aeic catalyzing ingenuity 2011

7/30/2019 AEIC Catalyzing Ingenuity 2011

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he ole of overnmentin nergy nnovation


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4// A e ica E e I ova io Co ci // CAtAlyzIng AmErICAn IngEnuIty: thE r lE g ErnmEnt In EnErg

About Us

Ab A cA yvA c c

www.americanenergyinnovation.org

Who we aremerican nergy nnovation Co ncil ( C) members areorm Augustine,

former chairman and chief exec tive of cer of ockheed artin;rsula burns ,chairman and chief exec tive of cer of Xerox;John Doerr, partner at KleinerPerkins;bill ates , chairman and former chief exec tive of cer of icrosoftcharles . ollida , chairman of Bank of merica and former chairman andchief exec tive of cer of D Pont;Je mmelt, chairman and chief exec tiveof cer of ; and im Solso, chairman and chief exec tive of cer of C mmi

nc. he C is staffed and hosted by the Bipartisan Policy Center.

Our missionhe mission of the merican nergy nnovation Co ncil is to foster strong

economic growth, create jobs in new ind stries, and reestablish mericas entechnology leadership thro gh rob st, p blic investments in the developmenclean energy technologies.

About the Bipartisan Policy CenterFo nded in 2007 by former Senate ajority eaders Howard Baker, om DascBob Dole and eorge itchell, the Bipartisan Policy Center (BPC) is a non-proorgani ation that drives principled sol tions thro gh rigoro s analysis, reasonnegotiation, and respectf l dialog e. With projects in m ltiple iss e areas, BPcombines politically-balanced policymaking with strong, proactive advocacy ao treach. For more information, please visit o r website: www.bipartisanpolic


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Ac D S

he merican nergy nnovation Co ncil ( C) gratef lly acknowledges the expertcontrib tions and g idance provided by Ken Caldeira, David arman, David Keithand axine Savit .

n addition, the C wo ld like to express its thanks to John lic, Jabe Bl menthal,arry Boggs, lix B rns, Scott lrod, Karen Fries, lex iftman, Brian ormino, John

Pinette and Jonathan Plowe for their important contrib tions to this report.

astly, the C wo ld like to thank the BPC staff for their hard work s rro ndingthis effort.

Acknowledgemen


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cknowledgements

Prel de

xec tive s mmary

Chapter one:Why does government need to play a role in s pporting energy innovation?

Chapter two:How sho ld the government play a constr ctive role in energy innovation?

Chapter three:How can the u.S. government pay for energy innovation in a new era of scal a sterity?

Concl sion

ndnotes 3

Ab f c S


Contents


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Prelude America has a great deal to ambitious innovation invest

P D

he ability to access vital energy services, prod ced in an environmentally responsible way and ata reasonable price, has a f ndamental and direct impact on the economic health of the nation. he

merican nergy nnovation Co ncil ( C) came together in 2010 aro nd a shared conviction: mericahas a great deal to gain from smart, ambitio s innovation investments in the energy sector.

ast s mmer, we released a report,A Business Plan for Americas Energy Future , which called fora more vigoro s p blic commitment to energy technology development and presented actionablerecommendations to nlock the ingen ity needed to reach these goals. mero s st dies have sincecon rmed o r ndings and echoed o r recommendations.

One year later there have been some signs of progress, b t o r recommendations remain largely nf l lled.

Drawing on o r own experiences leading large b sinesses in competitive ind stries, we nderstand thatinnovation-based programs are essential to maintaining mericas long-term competitiveness. his istr e for b sinesses; it is also tr e for the co ntry, especially for its energy interests. ven in an era ofconstrained p blic reso rces, we strongly believe that government has a critical role to play in stim latingclean energy technology innovation.

B ilding on o r previo s report, this pdate highlights the need for an active government role in energyinnovation, recommends ways to improve the effectiveness of government innovation programs, andhighlights options to pay for energy innovation investments.

ow is the time to make smart, aggressi e in estments to address Ameri as energ hallenges.


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x c v S A y

nnovation is the core of mericas economic strength and f t r

prosperity. ew ideas and technological advances f ndamentally

shape o r q ality of life. hey are the key to fostering s stained

economic growth, creating jobs in new ind stries, and contin in

mericas global leadership.

hro gho t the history of the united States, the federal governmen

played a central role in cataly ing and driving innovation and techn

development in a variety of strategic areas defense, health,

agric lt re, and information technology, to name a few and it ha

often done so with strong res lts.

However, of all the sectors in the economy where innovation has

critical role to play, the energy sector stands o t. eady access to

reliable, affordable forms of energy is not only vital for the f nct

of the larger economy, it is vital to peoples everyday lives. t alssigni cantly impacts the co ntrys national sec rity, environmen

well-being and economic competitiveness.

Executive S



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unfort nately, the co ntry has yet to embark on a cleanenergy innovation program commens rate with the scale ofthe national priorities that are at stake. n fact, rather than

improve the co ntrys energy innovation program and invest instrategic national interests, the c rrent political environmentis creating strong press re to p ll back from s ch efforts.

ncreasingly, three principal arg ments are being madeagainst an increased federal role in energy innovation:

~ nergy innovation sho ld be the responsibility of theprivate sector.

~ f there is a role for government in energy innovation, o rc rrent federal government is not eq ipped to invest taxpayer

dollars wisely and in a way that is likely to yield real res lts.

~ ven if there is a government role and governmentprograms are organi ed and empowered to achieves ccess, there isnt any money to f nd these activities inthis scal climate.

based on histor and on our own e perien es leadinginno ati e ompanies, we dont su s ri e to an o these arguments.

1. Why does government need to play a role insupporting energy innovation?

ltho gh we agree that the private sector is and willcontin e to be an important so rce of innovation, webelieve the federal government has an integral role to playin advancing energy innovation.

he u.S. government has a long and s ccessf l history ofs pporting p blicly-f nded research and development ( &D)projects that foster the development of new technologies.

History shows that s pport for innovations that serve af ndamental national interest cannot be left to the privatesector alone for two primary reasons:

Private markets generally do not exist for certain bene ts,s ch as providing for a strong military, improving p blichealth, and protecting the environment.

he private sector has tended to systematicallynder-invest in &D relative to the potential gains to

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society even where a market for the desired technologyexists beca se it is dif c lt for any individ al rm tomoneti e all the bene ts of these types of investments.

he energy sector in partic lar has s ffered from nder-investment in research, development and demonstration( D&D), for three main reasons:

nergy is not val ed in and of itself, b t rather for thegoods and services it provides. his means that prod ctdifferentiation does not drive innovation in energy s pplyoptions in the same way that it wo ld for other types ofprod cts and services.

any energy technologies are capital-intensive and

long-lived, with the res lt that many req ire signi cantp-front cash with a slow ret rn. Slow t rnover ofcapital assets combined with the need for large p-frontinvestments mean that the sector as a whole is s bjectto a high degree of inertia, a tendency to avoid risk, anddomination by inc mbent rms.

nergy markets are not perfectly competitive, d e toreg latory ncertainty, market fragmentation, anddistortions introd ced by past policiesall of whichgenerally slow the adoption of innovative technology.

overnment-f nded &D programs in a n mber ofareas s ch as defense, health, agric lt re, andinformation technology ( ) have enabled the unitedStates to lead not j st in speci c technologies b t in entireind stries. unfort nately, federal efforts th s far in s pportof clean energy &D have been inadeq ate to the task andpaltry in comparison with other sectors.

We strongly recommend increased government s pportand leadership to develop and demonstrate new energytechnologies to meet this cent rys challenges.

2. How should the government play aconstructive role in energy innovation?

o enhance u.S. leadership in clean energy technologies,the federal government m st not only maintain a rob steffort across the innovation contin m, b t it m st alsopromote an environment that favors innovation thro gho tthe energy economy.


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he united States is fort nate to have a n mber of strongassets celebrated national labs and niversities, world-class entreprene rs, a sophisticated nancial ind stry,

a legal system that protects the sanctity of contracts,and large technology and energy companies with theskills to scale technologies ready to contrib te toenergy innovation. B t the co ntry lacks a de ned senseof national p rpose aro nd this iss e and a strategy forb ilding innovative energy systems.

ooking at past examples of government innovation anddrawing from o r own private-sector experience, webelieve three principles sho ld g ide the u.S. governmentsinnovation programs:

Foc s on speci c market fail res in areas that can make asigni cant impact on strategic priorities.

Cataly e private-sector competition by providingincentives aligned with strategic o tcomes.

use the most cost-ef cient actions to facilitate positiveo tcomes.

