[Senate Hearing 112-536]
[From the U.S. Government Publishing Office]
S. Hrg. 112-536
AMERICAN ENERGY INNOVATION REPORT
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
TO
RECEIVE TESTIMONY ON REPORT PRODUCED BY THE AMERICAN ENERGY INNOVATION
COUNCIL TITLED ``CATALYZING AMERICAN INGENUITY: THE ROLE OF GOVERNMENT
IN ENERGY INNOVATION'' AND RELATED ISSUES
__________
MAY 22, 2012
Printed for the use of the
Committee on Energy and Natural Resources
U.S. GOVERNMENT PRINTING OFFICE
75-823 WASHINGTON : 2012
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana JAMES E. RISCH, Idaho
MARIA CANTWELL, Washington MIKE LEE, Utah
BERNARD SANDERS, Vermont RAND PAUL, Kentucky
DEBBIE STABENOW, Michigan DANIEL COATS, Indiana
MARK UDALL, Colorado ROB PORTMAN, Ohio
JEANNE SHAHEEN, New Hampshire JOHN HOEVEN, North Dakota
AL FRANKEN, Minnesota DEAN HELLER, Nevada
JOE MANCHIN, III, West Virginia BOB CORKER, Tennessee
CHRISTOPHER A. COONS, Delaware
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
McKie Campbell, Republican Staff Director
Karen K. Billups, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Augustine, Norman R., American Energy Innovation Council......... 3
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Jenkins, Jesse D., Director of Energy and Climate Policy,
Breakthrough Institute, Oakland, CA............................ 20
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 2
Zindler, Ethan, Head of Policy Analysis, Bloomberg New Energy
Finance........................................................ 16
APPENDIX
Responses to additional questions................................ 41
AMERICAN ENERGY INNOVATION REPORT
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TUESDAY, MAY 22, 2012
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:10 a.m. in
room SD-366, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. Alright. Why don't we get started here?
Thank you all for coming. Today we are here to discuss the
report of the American Energy Innovation Council on the role of
government in developing innovative energy technologies. The
business leaders of the Council have a long track record of
commercial success building technology companies that compete
in the global marketplace. They make a strong case in that
report that with the government as a partner the United States
can continue to lead in the clean energy sector.
As all of the witnesses today point out in their written
testimony there is a global race on to produce the next
generation of energy technologies. Though prices on our
electricity bills or at the pump do not always reflect it, our
current energy system is very expensive. The costs all of us
pay in national energy and climate and economic insecurity are
unacceptably high and it's likely the fast growing economies
throughout the developing world will be looking to a new
generation of technologies that avoid these costs.
It's not only a concern about costs and their effect on
future generations. It's also a significant commercial
opportunity for U.S. entrepreneurs. Fortunately developing new
technologies has historically been a great strength of the
United States. As the witnesses have pointed out, an area where
the government has been an effective partner.
Although there has a broad consensus in Congress in the
past in favor of investing in these emerging technologies,
we've been sending much more uncertain signals recently.
Important support programs have either already expired or
appear to be in danger of expiring. Despite repeated calls to
address the real problems of the so-called Valley of Death in
initial technology deployment, instead of expanding on crucial
current programs, some in Congress are looking to end these
programs that we have in place.
Meanwhile our competitors and potential competitors in the
developing world continue to press ahead aggressively to court
new energy companies and the talent that will develop the next
innovations in this area. As these technologies continue to
improve and become more cost competitive we should view this as
an opportunity to take a global leadership position. We have
some of the best minds in the world working on this problem.
It's very much in our national interest to show them a
clear pathway toward developing and deploying these
technologies here and exporting them abroad rather than forcing
them to go overseas to find opportunities. I've said many times
that I believe the only losers in the clean energy technology
race will be those that fail to participate. I hope that the
recent paralysis we've seen in Congress does not lead us to
miss this opportunity.
The witnesses testifying today have given a great deal of
thought to what leads to success in developing new
technologies. I look forward to hearing about their conclusions
and what we can do here to put American entrepreneurs in the
best position to succeed in this vital area.
Let me call on Senator Murkowski and acknowledge that today
is her birthday. We were delayed just a minute while we
celebrated that in the back room.
But let me call on her for any comments she has before we
turn to the witnesses.
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you, Mr. Chairman. It would be,
indeed, a fine birthday present if we could figure out, as a
committee, how we really advance some good, strong energy
policy for this Nation using the ingenuity, the, just the
opportunity that we have as a Nation to really build on all of
our strengths. So thank you for that recognition.
I'd like to welcome Mr. Augustine to the committee here
this morning. Also, Mr. Jenkins, Mr. Zindler.
It was your report on competitiveness rising above the
gathering swarm that served as a foundation for legislation
that passed by an overwhelming margin back in 2007. It wouldn't
surprise me if your work on energy innovation encapsulated in
the report that we're going to hear about today ultimately
could lead to a similar result.
I think most would agree that it's time for us to renew a
coherent, long term approach to energy development, truly and
all of the above approach. Innovation, of course, is absolutely
at the core of that strategy. I think it's one of the few areas
where the government can and should be providing greater
funding. At the same time aware that if we do decide to spend
more in energy innovation, we're going to have to make some
very difficult choices about the amount of spending and the
duration as well as what our priorities are for it.
A couple comments in each of these areas.
First, the obvious.
Investment is code for spending. That's going to require
taxpayer dollars with our debt situation sitting at $15
trillion right now. Greater spending in this area is going to
need to be offset. It's going to be challenging to find space
in the budget.
But I think it also presents us an opportunity here to be
financially creative. Let's figure out how we make this work.
Let's assess the priorities and focus on them.
For years now I've suggested that a portion of the revenues
from increased domestic energy production should be devoted to
energy innovation. It's a key part of my ANWAR legislation
which would raise an estimated $150 billion for the Federal
Treasury at today's oil prices. Even a fraction of those
revenues could go a long way toward developing the resources
and the technologies that we'll rely on in the future. So I'm
just glad to see the revenues from energy production listed as
a possibility in the catalyzing American ingenuity report.
Now beyond how much we spend we also need to think
carefully about our priorities. When we look back at where
taxpayer dollars have been spent in recent years, I think it's
clear that we haven't really gotten to that all of the above
policy. We can see that in how much the Federal Government has
spent on solar and wind as opposed to some of the other areas.
I'm always pointing out the opportunities that we have with
methane hydrates. We can see that in the direction the
Administration has taken in choosing to focus on electric
vehicles perhaps as compared to other promising alternatives.
Finally a point about how long we should be involved here.
It makes good sense to invest in energy R and D. That's clearly
in our interests. But I think it's against our interests to
keep subsidizing the same resources and technologies year after
year without a clear path toward allowing those technologies to
stand on their own in the market.
To strike the right balance will require reform of existing
programs, possibly the phaseout of many of the subsidies that
are currently in place. Some experts believe that Federal
efforts should be oriented more toward basic research and away
from deployment because in tight fiscal climate the government
should spend on priorities that no other institution will fund.
I tend to agree with that approach.
I think, though, when it comes to energy innovation we've
got a lot of thinking to do, a lot of decisions to make. I hope
that with the hearing this morning we'll have an opportunity to
explore some of that.
Again, I appreciate the good work that has gone into the
report.
Thank you, Mr. Chairman.
The Chairman. Our first panel is Norman Augustine, who is a
Retired Chair and CEO of Lockheed Martin Corporation. He's been
a witness before our committee many times in the past. We
welcome him back and look forward to any comments he has about
the report and what he thinks the Congress ought to do.
Go right ahead.
STATEMENT OF NORMAN R. AUGUSTINE, AMERICAN ENERGY INNOVATION
COUNCIL
Mr. Augustine. Thank you, Mr. Chairman.
There we go.
Thank you, Mr. Chairman and members of the committee for
this opportunity to share with you some thoughts on America's
energy future. I'll be drawing, as was mentioned, on the work
of the Energy Innovation Council. That's an informal group of 7
of us who came together because of our concern over the
underinvestment in energy R and D in our Nation.
The names of the other 6 members are in the written
statement that I would like to provide for the record.
The Chairman. Very good. We'll include the entire report*,
in fact, in our record.
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* Report has been retained in committee files and can also be found
at http://americanenergyinnovation.org/wp-content/uploads/2012/04/
AEIC_Catalyzing_Ingenuity_2011.pdf
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Mr. Augustine. Excellent. Thank you.
I also should acknowledge that we received excellent
technical and administrative support from the Bipartisan Policy
Council, an organization that was formed by 4 of your former
colleagues.
I'm today not able to speak directly for my associates in
this project because we are a highly informal group. On the
other hand, I think that my comments will closely reflect the
views of that entire group because there's very little
difference among us on this issue.
We've prepared two reports.
The first of those had to do with the underfunding of
research and development in the energy area in our country both
by the government and by the private sector. We also came out
very strongly for support in ARPA-E which I think has exceeded
most of our expectations to date.
The second report we put out deals with the need for the
government to involve itself in energy research and
development. I will speak more to that in my remarks.
It's probably fair to note that we are not a group that in
general welcomes government involvement in the private sector's
business and industry. The reason being, of course, that it
tends to form distortions in the way that people within
business behave. It hurts our competitiveness globally.
On the other hand there are certain areas where there are
programs that are of importance to the citizenry. But which the
private sector can't or won't invest. Those, would seem to me
to be, exactly the sort of thing that governments are designed
to do. Indeed our government has done in the past.
There are two areas where the private sector is
particularly reluctant to invest.
The first of these has become known as the Valley of Death.
In the case of energy research I think there's a second valley
also, a second Valley of Death, if you will.
The first of these describes a situation where basic
research leads to a promising idea, but it has not yet been
proven to be feasible in practice and is very risky because
applying research or performing research is a long term
proposition in terms of time. It often produces failure. Even
when it succeeds the performer or the funder of the work may
not be the beneficiary. Yet the work may well benefit society
as a whole.
The second challenge indicates the energy field is a--
energy is so capital intensive. That tends to discourage new
entrants into the marketplace. It also discourages putting new
ideas into the marketplace because they are so disruptive to
the investment that's in place.
The government, of course, has many options to support
energy research and development and the advancement of energy
in general. This goes all the way from contracts to grants to
direct involvement in the marketplace to regulation to tax
policy, in-kind support and more. The government has done many
of these things in the past that we're all familiar with.
One thing that one certainly has to reflect upon and be
aware of is that when performing research and also, the kind of
development we deal with in energy where the second Valley of
Death requires taking a proven concept and showing that it
could be scaled, be economically competitive at scale. That's a
very costly jump, usually more costly than the first threshold.
It's a, the threshold, it's fairly unique to the energy field.
Innovation--oh, I was going to say that we certainly should
be prepared to accept failures. That's a characteristic of
research and development. I wouldn't for a moment excuse
failure as due to incompetence or nefarious activity. But we're
dealing with the unknown here. When you do that even the best
intentions could lead to failure.
Finally I would just note that innovation really is the key
to succeeding in this area. Fortunately Americans have been--
America has been very good at innovation in the past. In fact
it's one of the few non-diminishing advantages that we have
today in the global marketplace.
In that regard, I believe that our ability to solve the
energy challenge is really just a microcosm of--a very
important microcosm, but America's position and the overall
competitiveness arena in today's global marketplace.
So with those opening comments, Mr. Chairman, members of
the committee, I'd be happy to address any questions you have.
[The prepared statement of Mr. Augustine follows:]
Prepared Statement of Norman R. Augustine, the American Energy
Innovation Council
Mr. Chairman and members of the Committee, thank you for this
opportunity to share with you some thoughts on the challenge of
providing safe, clean, affordable energy in sufficient amounts to power
our nation in the years ahead.
My remarks today will be based upon the work of the American Energy
Innovation Council, an independent and informal group of seven members
who came together because of our common concern over what we consider
to be America's insufficient response to one of the greater challenges
facing our nation today; namely, the provision of energy. In this
capacity we represent no other group. We speak simply as seven citizens
who in the course of our careers have been called upon to meet various
challenges and would like to share that experience as it relates to the
energy challenge.
My colleagues in this endeavor are Ursula Burns, chairman and CEO
of Xerox; John Doer, partner at Kleiner Perkins Caufield & Byers; Bill
Gates, chairman and former CEO of Microsoft; Charles Holliday, chairman
of Bank of America and former chairman and CEO of DuPont; Jeff Immelt,
chairman and CEO of GE; and Tim Solso, chairman and CEO of Cummins,
Inc.
Our work has been provided administrative and technical support by
the Bipartisan Policy Council (of which I am a director). The
Bipartisan Policy Council was founded by Senators Howard Baker, Tom
Daschle, Bob Dole and George Mitchell as a non-profit organization
seeking principled solutions to difficult public issues through
analysis and respectful dialogue.
Your committee is well aware of the extent to which energy issues
permeate of the challenges faced by our nation. These include the
impact the uncertain availability and cost of energy has on our
economy; the hazards of energy-related pollution on our planet's
natural environment; and the role of constrained and manipulated energy
supplies as a source of armed conflict. Thus, while fully recognizing
the overall demands facing America today, the provision of safe, clean,
affordable and sustainable energy is, by virtually any standard, one of
the foremost challenges, particularly given its high leverage upon
solutions to other problems.
While my testimony today is drawn from the work of the American
Energy Innovation Council and while I am honored to have been invited
by the Committee to appear before you, as in the case for all our
members, I have no special authority to speak for the group as a whole.
I do, however, believe that my testimony represents the general views
of my colleagues.
Among its activities to date the Council has issued two reports.
The first of these highlighted the need for a more vigorous public
commitment to energy technology development. America's investment in
energy innovation from the public and private sectors together is less
than one-half of one percent of the nation's energy bill. This fraction
is eclipsed by the innovation investment in most other sectors,
particularly those in the high-tech arena. Meanwhile, we send one
billion dollars abroad each day to pay our energy bill to foreign
producers.
The Council's second report addressed the limited but important
role the federal government will need to play in catalyzing American
ingenuity as it seeks to meet the energy demands of the future.
While most of the current means of energy production are likely to
be with us for a long time, each suffers from one or more shortcomings,
whether it be cost, pollution, hazardous by-products, safety, limited
scalability, or lack of domestic sources. If these liabilities are to
be overcome the nation will need to depend more heavily on innovation;
that is, utilize high quality research to create new knowledge, world-
class engineering to convert that knowledge into new energy sources and
delivery means, and enlightened entrepreneurship to translate those
sources and delivery means into the marketplace. Fortunately, America
has excelled in all three of these activities, which together make up
innovation--although it should be noted that we are now losing our lead
in at least two of these attributes.
In pursuing this process it is not uncommon to encounter what many
innovators refer to as ``The Valley of Death''--that period where an
idea appears promising but has not yet been demonstrably shown to be
workable in practice--and therefore is deemed too risky by most
investors. To surmount the latter generally requires some form of
convincing proof-of-principle demonstration. . .which in turn requires
financial resources--thus the dilemma.
In many of the potential avenues for providing large quantities of
energy there is also a second ``Valley of Death.'' This latter valley
is the gap that spans from proof-of-principle using, say, a prototype,
to verification of market utility, including economic viability, with a
near commercial-scale demonstrator. The latter valley, which also
deters investors from participating, is a consequence of the
characteristic that the steps in the process of developing new forms of
energy often come in large quanta, making it very expensive to remove
uncertainties as to ultimate scalability of an otherwise promising
project.
Further complicating energy innovation is the capital intensiveness
of most forms of energy production, delivery and storage, a
characteristic that makes the economic threshold for replacing old
plants with new ones very high.
In short, due to the risk entailed, private sector investment will
often be unavailable to assist in crossing either of these important
developmental gaps. In the case of basic research, market payoffs are
usually well over a decade in the future, and may not exist at all. In
the case of proving scalability, the size of the investment required is
often large and the results uncertain. But in spite of these
considerations, the development of new energy sources remains of
critical importance to the nation. . .hence means of overcoming them
must be found.
Although I must confess that I, and I believe my colleagues, are
strong devotees of free enterprise as opposed to government involvement
in markets to the extent practicable, the energy dilemma seems to be
exactly the sort of issue which governments are designed to help solve,
at least in democracies with free enterprise markets. That is, this is
a case wherein there is an important benefit to be had by the citizenry
as a whole but private resources cannot, or will not, provide that
benefit because of financial risk, extensive delays in receiving
returns, small or even negative returns and the possibility that the
returns will not even accrue to the investor or performer. The latter
is particularly true in the pursuit of basic research.
