The US government must step in to finance clean energy research and development as the private markets continue to shy away from such investments, experts said.
Energy innovators are being thwarted by a lack of financing at key stages of development, finding themselves in the ‘valley of death’, said Norman Augustine, the retired chairman and CEO of Lockheed Martin based in Bethesda, Maryland and a member of the American Energy Innovation Council, a coalition of seven business leaders that recently put out a report about the government’s role in energy innovation.
The first valley of death exists in the period when an idea appears promising, but has not yet been shown to work in practice and is therefore deemed too risky by most investors, while the second gap occurs when the technology progresses to near commercial scale-demonstration.
“Energy is still capital intensive,” Augustine testified during a Senate hearing on Tuesday. “That tends to discourage new entrants into the marketplace.”
The vast majority of new capital entering the clean energy sector is directed to well-established, low-risk technologies, said Ethan Zindler, Bloomberg New Energy Finance’s head of policy analysis based in Washington, DC. Of the $263 billion invested globally in the sector last year, just $5.1 billion was venture capital for new companies and technologies and even VC firms are spending less money on early-stage companies, he said.
“The so-called valley of death at the technology stage for the earliest technology development has certainly not been bridged so far,” Zindler said. “Similarly, the riddle of the later-stage commercialisation valley of death also remains unsolved.”
“We shouldn’t diminish the private sector’s role in driving innovation in these sectors,” said Jesse Jenkins, director of energy and climate policy for political think-tank the Breakthrough Institute in Oakland, California. “But the risks, the capital requirements, the time horizons required to drive these new technologies forward are really prohibitive and this is where the private sector does fail.”
For a time, it appeared the solution might come from public stock markets as new biofuels, solar and electric vehicle companies raised billions via initial public offerings, Zindler said. “But public market fundraising has all but evaporated in recent quarters for clean energy,” he said.
Federal spending to slump
Annual US federal clean-tech spending peaked in 2009 at $44.3 billion and has already declined to $30.7 billion in 2011, according to a report by the Breakthrough Institute, the Brookings Institution Metropolitan Policy Program and the World Resources Institute. But the sharpest reductions have yet to come, with spending expected to decline by nearly 50% next year and by 75% from 2009 levels in 2014, because 70% of federal programmes supporting the industry will expire, according to the report.
“That policy support is now poised to turn from boom to bust,” Jenkins said.
The three organisations are advocating reform of energy policies and subsidies. Reverse auction incentives, for example, could be established at the federal level, particularly because Republicans have previously expressed support for the concept, Jenkins said. In California, utilities are using reverse auctions to procure solar panels at record low prices.
“It creates competitive markets,” he said. “It steadily drives down price because it’s constantly driving competition and firms have an incentive to reduce costs to expand their market share.”
Meanwhile, the concept of a ‘green bank’, such as the proposed US Clean Energy Deployment Administration (CEDA), is an “intriguing” idea to address the valley of death for demonstration, Zindler said. The $100 million-200 million required to build a next-generation biofuels plant or a new solar technology, is a “market disconnect that is screaming out for some kind of a solution”, he said.
“That kind of capital, banks generally won’t lend because they have the money, but they don’t want to take that much risk,” he said. “Venture capitalists are willing to take that much risk, but they don’t have that much money usually to make on a single bet. It falls into a black hole. An institution like [CEDA] that’s willing to provide large amounts of capital at a higher risk rate offers real potential.”
By. Gloria Gonzalez