Drawing on these three principles and b ilding on o r previo sreport, we recommend ve concrete actions to improve the

effectiveness of the u.S. energy innovation program:

A. De elop and implement a omprehensi e,go ernment-wide Quadrennial nerg e iew (Q ) that seeks to align the capacities of the p blic and privatesectors. he Q sho ld pinpoint key market fail res andtechnology chokepoints in order to better orient federalprograms and reso rces.

b. Support inno ation hu s that concentrate reso rcesand knowledge and thereby accelerate the development of

new technologies. We strongly s pport the direction of u.S.Department of nergy (DO ) nnovation H bs, Bioenergy

esearch Centers and nergy Frontier esearch Centersand believe they sho ld receive f ll f nding.

c. Support and e pand the new Ad an e esear hProje ts Agen nerg (A PA ).s we have notedprevio sly, P challenges and empowers innovato

across a range of technology pathways. By nearly allacco nts, it appears that P - is being managed as ahighly ef cient, risk-taking, res lts-oriented organi ati

t a minim m, P sho ld receive at least $300 mper year. oing forward, investments in P sho ldprioriti ed and increased.

D. ake D work smarter along the A PA- model. DO has a critical role to play b t needs to evolve beyoits c rrent program str ct re and c lt re to be maximaeffective. We arg e for P -i ing a larger portion o

DO and the national labs by expanding some of the nea thorities, tools and processes that are embodied in

P to other parts of the agency.

. De elop a rst-o -a-kind te hnolog ommer ializatiengine along the lines o the proposed clean nergDe elopment Administration (c DA).Previo sly, wecalled for a new government-backed instit tion dedicated tovercoming nancing h rdles for new advanced, commerscale energy technologies. We believe the C D legislatioaligns with o r original recommendation and wo ld mobisigni cant private-sector capital to bridge the transition frodemonstration to commerciali ation.

3. How Can the U.S. Government Pay or EnergyInnovation in a New Era o Fiscal Austerity?

here is no way to make the progress this co ntry req iwitho t increasing federal s pport for energy innovatioacross the entire innovation contin m. ven in thesechallenging scal times, we believe that nderf ndingenergy innovation wo ld be a grave mistake. S pportin

innovation is an investment, not a cost.

We previo sly called for a three-fold increase in ann alenergy innovation investments and maintain that s ch a


Executive Summa


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level sho ld be o r co ntrys target over the next decade.t the same time, the C f lly nderstands the gravity of

the nations c rrent scal sit ation.

s a res lt, we see an rgent need for a new energyinnovation f nding regime that acco nts for c rrentb dgetary realities, b t still ens res that o r nation makestargeted, smart, basic investments in its energy f t re.We m st develop a f nding regime that is dedicated,consistent, and not beholden to ann al appropriations.

n general, federal f nds for energy innovation sho ldoriginate from reven es from the energy sector itself ratherthan from general reven es.

We have identi ed a n mber of options that co ld providef nding for energy innovation investments that arecommens rate with o r original recommendations. heseoptions incl de:

Diverting a portion of royalties from domestic energyprod ction;

eforming and redirecting energy ind stry s bsidies;

Collecting a charge on sales of electricity;

evying fees on other energy or poll tion so rces; and

Streamlining DO .

C does not advocate for one reven e option overanother; the only nacceptable option is to fail to makethese investments. he reso rces to s pport increasedinnovation investments are available. Wise investmentsin a new generation of energy technologies are not only

j sti ed, b t vital to o r f t re. We rge o r politicalleaders to direct them appropriately.

// 7

The PayoffWe know the federal government has a vital role to play in energy innovation. We know

the federal energy innovation system can be str ct red effectively to achieve real res lts.

nd we know there are several ways to pay for p blic investments in this domain.

f the u.S. fails to invent new technologies and create new markets and new jobs that

will drive the transformation and revitali ation of the $5 trillion global energy ind stry, we

will have lost an opport nity to lead in what is arg ably the largest and most pervasive

technology sector in the world. However, if the u.S. s ccessf lly innovates in clean energy,

o r co ntry stands to reap enormo s bene ts.

t is time to p t aside partisan interests and embark, as a nation, on a path to achieving

o r clean energy goals.


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1Chapter One:

Why does government need to playa role in s pporting energy innovation?

In this chapter we focus on therationale for an active governmentrole in supporting technologicalinnovation in the energy sector.

P A c f vA

echnology innovation has long been central to merican prosperit

to merican leadership on the world stage. From its beginnings, the

united States fostered a market system that allowed for the free ow

ideas, capital, and people. Over time, this system has proved niq

s ccessf l in nleashing the creativity and entreprene rial ambitio

individ al citi ens and in harnessing those energies for prod ctive

wealth-generating p rposes. s Joseph Stiglit said in his acceptan

speech for the 2001 obel Pri e in conomics: Changes in techno

&D, are at the heart of capitalism.1 From gas t rbines to smartphon

medical imaging to comm nications satellites, PS to the internet,

innovation has improved lives, created jobs, and s pported more th

cent ry of u.S. preeminence economically, technologically, and mil

s b siness leaders we are ac tely aware that mericas f t re s c

depends on its ability to carry forward this tradition of innovation an

contin e generating new ideas, technologies, processes and prod c


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Of all the sectors in the economy where innovation has acritical role to play, the energy sector stands o t. eadyaccess to reliable, affordable forms of energy is not only vitalfor the f nctioning of the larger economy, it is vital to peopleseveryday lives and signi cantly impacts the co ntrys national

sec rity and environmental well-being. nnovation-drivenimprovements in energy prod ctivity in the late 19th cent ry(especially the development of the electricity, a tomobile, andoil ind stries) gave cons mers nprecedented improvementsin q ality of life. ltho gh these innovations drove economicgrowth for m ch of the 20th cent ry, they also prompted rapidgrowth in domestic and global energy demand.

t this point in history, sec ring clean, scalable and inexpensiveenergy s pplies is a high-stakes innovation challenge. Fail rewo ld almost certainly lead to a lower q ality of life for most

mericans, b t s ccess will open p vast new markets andestablish u.S. leadership while making o r world cleaner andmore sec re.

B t all this is well known. We all agree that technologyinnovation has boosted o r economy and improved lives. Weall agree that to break o t of o r c rrent economic malaise,

merica needs to innovate, man fact re and b ild newtechnologies. his is tr e in many sectors of o r economy, andit is certainly tr e in energy.

Where the consens s breaks down, however, is in decidinghow the co ntry sho ld set o t to achieve a leadership positionin f t re energy markets. n these debates, some arg e thatgovernment serves little essential role in innovation (otherthan enforcing the r le of law and preserving the sanctity

of contracts) and that act al innovation especially forenergy sho ld be solely in the hands of the private sector.

Based on history and on o r own experiences leadinginnovative companies, we disagree. ltho gh we agree thatthe private sector is and will contin e to be an importantso rce of innovation,we elie e the ederal go ernmenthas an integral role to pla in ad an ing energinno ation speci cally in energy research, developmentand demonstration ( D&D).

RD&D= research,development & d

1980 1985 1990 1995 2000 2005 20

9

8

7

5

6

4

3

2

10

Public Energy R&D SpendingBillion 2005 USD

figure 1

* 2009 Preliminary data.ote: 2009 data incl de F 2009 f nding in addition to f nds appropriated thro gh the merican ecovery

and einvestment ct of 2009.


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cAS f A Ac vv

y vAhe u.S. innovation engine is the envy of the world. n fact,

thro gho t the nations history, b sinesses, entreprene rs,and researchers have worked to create new, game-changingtechnologies in a host of sectors. n the process, they haveprofo ndly changed the stat s q o. While b sinesses havedriven m ch of this progress, targeted and deliberate p blics pport has also been cr cial. t the most basic level,governments role in innovation is to foster an environmentthat is cond cive to the creation, development, andcommerciali ation of new ideas and technological advances.

his notion is widely accepted and dates back to the fo ndingof the rep blic; indeed, the u.S. Constit tion recogni ed theawarding of patents to promote the Progress of Scienceand sef l rts as one of the central f nctions of a nationalgovernment.2 B t the role of government goes beyondcreating the right market and instit tional environment. nfact, the u.S. government has a long and s ccessf l history ofs pporting p blicly-f nded research and development ( &D)as well as demonstration projects, proc rement practices, and

other policies (taxes, s bsidies, reg lations, etc.) that fostthe development of new technologies.3

he rationale for government intervention is two-fold. First,history shows that s pport for innovations that serve af ndamental national interest cannot be left to the private secalone. Private markets generally do not exist for certain benes ch as providing for a strong military, improving p blic heaand protecting the environment. herefore, it falls to governmto ens re that these bene ts are s pplied at the level societydemands. second rationale rests on the theory and practiceof knowledge spillover and the free-rider problem. When

rms make investments in basic science or &D, they createknowledge spillovers that bene t society as a whole, as well

other rms. hose other rms get a free ride on their competi&D investment. Beca se it is dif c lt for any individ al r

to moneti e all the bene ts of these types of investments, theprivate sector has tended to systematicallyunder -invest in &Drelative to the potential gains to society even where a markfor the desired technology exists.

n fact, real-world evidence s pports the proposition thatimportant energy ind stries are even more likely to nder-invest in &D than other sectors. utilities, in partic lar, steeremarkably few reso rces to &D. cross all u.S. ind strieprivate rms spend an average of 3.5 percent of reven eson &D.4 By contrast, tility spending on &D averages 0.1percent of reven es. oreover, Fig re 2 shows that tility spending has declined in absol te terms since the mid-19905

ltho gh on average u.S. rms employ 63 &D engineersand scientists per 1,000 employees, tilities employ j st5 fewer than any other sector and trailing far behind thenext-lowest sector, which is retailing (with 9 &D personneper 1,000 employees).6 s exec tives, we know that thesec rrent reso rce commitments are not s f cient to s pportf ndamental transformation of todays energy systems.

under-investment in &D is, not s rprisingly, m ch less ofan iss e where strong market incentives exist for technologyimprovement. t is not clear, for example, that governments pport is needed to advance oil and gas exploration and drilltechnologies. On the other hand, where p blic interests that anot val ed in the marketplace are at stake, government may bthe only or primary driver of innovation. n the case of climachange, the c rrent absence of comprehensive reg lation of

1990 1995 2000 2005

500

400

300

100

200

0

R&D Spending by UtilitiesMillion 2008 USD

figure 2


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greenho se gas emissions means that private rms face weakor non-existent incentives to p rs e low-carbon innovations. hechallenge this creates is compo nded by other feat res, niq e

to the energy sector, that present additional h rdles to innovation.