This circumstance is one that has long been recognized by our
government in a number of areas, including many involving the
application of technology. Commercial nuclear power was the result of
government investments in Naval reactors; commercial jet aircraft trace
their origin to military transports; GPS to military positioning
systems; the internet to packet-switched networks demonstrated by ARPA;
and communication and weather satellites to military space programs.
These achievements were in some cases by-products of the government's
pursing other missions in the interest of its citizens--but the
provision of energy is itself a mission of the utmost importance to the
citizenry.
Looking further back in time there was the creation of land-grant
colleges, agricultural research institutes, the federal highway
program, and the air traffic control system. The key point is that the
government advanced the state of the art in these areas to a point at
which the private sector could responsibly undertake implementation and
operation of the capability sought by the citizenry.
Principal objections to greater government participation in, and
particularly in funding of, such developments are that (1) government
involvement may favor one private entity over another, (2) foreign
firms, not U.S. firms, may prove to be the ultimate beneficiary of the
U.S. taxpayers' investments, (3) the government should not be in the
business of ``picking winners and losers,'' and (4) there are other
important demands for the application of the government's financial
resources.
In fact, the government's work in the early research phase can be,
and generally is, made available to all interested parties. . .much as,
say, NASA does with its aeronautics research. In the case of funding
scalability demonstrations, the solution resides in maintaining fair
and open competition. With respect to foreign firms being the principal
beneficiaries, it is simply a fact of life in the globalized
marketplace, permeated with instant communications, that the only way
to prosper is to be quicker to the market with a better overall product
that one's competitors. . .not to hope to hide information. With regard
to picking ``winners and losers,'' the government in effect does this
every day at DARPA, ARPA-E, NSF, NIH, and elsewhere. The key to success
under this circumstance is to maintain competition for ideas,
transparency of results, and competent government employees who can
weigh the options that are available--once having considered the
private sector's perspective. Without these three ingredients failure
will be assured irrespective of what foreign competitors might or might
not choose to do. Finally, with regard to the other funding demands
faced by the government, few issues have greater potential adverse
impact on our nation than the availability of clean, affordable energy.
One technological development that has only recent occurred has the
potential to profoundly impact the possibility of applying innovation
across the energy spectrum. This is the marriage of horizontal drilling
and hydraulic fracking to free trapped shale gas. This can provide
America with the opportunity, if appropriately executed, to greatly
reduce dependency upon foreign sources for its energy in the relatively
near future and for many decades into the future. . .thereby providing
the time needed to develop other energy sources including what may be
the ``ultimate'' solution to the energy challenge, nuclear fusion. But
the latter is yet another example of something that will never occur if
we must wait for private investors to fund the needed research and
development or if the government elects to under-invest in the relevant
technology.
The members of the American Energy Innovation Council are aware of
the intense fiscal problems facing the nation--and you as its leaders.
But we are also aware that in our own business responsibilities that
during difficult times it may be necessary and appropriate to increase
spending in some areas while at the same time making overall
reductions. There is an important distinction to be made between
investment and spending for consumption.
Whatever the case, it is important to recognize that not all
investments in innovation will ``pay off''. . .some, perhaps most, will
fail. This is simply a fact of life. Supporting innovation is neither a
short-term strategy nor a pursuit for the uncommitted.
Finally, it would be inappropriate for me to miss this opportunity
to address briefly the precarious position in which America's overall
innovation engine finds itself today. . .not just as it concerns energy
needs but as it affects virtually all national issues. Our graduate
schools of engineering now train mostly foreign engineers who
increasingly say they will be returning home; our public primary and
secondary schools are, on average, among the worst in the world; our
great public research universities are challenged as never before by
steep reductions in their funding; the consumer market is moving to the
developing nations; our debt is so immense that it makes investment in
the future particularly challenging; our corporate tax rates are now
the highest in the world; our patent system is antiquated, as are our
export controls and visa-granting systems; and U.S. corporations spend
over twice as much on litigation as on research. This is not a formula
for sustaining the success we have enjoyed in the past.
Fortunately, America still has a great deal remaining on the asset
side, including high quality, albeit endangered, research universities;
a culture of innovation and risk taking; the rule of law; the sanctity
of contracts; use of the English language; and more. But today's trends
are not in our favor, and when one considers the rapidity of
advancement in technology it is apparent that a nation can lose its
position in a technology driven, innovative economy very quickly. This
has consequences that span from national security to health care and
from the standard of living to the preservation of our planet's
environment. The energy challenge we face today is, in my judgment,
merely a reflection of this much broader challenge.
Thank you very much for the opportunity to share these rather
candid thoughts with you.
The Chairman. Thank you very much. Thanks again for all the
work that went into this and other reports that you've
championed and been involved in.
Let me start with a couple of questions.
You know, whenever we get into this discussion it strikes
me that a major change in the environment needs to be
acknowledged as we talk about what role should our government
play in working with industry in these areas. A major change in
the environment is what's happening with other governmental
support around the world. I think that, you know, for a lot of
our history the involvement of the government in order to
assist or work with industry, partner with industry, to be
successful was not really required to a great extent. There are
a lot of exceptions to that.
But it strikes me that when you look at what's happening in
renewable energy, technology development, now, worldwide, you
have very aggressive efforts going on by the Germans, by the
Chinese, by various other countries, to not only further
develop the technology, but also help with the
commercialization of the technology and the capturing of the
jobs that result from that technology. That puts a new
importance on our own government finding the right level of
involvement, the right type of involvement to have in this same
area.
I don't know if you have thoughts about that?
Mr. Augustine. I would certainly agree with your conclusion
that things have changed greatly. We do have foreign
governments very much involved in their--supporting their so-
called private sector. I've learned the hard way in my own
experience that private companies can't compete with
governments whether it be another government or our own.
So I think it's unfortunate thing that's taking place. On
the other hand, I think it's a fact of life. My hope would be
our government would have to involve itself only to the extent
that one, helping preserve a level playing field so our field
can compete fairly internationally.
Second, that our government would support those things that
the private sector can't do or won't do and the government has
done for many years all the way from building highways to
putting the research in place to produce the internet or GPS or
many of the other things we take for granted now.
So, yes, it is a changed world. Other governments are
deeply involved. The first priority of our government should be
to try to encourage other governments to limit their
involvement to that second category I described and not to
become active participants in the marketplace.
The, I guess the piece of good news for governments that
become overly involved is that when they make a mistake it's
usually a big one and carries throughout the economy. So I
think they're good reasons for our government comporting itself
as it has in the past. But we can't hide from the realities of
today.
The Chairman. Yes. Sort of a follow up on that first
question.
You know, we love to give speeches around the Congress here
about how the government shouldn't pick winners and losers.
Like most of these statements, it's a clear, simple formulation
that H.L. Mencken pointed out is almost always wrong.
You pointed out that ARPA-E has been a great success so
far. Of course, DARPA, which you were very intimately involved
in, has been a great success over decades. They are, as I
understand the way that DARPA has operated and the way that
ARPA-E is now operating, it is in the business of trying to
pick the winners.
Now it doesn't always do it. It doesn't make big bets by,
in a relative sense. But it certainly tries to identify those
areas of technology development that have great promise for the
country. You mentioned some of them, the internet and GPS and
some of the others that have proven to be very useful and have
been winners.
So I'd be interested in any thoughts you've got on this
concept of picking winners and losers.
Mr. Augustine. That certainly is the first accusation that
usually is made is you don't want the government picking
winners and losers. If you make it that simplistic, I guess I
would agree with the comment.
The problem is that in the real world the government does
and has to pick winners and losers every day. The government
decides who is to win contracts, who gets grants for research,
what projects are continued, which ones get canceled. That's,
once again, a fact of life. I think not inappropriate.
I believe there are 3 guards that are very important if the
government is going to have to make difficult choices which the
government has to do.
The first of those is that the government appoint
competition to the maximum possible extent so that everybody
has a fair shot at contributing and being involved.
Second, whatever is done should be highly transparent.
The third thing I think that needs to be done is to assure
that we have competent people in our government who are able to
make sensible judgments without conflicts.
Given those 3 criteria, I believe, that the government not
only can, but has to make choices, pick winners and losers.
You cited ARPA-E, ARPA. Many other parts of the government
do this. I would also add In-Q Tel to your list. I should
disclose I had involvement in it early on so I have a conflict
here. But there's a certain parallel.
In-Q Tel was given a number of tools in its tool kit by the
Congress. They go all the way from taking equity positions to
giving grants, to contracts, to giving advice and in my view
it's been quite successful at carrying out its missions. So it
would be another example of they make choices every day.
The Chairman. Thank you very much.
Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman.
Mr. Augustine, in the report you have concluded that we can
have the greatest impact if we focus on energy R and D. Others
have said that the focus or the major impact should be on the
deployment end. As we're trying to figure out how we allocate
scarcer dollars and how we prioritize. What part of the
technology chain do you figure we, here in the government,
should be focusing on most?
Mr. Augustine. That's a difficult question. Certainly if
you don't focus on research there will be nothing to deploy. On
the other hand if you focus entirely on research they'll be
nobody to deploy the benefits. So you need to do both.
As it happens research costs an awful lot less in general
then the development deployment, the proof of principle, proof
of scaling step. So maybe that much more money is required for
the latter even though ideally I think the role of the
government is more easily justified, focused on research. It
used to be that the U.S. government--when I say used to I mean
two, 3 decades ago, the U.S. Government provided about two-
thirds of the research and development that was spent in this
country. Today it spends about a third.
The problem is that industry which has picked up the two-
thirds now, spends almost entirely on D and is getting out of
the R business. The labs would be the classic example of what's
happening in industry. I have my own experiences in that
regard.
So my short answer is we need to do both.
Where do you focus, I think you focus on those two Valleys
of Death.
How do you take just basic research ideas that get funded
by a National Science Foundation and places like that?
How do you turn those into engineering projects? Then
second how do you get across that Valley, and then the second
valley, which is scalability?
In all cases I believe that industry should, that
beneficiaries should involve some of their own investment. They
should have some skin in the game.
Senator Murkowski. It is. It's trying to find that balance
and determining where you have those areas where the private
sector just isn't willing or able to be involved. How we define
all that is, of course, far more difficult than it might sound.
So let me ask you about the--how we pay for all of this
innovation. In my opening statement I mentioned that one of the
things that I think makes sense is to take the revenues from--
take certain revenues from greater domestic energy production
to help pay for our innovation.
Your report outlines that as one of the options. I
appreciate that. Some of the other possibilities would include
raising energy prices. But that's kind of tough for us all
right now. I think we look at that.
But I'm reading your language that says that the AEIC does
not advocate one revenue option over another. So that's
probably your out there. But as one of the individuals on the
committee here, do you think that there is one approach that is
perhaps better than some of the others that you have outlined
there for us?
Mr. Augustine. I suspect once again a mix of approaches is
appropriate. Although I do have some that I think, personally,
that are better than others. The reason we didn't try to make a
choice is that we simply didn't get into enough detail to take
a strong position.
Today, as you well know, we will send a billion dollars
overseas today, to foreign countries to pay for the net cost of
the oil we buy. For the last few years we've been averaging on
the order of $2 billion dollars a year on energy R and D a
year. That suggests to me that there's great opportunity to
find the kind of money we need to triple the R and D which is
what our little group has recommended.
The first sources of that certainly, I think back in my own
case, probably 25 years ago or more, I was proposing that we
add 3 or 4 cents to the cost of a gallon of gasoline back when
gasoline costs 50 cents a gallon. I can even recall when it
costs 19 cents a gallon. I said let's add two or 3 sets to it.
Put that money in research and development.
My economist friend told me I would destroy the economy if
we did that. Today we pay 4 and a half a gallon and the money
goes to other nations with fuel would like to kill us with the
money that we send to them. So there's clearly something wrong
with that model.
I would hope that we would, in fact, provide a tax, if you
will, on some of the energy sources, particularly those that
are high polluting sources much along the lines you suggested.
I personally don't have a problem with a modest tax at the gas
pump. But that I realize is a very difficult issue today.
But the idea of having the industry that most benefits in
the long term pay part of the costs. It seems appropriate to me
particularly when you have an industry that's been spending
maybe half a percent of its sales, revenues on R and D.
The industry I came from spent 10 percent.
The pharmaceutical industry spends 20 percent.
The electronics industry, I think, around 13.
It just seems not unreasonable to me that given the
importance of R and D and the modest pain that would be added
by some of these taxes. I'm not a tax guy. But in this case I
think it's worth the price.
Senator Murkowski. I appreciate your comments. I've long
held that one of the ways to get to our energy future is,
again, using those revenues from our fossil fuels to help build
out the technology, the innovation, to advance us to the next
generation of energy. But appreciate your comments.
Mr. Augustine. Thank you.
The Chairman. Senator Udall.
Senator Udall. Thank you, Mr. Chairman.
Thank you to you and the ranking member for holding a very
important hearing on innovation.
Always good to see you, Mr. Augustine.
Mr. Augustine. Thank you.
Senator Udall. Thank you for your continued service to the
country and your ideas are always spot on. The American Energy
Innovation Council has done yeoman's work here. I hope we will
listen to and then implement your recommendations.
As you've pointed out we are in the midst of a clean energy
revolution. By that I think we mean all energy sources and all
energy technologies can have clean elements. We can't have, as
you point out, inconsistent and uncertain innovation policies.
That's what you've underscored here and why this hearing,
again, is so important.
I said to myself, we need to be leaders in this field.
We've always been a paragon of innovation. But, I think about
the fact that we have been leaders in every energy technology.
But I think about solar and wind, for example, in the 1970s.
Now we're trying to play catch up with some countries that have
seen the possibility here.
You know Colorado. I'm biased. I'm honored to represent the
State of Colorado.
We are a national leader in many areas. We have a great, I
think, model of how industry, entrepreneurs, universities,
research institutions, like the National Renewable Energy Lab
and the government are all encouraging energy innovation which
then spurs job creation and economic growth. Then I would
venture to say that that therefore means Coloradans and
Americans have a more secure energy and economic future. So
thank you for pointing out all these possibilities to us.
Let me move to ARPA-E. You talk about ARPA-E as a model
program that we should prioritize. We can grow it going
forward.
Do you recommend that other parts of the DOE could use the
ARPA-E model? Would you speak to how this ARPA-E model could be
applied in more specific and maybe, perhaps, some more broad
ways, not just in the DOE, but as well in other agencies, other
areas of activity?
Mr. Augustine. Senator, I'd be glad to do that.
Let me try to describe what I think are the essential
facets of ARPA-E.
Let me say the ARPA model.
Senator Udall. Yes.
Mr. Augustine. ARPA was always willing to take risks and
realized that in some cases they would fail. ARPA did not
devote itself to trying to do something we now do 20 percent
better. They devoted themselves to try to do it 3 times better.
When they succeeded it was really an impactful event. So
they were willing to take risks. They set high goals. They were
very decisive in deciding what they would support. When they
could see that something wasn't achieving what they expected,
they stopped it and put the money elsewhere.
Very important to ARPA, I believe, is that they attracted
extremely high quality talent. One of the ways they did that
was by delegating a lot of authority to the program managers
who oversaw these projects.
Another thing they did was they expected people to only
stay there 4 or 5 years. They had a lot of rotation of people.
Clearly the best way to freshen an organization is to rotate
people through it. The best way to transfer knowledge to other
organizations is by rotating people out and into those other
organizations.
Then finally I would have to cite that in the case of ARPA,
the government has been I don't like the word generous but
because I think very constructive in supporting ARPA
financially so that it has the resources it needs to pursue
good ideas.
So those are the sorts of things. Also ARPA is very problem
solving oriented. They're not organized by discipline as is DOE
or our universities. They set out to solve a problem.
Senator Udall. So in effect you're saying you have to be
willing to risk failure, you need to provide a lot of space and
a decentralized environment and turn people lose with a goal of
not increasing the value of the product or the service 20
percent, but 3x. It's very helpful to hear all that, which
isn't necessarily the way things are done in government nor in
the private sector, as you well know. But I know under your
tutelage in the private sector you would put teams together to
do just what ARPA-E and DARPA still do today.
