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Launching an Energy Tech Revolution

01/22/09

ABRAHAM ENERGY REPORT
By Spencer Abraham & Hans Kobler

The Big Three automakers teeter on the edge of bankruptcy, the economy continues to slide, jobs are lost and credit remains elusive. In the midst of all the bad news, one economic number is giving people hope—the price of oil, which is around $100 cheaper than just a few months ago. This bright spot is, however, a mirage that could create a false sense of ease for consumers. Bottom line: The energy crisis is not going away. It will come roaring back once the world economy starts growing again.

How we meet this challenge is clearly a top national priority.  While many energy issues, such as the fate of offshore drilling and climate policy, will be resolved in the political arena, one subject on which all sides seem in agreement and President Obama has championed, is the need to allocate significant new government R&D resources toward developing advanced energy technologies.  However, with today’s weak economy and skyrocketing federal deficits, the question becomes, “How can we ignite an energy tech revolution in these tight fiscal times?” We have some suggestions.

First, we must make sure federal dollars are deployed for what they were intended, rather than hijacked and earmarked for pet projects.  In 2003, President Bush launched his “hydrogen initiative" aimed at developing a hydrogen economy. New funds were requested for the Department of Energy to implement the “initiative,” but it became difficult to execute because various members of Congress wanted some of the funds to go to researchers in their own constituencies, rather than to the top researchers in the field.  Similarly, Congress undertook to prematurely allocate some of the money to later-stage research projects before earlier-stage research had been carried out--thus hindering the potential of both types of efforts. 

Second, we cannot dilute our research by disbursing funds among too many projects, nor can we abandon projects or significantly reduce their funding before they are adequately developed. This scattershot approach has afflicted federal efforts to develop advanced, automotive-fueling systems. Back in 2000-2001, advocates were calling for more research on hybrid-engines. By 2002, the spotlight had shifted to clean-diesel research. Then, as clean diesel gained momentum, the call for hydrogen fuel cell research rose. Next, just as the hydrogen initiative was being funded, the demand for advanced biofuel research emerged. More recently, as the biofuel/cellulosic ethanol efforts got moving, people started insisting that more attention be directed toward plug-in hybrids.
 
Instead of using a rifle-shot system, we have taken a “flavor of the month” approach to automotive technology research. The same has occurred in other areas. As a result, various energy technology programs have not received the type of sustained support required for maximum success. This has both hindered the government’s research and confused the marketplace; for example, automotive companies have been forced to repeatedly shift research resources from one “new” fuel alternative to another.  The result has been less than optimal.

In addition to maximizing the impact of scarce federal dollars, we should attempt to motivate private money to step up. If we leverage private money correctly, industry will jump on the opportunity and will co-invest significantly.

To do this right, we must first focus government dollars on technologies that can stand on their own economically—ones that do not require continued subsidies to succeed. To do that, the Government should enlist partners that recognize and contribute to the understanding of a very complex marketplace—the needs of the consumer, the existing infrastructure, and the regulatory environment—and put them side-by-side with the capabilities of tomorrow’s technologies.

For that private/public partnership we recommend two vehicles: an advanced federal energy research agency and the creation of strategic innovation funds.

Innovations sparked by Defense Advanced Research Projects Agency (DARPA) throughout its 50 years of existence have been critical to the nation’s success. Recently, DARPA’s director, Dr. Anthony Tether, estimated that one-third of the developments in information technology and more than 75 percent in microelectronics started with DARPA. These two areas have driven enormous U.S. economic growth. DARPA’s remarkable success has been attributed to funding ideas with a high degree of technical risk but a potentially revolutionary payoff. This same spirit and its mechanism of innovation can also be applied to the development of energy technology that will likely foster a similar result.

The 110th Congress agreed with this assertion, in part, authorizing the creation of such an agency within the “America Competes Act.” The Advanced Research Projects Agency-Energy or ARPA-E is modeled after DARPA. Unfortunately, there were no appropriations made for the new agency, so it exists only on paper.  It’s now time to fund it properly.

Strategic investment funds should also be considered. Much innovation has been sparked by “angel” investors and venture capital firms, which have enabled brilliant engineers to pursue new approaches and bold ideas with often game-changing outcomes. Many large corporations, such as Intel, Microsoft and General Electric, have leveraged such capital to pursue innovation, aligning their investments with their strategic goals. They sparked advances where they needed them by creating technologies important to their strategic mission, and they made big bucks along the way. Their operating units sit together with venture capitalists and entrepreneurs to determine what makes sense for their businesses. And, they get a multiplier effect by leveraging their own dollars with third-party investors, reducing the cash they have to spend. Considering today’s economy, that’s essential.

 We advocate a similar private/public partnership for strategic, energy investment. Simply put, the government sets up funds with professional managers who work to stimulate technologies that will reduce our energy dependence. Just as GE Power Systems works with GE Equity, key government agencies and laboratories such as Sandia and the National Renewable Energy Lab should work with industry partners to help fund investment decisions. As a result, major industry players with relevant expertise such as utilities, power generators, and consumer product companies will participate as co-investors and will provide their relevant market expertise and money. The focus on profit will not only ensure that the investments have a commercial future, but will also provide a return on the dollars spent, thereby turning an expense into an investment with a solid revenue  stream going forward into the future.

Spencer Abraham and Hans Kobler

Spencer Abraham is the Chairman and CEO of The Abraham Group. He represented Michigan in the United States Senate from 1995 to 2001, and served as US Secretary of Energy from 2001—2005.

Hans Kobler is the Chairman and CEO of ICx Technologies. He headed the GE Power Technology Investment Group and was also Chief Quality Officer leading the six sigma effort at GE Equity.