One is that energy is generally not val ed for its owncharacteristics, b t rather for the goods and services itenables. s a commodity, one kilowatt-ho r of electricity isindisting ishable from any other kilowatt-ho r regardlessof how it was generated. Similarly, most people dont carewhat they p t in the gas tank, provided their vehicle cantravel eq ally far for the same money. his means thatprod ct differentiation does not drive innovation in energys pply options in the same way that it wo ld for other types

of prod cts and services.7

second impediment to innovation in the energy realm is thatmany of the technologies and systems involved are capitalintensive and long-lived. his is tr e on both the s pply sideof the eq ation (e.g., power plants, pipelines, and re neries)and on the demand side (e.g. b ildings and a tomobiles).8 Slow t rnover of capital assets combined with the fact thatmany new energy s pply or end- se technologies req ire

large p-front investments mean that the sector as a wholeis s bject to a high degree of inertia, a tendency to avoid risk,and domination by inc mbent rms. arkets do not drive

innovation especially well for investments that are l mpy,high-cost and high-riskpartic larly when the o tcomesof these investments play o t over decades in a contextwhere energy prices are volatile and many facets of o rnational energy policy are in x. he magnit de of req iredinvestments to develop new energy technologies is markedlydifferent from many other technologies. t is one thing toprototype a new smartphone; it is q ite another to prototype anew n clear reactor.

third iss e is that energy marketspartic larly for

electricity are far from perfectly competitive. he powersector, which is heavily reg lated at the state level, isespecially fragmented, b t energy markets more generallymay be slow to adopt innovations beca se of reg latory

ncertainty, lack of information, and distortions introd ced bypast policiesincl ding n mero s existing s bsidy programs.

ll of these factors together create a clear and compellingj sti cation for direct government s pport of energy innovation,partic larly given the economic, national sec rity, andenvironmental interests at stake. he q estion is not so m chwhether active intervention can be j sti ed, b t rather the detailsaro nd how that intervention sho ld happen and to what extent.

.S. v SS y f S PP fc y vA

he federal government has played a central role in cataly ingand driving innovation and technology development thro gho tthe history of the united States often with strong res lts.

his kind of s pport took a variety of forms. n the 19th cent ry,government scientists mapped o t nat ral reso rce endowmentsand rmy of cers s rveyed ro tes for railroads, incl ding helpingto plan and sometimes to manage their constr ction. n the earlyand mid-20th cent ry, programs s ch as r ral electri cation andmassive p blic works projects, s ch as the constr ction of the

nterstate Highway System, enhanced mobility and connectivityand directly or indirectly contrib ted to the development of newtechnologies and ind stries.

25

2020.5%

11.5%

7.9%

2.4%0.42%

15

10

5

0

Total R&D Spendingas a Share of SalesPercent

PharmaceuticalsAerospace and DefenseComputers & Electronics

AutomotiveEnergy

figure 3

ote: ncl des data for latest year available.


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odern arg ments for a s stained, broad-based governmentrole in basic science and technology &D did not emerge,however, ntil World War revealed that merica waslagging far behind Britain and ermany in the developmentof critical military technology s ch as radar and jet engines.9 Since then, the u.S. government has s pported a vast arrayof technologies and scienti c enterprises with considerables ccess. For instance, government efforts to develop g idancesystems for the military played a role in the development ofdigital comp ters and microchips. avy s pport for aviationtechnology led directly to Boeings 707 one of the rst

major commercial jetliners. he Defense dvanced esearchProjects gency (D P ) created a distrib ted network ofcomp ters called P , which laid the early fo ndationfor the internet. he u.S. government played a direct andindispensable role in la nching the commercial n clear powerind stry. ch of the initial technological know-how wasdeveloped thro gh government efforts working with rmslike to design n clear power reactors for the avy,and the tomic nergy Commission ( C) then extended

nancing to tilities for a series of demonstration plants.

1980 1985 1990 1995 2000

$7(2009 Pr

$3(2009 Pr

$(2009 Pr

$32.2B(1978)

$7.8B(1978)

$7.4B(1978)

80

70

60

40

50

30

20

10

0

Federal R&D SpendDefense, Health, andBillion 2005 USD EnergyHealthNational Defense

figure 4

lobal Positioning System ( PS) technology was inventedby the military b t was opened to widespread commercialse in 1996 and is now omnipresent in comm nications a

transportation systems. n fact, government s pport for bresearch and for the mission-driven programs of agencieslike the Department of Defense (DOD) and the ational

erona tics and Space dministration ( S ) has sparkelong list of landmark innovations.10

n many of these cases, government innovation efforts invothe private sector, which often cond cted design, developm

demonstration, and testing of systems and eq ipment ndercontract to federal agencies. hose systems and eq ipmentoften had important spin-offs; in partic lar, jet engines andgas t rbines both fo nd important applications in the energsector, m ltiple sectors of the economy make se of arth-orbiting satellites and remote sensing, and a host of lessvisible technology advances s ch as ber-reinforced compmaterials and micro antennas have been incorporated inton mero s cons mer prod cts. hese innovations enabled tunited States to lead not j st in speci c technologies b t in

Federal efforts thus far in support of cleanenergy R&D have been inadequate to the ta

and paltry in comparison with other sectors

ote: 2009 data incl de F 2009 f nding in addition to f nds appropriated thro gh thecovery and einvestment ct of 2009.


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entire ind stries. Federal efforts th s far in s pport of cleanenergy &D have been inadeq ate to the task and paltry incomparison with other sectors.11

y vA S D bA A A P y

oday, federal f nding for all types of &D totals nearly$150 billion per year. his f nding ows thro gh 30 differentagencies in the exec tive branch: half (along with 70 &D-s pporting s b-agencies) are in federal agency departments(this former gro p incl des DOD and DO ), and half areindependent and o tside of direct presidential control (this

latter gro p incl des the ational Science Fo ndation andS ). any of these federal agencies in t rn f nd researchby private rms, niversities, nonpro ts, and the governmentsown laboratories. ach of these agencies manages itsresearch programs differently. his decentrali ation hashad certain advantages, b t has also led to inconsistency,d plication, and gaps in the national &D portfolio. S pportfor energy &D constit tes a relatively small part of theoverall federal &D portfolio representing less than 2percent of the total federal &D b dget.

We believe this m st change. nergy innovation sho ld be ahigher national priority.

t is increasingly clear that the nation simply cannot affordto leave f t re energy technology challenges solely to themarketplace. he environmental and economic trade-offs inenergy, domestically and globally, are becoming more rgentand more complex. t the same time, jobs and internationalcompetitiveness considerations have moved to the forefrontof the nations priorities. he governments of China, ermany,Japan, and Korea, among others, are all making signi cant

investments in energy innovation. his is creating large newmarkets and millions of high-paying jobs in man fact ring andservices, and will ndo btedly shape the f t re evol tion ofthe $5 trillion global energy ind stry.

We strongly recommend increased government s pportand leadership to develop and demonstrate new energytechnologies to meet this cent rys challenges. he moredif c lt q estion is how to ens re that government plays thisrole more effectively.