Let me, in the remaining time I have, talk about how we
help American households transition to renewable energy
systems. Those initial capital investments can be really cost
prohibitive. We now see some creative ways in which residential
renewable energy systems are leased.
Senator Whitehouse and Alexander have introduced a bill.
The acronym is the REAL Act, Renewable Energy Access through
Leasing. I've joined them in that, co-sponsoring that
legislation.
What it does is it creates a secondary market by having the
government ensure the leasee's value. The CBO scored this at no
cost which is always great in this town today.
Can you speak to that model? Are there other areas you
might have identified where we could help those who want to
make the right investments, but who find the cost of capital
prohibitive or difficult to embrace initially?
Mr. Augustine. Yes. I think the sort of thing you describe
really addresses the other side of trying to encourage clean
energy implementation.
One side is to encourage the research and development and
so on.
The other side is the pull side. If we're to help the
consumer afford it.
That can certainly be done by subsidizing. I don't like the
word subsidizing. But I'll use it.
The cost of certain forms of energy helping people defray
the costs of new buildings that are very energy efficient and
then they can pay that back with the savings that they gain
from being more energy efficient. I think in the grand scheme
of things today we have a remarkable opportunity that bringing
together the idea of horizontal drilling and hydraulic
fracturing to recover shale gas could well buy us the time to
pursue some of these really promising clean energy
opportunities. Otherwise we just didn't have time to pursue
given our dependency on oil and the lack of much we could do
about it.
As you point out, it wasn't many years ago that we were No.
1 in photovoltaics and central thermal systems and wind power.
Today we've lost our lead. I was recently in Japan and I was
struck by how much we've lost our lead.
Senator Udall. Thank you again for your leadership. Great
to see you.
Mr. Augustine. Thank you. It was nice to see you, sir.
The Chairman. Senator Franken.
Senator Franken. Thank you, Mr. Chairman. Thank you, Mr.
Augustine.
We seem to have a debate here in this Senate over the very
nature of the role of government in development of new
technologies. Again, I appreciate the Ranking Member being
here. But again, I don't see any of my colleagues from the
other side.
We have these hearings a lot. We have either they don't
show up at all or they come in and make a statement and leave
and sometimes don't even want answers to their statement.
I mean, your report points to government support for
development of all kinds of technologies that have led to all
kinds of jobs. We talk about jobs.
Civilian nuclear reactors wouldn't have happened without
the government.
GPS technology wouldn't of happened without the government.
Civilian aircrafts, the aircraft, the way they developed
and that's your industry, without the government.
The internet, for goodness sakes. DARPA created the
internet.
The long list of government support for all these
industries just shows what the track record has been. I don't
see any reason why the track record wouldn't continue to be
where--is there anything about clean energy and renewable
energy that was different by its nature, different than all
these others that I've cited?
Mr. Augustine. I think, Senator, the things you cite have
in common the fact that they were high risk undertakings
offering high payoff. That's not an area that's particularly
attractive to the private investor. I think energy fits this
very well. Energy happens to have an additional characteristics
that it comes in very costly quanta, if you will.
To go to nuclear power you would never get there with the
private sector.
Senator Franken. Many steps.
Mr. Augustine. It just won't happen. That's right.
Senator Franken. Yes.
Mr. Augustine. If you talk about nuclear fusion that's a
60-year project. I happen to think a very important one.
Senator Franken. I noticed that you mentioned fusion.
That's something I've been interested in. They always say that,
you know, nuclear fusion is the energy of the future and always
will be. But I think that has a tremendous promise and we still
continue to invest in that.
They're doing, you know, there's been, you know, support
for industry for the development of shale fracturing and
directional drilling. That's been done by the government
support for industry. As well as 20 years of tax credits for
production and subsidies. If we're going to pay for some of
this stuff why not pay for it with some of the subsidies that
we're already paying to this very mature industry?
So you know, it was government support that got shale gas
to go from inaccessible to dominating much of our energy
sector. So I don't understand the unwillingness of my
colleagues from the other side to even be present and to
recognize what role the government has played.
You mentioned energy efficiency and about retrofitting. You
touched on it a little bit. I was just and that means things
like smart meters, better gauge energy use or efficient micro
processors to make batteries last longer and innovation. I
mean, and batteries or something that we've been doing in this
latest round of government research, government funded
research.
One thing we did in Minnesota that has helped create jobs
in retrofitting and I'll get to it, this will be a question
actually, is we have an energy efficiency standard that our
utilities have to meet. Every year their customers have to
improve their efficiency by 1.25 percent or something like that
or 1.5 percent.
Do you think that's an area where if we did that nationally
because it works in Minnesota. When we do that in Minnesota the
utility companies go like, you know what, I think I'll invest
in this retrofit of my customer. I'll lend them the money up
front. It will pay for itself, the energy savings pays for
itself.
If we did a national renewable energy standard, not
renewable energy standard, but an efficiency standard for these
utilities. Do you think that would have a good effect on our
use of energy?
Mr. Augustine. Yes, I do believe that energy efficiency is
an important part of the solution to this problem. I think
there is no one thing that's going to solve it, nor did you
suggest that. But if we can encourage the public either through
the use of controllers in their power, the time of day they use
energy or just using less energy that has to be a clear
positive.
To encourage the public to do that, I think, is an
important thing to do.
My bottom line, Senator, is that I spent 10 years in the
government. I've traveled to 111 countries. Having seen all
that, I'm a great believer in the private sector doing whatever
it can.
There's one area where I think there's an exception to
that. That is when the market itself fails. The energy market
has failed.
Without government support, the type you describe, and of
other types that have been described, we will not solve the
energy problem in this country.
Senator Franken. Thank you, sir. You've been a successful
businessman, haven't you?
Mr. Augustine. I don't know. I've been a businessman.
[Laughter.]
Senator Franken. OK. I think you've been successful, but
that's on my, you know, my bar.
The Chairman. Senator Murkowski, did you have additional
questions of Mr. Augustine?
Senator Murkowski. I do, Mr. Chairman. But I also know
we've got a second panel coming up.
But I have to have you fill in the blanks. Why do you think
that the energy sector has failed? Above all the other sectors
that are out there, what is it about energy that has made it
more complicated?
Mr. Augustine. I think a number of things.
That one is the high capital cost and the long time that
facilities remain in existence, 40, 50 years. But I think more
importantly it's been a highly regulated industry. It's
controlled, the oil industry, is controlled by cartels abroad.
The fair price system has generally not found its way into
the energy market today. One of the things that you all could
do is to help bring the fair price system into the market.
Senator Murkowski. Thank you, Mr. Chairman.
The Chairman. Mr. Augustine, thank you very much for your
testimony and the good work that's gone into these reports. We
appreciate it very much.
Mr. Augustine. Thank you. It's always a privilege to appear
before this committee.
The Chairman. Why don't we go to our second panel? We have
two witnesses on our second panel.
Mr. Ethan Zindler, who is Head of Policy Analysis with
Bloomberg New Energy Finance. He has testified to us before.
Mr. Jesse Jenkins is also here. He's the Director of Energy
and Climate Policy with the Breakthrough Institute in Oakland,
California.
We're told today is your birthday as well, Mr. Jenkins.
Congratulations. This is a big day for birthdays.
Senator Murkowski. Big day.
We do have cupcakes in the back here, Mr. Jenkins.
The Chairman. Yes, that's right.
Why don't we have the same procedure here that we did with
Mr. Augustine and have each of you give us 5 or 6 minutes of
summarizing what you think we should know from your testimony.
We will include your full testimony in the record. Then we'll
have some questions.
Mr. Zindler, did you want to be first?
STATEMENT OF ETHAN ZINDLER, HEAD OF POLICY FINANCE, BLOOMBERG
NEW ENERGY FINANCE
Mr. Zindler. Sure, thank you.
So, good morning, Chairman Bingaman, Senators, ladies and
gentlemen. Of course, happy birthday to my co-panelists and
Senator Murkowski.
It's an honor and privilege to be here before the committee
again. I join you in my role as analyst with Bloomberg New
Energy Finance, a division of Bloomberg, focused on the clean
energy sector. Our group provides accurate and actionable data
and insight on investment, technology and policy trends in
clean energy.
My remarks today represent my views alone and not the
corporate positions of either Bloomberg LP or Bloomberg New
Energy Finance. In addition, they do not represent specific
investment advice and should not be construed as such.
That's what the lawyers told me to tell you.
In June 2010 my firm----
Senator Franken [continuing]. By----
Mr. Zindler. In June 2010 my firm produced a study in
partnership with the non-profit Clean Energy Group, entitled,
``Crossing the Valley of Death: Solutions to the Next
Generation of Clean Energy--to the Next Generation Clean Energy
Project Financing Gap.'' That report examined the various
challenges facing energy technology companies looking to scale
up while driving their costs down. It encompassed interviews
with more than 5 dozen technologists, entrepreneurs and
investors in the clean energy space.
Other studies have since explored this area in greater
depth and advanced the discussion in important ways. The most
notable has been the American Energy Innovation Council's work
which examines the same Valley of Death conundrum, but with an
explicit focus on American competitiveness. My fellow witness,
Jesse Jenkins of Breakthrough Institute and others have also
provided important insights in this area.
The clean energy sector has seen significant growth in
recent years. New investment into the industry which total $54
billion in 2004 and $189 billion in 2009 rose to $263 billion
last year. In fact in the fourth quarter of 2011, our firm
counted the one trillionth new dollar invested in this sector.
Meanwhile we have seen clean energy technologies make
important progress down their respective learning curves.
The price of a solar module at the factory gate has dropped
by more than half in just the last 16 months.
The efficiency of wind turbines continues to improve.
Prices for lithium ion batteries used in electric vehicles
are starting to take down.
A substantial part of this progress is a result of
innovation, but much of it is due simply to economies of scale.
As production of this equipment is ramped up per unit costs
have come down.
Inevitably all this raises the question of whether or not
the capital markets are today providing sufficient financing to
address the Valley of Death conundrum. I would argue that they
do not under closer examination of the investment trends
reveals why. The vast majority of new capital entering the
clean energy sector in any given year is actually directed
toward well established, low risk technologies.
Just $5.1 billion of the $263 billion that we tracked last
year came in the form of venture capital for new companies with
the newest technologies. Within their portfolios VCs are now
spending less money on the earliest stage companies and making
fewer ``A'' round investments in new companies. So in short the
so called Valley of Death for--at the technology stage for the
earliest technology development has certainly not been bridged
so far.
Similarly the riddle of later stage commercialization
Valley of Death also remains unsolved. For a time it appeared
the solution might come from the public stock exchanges where
new biofuels, solar and electric vehicle companies raise
billions via initial public offerings to support their growth.
But public market fund raising has all but evaporated in recent
quarters for clean energy.
Today, for instance, there are half a dozen, next
generation biofuels firms looking to IPO. It remains to be seen
if any of them will be able to float their shares. As an aside,
I would note that last week, of course, Facebook managed to be
valued at $100 billion and Linked In is currently valued at
about $10 billion.
So there does seem to be an appetite for investors for dot
com startups. Maybe not startups but certainly dot com
companies. What the risk appetite for clean energy companies is
different at this particular moment.
Finally before concluding I'd like to take just a moment to
address the question of where the U.S. stands in comparison to
its peers in terms of clean energy technology development and
deployment. I would emphasize that these two issues,
development and deployment should be addressed separately.
In terms of deployment there can be little debate that the
U.S. today trails nations such as Germany and Italy in terms of
the installation of new, clean power generation. The same goes
for the manufacturing of that conventional equipment with the
U.S. often lagging behind China and others.
On the question of new technology development there remains
much to play for however. The clean energy marketplace could
not be sustained primarily by subsidies forever. Already we are
seeing signs of declining support from governments around the
world.
Rather, the industry must, and we think will, compete and
beat its fossil rivals on price without government support. For
some technologies in some parts of the world this is already
occurring. But the day when that happens far and wide still
lies ahead.
When it arrives will the U.S. be home to the most critical
new energy technologies and the associated manufacturing
capacity?
Will the U.S. be a market maker for these technologies or a
price taker buying the equipment from companies overseas?
This remains very much to be seen, but there are hopeful
signs for the U.S. despite the lack of investment.
The country is home to world class research institutions
and laboratories.
It is the hub for venture investing with 3 out of 4 venture
capital dollars for clean energy coming from the United States.
In short, in my view, no Nation may be better positioned to
own the long term energy technology future than the United
States. The only question is whether these resources can be
coordinated to maximum advantage. That is where public policy
inevitably must enter the picture.
Thank you very much for your time. I look forward to your
questions.
[The prepared statement of Mr. Zindler follows:]
Prepared Statement of Ethan Zindler Head of Policy Analysis, Bloomberg
New Energy Finance
Good morning, Chairman Bingaman, Senators, ladies and gentlemen.
Thank you very much for hosting me here today. It is an honor and
privilege to be before this committee again.
I join you in my role as analyst with Bloomberg New Energy Finance,
a division of Bloomberg focused on the clean energy sector. Our group
provides accurate and actionable data and insight on investment,
technology, and policy trends in clean energy. My remarks today
represent my views alone and not the corporate positions of either
Bloomberg LP or Bloomberg New Energy Finance. In addition, they do not
represent specific investment advice and should not be construed as
such.
In June 2010, my firm produced a study in partnership with the non-
profit Clean Energy Group entitled Crossing the Valley of Death:
Solutions to the Next Generation Clean Energy Project Financing Gap.
That report examined the various challenges facing energy technology
companies looking to scale up while driving their costs down. It
encompassed interviews with more than five dozen technologists,
entrepreneurs, and investors in the clean energy space.
Other studies have since explored this area in greater depth and
advanced the discussion in important ways. The most notable has been
the American Energy Innovation Council's work, which examines the same
valley of death conundrum but with an explicit focus on American
competitiveness. My fellow witness, Jesse Jenkins of the Breakthrough
Institute, and others have also provided important insights in this
area.
The clean energy sector has seen significant growth in recent
years. New investment into the industry, which totaled $54bn in 2004
and $189bn in 2009, rose to $263bn last year. In fact, in the fourth
quarter of 2011, our firm counted the one trillionth new dollar
invested in this sector.
Meanwhile, we have seen clean energy technologies make important
progress down their respective learning curves. The price of a solar
module at the factory gate has dropped by more than half in the last 16
months. The efficiency of wind turbines continues to improve. Prices
for lithium ion batteries used in electric vehicles are starting to
tick down.
A substantial part of this progress is a result of innovation, but
much of it is due to simple economies of scale. As production of this
equipment has ramped up, per-unit costs have come down.
Inevitably, all of this raises the question of whether the capital
markets are today providing sufficient financing to address the valley
of death conundrums. I would argue that they do not, and a closer
examination of the investment trends reveals why.
The vast majority of new capital entering the clean energy sector
in any given year is actually directed toward well established, low-
risk technologies. Just $5.1bn of the $263bn invested in 2011 came in
the form of venture capital in support of new companies with the newest
technologies. And within their portfolios VC's are today placing fewer
bets on the very earliest stage companies. So, the so-called technology
valley of death for embryonic research and development has by no means
yet been bridged.
Similarly, the riddle of the later stage ``commercialization''
valley of death also remains unsolved. For a time, it appeared the
solution might come from the public stock exchanges where new biofuels,
solar, and electric vehicle companies raised billions via initial
public offerings to support their growth. But public market fund
raising has all but evaporated in recent quarters for clean energy.
Today, for instance, there are half a dozen next-generation biofuels
firms looking to IPO. It remains to be seen if any will ultimately
float their shares.
Before concluding, I'd like to take just a moment to address the
question of where the US stands in comparison to its peers in terms of
clean energy technology development and deployment. And I would
emphasize that these two issues--development and deployment--should be
addressed separately.
In terms of deployment, there can be little debate that the US
today trails nations such as Germany and Italy in terms of the
installation of new clean energy power generation. The same goes for
the manufacturing of that conventional equipment with the US often
lagging behind China and others.
On the question of new technology development, there remains much
to play for, however. The clean energy marketplace cannot be sustained
primarily by subsidies forever, and already we are seeing signs of
declining support from governments around the world. Rather, the
industry must--and we think will--compete and beat its fossil rivals on
price without government support.
