Witnesses:
Panel I
Norman Augustine
Former Chairman and CEO, Lockheed Martin Corporation

 

Panel II
Ethan Zindler
Head of Policy Analysis, Bloomberg New Energy Finance
Jesse Jenkins
Director of Energy and Climate Policy, Breakthrough Institute

 

Committee Members Present:
Jeff Bingaman (D-NM), Chair
Lisa Murkowski (R-AK), Ranking Member
Al Franken (D-MN)
Mark Udall (D-CO)

 

On May 22, 2012, the Senate Energy and Natural Resources Committee held a hearing to address the economic and policy recommendations put forth by the American Energy Innovation Council (AEIC) report, Catalyzing Ingenuity, on the role of government in energy innovation. The report outlines the importance of developing the clean energy sector to guarantee the country’s national security, environmental well-being, and economic competitiveness. AEIC recommends a three-fold increase in annual clean energy investments using innovative funding policies to account for current budgetary realities. If congressional renewal of funds is not pursued, government appropriations for clean energy research and development (R&D) are predicted to decrease 75 percent by 2014 from a 2009 level of $44.3 billion. The decrease in funding is due to the decrease in available stimulus funds associated with the American Recovery and Reinvestment Act (P.L. 111-5) and the expiration of several tax credits. Recommendations on the extent of government influence in the clean energy marketplace and public/private investment policies were discussed with the objective of preventing concession of clean energy technologies to overseas competitors.

 

Chairman Jeff Bingaman (D-NM) opened the hearing stating the importance of public-private partnership in helping the U.S. “continue to lead in the clean energy sector.” He noted the high costs of the fossil fuel energy system and the economic “insecurity” associated with relying on overseas energy sources. Because of the continual improvement and growing cost-competitiveness of clean energy technologies, Bingaman explained, “the only losers in the clean energy technology race are those who fail to participate.” 

 

Ranking Member Lisa Murkowski (R-AK) followed with remarks on the importance of government investment into basic research. Murkowski stated that the government should support a coherent, long-term approach with innovation at the core of policy. Funding for clean energy research would need to be offset elsewhere; however, budget constraints should be seen as an “opportunity to be financially creative.” She questioned how long the federal government should be involved in the clean energy sector before phasing out subsidies and tax incentives, and concluded by highlighting the significance of establishing future marketplace independence for clean energy corporations.

 

In his testimony, Norman Augustine, former Chairman and CEO of the Lockheed Martin Corporation, mentioned two reports put forth by the AEIC. The first report, The Business Plan released in 2010, addresses the lack of funding from the government and private sector for energy R&D. Catalyzing Ingenuity, released in 2011, is the second report of interest and addresses the need for government involvement in energy R&D. Augustine continued by describing the reluctance of private sector investment into the “valleys of death.” There are two “valleys of death” associated with energy research. One is research that leads to promising ideas, but is not yet feasible in practice. This type of research requires long-term commitment and risky investments, in which the funder may not be a direct beneficiary if the technology is successful. The second “valley of death” is capital-intensive research that requires scaling-up a proven concept and promoting economic competitiveness. Augustine expressed the “valley of death” as a “threshold that is fairly unique to the energy field.” Investment into these types of research is necessary, Augustine said, because “innovation is the key to succeeding in this arena.”

 

Bingaman opened up the first question and answer period by reviewing the efforts of Germany, China, and other international governments in development, commercialization, and job creation associated with clean energy technology. He asked Augustine for his thoughts on the appropriate level of involvement for the U.S. government. Augustine replied that the government should “promote an even playing field” for the private sector, contribute to research that the private sector cannot or is unwilling to invest in, and discourage international governments from becoming active participants in the marketplace. Bingaman said the government should not pick winners or losers. Augustine replied, “Government can and has to make choices.” He suggested the government promote competition and make the reasons for their investment choices highly transparent.

 

Senator Murkowski followed up by asking how the government would pay for clean energy technology R&D. Augustine suggested implementing small taxes on high polluting fossil fuels. He stated that the U.S. sends $1 billion per day to foreign countries to pay for oil resources, whereas only $2.1 billion per year is allocated for clean energy R&D in the budget. Augustine suggested this practice shortchanges clean energy R&D. By adding to the clean energy R&D budget at the AEIC recommended level of $6 billion per year, the U.S. could reduce investment outflow to overseas energy industries.  

 

Senator Mark Udall (D-CO) asked Augustine for his opinion on the Advanced Research Projects Agency-Energy (ARPA-E) program and the contributing factors to the agency’s success within the Department of Energy (DOE). Augustine explained that the success of the ARPA-E model is due to the agency’s decisiveness, willingness to take risks, ability to adapt to failures, recruitment of high quality talent, and the financial support provided to the agency by the government. Senator Udall asked for suggestions to best help American households transition to clean energy technologies. Augustine suggested subsidizing the costs of clean energy or defraying start-up costs for energy efficient buildings until reimbursed with the money saved due to efficiency.

