, the existing energy industry is carbon-based and the existing energy industry is not going to be a big huge winner if the clean energy industry substitutes for its role in the economy. That is what happens in business. Somebody wins and somebody’s place is taken.

Knowledge@Wharton: How would advocates of green energy overcome that huge obstacle?

Hundt: There are two ways to overcome it. One is you get the government to tell everybody that they must buy clean energy. If we have to, to deal with climate change, I guess we might have to imagine that. But there is an easier way in a market-driven economy. You delight the consumer. You please the consumer. You make the consumer clamor for the better deal. If I went to anybody in the United States and said, “Could I just give you electricity that is cleaner?” [They’re] going to say, “Yeah, but is it going to cost more?” So suppose I say, “It is cleaner and cheaper.” Who is going to say no to this?

Knowledge@Wharton: And this is very doable — you are saying — even on a large scale?

Hundt: It is totally doable on a large scale. It is the secret of Solar City just to give you an example of a company.

Knowledge@Wharton: Solar City – could you just give us a brief sketch?

Hundt: Solar City is the rocket ship story of solar installers, but it is being emulated by other companies all across the country. Like a lot of other Americans, I opened up an envelope at home just last week and it said, would you like to meet somebody from Solar City, because if you have a high enough credit score we will give you clean electricity … and it will be cheaper than you are paying from the grid. This is not a bad offer.

Knowledge@Wharton: Could you tell us briefly what you thought about the U.S./China climate agreement.

Hundt: It is an historic agreement and there are two reasons. Reason No. 1, when the President of the United States and the leader of China – President Obama and Xi Jinping — have a handshake understanding about reducing carbon emissions by huge, huge numbers … in about a decade — when that happens … the two economies that are responsible for 40% of all global emissions have taken a step further toward the necessary clean-energy future than any other country or any other region of the world, that is a really big deal. Now, we are leaders with China, and everybody else should step up in every other country and match our promises. That is reason No. 1.

Reason No. 2: What the President said in Beijing is that the United States would increase its goal of cutting emissions by 50% over the previous stated goal. In other words, he is now saying that in just 11 years, we will reduce emissions by 27%, approximately. It is a very, very big number. It puts us down a very ambitious path, but one in which it actually is possible for Americans to have cheaper and cleaner electricity.

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