For some technologies in some parts of the world, this is already
occurring. But the day when it happens far and wide still lies ahead.
When it arrives, will the US be home to the most critical new energy
technologies and the associated manufacturing capacity? Will the US be
a market maker for these technologies or a price taker, buying the
equipment from companies overseas?
This remains very much to be seen, but there are hopeful signs for
the US despite the lack of investment. The country is home to world
class research institutions and laboratories. It is the hub of venture
investing--three out of every four venture capital dollars for clean
energy comes from US funds.
In short, in my view no nation may be better positioned to own the
long-term energy technology future than the US. The only question is
whether these resources can be coordinated to maximum advantage. That
is where public policy inevitably enters the picture.
Thank you for your time and I look forward to your questions.
The Chairman. Thank you very much.
Mr. Jenkins.
STATEMENT OF JESSE D. JENKINS, DIRECTOR OF ENERGY AND CLIMATE
POLICY, BREAKTHROUGH INSTITUTE, OAKLAND, CA
Mr. Jenkins. Thank you, Chairman Bingaman, Ranking Member
Murkowski and distinguished members of the committee. I'm Jesse
Jenkins. I direct the Energy and Climate Program at the
Breakthrough Institute, an independent public policy think tank
based in Oakland, California.
It's an honor to appear before you today to discuss the
role of government in energy innovation, particularly on my
birthday and Senator Murkowski's.
Advanced energy policy and markets in the United States are
now at a key inflection point. In recent years U.S. advanced
energy sectors have grown rapidly adding jobs even through the
depth of the recession while reducing costs for many
technologies including solar and wind power, batteries for
electric vehicles and advanced biofuels.
Still all recent cost declines mark important industry
maturation and progress. Nearly all advanced energy sectors
currently rely on public policy support to gain an expanding
foot hold in today's well established energy markets. That
policy support is now poised to turn from boom to bust.
Total annual Federal spending supporting advanced energy
industry surged to $44.3 billion in 2009. But it is now poised
to decline 75 percent to $11 billion by 2014. That's according
to original analysis of 92 Federal policies supporting advanced
energy sectors conducted by the Breakthrough Institute and
recently published with scholars at the Brookings Institution
and World Resources Institute as ``Beyond Boom and Bust'',
putting clean tech on a path to subsidy independence. Of the 92
programs we examined a full 70 percent are now scheduled to
expire by 2014.
The topic of this hearing is thus very timely. With the
U.S. advanced energy policy system set to be effectively wiped
clean in the coming years, my ``Beyond Boom and Bust'' co-
authors and I recommend smart energy policy reform along two
key fronts.
First, energy deployment subsidies and policies should be
reformed to better drive and reward innovation and move
advanced energy sectors toward subsidy independence as soon as
possible.
Second, we should strengthen our Federal energy R and D and
commercialization institutions and investments.
Our recommendations on energy R and D and commercialization
find much agreement with the recommendations of the American
Energy Innovation Council and with some of Bloomberg New Energy
Finance's thinking on policies to help private entrepreneurs
and firms cross the so called clean energy Valleys of Death.
I'm happy to discuss those topics in greater detail in the Q
and A to follow. But I want to focus here on subsidy reform.
First, when discussing the role of government in energy
innovation it is important to note that energy is a commodity.
Like a bar of steel or a lump of copper, we don't care much
about the qualities of the kilowatt hour of electricity or a
gallon of fuel itself. What we care about are the products and
services that we derive from those fuels.
As such while new pharmaceuticals or electronics command a
price premium from customers by offering new value added
features. New energy technologies must routinely compete on
price alone right from the get go. This is an extremely
challenging task, especially when facing competition from
fossil fuels that have enjoyed over a century to mature and
develop. It helps explain why the government must play a more
proactive and extended role in driving energy innovation than
in other sectors.
In light of this, the government's role is critical on at
least two fronts.
First, policy is key to jump start market demand for
nascent energy technologies that currently cost more than well
entrenched conventional fuels and would thus otherwise not
attract private sector investment.
Second and equally important, government policies must
drive steady innovation, cost declines and technology
improvements that can advance these maturing sectors toward
full cost competitiveness with mature fossil fuels.
With Federal funds now poised to contract, my colleagues
and I believe that now is the time to reform energy subsidies
to ensure that they efficiently accomplish both of these key
objectives, driving market demand and continual innovation. We
should not abandon today's still maturing advanced energy
sectors. But neither can we afford to perpetually subsidize
these industries without making steady progress on price and
performance.
In ``Beyond Boom and Bust'', we outlined a set of criteria
for energy subsidy reform to ensure that these policies reward
companies for developing, producing and continually improving
advanced energy technologies. In brief, optimized deployment
policies should establish competitive markets among
technologies at similar stages of maturity.
They should avoid locking out new technologies to promote a
diverse energy portfolio.
They should provide sufficient business certainty.
They should maximize the impact of taxpayer dollars by
efficiently unlocking private investment.
Above all market creating deployment policies should
provide only targeted and temporary support for technologies
that are still maturing and improving.
They should be explicitly designed to drive and reward
continually cost reductions and performance improvements.
They should steadily reduce subsidy levels and public
support as these technologies improve.
Eventually these subsidies should fade away entirely as
advanced energy sectors become fully competitive with
conventional fuels.
The role of government in driving markets and innovation
for advanced energy technologies should thus be limited and
direct. The goal should be to help develop robust industries
that can stand on their own and thrive without public subsidies
as soon as possible. Several policy mechanisms may be designed
to meet these criteria. I look forward to discussing those in
more detail in the questions to follows.
I thank you for considering these recommendations.
Thank you.
[The prepared statement of Mr. Jenkins follows:]
Prepared Statement of Jesse D. Jenkins, Director of Energy and Climate
Policy, Breakthrough Institute, Oakland, CA
Chairman Bingaman, Ranking Member Murkowski, distinguished members
of the Committee, I thank you for the opportunity to appear before you
today to discuss the role of the government in the process of energy
innovation. It is an honor and a privilege to speak with you on a topic
so critical to the nation's energy, economic, and environmental future.
I am the Director of the Energy and Climate Program at the
Breakthrough Institute, an independent public policy research institute
in Oakland, California (see http://thebreakthrough.org/energy.shtml).
The Breakthrough Institute is non-partisan and accepts only charitable
contributions from individuals and foundations without a direct
economic interest in our research and analysis. The Institute's Energy
and Climate Program focuses centrally on identifying and advancing the
optimal policies to accelerate innovation to ensure that advanced
energy technologies become affordable, reliable, and scalable. This
objective is essential to securely and sustainably fueling the national
economy, improving public health and environmental outcomes, and
ensuring U.S. technological leadership in the multi-trillion dollar
global energy markets of the 21st century.
I am here today to share key findings and recommendations derived
from several recent reports and analyses published by the Breakthrough
Institute, as this Committee takes a hard look at identifying a limited
and direct role for the government in accelerating advanced energy
innovation.
GOVERNMENT POLICY BUOYS RECENT ADVANCED ENERGY INDUSTRY PROGRESS
Driven by private innovation and entrepreneurship as well as
critical public sector support in the form of tax credits, grants, and
loan guarantees, several advanced energy technology segments (often
referred to collectively as ``clean tech'') have grown robustly in
recent years while making progress on cost and performance.\1\
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\1\ Advanced energy technology or ``clean tech'' industry segments
are defined variously. Unless otherwise noted, this testimony refers to
the following industry segments when discussing advanced energy
technology or clean tech sectors: solar, wind, geothermal, biomass, and
nuclear power technologies; fuel cells; combined heat and power (CHP);
energy efficient technologies, appliances, and building practices;
smart grid; carbon capture and sequestration (CCS); alternative fuels
(alcohol fuels, biofuels, biodiesel); advanced batteries; hybrid and
electric vehicles; and high speed rail.
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Electricity generation from renewable sources (excluding
hydropower) doubled from 2006 to 2011.\2\ Construction is now under way
on the nation's first new nuclear power plants in decades. And American
manufacturers are regaining market share in advanced batteries and
vehicles.\3\ Private sector investment in U.S. clean tech sectors
(excluding nuclear energy) grew 42 percent to $48 billion in 2011, the
first year the United States has commanded the lead in global clean
tech investing since 2008.\4\ Meanwhile, employment across advanced
energy sectors expanded by almost 12 percent from 2007 to 2010, adding
more than 70,000 jobs even as overall U.S. employment stagnated during
the height of the recession.\5\
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\2\ Non-hydro U.S. renewable electricity generation increased from
96 million megawatt-hours in 2006 to 195 million megawatt-hours in
2011. See: U.S. Energy Information Administration, ``Electric Power
Monthly,'' March 27, 2012, http://www.eia.gov/electricity/monthly/
epm_table_grapher.cfm?t=epmt_1_1. Accessed April 4, 2012.
\3\ Up from 2 percent in 2008, the United States is expected to
make up 40 percent of the market for advanced batteries by 2014. See:
``Transforming America's Transportation Sector: Batteries and Electric
Vehicles,'' U.S. Department of Energy, July 2010.
\4\ Investment figures include the following sectors: renewable
energy, biofuels, energy efficiency, smart grid, energy storage,
advanced transportation, carbon capture and storage, and clean energy
services. See: ``Who's Winning the Clean Energy Race? 2011 Edition,''
Pew Charitable Trusts, April 2012.
\5\ Employment grew by a total of 71,633 jobs from 2007 to 2010 in
the following sectors: renewable energy, nuclear energy, carbon storage
and management, fuel cells, energy efficiency (including buildings,
lighting, and consumer products and appliances), smart grid, and
electric vehicle technologies and advanced vehicle batteries. See: Mark
Muro, Jonathan Rothwell, and Devashree Saha, ``Sizing the Clean
Economy: A National and Regional Green Jobs Assessment,'' Brookings
Institution and Battelle Technology Partnership Practice, 2011.
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Perhaps a more important measure of technological and industry
maturation is that prices for solar, wind, and other advanced energy
technologies fell in recent years, moving these technologies closer to
cost competitiveness with conventional energy technologies. The global
average cost of solar installations fell more than 50 percent between
2007 and 2011, while wind turbine costs fell 27 percent from 2008 to
2011.\6\ The price of lithium-ion batteries used in electric vehicles
also fell 30 percent since 2009 and dropped by 14 percent last year
alone.\7\ Finally, the cost of advanced ``drop- in'' biofuel
replacements for petroleum-based military fuels (jet fuel, etc.)
declined 82 percent from 2009 to 2011, as procurement by the U.S. Navy
catalyzed a 10-fold increase in demand for these advanced fuels.\8\
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\6\ For solar cost trends, see: Ron Pernick, Clint Wilder, and
Trevor Winnie, ``Clean Energy Trends 2012,'' Clean Edge, March 2012.
For wind cost trends, see: Mark Bolinger and Ryan Wiser,
``Understanding Trends in Wind Turbine Prices Over the Past Decade,''
Lawrence Berkeley National Laboratory, October 2011.
\7\ Justin Doom, ``Battery Prices for Electric Vehicles Fall 14%,
BNEF Says,'' Bloomberg, April 16, 2012.
\8\ Breakthrough Institute analysis of data provided by the Office
of the U.S. Secretary of the Navy, May 2012.
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The role of government policy has been crucial to recent advanced
energy industry growth and progress. Advanced energy technology
segments, from renewable and nuclear power plants to alternative
transportation technologies and fuels, receive a variety of federal
incentives, including direct grants, tax credits, financing guarantees,
and other subsidy programs. Similarly, nearly all clean energy research
and development benefits from some form of federal support. These
federal incentives help clean energy segments gain a foothold in energy
markets by overcoming the higher costs or risks these nascent
technologies currently face relative to highly mature fossil fuels or
vehicle technologies. We should acknowledge that this federal support
is by no means unique to today's advanced energy sectors. Conventional
fossil energy sources have enjoyed substantial public R&D funding,
favorable tax and regulatory treatment, and production subsidies
ongoing to this day.\9\
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\9\ See: ``60 Years of Energy Incentives: Analysis of Federal
Expenditures for Energy Development,'' Management Information Services
Inc, October 2011; and Nancy Pfund and Ben Healey, ``What Would
Jefferson Do: The Historic Role of Federal Subsidies in Shaping
America's Energy Future,'' DBL Investors, September 2011.
---------------------------------------------------------------------------
The recent growth of advanced energy sectors is due in large part
to a parallel increase in federal investment via this range of public
policy mechanisms. Cumulative federal support for advanced energy
technology sectors totaled an estimated $44 billion over the 2002-2008
period.\10\ That level compares to a cumulative $150 billion invested
between 2009-2014 (see Figure 1)*, according to an original analysis of
92 distinct federal programs supporting advanced energy/clean tech
sectors conducted by the Breakthrough Institute and published as the
April 2012 report, ``Beyond Boom and Bust: Putting Clean Tech on a Path
to Subsidy Independence.''\11\ Furthermore, we estimate these initial
public expenditures will leverage an overall cumulative public and
private sector investment of $327 billion to $622 billion in U.S.
advanced energy sectors from 2009-2014.
---------------------------------------------------------------------------
\10\ Figure derived from ``Estimating U.S. Government Subsidies to
Energy Sources: 2002-2008,'' Environmental Law Institute, 2009 with
RD&D data added from Information Technology and Innovation Foundation,
``The Energy Innovation Tracker,'' www.energyinnovation.U.S. Accessed
April 4, 2012.
* Figures 1-6 have been retained in committee files.
\11\ The report was authored by Jesse Jenkins, Ted Nordhaus,
Michael Shellenberger, and Alex Trembath of the Breakthrough Institute
along with Mark Muro of the Brookings Institution and Letha Tawney of
the World Resources Institute. See: http://thebreakthrough.org/blog/
Beyond_Boom_and_Bust.pdf
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FROM CLEAN TECH BOOM TO FEDERAL SPENDING BUST
Despite recent cost declines, nearly all advanced energy sectors
currently rely on public policy support and subsidy to gain an
expanding foothold in well-established energy markets. That support is
now poised to decline precipitously, presenting new challenges and
raising the possibility of market turmoil ahead for several U.S. clean
tech markets.
In summary, our research finds that annual federal clean tech
spending peaked in 2009 at $44.3 billion and has already declined
steadily through 2011 to $30.7 billion. Yet the sharpest reductions in
federal support for these advanced energy sectors are still ahead:
absent Congressional action, total federal clean tech expenditures will
be cut nearly in half from 2011 to 2012 and will fall to just one-
quarter of 2009 levels by 2014 (see Figure 2).
In the absence of legislative action to extend or replace current
subsidies, America's system of policy support for nascent advanced
energy sectors will have been largely dismantled by the end of 2014, a
casualty of the scheduled expiration of 70 percent of all federal clean
tech policies. Examples of expired or soon to expire policies include:
The Section 48C tax credit for manufacturers of advanced
energy technologies and components (volumetric cap reached as
of January 2010).
The Section 1705 DOE Loan Guarantee Program for advanced
energy technologies (expired September 2011).
The Section 1603 Treasury Grants for renewable electricity
projects (expired end of 2011).
The Volumetric Ethanol Excise Tax Credit (expired end of
2011).
The Production Tax Credit (PTC) enjoyed by wind power and
other renewable electricity sources (expires at the end of 2012
for wind and at the end of 2013 for other technologies).
A total of $51 billion in temporary clean energy
expenditures under programs created or expanded by the Recovery
Act (note that this total includes the Section 48C, 1705, and
1603 programs noted above).
Furthermore, many of the remaining programs will end shortly after
2014. The solar industry, for example, will be left with just two more
years before the 30 percent federal Investment Tax Credit (ITC) buoying
solar markets expires at the end of 2016. The only other ongoing
programs left after 2014 include the nation's underfunded energy RD&D
programs and a handful of tax credits and grant programs for energy
efficiency and conservation.\12\
---------------------------------------------------------------------------
\12\ See ``Beyond Boom and Bust'' for more detailed analysis of
federal clean tech expenditures and programs.
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This impending mass-expiration of federal policy support comes at a
time of corresponding subsidy declines in many European markets as well
as heightened competition from both foreign clean tech manufacturers
and record-low prices for natural gas--the chief domestic competitor to
many clean electricity generation technologies, from wind and solar to
nuclear power. Without action, the combination of these forces could
see recent years of clean tech boom go bust--with significant effects
to the economy and American competitiveness--and they will certainly
present new challenges and headwinds for advanced energy sectors in the
years ahead.