John DoerrPartner, Kleiner Perkins Ca eld & Byers

met Sridhar, an ndian orn Ameri an entrepreneur, in2001 in his la at the ni ersit o Arizona. e was, literalla ro ket s ientist. ith a ederal grant to de elop te hnolog to sustain li e on ars or ASA, he in ented and uilt aremarka le de i e apa le o produ ing air and uel romele tri it to meet this hallenge.

soon realized that this te hnolog ould ha e an e engreater impa t here on earth. b running the s stem in

re erse, he ould trans orm an h dro ar on (natural gas,iomass, animal waste) to generate ele tri it at er high

e ien all without urning the h dro ar on.

n 2001, made the initial in estment to help him a hie e hgoal o hanging the wa the world generates and onsumesenerg . he team pa ked up three hauls and headed to

ASA Ames esear h center in Sili on valle , and bloomnerg was ounded.

er the ne t ew ears, the te hnolog qui kl de elopedrom on ept, to protot pe, to produ t, as the major

te hnologi al hallenges were sol ed and the s stemse ame more power ul, more e ient, more relia le, and

more e onomi al.

bloom is now powering se eral fortune 500 ompaniessu h as oogle, almart, fed , eba , and others. heha e grown into a 1000+ person ompan with headquartersand manu a turing operations in cali ornia. he e uilt aglo al suppl hain, and re entl announ ed plans to uilda new manu a turing a ilit in Delaware, taking o er thea andoned chr sler plant and rein igorating jo growth.

bloom is a stor o su ess in Ameri an energ inno ationand jo reation. t egan with ederall unded uni ersit

asi resear h to ena le a trans ormati e te hnolog , unde the leadership o an immigrant to Ameri a with an amazingentrepreneurial spirit and ision.

for e er bloom man other inno ati e entures will ail; tha the dis ipline o apitalism and power o markets. Ameri amust em ra e risks in inno ation and in est hea il in &D to reate a ull pipeline o good ideas toda so that dozensmore e en hundreds more Ameri an blooms will loom

// 13


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2Chapter Two:

How sho ld the government play aconstr ctive role in energy innovation?

In this chapter we focus on how the governsupport the development of new energy tec

A c f D A v SAb y ff c v y vA

he united States still holds a lead in many key energy technolog

and can draw on an extraordinary depth of talent and experience.

hese advantages create a real opport nity for the u.S. to carry

its global leadership position into the advanced energy technolog

marketplace of the 21st cent ry. B t merica today is only partia

eq ipped to meet this challenge.


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// 15

o enhance u.S. leadership in energy technologies, the federalgovernment m st not only maintain a rob st effort across theinnovation contin m, b t it m st promote an environment thatfavors innovation thro gho t the energy economy. We knowfrom history and from o r own b siness experiences that greatinnovation s ccesses can emerge from a strong p blic-privatepartnership in technology development. Similar s ccesses areachievable in energy, b t only if the co ntry bolsters its energyinnovation capacity and investments and the nations politicalleaders and b siness comm nity work together to make a cleanand sec re energy f t re a reality.

c A DScAPhe u.S. energy sector is a massive enterprise of

interconnected and interrelated systems. Direct energyexpendit res comprise ro ghly 9 percent of u.S. gross domesticprod ct ( DP), b t the importance of energy to virt ally all u.S.economic activity far exceeds that. he u.S. energy enterpriseis predominantly managed by the private sector, tho gh thereare n mero s federal and state policies and programs that

affect private-sector decisions on nearly every aspect of energyinvestment, prod ction, delivery and end se.

he u.S. is fort nate to have a network of celebrated nationallabs and niversities, rob st vent re capital reso rces andpro cient entreprene rs, a sophisticated nancial ind stry,a legal system that protects the sanctity of contracts, andlarge technology and energy companies with the skills toscale technologies. What merica arg ably lacks comparedto co ntries like China, ermany, Japan, Korea and others,however, is a collective sense of national p rpose aro ndthis iss e and a strategy for b ilding innovative energysystems. he governments of o r competitors, by contrast,are very clearly boosting their efforts to cataly e scienti c andtechnological progress in the energy domain.

F rthermore, as pointed o t in o r initial report, total u.S.investment in energy innovation, by both the p blic and privatesectors, pales in comparison to the levels of investmenttypical of other technology-dependent sectors s ch aspharmace ticals, aerospace, comp ters, and electronics.

Three Stages in the Energy Innovation Value Chai

Science Engineering Commercializa

Basic research and development. Primarily conductedat the benchscale to solve underlying challenges inphysics, chemistry and biology challenges.

Def i io

W e e Co d c ed

Mostly in universities and national labs; a fewlarge companies.

Turns research into practice by converting scienceinto workable product. Also addresses problemswith pilot projects.

Companies and labs. Start-ups andventure capitalists.

Deploying new products, processes and supplychains at national scales.

Companies

figure 5

a e o DeaTurning science into amarketable product.

a e o DeaFinancing and demonstratingtechnology at scale.


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S S f P SShe good news is that sol tions to this problem of nder-

investment exist. o achieve them, however, great carem st be taken to leverage the strengths of the privatesector while strategically and ef ciently managing speci cp blic interventions. government-f nded, government-directed approach reminiscent of the pollo and anhattan projects is nlikely to be either effectiveor politically viable. n those historical examples, enormo sfederal reso rces were concentrated on a single, de nedtechnological challenge. overnment was the sole c stomerand was willing to pay essentially any price to achievethe desired o tcome. By contrast, the effort going forward

req ires targeted, limited government interventions atappropriate points in an energy innovationvalue chain thatc lminates in new cons mer choices based on competitivecost and performance.

Fort nately, there are some enco raging signs of progress.

First, the federal government has provided clear andconsistent s pport for basic science research for at least adecade now. ecent administrations have endeavored toincrease federal expendit res for basic research even in the

face of press re to red ce spending.

Second, the c rrent administration is taking speci c stepsto foc s the DO 's basic science programs on technologychallenges with high economic and environmental ret rns,while sim ltaneo sly improving links with the engineeringcomm nity. hese steps can improve the likelihood of achievingtransformative scienti c breakthro ghs.

hird, Congress has recently a thori ed new efforts, s ch asthe dvanced esearch Projects gency- nergy ( P - ),

to translate early-stage science and engineering workinto prod cts with commercial potential. he federal loang arantee program enacted in the bipartisan nergy Policy

ct of 2005 iss es loan g arantees to energy projects andadvanced man fact ring facilities that co ld not otherwisesec re nancing. n o r view, both programs face challengesb t are directionally correct.

common feat re of these programs is that they attemptto address speci c h rdles or pinch points in the energyinnovation chain. oing forward, the governments key ro

sho ld be to help ll gaps and address missing links alongthis chain.

P c P S Df D A vA Ac vB ilding on o r own private-sector experience andlooking across the many examples where government hass cceeded and failed in its efforts to s pport energyinnovation, three simple principles emerge:

First, the ederal government needs toocus its e orts on specifc market ailures

in areas that can make a signifcant impacton strategic priorities.

he most signi cant market fail res for energy technologcenter on the dif c lty of nding adeq ate private-sectors pport for basic research, early pilot demonstrations (inthe case of capital-intensive projects), and rst-of-a-kindcommercial deployment for new technologies. Privatecompanies are deterred from basic research and early pilo

demonstrations beca se they dont q ickly earn adeq ateret rns and cant prevent their competitors from alsocapt ring some of the commercially val able knowledgegained thro gh these investments. When nancing rst-oa-kind technologies, the risks are too great for traditionalinfrastr ct re investors to bear while the costs are too largfor technology investors.

he federal government sho ld intervene in those areaswhere a signi cant gap exists between national prioritiesand naided private-sector o tcomes. Foc sing on speci

steps in the val e chain where the market falls short is likto be more s ccessf l than trying to develop sol tions frobeginning to end. his kind of staged approach to investmdemands private-sector involvement to (1) provide importmarket discipline, (2) red ce the potential waste of taxpayreso rces, and (3) ens re that the government plays aconstr ctive role at each stage.


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Ursula BurnsChairman and C O, Xerox

aking lean energ te hnolog a widespread ommer ial realit requiresmore than just in ention. t requires a omple optimization along thedimensions o per orman e, manu a tura ilit , usiness model, markets,suppl hain, ease o adoption/user e perien e, and low ost. he ke toa hie ing this omple optimization along all dimensions is olla orationamong di erent pla ers in the inno ation e os stem, rom go ernmentagen ies and large orporations, to startups and uni ersities. b in orporatingPA c in 2002 as an independent su sidiar that is in the usiness o openinno ation with numerous lients in this e os stem, xero helped reate at

PA c a new model or &D partnerships. his model a ilitates the kinds ostrategi olla orations that are needed in energ and other domains tole erage the strengths o partners, redu e risks, and ll in gaps or whatsneeded to a elerate reakthroughs to market.

d like to share a spe i e ample o a olla oration where .S. go ernmentsupport atal zed PA cs strategi relationships with an inno ati e startup,allowing PA c to appl apa ilities originall de eloped or xero to ke

hallenges in inno ation.

e entl , PA c partnered with Solfo us, n ., a solar on entrator startup that was in u ated at PA c where it grew to 50+ emplo ees and egan its

rst ommer ial deplo ments. based on its in-depth and longstanding workor xero in opti s or laser printers, PA c was a le to pro ide reakthrough,

manu a turing- riendl opti al design on epts to Solfo us. owe er, the a ilit to a hie e the ne essar ost and relia ilit per orman e or the Solfo us s stems would not ha e een possi le without the .S.go ernments ational enewa le nerg a orator ( ). hroughoutSolfo us de elopment phase at PA c, pro ided e pert guidan e insolar ell per orman e and e ien , as well as earl relia ilit testing o the riti al mirror and pa kaging approa hes. hese inputs rom were

ital to insure that the produ ts would ha e the ne essar per orman e andli espan on e deplo ed in the eld.

e ti e partnerships like these are the onl wa lean energ te hnologan e ome a widespread realit .

