Following the failure of solar company Solyndra, which received a large loan guarantee from the Department of Energy, media outlets have been trying to derive broad lessons about government investments in clean energy.
The Washington Times, for instance, predictably declared that Solyndra illustrates “the failure of government intervention in the economy.” For its part, the Washington Post decided that government has a “role in promoting clean-energy technology,” but it “needs to limit its intervention to an earlier stage in the process: basic scientific research.”
The Post's proposal would mark a major policy retraction, not only in terms of renewable energy investments (currently only a small portion of DOE's clean energy funding goes to basic research) but also with reference to the history of innovation in this country. As the Breakthrough Institute outlined last year, public-private partnerships have led to the development and deployment of major technological advancements throughout U.S. history. The report said “most of us remain unaware of the depth and breadth of American government support for technology and innovation.
Others have cautioned against the type of overreaction exhibited by the Post. Brookings Institution experts recall that the IT sector, “credited by many economists with causing the tremendous economic boom of the 1990s,” was “certainly not immune to closures and layoffs,” adding that “the U.S. risks losing out on tremendous gains if decides not to invest heavily in cleantech and relies on imports.”
The American Energy Innovation Council, a group of prominent CEOs including Microsoft's Bill Gates, warns in a new report:
Unfortunately, the country has yet to embark on a clean energy innovation program commensurate with the scale of the national priorities that are at stake. In fact, rather than improve the country's energy innovation program and invest in strategic national interests, the current political environment is creating strong pressure to pull back from such efforts.
The report notes that “total U.S. investment in energy innovation, by both the public and private sectors, pales in comparison to the levels of investment typical of other technology-dependent sectors such as pharmaceuticals, aerospace, computers, and electronics.” It also calls for the government to “help fill gaps and address missing links” in the energy innovation chain.
Clean energy experts have repeatedly identified one such gap: the lack of private-sector support for the wide-scale deployment of new technologies. For instance, Bloomberg New Energy Finance stated in a June 2010 report:
One of the biggest impediments to further progress is a persistent dearth of capital for potentially lower-cost breakthrough technologies that have advanced out of the laboratory but still require extensive and expensive field testing and trial installations before being deployed at scale.
This “Commercialization Valley of Death” reflects “fundamental, structural markets short comings” that “cannot be resolved by the private sector acting on its own,” according to the report, which drew upon interviews with over 60 “venture capitalists, project developers, attorneys, insurers, private equity players, commercial bankers, and others.” The report added:
Even in good times, when lending standards are most flexible, banks and other financial institutions are simply not structurally positioned to back large-scale projects deploying new technologies.
This is not a problem caused by a lack of interest by the various parties involved. In fact, no private funder has the mandate to deploy capital addressed at this particularly challenging point in the risk/reward spectrum. Venture capital firms have high technology risk tolerance but relatively limited capital, and they demand short-to-medium returns. Project finance funders and bank lenders typically have high levels of capital and can commit to longer-term investments, but they have little or no technology risk tolerance. No existing class of financing institutions is effectively positioned to address this particular risk/return category.
The events of the past few years confirm that it is only with the public sector's help that the Commercialisation Valley of Death can be addressed, both in the short and the long term. Only public institutions have “public benefits” obligations and the associated mandated risk-tolerance for such classes of investments, along with the capital available to make a difference at scale.
According to the report, “There is historical precedent for such government intervention. Governments helped foster industries for aeroderivative turbines, semi-conductor chips, and even nuclear reactors.”
Referencing “the myriad, thorny 'market failures' that impede the scale-up of clean energy solutions,” Mark Muro of the Brookings Institution said in an email that he disagrees with the Post's policy prescription and that “smart, market-wise and technology savvy government interventions will be necessary for some time if we want to participate in these economies.”
Muro's recent report, “Sizing Up The Clean Economy,” outlines a number of policy gaps and uncertainties that have depressed demand for clean economy products. It also flags the difficulty of accessing affordable capital, stating that “finance problems located at the later-stage demonstration and deployment stage of the growth pathway now cry out the most for response--and yet remain unresolved.” The report says China “leads the world in clean economy deployment” largely because it has been able to “channel vast sums of affordable capital into innovative large-scale deployment projects” :
What is China's secret in ensuring deployment finance? China has been inordinately successful in mobilizing large volumes of low-cost capital through its state-owned banks and other financial institutions. Clean energy projects have received preferential access to bank loans at interest rates far below what is available in other countries. Moreover, state-owned enterprises, especially the “Big Five” power companies, have been major investors across a broad range of energy conservation, pollution control, and renewable energy projects. For instance, China Guodian Corporation--one of the Big Five--recently announced a plan to invest $3 billion over the next five years in a variety of clean energy projects, including thermal, wind, natural gas, and biomass power stations in southwest China.
But that is only part of the story. Critical to China's success is its articulation of a comprehensive and long-term state clean energy build out policy that sends clear signals to investors. Through its 12th Five Year Plan, China has identified “new energy” as one among seven “strategic emerging industries” and will invest $760 billion over the next 10 years in this sector alone. A range of complementary policies will guide these investment decisions, including the Renewable Energy Law, national demand-side management regulations, and pilot carbon taxes, among others. China has swiftly made itself a clean energy power, in large part by ensuring the availability of copious, affordable capital at a time it has been short in the United States.
A Deutsche Bank report also stresses the importance of a clear policy framework, contrasting countries like Germany and China, which have built “transparency, longevity and certainty” into their policy strategies, with the United States, which exhibits “climate policy inertia” resulting in “a patchwork of inconsistent state policies.” The report states: “The net effect is that while Congress stumbles, the US stands to fall behind.”
Perhaps the Post was hasty in denouncing all government clean energy intervention outside of basic research. After all, the paper has in the past endorsed putting a price on carbon to “send signals throughout the economy that would help shift the nation to fuels and practices that wouldn't warm the planet.” Certainly, the fact that the price of fossil fuels does not account for their costs is a broader problem, but it's not the only market failure obstructing American clean energy innovation.