FEDERAL FUNDING CLIFF AND CHEAP GAS CHALLENGE ADVANCED ENERGY SEGMENTS
The expiration of key federal programs, including the Section 1603
renewable energy grant program and other ARRA-created programs, has
already begun to impact advanced energy technology markets and
investments. Furthermore, the scheduled expiration of other programs,
including the wind PTC at the end of 2012 and the broader collapse in
funding scheduled to unfold by 2014, are all well within the time
horizon relevant to investment decisions being made today by advanced
energy firms and financiers.
This policy uncertainty is thus already having a chilling effect on
private sector investment in advanced energy sectors. After setting a
record in 2011, global clean tech investment plunged in the first
quarter of 2012, diving to the lowest levels since the depths of the
global recession in 2009.\13\
---------------------------------------------------------------------------
\13\ ``Q1 2012 clean energy investment squeezed by policy
uncertainty,'' Bloomberg New Energy Finance, April 12, 2012, http://
www.bnef.com/PressReleases/view/208, accessed May 16, 2012.
---------------------------------------------------------------------------
With virtually all advanced energy segments dependent in one way or
another on policy support, how this emerging industry will weather this
policy collapse remains to be seen. Market impacts will certainly vary
by industry segment, and ``Beyond Boom and Bust'' closely examines the
outlook for wind, solar, and nuclear power, as well as corn and
cellulosic biofuels, and plug-in hybrid/electric vehicles and advanced
batteries.
To summarize our findings, we conclude that clean electricity
sources competing directly with gas-fired power plants may face the
most severe economic challenges, as low natural gas prices coincide
with declining federal incentives (see Figure 3). Below I discuss the
outlook for wind, nuclear, and solar markets.
Wind Power
Absent subsidy, the levelized cost of electricity from wind power
facilities is now competitive with combined-cycle natural gas-fired
power plants only at locations with the best wind speeds and ready
access to existing transmission capacity. The PTC thus remains critical
to ensure wind power is cost competitive and can expand in a broad
range of locations. If the PTC expires without any replacement, market
analysts expect annual wind energy installations to contract by as much
as 85 percent from a projected peak of 8-10.5 gigawatts (GW) in 2012 to
just 1.5-2 GW in 2013.\14\
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\14\ Felicity Carus, ``Wind Rush: U.S. Industry Hurdles Towards a
Cliff Without Production Tax Credit,'' AOL Energy, November 14 2011;
``Impact of the Production Tax Credit on the U.S. Wind Market,''
Navigant Consulting, December 2011.
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Nuclear Power
Given the expected construction costs of the two new nuclear
reactors under construction by Georgia Power at Plant Vogtle, the
levelized cost of electricity from new nuclear reactors may fall in the
range of $95-130 per MWh, assuming amortization of capital costs over a
30-year period.
While financial incentives offered by the Energy Policy Act of 2005
will help reduce these costs somewhat for the first 6 GW of new nuclear
builds, these unsubsidized cost estimates are roughly twice the current
costs of electricity from new combined-cycle gas-fired plants,
significantly dampening the interest of investors and utilities for new
reactor construction.
It is worth noting however, that the levelized cost of electricity
from nuclear power plants is very sensitive to the cost of financing.
Furthermore, the new AP1000 reactors under construction at Vogtle are
designed to operate for 60 years and may operate well into the 2080s if
not beyond. Comparisons of such long- lived assets to the cost of gas-
fired power plants at current gas prices thus unfairly value the
longevity and price predictability of new nuclear power plants.
Solar Power
Finally, solar panels installed on residential and commercial
rooftops do not have to compete directly with the wholesale cost of
power from natural gas-fired plants. Given much higher retail
electricity rates, more long-term federal incentives, and additional
aid in several states, the outlook for solar power may be stronger.
After significant recent cost reductions, rooftop solar installations
on residential or commercial buildings have now reached unsubsidized
prices that are competitive with retail electricity rates in Hawaii,
where average residential electricity prices are quite high. Depending
on the pace of innovation and cost reductions, rooftop solar is also
within range of cost parity in certain U.S. retail markets with high
average electricity prices and/or high solar irradiance, including
California, Texas, Florida, and Nevada. Solar is approaching retail
cost parity in a set of Northeastern states as well (Connecticut, New
York, New Hampshire, and New Jersey), where retail rates exceed $160
per MWh and solar irradiance is modestly high (see Figure 4). The
federal ITC for solar currently combines with numerous state and local
inventive programs to open up wider opportunities for solar in select
markets.
Large, utility-scale solar power plants must compete more directly
with gas-fired generating units in wholesale power markets. While
utility-scale solar installations typically achieve lower costs than
rooftop installations due to greater economies of scale, solar power
remains more costly (absent subsidies) than new gas-fired generation in
wholesale power markets, except perhaps in regions with the highest
solar resource (see Figure 3). Utility-scale solar installations thus
currently rely on the federal ITC and other state incentives to be
competitive in most U.S. markets.
FURTHER COST REDUCTIONS KEY TO MOVING CLEAN TECH BEYOND BOOM AND BUST
This is not the first time booming clean tech markets in America
have been on the brink of a bust. U.S. markets for clean tech segments
from wind, nuclear, and solar power to electric vehicles and
alternative fuels have each surged and declined in the past. While a
drawdown of federal subsidies is most often the immediate trigger of
clean tech market turmoil, the root cause remains the same each time:
the higher cost and risk of U.S. advanced energy technologies relative
to either mature fossil energy technologies or lower-cost international
competitors, which make U.S. clean tech sectors dependent on subsidy
and policy support.
New industry sectors are often volatile, as innovative technology
firms must challenge both established incumbents and competing
upstarts. Advanced energy technologies are no exception.
Yet in energy, unlike biotechnology or information technology,
price is king. Like steel or copper, energy is a commodity, principally
valued not for its own qualities but for the services and products
derived from it. As such, while new drugs, software, or consumer
electronics command a price premium from customers by offering new
value-added features, new energy technologies must routinely compete on
price alone, even if they offer other long-term benefits.\15\ It would
be a difficult feat for any nascent technology to enter a commodity
market and compete immediately on cost, but clean tech sectors face a
particularly challenging rival: well-entrenched fossil fuel incumbents
that have had more than a century to develop their supply chains--aided
by government subsidies and support--and make incremental innovations
to achieve high levels of efficiency.
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\15\ For more on the challenges facing nascent advanced energy
sectors, see: ``Bridging the Clean Energy Valleys of Death.'' Full
citation in references at end of this testimony. See also: Richard
Lester and David Hart, Unlocking Energy Innovation: How America Can
Build a Low-Cost, Low-Carbon Energy System (Cambridge: MIT Press 2011);
Karsten Neuhoff, ``Large-scale Deployment of Renewables for Electricity
Generation,'' Oxford Review of Economic Policy, Vol 21, No 1, 2005.
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The immediate cessation of advanced energy subsidies would not be
in the national interest. These advanced energy sectors are still
emerging and maturing and must compete against well- entrenched fossil
energy sources. Supporting the development of a new portfolio of cost-
competitive, scalable advanced energy technologies offers substantial
opportunities for enhanced American energy security, economic growth,
new technology exports, and improved public health. But this process
will take time. Policy continuity, which provides assurance to the
market and attracts private investment, is thus critical.
Fortunately, energy technology experts at the International Energy
Agency point to numerous remaining technical opportunities to achieve
significant cost reductions and performance improvements across a range
of advanced energy technologies, from wind and solar power to enhanced
geothermal energy systems, advanced nuclear designs, and improved
vehicle technologies and fuels.\16\ If costs continue to fall over the
next several years, for example, rooftop solar PV installations will
become fully cost competitive without subsidy in a growing number of
retail electricity markets. Line-of-site innovations and improvements
in both PV module and non- module costs could also bring utility-scale
solar costs down to $40-102 per MWh by the end of the decade, making
solar power subsidy independent in wholesale markets across much of the
United States.\17\ Analysts similarly project incremental turbine
technology improvements have the potential to decrease wind energy
costs by 10-30 percent in the 2015-2020 period, bringing the
unsubsidized levelized cost into the $42-67 per MWh range and making
wind power broadly competitive in that time frame.\18\
---------------------------------------------------------------------------
\16\ See: Energy Technology Perspectives 2010, International Energy
Agency, 2010.
\17\ See: ``Gas Boom Poses Challenges for Renewables and Nuclear.''
Full citation in references at end of this testimony. See also: D.M.
Powell, et al., ``Crystalline silicon photovoltaics: a cost framework
for determining technology pathways to reach baseload electricity
costs,'' Energy & Environmental Science, 2012, 5, 5874; and ``SunShot
Vision Study,'' United States Department of Energy SunShot Initiative,
February 2012.
\18\ See: ``Gas Boom Poses Challenges for Renewables and Nuclear.''
See also: Ryan Wiser et al., ``Wind Energy,'' in IPCC Special Report on
Renewable Energy Sources and Climate Change Mitigation, 2011, Cambridge
University Press; and ``2010 Wind Technologies Market Report,'' U.S.
Department of Energy Office of Energy Efficiency and Renewable Energy,
July 2011.
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Full cost competitiveness with fossil fuels should be achievable in
the near- to medium-term for a variety of advanced energy technologies.
The steady process of innovation is the key.
As with prior energy innovations from gas turbines and nuclear
reactors to shale gas extraction techniques,\19\ sustained government
policies will be critical to support private entrepreneurs and firms in
driving further cost reductions and moving today's advanced energy
technologies towards full maturity.
---------------------------------------------------------------------------
\19\ See: ``Where Good Technologies Come From'' and ``Where the
Shale Gas Revolution Came From.'' Full citation in references at end of
this testimony.
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At the same time, the reality is that until technological
innovation and cost declines can secure independence from ongoing
subsidy, advanced energy technologies will remain continually imperiled
by the threat of subsidy expiration and political uncertainty.
Meanwhile, public tolerance for significant energy subsidies or the
internalization of higher prices for energy is limited. If nascent
energy technologies scale up without corresponding declines in price,
this limited tolerance will eventually be expended, leading to another
market bust. This means that the simple, perpetual extension of today's
advanced energy subsidies and policies, with its passive approach to
innovation, does not offer a sustainable path beyond a cycle of clean
tech boom and bust.
The time has come then to craft a new energy policy framework
specifically designed to accelerate technology improvements and cost
reductions in advanced energy sectors, ensure scarce public resources
are used wisely to drive technologies towards subsidy independence as
soon as possible, and continue the growth and maturation of America's
advanced energy industries.
With the U.S. advanced energy policy system set to be effectively
wiped clean in the coming years, the time for smart reform is now, and
this Committee will no doubt play a leading role in such efforts.
To these ends, my colleagues and I recommend policy reform on two
critical fronts, detailed in ``Beyond Boom and Bust'' and summarized in
the sections below.
I. Reform Advanced Energy Deployment Subsidies to Reward Technology
Improvement and Cost Declines
Expiring policies and programs are poised to wipe away the large
bulk of today's advanced energy deployment regime. This creates a clear
and urgent need for policy reforms that sustain market opportunities
for advanced energy technologies, more effectively deploy limited
public resources, and support innovative entrepreneurs and firms.
Whatever form it takes, a new suite of advanced energy deployment
policies must simultaneously drive market demand and continual
innovation.
By and large, today's energy subsidies do not do enough to support
America's innovators, and they have not yet succeeded in driving down
the costs of advanced energy technologies far enough to compete with
conventional fuels. For example:
Many of today's clean energy subsidies are focused primarily
on supporting the deployment of existing energy technologies at
current prices, and most provide no clear pathway to subsidy
independence. The federal renewable electricity PTC, for
example, has provided the same level of subsidy to wind power
since initial enactment in 1992. Subsidy levels increase each
year at the rate of inflation, keeping per MWh subsidy levels
constant in real dollar terms and providing no clear incentive
for continual cost declines or pathway to eventual subsidy
independence.
If not designed with care, deployment policies can also lock
out more promising but higher risk technologies from markets,
slowing their development. This is a challenge in particular
for the renewable portfolio standard and clean energy standard
policies given serious consideration by this Committee. These
policies typically encourage deployment of the lowest-cost
qualifying energy technology available--generally wind power or
biomass, or in the case of a proposed CES, natural gas-fired
plants. Yet if designed in this manner, RPS or CES policies may
do little to drive down the price of other advanced energy
technologies, such as solar or advanced nuclear reactor
designs, that may have higher costs now but hold the potential
to become much cheaper in the long-run.
Intermittent and haphazard policy support can also wreak
havoc with the business confidence necessary for the long-term
investments required to develop new and improved products. The
PTC for wind power, for example, was first enacted in 1992, but
has since expired three times, and has been renewed a total of
seven times, often with less than a month to spare before
pending expiration. Other clean tech subsidies, including key
tax credits for solar, biofuels, energy efficient products, and
other segments have experienced similarly erratic expirations.
The market effects are chilling, and many private firms are
forced to focus principally on ramping-up production for
subsidized markets while they last, rather than pioneering
next-generation designs and manufacturing processes for the
long-term. The intermittent nature of many advanced energy
support policies thus slows the pace of innovation in these
sectors and actually prolongs the amount of time these sectors
remain reliant on public subsidy.
The United States can do better than this. Deployment subsidies and
policies should be reformed and designed from the beginning to better
support innovative U.S. firms and reward companies for developing,
producing, and improving advanced technologies that can ultimately
compete on price with both fossil fuels and international competitors
alike. Each dollar of federal support today should be optimized to move
maturing advanced energy technology sectors towards eventual subsidy
independence as soon as possible.
Recognizing that investment horizons, technology development
cycles, and market conditions vary across advanced energy technology
segments, precise policy mechanisms will likely differ from sector to
sector. Yet whether through production or investment subsidies,
consumer rebates, market-creating regulations or standards, or other
market incentives, we recommend that any advanced energy deployment
subsidies meet the following policy design criteria. Reformed policies
should:
1. Establish a Competitive Market.--Deployment policies
should create market opportunities for advanced clean energy
technologies while fostering competition between technology
firms.
2. Drive Cost Reductions and Performance Improvements.--
Deployment policies should create market incentives and
structures that demand and reward continual improvement in
technology performance and cost.
3. Provide Targeted and Temporary Support for Maturing
Technologies.--Deployment policies must not operate in
perpetuity, but rather should be terminated if technology
segments either fail to improve in price and performance or
become competitive without subsidy.
4. Reduce Subsidy Levels in Response to Changing Technology
Costs.--Deployment incentives should decline as technologies
improve in price and performance to both conserve limited
taxpayer and consumer resources and provide clear incentives
for continued technology improvement.
5. Avoid Technology Lock-Out and Promote a Diverse Energy
Portfolio.--Deployment incentives should be structured to
create market opportunities for energy technologies at
different levels of maturity, including new market entrants, to
ensure that each has a chance to mature while allowing
technologies of similar maturity levels to compete amongst
themselves.
6. Provide Sufficient Business Certainty.--While deployment
incentives should be temporary, they must still provide
sufficient certainty to support key business decisions by
private firms and investors.
7. Maximize the Impact of Taxpayer Resources and Provide
Ready Access to Affordable Private Capital.--Deployment
incentives should be designed to avoid creating unnecessarily
high transaction costs while opening up clean tech investment
to broader private capital markets.
Several policies could be structured to meet these criteria,
including:
Competitive deployment incentives could be created for
various clean tech segments of similar maturity, with
incentives for each segment falling steadily over time to
demand and reward continual innovation and price
improvements.\20\
---------------------------------------------------------------------------
\20\ See ``Post-Partisan Power,'' page 22-23. Full citation in
references at end of this testimony.
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Steadily improving performance-based standards could create
both market demand and spur consistent technology
improvement.\21\
---------------------------------------------------------------------------
\21\ Corporate Average Fuel Economy standards (CAFE) for passenger
and freight vehicles or Emissions Performance Standards for new power
plants each demand progressively improved technology performance.
Similar standards could be designed to drive improvements in key
factors determining technology costs or performance, such as the
electric conversion efficiency of power plants.