 

Senator Al Franken (D-MN) cited many former government supported technologies including the Global Positioning System (GPS), nuclear power, the internet and hydraulic fracturing, all of which created jobs and spurred the economy. He said it “wouldn’t have happened without the government” and asked if there is anything that makes renewable energy different. Augustine stated that the aforementioned technologies are similar to clean energy technologies because of the associated high-risk and high-investment costs. He continued by saying that contrary to the other technologies, “the energy market has failed.” This is because the clean energy market is highly regulated, requires high initial investment costs, and must compete with low fossil fuel prices. “Without government support we won’t be successful,” he concluded.

 

Ethan Zindler of Bloomberg New Energy Finance opened up the second panel discussion by reiterating the challenges associated with the “valley of death.” He attributed the success of research innovation to “economies of scale,” stating that once production scales up the unit price of a commodity will decrease. Zindler mentioned that the U.S. lags behind Germany and China in development and deployment of clean energy technology. Due to the extensive network of research institutions and the hub for industry investment, Zindler asserted that “no nation is in a better position than the U.S.” for clean energy R&D.   

 

In his testimony Jesse Jenkins of the Breakthrough Institute recommended a “smart energy policy reform.” Smart energy policy reform treats energy as a commodity by guiding energy innovation toward subsidy independence as well as supporting R&D and commercialization of clean energy technologies. “Policy is the key to jumpstart market demand for clean energy,” Jenkins claimed. He continued stating that the U.S. needs to “advance full cost competitiveness” between clean energiesand fossil fuels. Jenkins asserted that limited and direct policy would be the best way “to develop robust industries.”

 

The second question and answer period began with a discussion between Senator Bingaman and Zindler on the clean energy banks established in the United Kingdom and Australia. Zindler explained that the goal of these establishments is to create a “quasi-federal seed bank” to provide initial federal investment and allow transition into a self-sustaining enterprise. As clean energy technologies improve, the seed-bank entity obtains investment returns and can begin to re-invest in more clean energy pursuits independent of government influence. By breaking from the government, clean energy banks grant clean energy technology development more leeway and allow for financial bets in the private sector that may not be possible under highly regulated federal investment ventures.

 

Bingaman asked Jenkins about the ability of a reverse auction incentive policy to drive industry competition and innovation. Jenkins described a reverse auction incentive policy, stating that the government is essentially the first demanding customer for a technology. This drives down the cost of a commodity to the point where it can be more widely competitive within the private sector. Investors bid on the new technologies with the winning bids subject to strong penalties for non-compliance, which ensures the company provides the promised funding. Jenkins said this type of policy could “provide both market opportunities and continual cost reductions.”

 

Franken asked about the government’s historic role in hydraulic fracturing technologies. Jenkins responded that the government’s collaboration with the private sector and initial funding were critical to developing the technologies which have increased the technically recoverable resources of shale gas. Jenkins mentioned the Eastern Shale Gas Project funded by the Federal Energy Regulatory Committee (FERC) and mentioned the Gas Research Institute (GRI) funded by user surtaxes from gas transmission fees. He cited the development of directional drilling technologies by the Department of Energy, the former U.S. Bureau of Mines, and the National Energy Technology Lab made possible through government support. Finally, he referred to Sandia National Laboratories in New Mexico, where research has focused on understanding the geology of shale deposits and potential fracturing locations using micro-seismic imaging technology. The projects were initially expensive, Jenkins explained, but the Internal Revenue Code Section 29 production tax credit for unconventional gases in place from 1980 to 2002 made it profitable for the private sector to develop and innovate upon shale extraction technologies. Jenkins recommends the government “encourage the private sector to do what it does best” by reducing price barriers on clean energy technology. 

 

Franken discussed outsourcing of clean energy technologies to countries such as China, where the government insists on ensuring “intellectual property.” Franken asked for solutions on how the U.S. government can prevent violation of basic free trade principles to protect taxpayer funded technologies. Zindler said that the U.S.-China energy trade relationship is at an “interesting juncture.” Due to the scale up in production in China, the cost of solar and other technologies have been lowered globally. Jenkins emphasized the need for government involvement to drive down costs and support policies that promote innovation to enhance the United States’ international competitiveness.

 

Franken concluded the hearing by saying the government is “basically fighting for the future.” He said it is inevitable that a global market will develop and the government should support price-competitiveness of solar, wind, and other clean technologies. Speaking of government support of R&D, Franken asserted “if we don’t do this now, we won’t be a part of it.” Jenkins agreed with Franken’s statements, citing the importance of the current government partnership with shale gas development. He said this led to a revolution in the global energy markets and “this is a parable for what [the U.S.] can and should do.”

 

Witness testimonies and a webcast of the hearing can be foundon the Senate Committee on Energy and Natural Resources web site.