// 17

Effective partnerships like these are thcan become a widespread reality.


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foc sed approach also means p lling back fromtechnologies that do not show the same rate of improvementor promise, or where existing markets are already delivering

contin ed progress.12

Second, the ederal government shouldcatalyze private-sector competition by providingincentives aligned with strategic goals.Having identi ed targeted, strategic investment areas,government sho ld then invest in these areas with theprimary goal offostering increased competition among energy innovators and technologies . he goal sho ld be tocorrect market fail res, b t to do so by investing in m ltipletechnologies and m ltiple competing approaches that show

real and meaningf l potential. his will create competitionon m ltiple levels and maximi e the likelihood of ltimatetechnical s ccess.

overnment sho ld also base its investment goals on long-term,strategic and potentially high-payoff priorities, recogni ingthat some short-term technology gains can have signi cantpositive impacts over time. his approach will both stim latecompetition and leave room for m ltiple types of innovation.

o facilitate competition among technology, the federalgovernment sho ld take a portfolio approach to energyinnovation investments one that balances technologypathways and risks. Within its investment portfolio, DOsho ld also strive to instit tionali e the ability to take risks.

ncentives to lowball goals and metrics for fear of missinga target or losing f nding sho ld be minimi ed; some fail reis req ired to achieve signi cant technology gains. oreover,the federal government sho ld be technology-agnostic as longas one or more innovations achieve the price and performancegoals req ired to meet national objectives.

Third, the ederal government should use the most cost-e fcient actions to acilitatepositive outcomes.

n the c rrent restrictive b dget environment there will likelybe fewer f nds for all technology areas, incl ding energy. hefederal government sho ld seek maxim m leverage in sing

its reso rces to achieve p blic objectives, ideally identifythose interventions where a small government action cansigni cantly increase private market activity.

he most highly leveraged form of government s pport foinnovation often foc ses on fostering entreprene rial actiand red cing barriers to innovation. Common examplesincl de intellect al property protection, so nd anti-monopolicy, immigration policies that attract the best and brighto the co ntry, and str ct ral market changes. For exampthe reorgani ation of telecom markets in the 1990s led tomassive innovation and investment in ber and wirelessnetworks. Similarly, energy markets co ld be restr ct redenco rage more advanced clean energy options.

Where direct government f nding is req ired, federalagencies sho ld strive to make their investments go asfar as possible. o that end, they sho ld foc s on rigoro speer-review processes and competitive f nding optionsthat, when possible, attract private-sector participation andco-investment. s a general r le of th mb, the proportion oprivate-sector investment sho ld increase as a technologyapproaches commerciali ation. DO c rrently leverages itf nding by req iring private-sector cost sharing b t additiomechanisms sho ld be explored and tailored to speci ctechnology needs.13

Predictable government reg lations also create appropriatelong-term incentives for innovation witho t req iring fededollars. For instance, many state and national energyef ciency standards have systematically driven technologyimprovements witho t direct government f nding. s a reof performance-based standards, new refrigerators soldin 2007 se approximately 70 percent less electricity thanthose sold 30 years earlier.14 n general, performance-basedreg lations that set goals or r les and rely on private-secto

rms operating in a competitive environment to nd the beways to meet them consistently drive innovation.

n s m, programs and policies that allow the co ntry to mtechnological progress and meet national objectives withrelatively small direct investments sho ld be prioriti ed,improved and expanded.


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Tim SolsoChairman and C O, C mmins nc.

consistentl inno ating in energ te hnolog requirespairing top engineering talent with world- lass resear hand de elopment a ilities and e pertise. Pu li -pri atepartnerships pla an essential role. ell stru turedpartnerships a elerate the de elopment o new andimpro ed te hnologies, in luding the lean engines and

omponents uilt at cummins.

for instan e, cummins urrentl is partnering with se eral

pri ate rms in luding PAccA n ., aton corporationand vanD ne Super ur o n . and ak idge ationala orator and Purdue ni ersit on a proje t under the

Department o nerg s Super ru k program to signi antlimpro e reight e ien .

he Super ru k program om ines pu li and pri atee pertise and resour es to ad an e uel e ien te hnolog or class 8 tra tor trailers. he goal is to makesigni ant e ien gains and pro ide real ossil- uelsa ings ostering inno ati e ad an es in diesel engines,

a and trailer aerod nami s and engine idle management.his will e a omplished through a omprehensi e, s stemased approa h.

cummins and its partners re ei ed a $39 million award rom thD under this program and are mat hing these unds dollar

or dollar an e ample o how pu li resour es attra t prise tor in estment and parti ipation. hen the te hnologiesde eloped under the proje t are ull deplo ed, the enginee ien impro ements alone are proje ted to redu e uel

onsumption or on-road hea tru ks o er 20 per ent. 5 ears, the eet would see a redu tion o more than 73 million

tons o c 2 equi alent to on erting 13 million passengerars to zero emissions. his initiati e demonstrates how Drings pu li and pri ate entities together and in ents them to

deli er inno ati e te hnolog results.

o ernment and the pri ate se tor su ess ull work togethe through su h thought ull ra ted pu li -pri ate partnershipand these initiati es should e e panded going orward.

// 19

c DA S S .S. AD S P

c A y vAB ilding on the recommendations we rst o tlined inA Business Plan for Americas Energy Future , we have identi ed a s iteof policies and programs that co ld strengthen o r nationsenergy innovation capabilities. s we have stated in the past,we strongly recommend making healthy investments in energyinnovation activities across the contin m of science, engineeringand early commerciali ation. ore speci cally, drawing on thethree principles described above, the recommendations beloware part of an overall approach that we believe is necessary to

advance o r co ntrys innovation capacity.15

RECO EN ATION 1:evelop and implement a comprehensive,

government-wide Quadrennial EnergyReview (QER)

s we recommended previo sly, the nation needs a rob stational nergy Plan to serve as a strategic technology and

policy roadmap. s we noted then, DO s strategic planningprocess and individ al technology system roadmaps have onlypartially addressed the need for strategic clarity.

mportantly, s ch a plan sho ld pinpoint key market fail resand technology chokepoints in order to better orient federalprograms and reso rces.16 t sho ld be based on rigoro sanalysis and sho ld incorporate critical stakeholder inp t.With help from the private sector, the plan sho ld identifycritical gaps in the innovation chain and establish goals andeffective partnerships to align the capacities of the p blic andprivate sectors and move technologies to market.

he Presidents Co ncil on Science and echnology recently

recommended developing a Q to provide a clear, integratedroad map with short-, intermediate-, and long-term objectivesfor federal energy technology programs, along with astr ct red, time-bo nd plan to get there.17 DO is alreadyimplementing a Q adrennial echnology eview (Q ) that, inaddition to s mmari ing the c rrent stat s of selected energytechnologies, aims to describe program goals, engage private-sector stakeholders and identify important D&D policiesand levers. S ch a road map has important precedents. nnational sec rity, the Q adrennial Defense eview lays o t a


24/44


long-term strategy that both the p blic and private sector canplan aro nd. lements of the QD s s ccess incl de providingclarity aro nd long-term o tcomes, driving alignment across

m ltiple stakeholder gro ps, opening p Department ofDefense (DOD) technology ass mptions to o tside scr tiny,and sing a portfolio approach to balance investments.

We s pport DO s Q process, which we see as animportant and meaningf l rst step toward developing anational energy strategy consistent with o r own call for a

ational nergy Plan. he federal government sho ld b ild onthe Q and move q ickly toward a government-wide Q .

RECO EN ATION 2:Support innovation hubs

n o r 2010 report we called for greater reso rces to beconcentrated at centers of excellence. We believe thisconcept has m ch in common with DO s effort to establishinnovation h bs and other collaborative innovation models.

xperience has shown that concentrated research centers candrive technologies down all three phases of the innovationlearning c rve by:

F nding and organi ing &D projects that can lead to

technology breakthro ghs; Providing eq ipment and lab space to test the viability and

scalability of new energy technologies; and

Sec ring partnerships to collaborate and share intellect alproperty with the aim of bringing new technologies to market.

he geographic concentration of highly technical companies asocc rred in Silicon Valley d e to early federal spending on defenseand space exploration enco rages concentrated talent, theexchange of ideas, and the creation of new technologies and

vent res. o this end, we strongly s pport the direction of DO Innovation Hubs , Bioenergy Research Centers andEnergy FrontieResearch Centers and believe they sho ld receive f ll f nding

RECO EN ATION 3:Support and expand ARPA-E

s we have noted previo sly, P - offers a stark contrto the historic DO str ct re in that it brings togetherexperts from across the technology development spectr m

he creation of P - demonstrates a new commitmentto working more exibly within DO to achieve technologoals. While it is too early to expect transformative technis ccesses from embryonic P - programs, the leadersteam at P - has already marked several milestones:

nvesting in high potential projects;

S ccessf lly attracting talent from the private sectorand academia;

Creating an open architect re organi ational design this well adapted to meeting c rrent program needs; and

Developing processes that s pport transparency andenhanced coordination with the private sector.