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``Top-runner'' programs competitively establish performance
standards or financial incentive levels based on the leading
industry performers in each market segment, forcing other firms
to steadily innovate to stay competitive in the market.\22\
---------------------------------------------------------------------------
\22\ Japan's ``top-runner'' or ``front-runner'' energy efficiency
program, for example, sets minimum standards for the energy efficiency
of a variety of appliances, personal and freight vehicles, and lighting
technologies. These standards are automatically revised on a periodic
basis with new performance standards set based on the real performance
of the most efficient products the market in each technology segment.
Market leaders thus set the bar for the next performance standard, and
competing firms must improve their technology performance to keep pace,
driving market competition, innovation, and steady improvement in
performance across each technology segment. See ``Top Runner Program:
Developing the World's Best Energy-Efficient Appliances,'' Ministry of
Economy, Trade, and Industry of Japan, March 2010.
Environmental and air quality regulations requiring the
implementation of ``best available control technology'' (i.e. certain
New Source Review regulations implementing the Clean Air Act) operate
on similar principles as well, requiring steady improvement in
performance as available technologies improve.
---------------------------------------------------------------------------
Demanding federal procurement opportunities could be created
to drive both market opportunities and ensure steady
improvement of each successive generation of product,
particularly when advanced energy technology products align
with strategic military needs.\23\
---------------------------------------------------------------------------
\23\ See ``Post-Partisan Power,'' page 23-24. See also: Daniel
Sarewitz and Sam Thernstrom, ``Energy Innovation at the Department of
Defense: Assessing the Opportunities,'' Consortium for Science, Policy,
and Outcomes and Clean Air Task Force, March 2012.
---------------------------------------------------------------------------
Reverse auction incentives could be established for varying
technologies to drive industry competition and innovation.\24\
---------------------------------------------------------------------------
\24\ Reverse auction programs are now in place in California for
utility procurement of rooftop solar power installations and have been
used in India and China to determine accurate market prices for later
feed-in tariff subsidies. These programs provide strong incentive for
market competition and reward firms who set the bar for price and
performance with expanded market opportunities. The reverse auction
mechanism for solar in California have secured record low contract
prices. See: ``Update to RAM Contract--145 MW Total,'' Vote Solar
Initiative,'' http://votesolar.org/2012/04/update-to-ram-contracts-145-
mw-total/, accessed May 16, 2012.
For Congressional proposals establishing reverse auction
mechanisms, see: H.R.909 (112th Congress), ``A Roadmap for America's
Energy Future,'' Title III, ``Reverse Auction Mechanism for Renewable
Energy Generation and for Renewable Fuel Production,'' sponsored by
Representative Devin Nunes (R-CA-21); S.3434 (111th Congress),
``Practical Energy and Climate Plan,'' Title I, Subtitle B, Sec. 111,
``Production Incentives for Renewable Fuels,'' sponsored by Senator
Richard Lugar (R-ID).
---------------------------------------------------------------------------
If structured to adhere to these criteria, a new era of advanced
energy deployment policies will neither select ``winners and losers'' a
priori, nor create permanently subsidized industries. Rather, these
policies will provide opportunity for all emerging advanced energy
technologies to demonstrate progress in price and performance, foster
competitive markets within a diverse energy portfolio, and put these
segments on track to full subsidy independence.
II. Strengthen the National Energy Innovation System
Subsidy reform by itself will not be sufficient to drive the needed
technology innovation and subsequent adoption of affordable advanced
energy technologies. For that reason, energy policy reform to secure an
internationally competitive, subsidy-independent advanced energy
technology sector must harness America's strengths as an innovator.
The United States is home to world-class universities, generations
of trained scientists and engineers, potent centers of
entrepreneurship, finance, and advanced manufacturing, and a creative
culture capable of attracting talent from around the world. Yet when it
comes to energy, America's innovation system falls short.\25\ Policy
makers must strengthen the U.S. energy innovation system to catalyze
advanced energy breakthroughs and support continual technology
improvement.
---------------------------------------------------------------------------
\25\ See: ``Post-Partisan Power,'' pages 13-16.
---------------------------------------------------------------------------
Along with the key reforms to deployment policies discussed above,
the nation should pursue policy reform along three additional fronts:
Steadily Increase Investment in RD&D While Reforming
and Strengthening the U.S. Energy Innovation System
Stepped up investment in energy RD&D is sorely needed to both
invent new technologies and improve the cost and performance of
existing ones to make them more competitive with conventional energy
sources. Yet neither the private nor the public sector currently
invests the resources required to accelerate energy innovation and
drive down the cost of advanced energy technologies.
Multiple barriers prevent firms from adequately investing in the
development of new, high-risk energy technologies. These include:
knowledge spillover risks from private investment in research; the
commodity nature of most energy markets, which prevent nascent, higher
cost energy technologies from charging a premium; inherent technology
and policy risks in energy markets; the financial scale and long time
horizon of many clean energy projects; and a lack of wide-spread
enabling infrastructure. As a result of these and other barriers, U.S.
energy firms reinvest well below one percent of revenues in RD&D. This
stands in stark contrast to firms in the information technology,
semiconductor, and pharmaceuticals sectors, which typically reinvest 15
to 20 percent of their revenue in RD&D and new product development.\26\
---------------------------------------------------------------------------
\26\ See: ``Bridging the Clean Energy Valleys of Death,'' pages 7-
10. Full citation in references at the end of this testimony.
---------------------------------------------------------------------------
This private sector gap is due in part to an analogous one in the
public sector. Federal energy RD&D spending has stood in the $4-6
billion range in recent years.\27\ By contrast, the United States
invests almost $19 billion per year in the National Aeronautic and
Space Administration (NASA) and $33.5 billion each year into health
research (primarily through the National Institutes of Health), while
defense related R&D now approaches $80 billion annually. At 10 percent
of total economic activity, the vast size and critical importance of
the energy sector to the U.S. economy and national security calls for
investments in advanced energy innovation of a similar order of
magnitude.
---------------------------------------------------------------------------
\27\ See: ``Energy Innovation Tracker,'' http://
energyinnovation.us, Information Technology and Innovation Foundation.
---------------------------------------------------------------------------
As such, a broad consensus has emerged among energy sector
analysts--including the business leaders of the American Energy
Innovation Council, the members of the Presidential Council of Advisors
on Science and Technology, and a set of think tanks with diverse
ideological backgrounds\28\--that energy RD&D investment should roughly
triple over time to at least $15 billion annually.
---------------------------------------------------------------------------
\28\ See for example: ``A Business Plan for America's Energy
Future'' from the American Energy Innovation Council (AEIC); ``Report
to the President on Accelerating the Pace of Change in Energy
Technologies Through an Integrated Federal Energy Policy'' from the
President's Council of Advisors on Science and Technology (PCAST)and
``Post-Partisan Power,'' authored by scholars at the American
Enterprise Institute, Breakthrough Institute, and Brookings
Institution.
---------------------------------------------------------------------------
At the same time, America's energy innovation system must also be
modernized to leverage regional innovation opportunities and strengthen
new institutional models at the federal level. Examples of recent
institutional innovations at DOE include the creation of the Energy
Frontier Research Centers (EFRCs), the Advanced Research Projects
Agency-Energy (ARPA-E), and the Energy Innovation Hubs. Such efforts
should be continued and expanded. Similarly, efforts to build public-
private partnerships responsive to both industry needs and regional
strengths should continue to be encouraged across the DOE and
particularly in the National Labs in order to ensure a maximum return
on the federal investment in RD&D.\29\
---------------------------------------------------------------------------
\29\ See: ``Post-Partisan Power.'' Full citation in references at
end of this testimony. See also: Duderstadt et al, Energy Discovery-
Innovation Institutes: A Step Towards America's Energy Sustainability,
Brookings Institution, February 2009; and Jesse Jenkins, Joshua Freed,
and Avi Zevin, ``Jumpstarting a Clean Energy Revolution with a National
Institutes of Energy,'' Breakthrough Institute and Third Way, September
2009.
Implement Effective Policies to Accelerate
---------------------------------------------------------------------------
Commercialization of Advanced Energy Technologies
To ensure a fully competitive energy market, the federal government
must also do more to speed the demonstration and commercialization of
new advanced energy technologies. Due to multiple market barriers,
private sector financing is typically insufficient to move new energy
innovations from early-stage laboratory research on to proof-of-concept
prototype and then to full commercial scale. There are two financing
gaps, in particular, that kill off too many promising new technologies
before they have a chance to develop. These are known as the early-
stage ``Technological Valley of Death'' and the later- stage
``Commercialization Valley of Death'' (see Figure 5).\30\
---------------------------------------------------------------------------
\30\ See: ``Bridging the Clean Energy Valleys of Death.'' Full
citation in references at the end of this testimony.
---------------------------------------------------------------------------
The Technology Valley of Death occurs early in the development of a
technology, as breakthrough research and technological concepts aim to
develop commercially viable products. Investors are typically reluctant
to fund early-stage research and product development, and many
entrepreneurial start-ups fail to attract sufficient capital to see
their research concepts translated into commercial products. New
institutional arrangements for federal research support discussed above
can help address this Technology Valley of Death, including ARPA-E and
new regional innovation consortia.
The Commercialization Valley of Death exists between the pilot/
demonstration and commercialization phases of the technological
development cycle. This financial gap plagues advanced energy
technologies that have already demonstrated proof of concept but still
require large amounts of capital--often on the order of hundreds of
millions of dollars--to demonstrate that their design and manufacturing
processes can be brought to full commercial scale. This scale of
funding exhausts the comparatively limited resources of typical venture
capital-led financing rounds, and many VCs are beginning to eschew
these nascent and capital-intensive energy technologies in favor of
companies with more timely returns to investment.
Advanced energy policy reform should be extended to policies
designed to address this Commercialization Valley of Death, including
the DOE's Loan Programs Office. The LPO was created in part to help
address this Valley of Death, yet the office was soon caught in a mix
of competing objectives, including job creation, near-term economic
stimulus, and long-term innovation. The LPO should now be replaced by a
more flexible, independent, and sophisticated suite of financial tools
and other mechanisms designed to draw private capital into advanced
energy projects through a variety of investment, credit,
securitization, insurance, and standardization activities. Whether
delivered through a Clean Energy Deployment Administration (CEDA) or
other entities or programs, the clear mission of these activities would
be to accelerate the commercialization and deployment of critical
advanced energy technologies.\31\
---------------------------------------------------------------------------
\31\ See: Jesse Jenkins and Sara Mansur, ``A Clean Energy
Deployment Administration: Unlocking Advanced Energy Innovation and
Commercialization,'' November 2011. http://thebreakthrough.org/blog/
CEDA.pdf
---------------------------------------------------------------------------
A National Clean Energy Testbeds program (N-CET) could also be
established to take advantage of public lands to accelerate technology
demonstration and commercialization. This new program would provide
access to pre-approved, monitored, and grid-connected public lands and
waters ideal for demonstration of innovative energy technologies,
thereby reducing the cost, time, and permitting challenges associated
with technology commercialization.\32\
---------------------------------------------------------------------------
\32\ See: Jesse Jenkins, Sara Mansur, Alexandra Tweedie, and Paul
Sharfenberger, ``A National Clean Energy Testbeds Program: Using Public
Lands to Accelerate Advanced Energy Innovation and Commercialization,''
November 2011. http://thebreakthrough.org/blog/Testbeds.pdf
---------------------------------------------------------------------------
The power of military procurement should also be leveraged to drive
demanding early markets for advanced energy technologies that meet
tactical and strategic military needs and may have later commercial
applications. Energy technologies with dual-use military and commercial
potential include advanced vehicle technologies, aviation biofuels,
advanced solar power, improved batteries, and small modular nuclear
reactors.\33\
---------------------------------------------------------------------------
\33\ See ``Post-Partisan Power,'' page 23-24. See also: Daniel
Sarewitz and Sam Thernstrom 2012, op cit. note 21.
Harness Advanced Manufacturing, Regional Industry
Clusters, and a World-Class Energy Workforce to Enhance
---------------------------------------------------------------------------
America's Innovative Edge
Advanced manufacturing is an integral part of the innovation system
and a key area for cost reductions and performance improvements in
emerging technologies. Innovation thus suffers when divorced from
manufacturing activities. U.S. advanced manufacturing must play a key
role in accelerating energy innovation. Technical support programs,
public-private research consortia, and other strategic policies can
help domestic manufacturers of advanced energy technologies remain at
the cutting edge.\34\
---------------------------------------------------------------------------
\34\ See: Ryan McConaghy and Devon Swezey, ``Manufacturing Growth:
Advanced Manufacturing and the Future of the American Economy,''
Breakthrough Institute and Third Way, October 2011. http://
thebreakthrough.org/blog/BTI_Third_Way_Idea_Brief_-
_Manufacturing_Growth_.pdf
---------------------------------------------------------------------------
Likewise, the nation needs to develop more potent, catalytic ways
to leverage and enhance regional advanced energy industry clusters.
Such industry clustering has been shown to accelerate growth by
promoting innovation, entrepreneurship, and job creation. Policy makers
should increase investment in competitive grants to support smart
regional cluster initiatives, designed not in Washington but on the
ground close to the ``bottom up'' innovation that has broken out in
numerous states and metropolitan areas.\35\
---------------------------------------------------------------------------
\35\ See: Mark Muro and Bruce Katz, ``The New `Cluster Moment:' How
Regional Innovation Clusters Can Foster the Next economy,'' Brookings
Institution, 2010.
---------------------------------------------------------------------------
Finally, American energy technology leadership will require a
highly educated, globally competitive advanced energy workforce. The
nation must make new investments in energy science, technology,
engineering, and mathematics education and make smart reforms to
immigration policies to ensure America remains the destination of
choice for the world's best entrepreneurs and innovators.\36\
---------------------------------------------------------------------------
\36\ See: ``Post-Partisan Power,'' pages 18-20. Full citation in
references at end of this testimony.
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SHALE GAS REVOLUTION DEMONSTRATES IMPORTANCE OF GOVERNMENT ROLE IN
ADVANCED ENERGY INNOVATION
As we consider policy reforms to accelerate energy innovation and
move advanced energy technologies towards full maturity, we can look no
further than the shale gas boom that has revolutionized U.S. energy
markets for an important precedent for the key role of government in
advanced energy innovation.
Shales now produce over 25 percent of domestic natural gas
resources, up from 2 percent in 2001. The shale boom has also pushed
natural gas's contribution to America's electricity generation
portfolio from 20 percent to nearly 30 percent in the last few years
alone. Natural gas resources in shale, once thought to be unrecoverable
and until this past decade prohibitively expensive to extract on a full
commercial scale, are now accessible and abundant. The shale boom has
expanded domestic energy production, pushed down wholesale electricity
prices to record lows, and accelerated the retirement of America's
aging coal plant fleet, significantly improving public health. These
advances were made possible by technological innovations resulting from
a sustained partnership between the gas industry and the American
federal government.
In a series of investigations and interviews with historians, gas
industry executives, engineers, and federal researchers, the
Breakthrough Institute uncovered the historical role of the federal
government in the development of cost-effective shale gas extraction
technologies.\37\ We consistently found that innovation and progress in
the development of hydraulic fracturing and other key gas recovery
technologies arose from public-private research and commercialization
efforts. From basic science to applied R&D to technological
demonstration to tax policy support and cost-sharing partnerships with
private industry, federal programs proved essential to gas industry
engineers in figuring out how to map, drill, and recover shale gas--
and, most importantly, how to do it cost effectively.
---------------------------------------------------------------------------
\37\ See: ``Where the Shale Gas Revolution Came From.'' Full
citation in references at the end of this testimony.
---------------------------------------------------------------------------
In summary, federal investments and involvement in the development
of shale gas extraction technologies spanned three decades (see Figure
6) and were comprised of:
The Eastern Gas Shales Project, a series of public-private
shale drilling demonstration projects in the 1970s;
Collaboration with the Gas Research Institute (GRI), an
industry research consortia that received partial funding and
R&D oversight from the Federal Energy Regulatory Committee
(FERC);
Early shale fracturing and directional drilling technologies
developed by the Energy Research & Development Administration
(later the Department of Energy), the Bureau of Mines, and the
Morgantown Energy Research Center (later the National Energy
Technology Laboratory);
The Section 29 production tax credit for unconventional gas,
in effect from 1980-2002;
Public subsidization and cost-sharing for demonstration
projects, including the first successful multi- fracture
horizontal drilling play in Wayne County, West Virginia in
1986, and Mitchell Energy's first horizontal well in the Texas
Barnett shale in 1991;
Three-dimensional microseismic imaging, a geologic mapping
technology developed for applications in coal mines by Sandia
National Laboratories.
