“The clean energy industry in the United States is indeed poised for crisis, as the bulk of the nation’s major federal clean energy support programs are now scheduled to expire. The lapse of the Section 1705 DOE Loan Guarantee Program, which provided the now-infamous Solyndra loan guarantee, is just the beginning. Over 2011-2014, the federal government will sunset the Production Tax Credit and the Section 1603 Treasury Grants supporting wind and other renewable electricity sources, the Volumetric Ethanol Excise Tax Credit, and the remaining clean energy investments under the Recovery Act. In total, nearly 70% of federal clean energy policies and programs will expire by 2014, according to a forthcoming report from the Breakthrough Institute.
Absent timely action by federal policymakers, the coming mass-expiration of federal clean energy policies and investments virtually guarantees that the boom-times of recent years will give way to an industry bust. In the perilous and challenging journey from basic research to full commercial deployment of nascent energy technologies, several pervasive market barriers require limited but direct public policies to accelerate advanced energy innovation and commercialization. Faced with the collapse of current federal clean energy policies, however imperfect they currently are, private investors will be left largely incapable of picking up the slack on their own.
The institutional, technological, and financial barriers facing advanced energy entrepreneurs are numerous. An early-stage finance gap known as the “Technological Valley of Death” immediately faces promising energy ventures emerging from breakthrough research and seeking risk-tolerant investors to prove their concept can succeed beyond the lab. This challenge has only grown in recent years, as venture capital investments begin to shift towards later-stage, lower-risk ventures. As this gap in private finance grows, the targeted public investments of the Advanced Research Projects Agency-Energy (ARPA-E) and the Small Business Innovation Research (SBIR) program become increasingly important. Expanded federal support for state and regional clean energy cluster development could further address this Technological Valley of Death.
Clean energy finance challenges do not fade after developing a successful technology pilot and strong business plan, however. A second “Commercialization Valley of Death” plagues technologies that have already demonstrated proof of concept but still require large capital infusions to demonstrate that their design and manufacturing processes can succeed as a full-scale power plant or manufacturing facility. The hundreds of millions of dollars or more in financing often required to overcome this Commercialization Valley of Death outstrips the funds of typical venture capitalists, yet the remaining technology and management risks associated with as-yet-unproven advanced energy technologies also exceeds the tolerance of conventional project finance or equity investors.
Absent targeted policy, the dearth of risk-tolerant private capital represented by these two Clean Energy Valleys of Death effectively prevents many potentially game-changing advanced energy technologies from ever making it into the marketplace. As a result, conventional fossil energy technologies are insulated from new competitors, impeding the development of clean, affordable, and reliable domestic energy sources.
Securing the future of American clean tech requires a stable and efficient policy platform that accelerates and rewards advanced energy innovation, commercialization, and improvement. In a report released last week by the Breakthrough Institute, we offer several recommendations for “Bridging the Clean Energy Valleys of Death” and unlocking American energy innovation and entrepreneurship. In particular, Congress should cease the political circus around the collapse of Solyndra and focus in on the key lessons to be learned from the experience to date of the DOE loan guarantee programs. We recommend replacing the troubled Loan Programs Office with a Clean Energy Deployment Administration (CEDA), a new flexible, independent financial entity targeted to help American energy entrepreneurs bridge the Commercialization Valley of Death (more here). Establishing a National Clean Energy Testbeds (N-CET) program could also put America’s vast public lands to work driving the development and demonstration of emerging energy technologies (more here).
Furthermore, to fully avert the coming clean energy crash, policymakers must re-think and re-design America’s current (and expiring) deployment policies to both demand and reward innovation. Markets for early-stage advanced energy technologies are fundamentally created and shaped by public policies, from tax credits to deployment mandates and pervasive regulations. Special care must be taken to design and optimize these policy-supported markets to provide the right incentives for continual improvement in the price and performance of advanced energy technologies, putting these clean energy sources on a rapid path to subsidy independence. Such a strategy would leverage limited taxpayer dollars to the highest degree possible and unlock the private activity and investment required to drive the widespread deployment of innovative and cost-competitive clean energy technologies.
As America’s current, haphazard collection of clean energy policies begin to collapse in the years ahead, policymakers and industry alike will face a clear and urgent challenge: remaking U.S. clean energy policy to effectively unlock critical private capital, demand and reward price- and performance-improving innovations, and provide a predictable and efficient framework for America’s clean energy entrepreneurs and investors.
If Americans want their entrepreneurs, manufacturers, researchers, contractors, and investors to share in the largest and most important growth sector of the 21st century global economy, then we can waste no more time before optimizing and executing smart, effective public policy support for advanced energy technologies.
This post was coauthored by also TEC author Alex Trembath. This post was originally published in the National Journal.