P - challenges and empowers innovators across arange of technology pathways. his has made it possible tleverage federal dollars with private-sector expos re and,in many cases, follow-on capital. By nearly all acco nts, iappears that P - is being managed as a highly ef cienrisk-taking, res lts-oriented organi ation. n short, Pexempli es the principles laid o t in this report.

We originally called for $1 billion in federal f nding to sP - . We maintain that this f nding level sho ld be th

goal over the coming decade and reso rces sho ld move tthis level as q ickly as they can be ef ciently and effectivexpended. t a minim m we believe that P - sho ldreceive $300 million per year its a thori ed b dget the expense of other DO programs, if necessary. oingforward, investments in P - sho ld be prioriti ed andincreased. We believe this new agency represents one of thbest investments the federal government can make.

We believe ARPA-E represents one of the binvestments the federal government can ma


25/44

Norm AugustineFormer Chairman and C O, ockheed artin

ten ears in go ernment were among the most rewarding o mareer ut must on ess that am not a an o ig go ernment. t was m

o ser ation that go ernment is o ten at its est when it is helping the pri atese tor do those things that the latter ant undertake on its own: pursuits thatare learl in the pu li interest ut where the ruits o those pursuits ma nota rue to their underwriters and per ormers or where those pursuits entailhigh risks and undul large in estments or e tend o er a prolonged period o time. n su h ases, relati el modest go ernment in estments an e used to

ene t the itizenr as a whole.

n estors o ten re er to a valle o Death whi h new initiati es o ten ha e to transit. tend to think o not one ut two su h alle s; the rst when anidea o ers onsidera le promise et retains su stantial risk o te hni al

ailure; and the se ond when the ideas asi easi ilit has een pro en utits e onomi ia ilit at s ale is still un ertain. hese are the tipping pointswhere onstru ti e go ernment inter ention an make all the di eren e. And these are the points when leaders, go ernment and pri ate se tor alike, must think out o the o and perse ere in the a e o onsidered risks.

for instan e, in the aerospa e portion o m areer, o ser ed man oour nations greatest aerospa e in entions u le Spa e eles ope,

e onnaissan e Satellites and Polaris, to name a ew su er major earlailures onl to o er ome set a ks and ultimatel a hie e su ess. n ea h o

these ases ooperation etween go ernment and the pri ate se tor to ndreati e solutions and o er ome di ult te hni al hallenges e entuall

produ ed positi e out omes.

nl reating win-win partnerships etween go ernment and the pri atese tor that en ourage Ameri an ingenuit and perse eran e an we hope tosol e su h so ietal hallenges as pro iding lean, a orda le, sustaina leenerg , assuring national se urit , prote ting the natural en ironment, andmaintaining a strong e onom .

Cooperation between government andand overcome dif cult technical chall

// 21


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RECO EN ATION 4:ake OE work smarter along the

ARPA-E model.ven with the best policy tools to promote innovation,

government programs can fall at witho t nimble, high-performing, risk-tolerant federal agencies. DO has a criticalrole to play and will need to evolve beyond its c rrentprogram str ct re and c lt re to be maximally effective.

DO s oversight of energy is c rrently organi ed aro ndspeci c technologies (e.g., renewable energy, fossil energy,n clear energy) and f nctional aspects of the system (e.g.,electricity delivery and reliability, energy ef ciency). heres lt is a classic stovepipe organi ational str ct rethat s ffers from well- nderstood challenges in terms ofinformation sharing and internal b dget competition. o bemaximally effective in the c rrent energy market, the federalgovernment partic larly the national labs and the of ceswithin DO that f nd and direct D&D m st operate morenimbly and strategically.

DO is making important strides in this area, b t there ismore to be done. We arg e for P -i ing a larger portionof DO and the national labs by expanding some of the newa thorities, tools and processes embodied by P - .

Beyond P -i ing a larger portion of DO , a n mber ofsteps sho ld be taken to improve the overall effectiveness ofthe agency:

fo us more on o erall program su ess than onindi idual proje t su ess and emphasize the alue in

al ulated risks. S ch an approach wo ld b ild in greaterability for DO to accept and manage risks and allow someprojects to fail even as others s cceed.

fo us on the role o program managers.While vario sorgani ational taxonomies co ld provide alternatives tothe existing stovepipe program str ct re, we contend that

talent management is ltimately more important thanorgani ational str ct re. O tstanding employees can overcs boptimal organi ational arrangements, b t even the

perfect organi ational str ct re if it lacks talent will stnderperform. Hence, DO s talent management system sh

foc s on (a) recr iting world-class program managers fromacademia and the private sector and (b) establishing rst-ratraining and mentoring programs for existing employees.DO sho ld be empowered to implement fast-track hiringproced res and assid o sly review both managers andemployees performance and contrib tion to programmaticgoals. he highest performers sho ld be rewarded with bot

nancial and non- nancial incentives; poor performers mdealt with appropriately and q ickly.

Align the internal stru ture. DO is beginning to drivem ch greater alignment across its of ces and programsFor instance, DO s S nShot initiative aims to ens re tall DO s solar innovation activities from the Of ce Science thro gh P - , the Of ce of nergy f cienand enewable nergy ( ), and the loan g aranteeprogram are well aligned. While it is too soon todetermine if these efforts will be effective, we believe thare directionally correct. DO sho ld contin e to imprthe alignment of cross-departmental efforts from thenational labs and Of ce of Science to the applied andcommerciali ation programs as a way to eliminatered ndant projects and ens re a tight hand-off across thinnovation val e chain.

mplo rigorous and transparent peer re iews. heneed for rigoro s program and project reviews may seemobvio s, b t tricky iss es often arise in exec tion. Forexample, in an effort to prevent con icts of interest or theappearance of con icts, DO will often excl de all profefrom a partic lar niversity from participating in the o tsreview of proposals s bmitted in response to a DO f ndsolicitation if even one professor from that same niversithas s bmitted a proposal. Carried to extremes, s ch polic

To be maximally effective in the current engovernment must operate more nimbly and


27/44

// 23

can nnecessarily narrow the pool of q ali ed o tside expertsavailable to review proposals. While it is important to avoidcon icts of interest, that goal m st be weighed against

the bene ts of seeking the most q ali ed individ als toparticipate in peer review. We believe rigoro s disclos re andtransparency req irements can provide adeq ate safeg ardsagainst potential con icts of interest in most cases.

can el non-per orming proje ts.Projects that receivefederal s pport m st be contin ally monitored to ass rethat goals and deadlines are being met and that failingprojects are not allowed to linger. ltho gh DO c rrentlyemploys stage-gate assessments and has the ability toterminate projects, it has enco ntered dif c lty in canceling

failing projects. DO m st empower managers and providethe necessary leadership to make these critical decisions.

ho gh it may be dif c lt to admit that a selected projectis not going to s cceed, doing so and then taking action tostop f nding so that reso rces can be re-directed to morepromising alternatives is critical, partic larly given thec rrent scal imperative to accomplish more with less.

RECO EN ATION 5:evelop a frst-o -a-kind technology

commercialization engine along the lineso the proposed Clean Energy evelopmentAdministration (CE A).O r previo s report called for a new government-backedinstit tion dedicated to overcoming nancing h rdles foradvanced energy technologies. ts speci c mission wo ld be tomobili e signi cant private-sector capital to b y down the risksof emerging technologies and ll nancing gaps so that thesetechnologies can bridge the transition from demonstration tocommerciali ation (in the relevant literat re, that transitionis often referred to as the valley of death). C rrently, o rco ntrys energy innovation system still lacks a s ccessf l,repeatable, technology-ne tral mechanism to nance, b ild anddemonstrate nproven, large-scale energy facilities.

o effectively accelerate the demonstration and s bseq entdeployment of competitive new technologies, a new government-backed nancing instit tion sho ld b ild off the s ccessf lelements of DO s loan g arantee program and be caref llystr ct red aro nd the following principles and design feat res:

ndependen e. he kinds of projects that will req irenancing s pport will typically involve complex technology

and span m lti-year constr ction periods, both of whichincrease project nancing risks and costs. his means the newinstit tion m st have s f cient a tonomy to take calc latedrisks, witho t political interference. Creating a c lt re thattolerates risk, and even some fail res, is essential.

Pri ate-se tor o-in estment.S bstantial private-sectorparticipation is req ired to red ce the instit tions capitalreq irements and help ens re that new technologiesevent ally meet the test of competing in real-world markets.