It's clear that these government investment and research worked to
drive innovations and cost declines in shale gas extraction
technologies. Nevertheless, skeptics may wonder whether the private
sector would have achieved these gains without any public support.
Luckily, history puts this counterfactual to the test: there are plenty
of countries with sizable shale deposits--including Russia, China,
Poland, South Africa, Britain, and others--where active oil and gas
industries did not make congruent investments in shale fracturing
technologies. Instead, it was the United States that first cracked the
shale gas challenge through decades of research and commercialization;
shale fracturing operations in other countries are only now getting off
the ground. The U.S. partnership between both public and private
sectors was the key to America's shale gas leadership.
The importance of this government role should come as no surprise.
Because private companies have difficulty monetizing and capturing all
the benefits of energy technology research, it is consistently the case
that federal coordination and investment is required to drive high-
level technological innovation in the energy sector. As documented in
the Breakthrough Institute's 2010 report ``Where Good Technologies Come
From,'' the American federal government has historically played a
leading role in the development a broad range of other innovative
technologies, including microchips, jet turbines, nuclear power
reactors, and the Internet.\38\
---------------------------------------------------------------------------
\38\ See: ``Where Good Technologies Come From.'' Full citation in
references at end of this testimony.
---------------------------------------------------------------------------
The gas industry itself has spoken on behalf of the importance of
federal research efforts. As Fred Julander, head of Julander Energy and
member of the National Petroleum Council, notes: ``The Department of
Energy was there with research funding when no one else was interested
and today we are all reaping the benefits. Early DOE R&D in tight gas
sands, gas shales, and coalbed methane helped to catalyze the
development of technologies that we [in the industry] are applying
today.''\39\
---------------------------------------------------------------------------
\39\ See: ``Shale Gas: Applying Technology to Solve America's
Energy Challenges,'' US National Energy Technology Laboratory, http://
www.netl.doe.gov/technologies/oilhgas/publica5ons/brochures/
Shale_Gas_March_2011.pdf
---------------------------------------------------------------------------
``The DOE started it, and other people took the ball and ran with
it,'' Mitchell Energy's former Vice President Dan Steward told
Breakthrough Institute. ``You cannot diminish DOE's involvement.''\40\
---------------------------------------------------------------------------
\40\ See: ``Where the Shale Gas Revolution Came From.''
---------------------------------------------------------------------------
CONCLUSIONS
The American shale gas boom has brought bountiful new energy
reserves, low prices, and thousands of new jobs. As we have seen,
government policies--including federal R&D funding, public-private
demonstration initiatives, and production incentives for maturing, pre-
competitive energy technologies--played a critical role in advancing
the key energy innovations required to unlock U.S. shale gas reserves.
Yet America's energy appetites are vast, and new uses for gas--from
expanded chemicals production and gas-fired power generation to demand
from new natural gas vehicles and export markets--will quickly take up
new production. Rather than rest on our shale gas laurels, U.S.
economic growth and energy security are best served by a diversified
energy strategy that builds on the success of the shale boom to
steadily expand--and make cleaner--domestic energy supplies.
As with government support for nascent unconventional gas
technologies, the revamped U.S. energy strategy discussed in this
testimony could establish a suite of limited and targeted policies
principally focused on driving innovation and cost declines to improve
advanced energy technologies and unlock vast new domestic energy
resources. These policies can accelerate technology improvements and
cost reductions in advanced energy sectors, ensure scarce public
resources are used wisely to drive technologies towards subsidy
independence as soon as possible, and continue the growth and
maturation of America's clean tech industries.
I thank you for considering these recommendations.
REFERENCES
This testimony relies centrally on the following publications,
which may provide further resources and which may be read into the
Hearing Report at the Committee's discretion:
Alex Trembath, Jesse Jenkins, Ted Nordhaus, and Michael
Shellenberger, ``Where the Shale Gas Revolution Came From: The
Role of Government in the Development of Hydraulic Fracturing
in Shale,'' May 2012. http://thebreakthrough.org/blog/
Where_the_Shale_Gas_Revolution_Came_From.pdf
Jesse Jenkins, Mark Muro, Ted Nordhaus, Letha Tawney, and
Alex Trembath. ``Beyond Boom and Bust: Putting Clean Tech on a
Path to Subsidy Independence,'' April 2012. http://
thebreakthrough.org/blog/Beyond_Boom_and_Bust.pdf
Alex Trembath and Jesse Jenkins, ``Gas Boom Poses Challenges
for Renewables and Nuclear,'' April 2012. http://
thebreakthrough.org/blog/
Gas_Boom_Challenges_Renewables_Nuclear.pdf
Jesse Jenkins and Sara Mansur, ``Bridging the Clean Energy
Valleys of Death: Helping American Entrepreneurs Meet the
Nation's Energy Innovation Imperative,'' November 2011. http://
thebreakthrough.org/blog/Valleys_of_Death.pdf
Jesse Jenkins, Devon Swezey, and Yael Borofsky (eds.),
``Where Good Technologies Come From: Case Studies in American
Innovation,'' December 2010. http://thebreakthrough.org/blog/
Case%20Studies%20in%20American%20Innovation%20report.pdf
Steven F. Hayward, Mark Muro, Ted Nordhaus, and Michael
Shellenberger, ``Post-Partisan Power; How a Limited and Direct
Approach to Energy Innovation Can Deliver Clean, Cheap Energy,
Economic Productivity, and National Prosperity,'' October 2010.
http://thebreakthrough.org/blog/Post-Partisan%20Power.pdf
The Chairman. Thank you very much.
I believe Senator Murkowski wanted to make a statement.
Senator Murkowski. If I may, Mr. Chairman. I've got to
excuse myself and attend an Appropriations mark up, otherwise I
would not be leaving. I'd be sitting and asking a series of
questions.
I'm intrigued by some of your proposals, Mr. Jenkins, about
how we really do get to reform of some of our subsidies and how
we figure out what the ramping is. I think it is a key part to
what we need to consider.
I do have a whole series of questions that I would like to
submit to both of you for the record.
Perhaps we'd have an opportunity to visit outside of the
committee hearing to follow up on some of the proposals.
This is an important topic. I think we all recognize that
energy, the energy sector, is one where things are constantly
evolving. How we appropriately integrate the Federal Government
into the incentive process is an important one.
So, thank you, Mr. Chairman, appreciate it.
The Chairman. Thank you very much.
Let me go ahead with a couple of questions. First, let me
ask Mr. Zindler.
One of the policies that some governments have pursued is
to establish so called clean energy banks to help with
deployment of clean energy. I believe, the United Kingdom and
Australia, in particular, have moved ahead with this.
Could you describe what this phenomenon is and what you
think the benefits might be if we were to consider that or if
you don't think it makes sense here, say that as well?
Go right ahead.
Mr. Zindler. As a quick update. So, you know, as obviously
you're well aware here in the U.S. under your leadership and
others there's been some attempt to establish a clean energy
deployment administration. I think, as you know, and I think
it's important to mention, this same idea is being pursued by
other countries around the world right now.
Australia is close to finalizing a $10 billion green
investment bank.
The UK is committing potentially 3 billion pounds.
India has made some announcements, but though I don't think
that plan has moved forward to far.
The basic idea of all these institutions, more or less, is
to create a separate, sort of quasi public entity that gets
some seed funding from government. Then essentially can operate
relatively autonomously in making investment in new
technologies. Then as those technologies develop and hopefully
are winners, they get a return on that investment that they can
reinvest and continue on.
The idea is that it becomes--it does start with some--a nut
of government money to begin with. But then it becomes self
sustaining over time. I think one of the interesting, potential
advantages of this model is that by kind of breaking it out of
government infrastructure you can give it more leeway to make
faster decisions and to operate in a more flexible manner and
to make different kinds of bets, financial bets, than you might
get through highly regulated government program.
So that's the idea generally speaking. It's certainly
intriguing. What it really, I think what's potentially most
interesting about it is its ability to address the so called
demonstration Valley of Death. So that's the $100 to $200
million that might be needed to build a next generation
biofuels plant or a plant that uses a new solar technology.
That kind of capital, banks won't, generally won't, lend
because they have the money but they don't want to take that
much risk. Venture capitalists like that much. They're willing
to take that much risk but they don't have that much money to
make on a single bet.
So it kind of falls into a black hole of sorts. An
institution like that, that's willing to provide large amounts
of capital at a higher risk rate, you know, really offers real
potential.
The Chairman. Thanks.
Let me ask Mr. Jenkins a question. You list in your
testimony here several policies that could be structured to
accomplish some of the objectives you identify. One of the
policies you mention is reverse auction incentives. You say
that those could be established for varying technologies to
drive industry competition in innovation.
I was wondering if you could elaborate on that a little bit
and tell us what/how you think that might work and whether
there are examples of that that we ought to look at.
Mr. Jenkins. Yes. Thank you, Senator.
Senator Franken earlier mentioned the role of government in
a number of key technologies that have developed in the past.
One of those is microchips where the government played an early
demanding role or a role as an early demanding customer for
virtually all of the market for microchips, in the 1960s and
1970s for the space program, the Minuteman missile program.
That had the job of effectively driving down the cost of those
technologies to the point where they could be more widely
adopted by the private sector.
I think reverse auctions have the potential to play a
similar kind of role as government procurement. In Southern
California utilities are using reverse auction programs to
procure solar panels at record low prices. To use the reverse
auction mechanism to create a competitive market opportunity
for firms to bid costs for their projects to meet a certain set
of demand, a, you know, a number of megawatt hours or megawatts
that utilities there need to procure from solar projects.
The winning bids then have strong penalties for non
compliance which is a critical aspect of reverse auctions to
ensure that people are providing accurate bids so they can
actually meet. In the process the Southern California utilities
are procuring several hundred megawatts of solar at close to or
under $90 per megawatt hour which are significantly lower than
prices we've seen even in the last quarter.
So it's a model that's been used in other markets, in
India, in China, in Brazil, to varying degrees of success
depending on how well they're able to police against non
performance of contracts. But I think it's a model that meets
many of the criteria that we outline.
It creates competitive markets.
It steadily drives down price because it's constantly
driving competition.
Firms have an incentive to reduce costs, to expand on their
market share.
So it's one of the policies we think we should look very
closely at.
I should also note that some of the colleagues on the
Republican side of the aisle have proposed similar reverse
auction mechanisms in the past for biofuels, for deployment of
wind or solar. So it seems like an idea that has been bouncing
around the halls here as well. I think we should take a close
look at it as we consider ways to drive both market
opportunities but also continual cost reductions for these
technologies.
The Chairman. Thank you very much.
Senator Franken.
Senator Franken. Thank you, Mr. Chairman.
I just wanted to ask you, Mr. Jenkins. I spoke a little
earlier about the government support for industry, for the oil
industry, and gas industry and support for the industry in the
development of shale fracturing and directional drilling.
Can you talk a little bit about that?
Mr. Jenkins. Yes. Thank you, Senator.
Yes, this is the result of an independent investigation the
Breakthrough Institute conducted interviewing historians,
industry, folks from the oil and gas sector as well as
government researchers, to really piece together what was the
process of development of the key technologies that enabled the
shale gas revolution that is now sweeping across domestic
energy markets in the United States.
What we found is that as with a number of other
technologies the role of government in supporting innovation in
the private sector was critical to the development of a number
of the technologies that were needed to unlock previously
unrecoverable shale resources.
So to summarize that includes the Eastern Gas Shale
Project, a series of public/private shale drilling
demonstration projects that were undertaken in the 1970s by the
Energy Research and Development Agency and the Bureau of Minds,
the collaboration with the Gas Research Institute, which is an
interesting model of an industry research consortia that
received partial funding in R and D oversight from the Federal
Energy Regulatory Commission or Committee, FERC. To the
discussion earlier of Senator Murkowski's questions about
funding, GRI was funded by a user surtax on gas transmission
fees. So we set aside a little bit of that funds in a way that
Mr. Augustine mentioned, to drive further innovation in that
sector. We think it's an intriguing model here.
Early shale fracturing and directional drilling
technologies were also developed by ERTA and later the
Department of Energy, the Bureau of Minds and the Morgantown
Energy Research Center in West Virginia which is now the
National Energy Technology Lab.
To Senator Bingaman's home State, Sandia National
Laboratory has played a key role in developing micro seismic
imaging technology initially to detect potential fractures and
collapses in coal mines. That was a key technology that was
later applied to understanding the geology of shale deposits
and understanding where the fractures would occur so that
private industry could figure out where to locate their drills,
their drill bores and their fractures.
So there's--and beyond the initial demonstration of these
technologies there was also a period of time when shale was
technically recoverable but prohibitively expensive compared to
more conventional extraction technologies. Once again this is
the second key role that the government has to play.
The government instituted the section 29 Production Tax
Credit for unconventional gases from shale, tight sands and
coal bed methane. That was in place from 1980 to 2002. It made
it profitable for the private sector to continue to develop and
innovate upon that, those shale extractions.
Senator Franken. That helped develop the market.
Mr. Jenkins. Without that conventional tax credit there
would have been no profitable return for private sector
innovators to invest in that sector.
Senator Franken. That was the second Valley of Death.
So it really, the government, brought----
Mr. Jenkins. Across.
Senator Franken. An industry--created the technology that
made it possible which is, in one way, the first Valley of
Death.
Mr. Jenkins. Yes.
Senator Franken. Then created the market and subsidized it
for the second Valley of Death. So that when my colleagues on
the other side, who aren't here, when they sing the praises of
fracturing and then demonize government involvement in picking
winners and losers, it seems like they don't know the history
of this industry.
Would that be a fair statement?
Mr. Jenkins. That may be the case. I do believe that the
history has a clear record here that the government has played
a substantial role in partnering with the private sector. We
shouldn't diminish the private sector's role in driving
innovation in these sectors.
But the risks, the capital requirements, the time horizons
required to drive these new technologies forward are really
prohibitive. This is where the private sector does fail. You
needed the right kind of partnership between, you know, smart
government policies in a limited and targeted way to address
those barriers. That will unlock the private sector to do what
it does best.
Senator Franken. I'll take that as a yes.
Mr. Zindler, this is what the chairman was asking about. I
think you spoke to it. But I just want to specifically talk
about the Clean Energy Development Administration or CEDA.
Do you think that is a useful model as a way of helping get
over the second Valley of Death?
Mr. Zindler. I mean potentially. It certainly has that
opportunity. There is a short circuit in the market as I tried
to sort of articulate. I don't know if I did earlier.
But basically, that there is not the right kind of money
out there for this kind of task for large scale demonstration
projects. So whether it's CEDA or maybe it's some other model
or maybe you change the tax rules or whatever it is, you know,
that that is a market disconnect that is sort of screaming out
for some kind of a solution. I think, you know, that there are
a number of interesting ideas out there. That's certainly one
of them.
Senator Franken. Thank you.
Thank you, Mr. Chairman.
The Chairman. Did you have any additional questions? If
not, we can conclude the hearing at this point.
Senator Franken. I don't want to, you know, put a crimp in
your day, but.
The Chairman. No, go right ahead. That's what my day is
for.
Senator Franken. I wanted to ask about China. Sometimes we
help, the U.S. Government helps U.S. companies come up with
technologies. Then when these companies go to do something in
China, China insists on their, you know, their intellectual
property being--giving up their trade secrets in order to do
business in China. I think this violates basic free trade
principles.
Senator Webb has looked at this issue. I believe this
committee ought to explore solutions to this problem. Do either
of you have any opinions on how funding agencies can better
protect taxpayer funded technologies?
Mr. Zindler. I'll take a crack at that. That's a tough
question, obviously.
The U.S./China Clean Energy Trade relationship is at a very
interesting juncture. In fact as you may have seen last week
the Department of Commerce announced new, fairly substantial
tariffs on Chinese goods, solar equipment, imported into the
United States. So there's some tension there. I'll sure tread
carefully in my remarks on this.
To some degree the Chinese government made some of the most
important decisions about clean energy 3 or 4 years ago when it
did make it difficult for outside companies to compete for
contracts there. Now essentially and in the meantime, we saw a
real scale up of domestic wind turbine manufacturing in China
and really, in particular, for solar photovoltaics over that
time. They've become, you know, really world leaders.
So, you know, on the one hand as you think about the
politics of this, I understand the concerns about creating jobs
and in protecting intellectual property. On the other, I do
think it's important to note that in part because of that scale
up the cost of solar, for instance, has never been cheaper than
it's been. If you----
Senator Franken. That actually undercut Solyndra. I mean
that was part of the Solyndra story. Right?
Mr. Zindler. Yes, certainly part of the issue for Solyndra
is that the--Solyndra is a very interesting example of a
company that was trying to look longer range about driving down
costs and literally got caught up, to some large degree, about
what was going on at that very moment. So the conventional
sector for solar has simply scaled faster and prices have come
down faster.
Senator Franken. So in an odd way they were undercut,
Solyndra was actually undercut by the fact that the Chinese
spent so much in promoting their own solar industry to make it
so much cheaper that they were undercut and that their long
term viability became longer term. Because they had a higher
quality but more expensive product, right?
Mr. Zindler. What they were doing was looking further down
the road. Basically the future arrived faster than I think that
they had anticipated. That happened for a number of reasons. It
frankly wasn't just the Chinese that scaled up. We've seen new
capacity come online in Taiwan and other places as well.
But the solar market has very rapidly expanded and frankly
gotten a little ahead of itself in the last couple of years.
That's driven down prices very sharply.
Senator Franken. Right.
Mr. Jenkins, did you?
Mr. Jenkins. Yes. Just one thing to add is that I mean, I
think there are the current markets today for advanced energy
technologies are substantial and but they are almost entirely
government created markets. They are, you know, created by
subsidies in Europe, in China and the United States or
elsewhere.
I think we have to keep our eye on the ultimate prize which
is the development of cost competitive, advanced energy
technologies that can scale, you know, a $5 trillion global
energy market without subsidies.
The game, I think, in the long term is who can develop the
technologies that are cost competitive enough to export to
global markets. Ninety plus percent of energy demand growth is
coming from outside of the OECD countries, in the emerging
economies. Those countries are going to be either unable or
unwilling to substantially subsidize the deployment of cleaner
energy technologies.
So one thing we can focus on both to drive competition, to
enhance U.S. competition and to reduce the cost of taxpayer
investments now is that the investments we level in creating
these markets do have to continually drive down the cost of
these technologies, support the right incentives for firms to
continually innovate.
If we do that right and I think if we provide the right
kind of continuity over the medium term and the right policy
incentives and markets, we can succeed in out competing China.
We can see firms in the United States take root that can deploy
their technologies without subsidy and without the need for
ongoing public support.
Senator Franken. OK.
This is my last question/comment.
What we're basically doing is fighting for the future.
Mr. Jenkins. Yes, that's right.
Senator Franken. Because what we're saying is is we know
when these solar, wind, other renewables, other clean
technologies become price effective. They will. They can, and
they have to.
There's going to be an enormous world market and if we
don't do this now we're not going to be part of it.
Mr. Jenkins. Yes.
Senator Franken. Is that correct?
Mr. Jenkins. I think that's exactly correct. I think,
again, we can look at the history of shale gas as a key example
that we're not the only country in the world with large shale
gas resources. China has even larger amounts of shale gas than
we do, South Africa, many countries in Europe. But it was the
United States that developed cost effective shale extraction
technologies first.
That wasn't because we were the only country with an oil
and gas sector either. It was because of the government
partnership with that dynamic oil and gas sector that was able
to develop those technologies. Now the United States enjoys a
massive new source of domestic energy. We've created tens of
thousands of jobs in that sector.
But if you go back and look, even in 2005 or 2006, not long
ago, that sector was a tiny contributor to our national energy
system. Those technologies were still cost ineffective. So you
crossed that tipping point and all of a sudden you have a
revolution in our American energy markets. We're exporting
those technologies abroad, that expertise to China now and
South Africa and other countries to help them develop those
resources.
I think that's a parable for what we can and should do with
other technologies, you know, energy demand in the United
States is vast. So shale is great for expanding our energy
supplies. We can't rest on those laurels.
We should continue to develop a diverse source of ever
cleaner energy technologies. Those same kinds of polices are
going to be key to doing that and as you said, Senator Franken,
winning the future.
Senator Franken. I don't think we could end on a better
note.
Thank you, Mr. Chairman.
The Chairman. Thank you both very much. This was very
useful testimony. We appreciate it.
That will conclude our hearing.
[Whereupon, at 11:27 a.m., the hearing was adjourned.]
APPENDIX
Responses to Additional Questions
----------
Responses of Ethan Zindler to Questions From Senator Murkowski
CHINESE SOLAR TARIFFS
Question 1. Last week, the administration announced antidumping
tariffs for Chinese solar panel producers. There's been conflicting
media coverage about what this means--one article stated that ``China
unleashed a storm of protest across multiple outlets criticizing the
U.S. decision'' while another reported that ``Chinese firms insisted US
consumers would see only small price increases as a result.'' Have you
been monitoring this issue? What do you think it means for the domestic
solar market, and for our trade relations with China?
Answer. We have been monitoring this issue closely and reporting to
our clients about it. We believe that a good deal of the rhetoric on
all sides of this issue has been overblown and that the reality of the
situation may be a good deal less dramatic than has been portrayed in
the media to date.
Regarding the U.S. market for small-scale photovoltaic
installations, we believe the duties are unlikely to have significant
near-term impact on growth. A persistent global glut in photovoltaic
cells and panels will continue to depress equipment prices though they
could rise slightly from where they were before the tariffs in the US.
Nevertheless, there is more than enough photovoltaic cell manufacturing
capacity on line in other low-cost producing nations such as Taiwan to
make up for any shortfall that might be created by the new tariffs.
Cells and panels from these third party nations will not be subjected
to the new tariffs.
Another reason for our outlook is that modules today account for
only approximately a quarter of a typical installed watt of residential
photovoltaic capacity in the US. That means US installers and
developers could in many cases potentially cut their costs or trim
their margins to accommodate the cost of these new duties.
For similar reasons, the new tariffs are unlikely to do much to
help preserve jobs at US-based photovoltaic manufacturing plants. The
cost advantages enjoyed by the Chinese in production are enjoyed by
other nations who can now supply the US in their place. This largely
leaves US-based manufacturing plants where they were before the tariffs
were announced.
There clearly is a risk that the dispute with China can escalate
and result in retaliation from the Chinese government that is either
specific to the clean energy sector or involves other industries. Soon
after the duties were imposed in May, the Chinese government said it
was `strongly dissatisfied' with the move. On May 25, 2012, China
requested consultations with the United States before the World Trade
Organization. China claims that the tariffs are inconsistent with
several international trade conventions.
RESEARCH TRENDS
Question 2. In early May, it was reported that GM has decided to
cut about 1/4 of its R&D workforce a technical center in Michigan--
which surprised me, given the aggressive fuel economy standards the
company has pledged to meet. Have you followed this story? Is it just a
reshuffling on GM's part, or is it part of a larger trend in the
industry?
Answer. While we are not closely familiar with the exact motives
behind this move, our view from externally is that this most likely
represents a reshuffle of resources within GM and is not emblematic of
larger trends in the industry. Our understanding is that GM is cutting
190 employees, 100 in US and 90 in India as part of a restructure. Some
'R&D Division' staff will also be moving to other divisions--i.e. the
fuel-cell research team will now become part of GM's powertrain
division. GM has stated that a smaller workforce will focus on
technologies that have a good chance of being utilized on future
vehicles/trucks rather than simply patenting innovations. By
integrating some R&D into the relevant divisions, this does seem to
make sense. We don't think this is part of a larger trend as we have
not seen other automakers making similar moves.
It is worth noting that one key trend that we have seen emerge has
been more partnerships between original equipment makers particularly
surrounding electrification and fuel cell technologies. This has
involved partnerships for technology sharing and development in a way
that has not really been done with conventional powertrains. For
example, Toyota and BMW began an agreement last December to cooperate
on lithium ion battery cells and have just agreed to widen their
cooperation to fields including lightweight construction, fuel cells
and electric drive-trains. Essentially BMW is getting Toyota's strength
in hybrid and battery technology and fuel cells, and Toyota is getting
BMW's knowledge in diesel engines and sports cars. This splits the cost
of R&D and allows the companies to play to their strengths. Similarly,
BMW and PSA Peugeot Citroen have formed a joint venture to develop and
manufacture components for electric drive-trains.
______
Responses of Jesse D. Jenkins to Questions From Senator Murkowski
SPENDING LEVELS
Question 1. The ``Beyond Boom and Bust'' report suggests that
spending on clean tech will decline from $44 billion in 2009 to $11
billion in 2014. I think we all understand that 2009 was a stimulus
year, and not representative of the amount the federal government has
traditionally spent in this area. What do you think is an ideal level
of spending on energy innovation? What would a realistic target be in
2020?
Answer. We have joined the broad consensus in advocating clean tech
spending of at least $25 billion per year annually (see also PCAST,
AAU/APLU, American Energy Innovation Council, Nobelists, Information
Technology and Innovation Foundation). Federal spending on energy
should at least match spending on health (NIH budgets run about $30
billion annually). In addition to the amount of funding, we have
supported particular RD&D programs like ARPA-E and DOE's SunShot
initiative, which prioritize breakthroughs for practical energy goals
and improvement/commercialization of existing technology designs
through partnership with private industries. Federal investments should
be spread across RD&D and deployment, and these policies and programs
should make innovation a top priority.
RD&D VS DEPLOYMENT
Question 2. Many observers believe that the federal government can
have the greatest impact on energy R&D, but the vast majority of
current spending goes to deployment. Do you think we need to improve--
or perhaps reverse--that balance? In a time where our ability to spend
money is greatly constrained, what part of the technology development
chain should government focus on the most?
Answer. We have resisted the tendency to pin RD&D and deployment
investments against one another. Our view has been that we should
pursue strong and smart investments throughout the innovation pipeline,
and that the amount of money spent on today's deployment subsidies is
less important than the design of the policies. Today's deployment
incentives prioritize output, not innovation. Scaling and market
formation are important parts of maturation and cost declines, but
policy needs design criteria explicitly directed towards these goals.
This element hinges substantially upon an understanding of current
market and technology realities. Clean energy technologies should be
evaluated in terms of relative maturity and access to private
financing; where these are less developed, more public support for
innovation and deployment is called for. Where policies are not
observed to drive regular and continuous cost declines and innovations,
these policies in particular should be reevaluated or phased out.
TECHNOLOGIES VS OUTCOMES
Question 3. Something that bothers me is the federal government's
habit of picking one technology, and plowing money into it at the
expense of others. Then a new technology comes along, and we shift our
focus and our spending. Do you think it would be more useful for the
government to issue solicitations that focus on outcomes--with an
example being, alternative fuel vehicles that can travel 300 miles
without refueling--instead of focusing narrowly on individual
technologies?
Answer. Our view is that the federal government should invest in a
portfolio of technologies with the expectation that some may be more
successful than others. For instance, the 1980-2002 Section 29 tax
credit for unconventional gas benefitted shale gas, tight sands gas,
and coalbed methane; while all of these are now important contributors
to domestic natural gas resources, shale has far outstripped tight gas
and coalbed methane as a revolutionary new energy source.
The difficulty with a ``one size fits all'' approach to energy
goals is that it inevitably ends up favoring certain winners at the
expense of longer-term innovation and diversity of energy supply. An
example is RPS's, which have largely been met by the most mature wind
and biomass generation designs, without doing much in the way of
fostering development of other less mature power technologies.
We have seen dynamic policy support for energy technologies in the
past. In 1991 Mitchell Energy requested financial and technical
assistance for their horizontal drill in the Texas Barnett shale, and
the DOE and public-private Gas Research Institute provided that
assistance. This was an example of a public commercialization
investment, and an institution (the GRI) that teams taxpayer resources
with industry expertise in the development of innovative technologies.
A prize or solicitation policy can be an important tool in a broad
portfolio of federal clean tech innovation policies, but different
technologies have different pathways to commercial maturity and are
part of different markets with different needs. In some cases,
innovation policies will incentivize performance and efficiency
improvements; in other cases, financial or supply chain improvements
are called for.
CLEAN ENERGY TEST BEDS
Question 4. I'm intrigued by your Institute's proposal for a
``national clean energy test bed program,'' which would use public
lands as dedicated demonstration sites. To take that concept a step
further, I think about my home state of Alaska, and places like Hawaii,
where energy is often tremendously expensive. Do you think it makes
sense to focus on the areas where those costs are the highest--where
new technologies make the most sense and are most likely to succeed--
for demonstration and deployment?
Answer. This seems to us a desirable strategy. Solar power, for
instance, is already at ``grid parity'' in Hawaii, where further test
bed-style deployment might be appropriate. California and other states
have developed financing models that allow residences and commercial
businesses to enter into 20-year PPAs with power companies, which
allows them to install solar panels on the residence or commercial
rooftop with no upfront cost to the owner and typically a lower and
constant electricity rate than the grid can provide. Early adoption
policies should be targeted at these constituencies, where markets are
allowed to grow, private finance enters the game, and technologies have
the chance to achieve scale and maturity.
The test beds proposal was more for the high-impact demonstration
on public lands of new energy technologies, including large-scale
solar, wind, and (where applicable) hydro and tidal designs. If this
proposal could be integrated into a strategy where local constituents
can purchase power from test bed facilities, all the better.
INCENTIVIZING INNOVATION
Question 5. Your report recommends that federal policymakers
``reform energy deployment subsidies and policies to reward technology
improvement and cost declines.'' As we look at some of the subsidies
that are expiring this year, including the wind tax credit, can you
explain how you would begin that process? Assuming we come to a place
where there's general agreement about renewing the credit--should we
begin to phase it out, or limit eligibility to higher and higher
efficiency turbines, or something else?
Answer. There are several ways we think clean tech existing
deployment subsidies could be better designed that builds in a glide-
path to their predictable closure. In the case of the PTC, it is clear
that electricity generated by wind is close to competitive with
wholesale natural gas-generated electricity, but also that the
expiration of the PTC would do serious damage to the domestic
generation and manufacturing market. This is because the wind industry
has become accustomed to a particular type of project finance (tax
equity markets) for wind energy projects.
An extension of the PTC could build in a gradual phasedown of the
per-MWh subsidy, with the expectation that wind developers identify new
sources of financing over the period of the phasedown (e.g., four
years). Alternatively, the PTC could be re-oriented to provide a
relatively higher subsidy rate to installations in lower wind-speed
sites, and a lower subsidy rate in relatively higher wind resource
zones.
Other smart deployment policies we've looked at include subsidies
that scale down as deployment milestones are achieved (e.g., the
California Solar Initiative). This guarantees a) that industry has an
incentive to achieve cost declines and b) that the amount of public
spending on the deployment policy is fixed.
There are also reverse-auction mechanisms (RAMs), which coupled
with the appropriate enforcement protocols incent competition among
project developers and reward those that promise the lowest-cost power
generation with a utility contract or PPA.
Feed-in tariffs can fold in many of these criteria, and can also be
ratepayer-financed as opposed to taxpayer-financed, which adds a layer
of subsidiarity to the policy.
Wind turbines are a relatively mature power technology, and
provided there remains a market for projects in the United States,
turbine costs are projected to fall 10-30% in the next five years and
wind electricity costs are projected to fall 20-40% by 2020. The
phaseout of the credit will guarantee and accelerate these projections,
while weaning the industry off its conventional form of project
finance. For wind, a performance-based phaseout is less necessary than
a scale-or time-based phaseout, both of which provide predictability
and incentives for cost declines.
Federal energy policy should neither put all its eggs in one basket
or assume a ``one-size-fits-all approach,'' which will inherently favor
today's most mature technologies over tomorrow's potential successes.
As was the case with shale fracking commercialization, which relied on
gas industry engineers and federal technology experts, technological
development is a long path that often needs public investment at each
successive step of the innovation pipeline (federal investments in
shale gas included basic science, applied R&D, cost-sharing on
demonstration projects, tax policy support for market pull). A
successful energy policy will aim towards a broad portfolio of advanced
technologies with a smart portfolio of investment and innovation
policies.