Strong pu li - and pri ate-se tor e pertise. henancing instit tion sho ld have the a thority to se

scienti c experts from government agencies to providetechnical eval ation while seeking advice from b sinessexperts in the private sector concerning the commercialaspects of potential investments. Similarly, the nancing

figure 6

60

50

40

3020

10

0

Top 5 Countries inClean Energy Financing, Billion USD

China Germany U.S. Italy Brazilote: Data incl des the following investments: vent re capital/private eq ity, p blic markets,

asset nance, and small distrib ted capacity. Private and p blic investment in &D is excl ded.


28/44


instit tion sho ld adopt exible hiring practices to attracthighly-skilled technical experts, investment professionals,and scientists.

fle i ilit to o er nan ing produ ts ased onmarket gaps. he instit tion sho ld have broad exibilityin the types and terms of nancial instr ments it employsto address the speci c market fail res that apply toeach target investment. t sho ld also have strict, shortdeadlines for conditional acceptances or rejections tospeed development and red ce b rea cracy so that its

nancial prod cts are attractive to the private sector.

o ernan e and o ersight. diverse board of directors

sho ld provide g idance on priorities and best practices, whileens ring that the instit tion adheres to its organi ationalmission, operating principles, and strategic objectives.

Sel - unded. he new instit tion sho ld strive to be self-f nding after an initial p blic capitali ation, meaning that onan ongoing basis it sho ld be f nded to the extent possibleby nancing fees and by ret rns on pro table investments.

Port olio in estment approa h. he instit tion sho ldstrive to create a diversi ed investment portfolio, foc sedprimarily on clean energy technologies with breakthro ghpotential. dditionally, the Of ce of anagement andB dget (O B) and the new instit tion sho ld jointly developa methodology to score investments at the portfolio level.18

his wo ld allow the new instit tion to operate morenimbly and be eval ated on the overall performance of itsinvestments in contrast to DO s oan arantee Program,which is scored on a project-by-project basis.

ransparen .Decision processes, selection criteria, andinvestment res lts sho ld be p blished to provide feedbackto the private sector and red ce the perception that projectsare being selected on the basis of partisanship or favoritism.

n mber of recent proposals have been introd ced in Conto create a green bank along these lines. C rrently, there isome moment m in the Senate behind legislation to establi

a new energy nancing instit tion called the Clean nergyDeployment gency (C D ). We believe the C D legislaaligns with o r original recommendation to create an institto nance and b ild at-scale, advanced energy technologiesand co ld be implemented in a way that encompasses thedesign elements en merated above. We believe greaters ccess in this area co ld have profo nd implications for emarkets over the coming decade and for u.S. competitivenein the global market.

D f S A f D AP A SWe believe it is critical that the united States p rs e a strongstrategy to lead in the global race to develop new energytechnologies. With China and other trading competitors poisto b ild more energy infrastr ct re in the next 15 years thanthe united States has b ilt in the last 100, o r nation faces asigni cant challenge in maintaining a place at the forefront om lti-trillion dollar effort to transform the worlds energy sysand develop new, high-val e ind stries. eeting this challeng

will req ire smart government intervention to overcome spetechnology h rdles and close speci c market gaps.

While we contin e to believe that the sit ation req iresincreased federal investment in energy D&D, ramped pover an appropriate period of time and offset by spendingelsewhere in the federal b dget, we nderstand that DO the rest of the federal government will need to demonstratimproved performance to j stify a greater commitmentof p blic reso rces. We are con dent that applying theprinciples and recommendations o tlined in this report wi

help establish credibility with Congress, the marketplace,and the p blic and earn the additional reso rces needed toadvance the energy innovation enterprise.


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Chad HollidayChairman, Bank of mericaFormer Chairman and C O, D pont

n order to ring down the osts o lean energ te hnologies and reate ro ustdomesti suppl hains that generate e onomi growth and new jo s, the

ountr needs to s ale lean energ te hnologies here at home. A hie ing rapidgrowth in lean energ will require onstru ti e partnerships that ena le thepu li and pri ate se tors to work together e e ti el and le erage the uniquestrengths o ea h. At bank o Ameri a, we re entl worked with two other

ompanies Prologis and nerg and the .S. Department o nerg toput together a rst-o -a-kind deal alled Proje t Amp that will do e a tl this.

Proje t Amp is a large-s ale distri uted solar generation proje t that willnan e appro imatel $2.6 illion o ommer ial roo top solar installations,

produ ing 733 megawatts ( ) in 28 states a ross the ountr . ore thansheer size, this deal is unique in se eral wa s it will e the rst distri utedsolar deal to:

Sell all o its power a k to the grid through lo al utilities;

e ei e a redit rating and raise long-term de t; and

se a new, repeata le nan ing stru ture de eloped bank o Ameri a thatan oster su sequent gigawatt-s ale solar proje ts.

aken together, these rsts are ringing down te hnolog osts and hanging the wa the market iews solar power.

but none o this would ha e een possi le without the help o the ederalgo ernment. b a king the deal with a partial loan guarantee whi hlowered the proje ts o erall nan ial risks the go ernment ena led us to put this trans ormati e deal together in what has een a ragmented andunderser ed segment o the energ market. oreo er, with the go ernmentshelp, we were a le to nan e the proje t almost e lusi el with pri atese tor apital. a h $1 set aside the D to o er the guarantee will supportroughl $20 in pri ate in estment in lean energ de elopment.

Although there were some hallenges earl in the pro ess, this proje tdemonstrates how small a tions the pu li se tor an atal ze signi antpri ate-se tor in estment.

// 25

This project demonstrates how smallcatalyze signi cant private-sector inv


30/44


3Chapter Three:

How can the u.S. overnmentpay for energy innovation in anew era of scal a sterity?

Here we turn to the third questionand explain how the federalgovernment could pay for a robustenergy innovation enterprise,especially in light of Americascurrent budgetary dilemma.

PAy f A SS A v S

he previo s two chapters make the case for a critical federal role i

s pporting energy innovation and s ggest ways to organi e govern

efforts more effectively. Here we t rn to the q estion of how the

federal government co ld pay for a rob st energy innovation enterp

especially in light of mericas c rrent b dgetary dilemma.

Previo sly, we arg ed that meaningf l progress in developing new e

technologies and capt ring a signi cant portion of the $5 trillion g

energy market wo ld req ire s bstantially increased investment

in energy innovation. ndeed, there is no way to make the progress

this co ntry req ires witho t increasing federal s pport for energy

innovation across the entire innovation contin m. evels of clean e

D&D investment m st be bro ght closer to the levels typical of oth

technologically-intensive sectors and m st relate to the si e of the u

energy market and its importance in driving the u.S. economy.


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Allowances$61

Energy$2.1

CommunityandRegionalDevelopment$22

General Science, Space and Technology$31

Commerce andHousing Credit$38

Administrationof Justice$53

Education, Training,Employment$93

Veterans Benets$124

International Affairs$67

GeneralGovernment$29Natural Resources

$40 Transportation$94

Agriculture

$25

Health$386

2010 Federal Budget$3.60 Trillion(in billions)

Medicare$462IncomeSecurity$629

Defense$722SocialSecurity$724

Net Interest$188

figure 7

// 27


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n o r original report, we called for a three-fold increase inann al energy innovation investments, spanning early stage

&D to early commerciali ation of large-scale advanced energy

facilities. mero s organi ations from both ends of thepolitical spectr m have st died energy innovation spendingand all agree that signi cant increases in f nding are necessaryto ll the pipeline with science, material, and systems gainsthat can lead to the clean energy technologies of tomorrow.19

o be s re, the sit ation demands a combination of p blicand private reso rces and money is not the only sol tion.B t witho t bringing energy investments to a level that iscommens rate with the scale of the ind stry and with thescale of the national priorities that are at stake, we are

nlikely to make the progress o r co ntry needs.

However, even in these challenging scal times, we believenderf nding energy innovation wo ld be a grave mistake

u.S. cons mers contin e to send close to $1 billion overse

every day to feed o r co ntrys oil appetite, yet both the prand p blic sectors contin e to shortchange the very D&Dinvestments that offer the best path toward red cing theseo t ows. he co ntry cant afford to only spend its reso ron cons mption; it m st make smart investments in activitthat collectively will res lt in signi cant ret rns in the f t

oday, as lawmakers debate how to bring o r nations debtnder control, we believe it is critical to s pport energy

innovation b dgets. o be clear, s pporting innovation b dis an investment, not a cost. he co ntry needs to bolster its

energy innovation infrastr ct re to attract and s pport the bscienti c talent and drive competitive growth. s one Cmember p ts it: n a time of a sterity, the last thing one shdo is nder-f nd &D and high technology prioritiesto dso is the eq ivalent of removing an engine from an overloaaircraft in order to red ce its weight.

s b siness leaders, we have all faced to gh b dgetarydecisions thro gho t o r careers. n lean times, each of

s has been tasked with c tting back and reorientinginvestments. hese decisions are never easy, b t we havealways critically assessed and targeted f nding c ts, beingespecially caref l to preserve, and in some cases evenincrease, f nding for activities that have the potential todrive f t re growth. cross the board red ctions rarely msense. ltho gh innovation-based investments often willnot show immediate ret rns in fact, many take years topay off history has shown that the payoffs to s ccessfinvestments are s ally large.

n short, we see an rgent need for a new energy innovationf nding regime that acco nts for c rrent b dgetary realities,still ens res that o r nation makes targeted investments in itsenergy f t re. his will be no easy task. Creating a dedicatedconsistent stream of federal dollars that is not beholden to thevolatility and ncertainty of the ann al appropriations procesis a common b t el sive goal for many interests. For too long

We maintain that signi cantly increasedinvestments in energy innovation should beour countrys target over the next decade.

t the same time, the C f lly nderstands the gravity ofthe nations c rrent scal sit ation. Serio s concerns abo tthe mo nting federal debt and b dgetary de cits have led toa legitimate and rgent foc s on o r co ntrys long-term scalhealth. he c rrent estimate of the federal b dget de citfor 2011 is $1.3 trillion, and by the end of this scal year theCongressional B dget Of ce (CBO) has projected that debtowned by the p blic will be more than $10 trillion.20 Whilesome progress may be made on identifying f rther de cit-red ction meas res in the coming months, few expect thatthe co ntry will q ickly p t its scal ho se in order. Press resto red ce government spending will contin e to be a strongin ence on policymakers.


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Bill GatesChairman and former C O, icrosoft

Ameri a is the world leader in pharma euti al and medi alinno ation. ts eas to see wh .

er the last 100 ears, the .S. ational nstitutes o ealth( ) has unded ground reaking medi al resear h leading to dis o eries that ha e dramati all in reased the li espano Ameri ans, redu ed the death rate rom an er and hearatta ks, and pro en the alue o pre enti e health are.

e an and should pla a similar role in new energ

te hnologies.

e are in riti al need o a go ernment ommitment toresear h into new energ te hnologies that an ree us romour dependen e on oreign oil, reate a orda le lean-energ alternati es, and slow the rate o glo al warming.

yet, toda , the .S. go ernment spends onl one-si th asmu h on energ inno ation as it does on medi al resear h.

At i roso t, we saw &D in estment as undamental to ousu ess. hroughout the high-te h se tor, &D in estment

represents a sizea le per entage o operating udgets. t isessential to ueling inno ation and remaining ompetiti e.

nderstanda l , people ask wh the pri ate se tor antund the ne essar resear h into energ alternati es.

fundamentall , we ant rel on the marketpla e alone toaddress a riti al national interest. o matter how wellintentioned, utilit ompanies and other pri ate in estorssimpl are not going to in est deepl in the kind o &Dneeded to reate s ala le, low- ar on energ inno ations.

e ha e seen time and again the atal zing role the ederal

go ernment an pla in te hnologi al reakthroughs PS the nternet, and ommer ial a iation to name a ew witimportant so ietal and e onomi ene ts. oda , there isno more important issue deser ing o in reased go ernmentresear h unding than lean energ .

// 29

federal energy innovation investments have been plag ed bynpredictable f nding patterns. uncertain ann al appropriations,

short-term tax credits, and one-time spending injections are all

ns ited to creating the s stained, predictable f nding streamneeded to bolster the co ntrys innovation infrastr ct re.

oing forward, in general and when possible, we believefederal energy innovation investments sho ld originate fromreven es from the energy sector itself rather than from generalfederal reven es. We believe this step is essential to moderni ethe nations energy systems and to attend to the long-termnational sec rity and environmental v lnerabilities we face.

While the political obstacles are da nting,a ariet o

me hanisms ould e emplo ed to generate theneeded re enue rom within the energ se tor. Optionsincl de diverting a portion of royalties on domestic reso rceprod ction, red cing or eliminating c rrent s bsidies to well-established energy ind stries (and redirecting the savings),collecting a charge on sales of electricity, levying fees onother energy or poll tion so rces, and streamlining DO .While we dont advocate for any speci c option, based on o rassessments, these options co ld provide f nding offsets tos pport investments in energy innovation commens rate witho r original recommendations.

D S c y P D che u.S. has an ab ndance of nat ral reso rces, incl ding si able

oil and nat ral gas reserves. he energy sector is an enormo sreven e generator for the government, which collects a varietyof taxes and fees from the many companies that prod ce, re ne,and deliver energy to cons mers and b sinesses. oing forward,any expansion of domestic prod ction offers an opport nity toreeval ate the reven e sharing associated with the extraction ofu.S. nat ral reso rces.

With contin ed, and likely expanded, off-shore oil and gasexploration, shale gas prod ction on federal lands, andenhanced oil recovery in the coming years, reorienting aportion of the c rrent s ite of domestic energy prod ction


34/44


fees incl ding royalty payments, lease sales, bon s bidsand other charges presents a real opport nity to raise newreven e for the federal government that co ld f nd innovation

in new energy technologies.

Former Senators rent ott and Byron Dorgan, co-chairmenof the Bipartisan Policy Centers nergy Project, recentlyproposed sing a small portion of the reven es fromexpanded oil and nat ral gas prod ction to f nd alternativeenergy investments. Other recent proposals in Congress haves ggested expanding domestic prod ction and p tting someof the reven e generated in a tr st f nd that wo ld be sed tos pport clean energy development.

C rrently, a dedicated portion of oil and gas royalties s pportinnovation activity in the oil and gas ind stry. he nergy Policy

ct of 2005 established a oyalty r st F nd that receivesa small share of federal oil and gas royalties for researchon advanced exploration and prod ction technologies andenvironmental protection. esearch is managed by a nonpro tp blic-private consorti m that operates with DO s approval.Similar f nd and research str ct res co ld be established forclean energy innovation.

Beca se f t re royalties and other fees depend, to a largeextent, on act al prod ction from new areas, predicting thereven e impacts of new prod ction is spec lative. However,over the past ten years, oil and gas royalties have generatedapproximately $11 billion per year, 60 percent of which goesdirectly to the reas ry. oing forward, a portion of reven esfrom domestic reso rce extraction co ld be dedicated to cleanenergy technologies.

federal re enues rom domesti oil and gas produ tionould generate on the order o $1$5 illion dollars

per ear.21

D c D yD S y S bS D S

mero s state and federal programs have evolved overthe years that s bsidi e partic lar energy so rces ortechnologies. nergy s bsidies come in a wide variety offorms direct expendit res, tax expendit res and controamong others and are estimated to cost the governmenttens of billions of dollars each year. recent conservativeestimate by the nergy nformation dministration is thatgas and coal all mat re ind stries received over $4.2billion in s bsidies in 2010.22 ax credits for ethanol alsoa mat re technology that sim ltaneo sly bene ts from amandatory prod ction req irement cost taxpayers anestimated $5.7 billion in 2010. Similarly, renewable electrtechnologies received over $6 billion in p blic s pport layear (incl ding &D, altho gh &D activity constit ted small portion $632 million of this s pport). early evenergy ind stry is s bsidi ed in one form or another. he has come to rethink where these s bsidies go and how theare delivered.

oreover, in the context of broader scal reform, theelimination of long-standing federal s bsidies to well-established commercial technologies or ind stries appearsbe gaining bipartisan political s pport. n both the Ho seSenate there have been proposals to eliminate a n mber oenergy s bsidies incl ding those for oil, gas and ethano23 We appla d efforts to critically examine the c rrent s iteof energy s bsidies, which sho ld be sed in a targetedfashion and only for a limited period of time to allow newtechnologies to scale p while driving down costs.

o this end, s bsidies to inc mbent ind stries and mat retechnologies sho ld be red ced or reformed. he market

provides ample incentives for these players to deploy

We see an urgent need for a new energy innthat accounts for current budgetary realitiesour nation makes targeted investments in it


35/44

// 31

technology witho t p blic s pport. For other technologiesthat are still in the earlier and more risk-prone stages ofcommerciali ation, the federal government sho ld begin to

explore a greater n mber of competitive s bsidies, like reversea ctions, that co ld sq ee e the most val e o t of every p blicdollar dedicated to these iss es.24 oing forward, a portion ofreven es liberated by eliminating, red cing or reforming energys bsidies sho ld be directed to clean energy innovation.

edu ing or eliminating su sidies and ta reaks ormature industries has the potential to raise on the ordero $5$10 illion per ear.25

c A c c yhe term wires charge (also sometimes referred to as a

p blic goods charge) refers to a small fee imposed on eachkilowatt-ho r of electricity delivered to cons mers. t is a fairlycommon levy at the state level where it is typically sed topromote energy ef ciency, f nd research and development, orp rs e other p blic p rposes. he fee is collected by electricitys ppliers and is generally kept fairly small less than one-tenth of one cent pe

aeic catalyzing ingenuity 2011

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