Wednesday, December 9, 2009

Feel-Good Government Grants Leading Cleantech Astray

Grants for smart grid projects.  Grants for battery manufacturing lines.  Loan guarantees for renewable energy project development.  Grants to private companies for energy efficiency projects.  And with each it seems that the cleantech world cheers.  Yet for all our desire to create sustainability in our consumption and use of energy, this model of getting us there is not only unsustainable but is of questionable value. 

I want to  emphasize that I am speaking about government grants to the private sector where the government is not the end customer and where the grants are for implementation of projects that businesses may (or may not) have done otherwise as opposed to grants to conduct basic R&D. Projects like smart grid implementations, battery manufacturing linesbiofuels plants or  industrial energy efficiency implementations that have represented the bulk of cleantech grants to the private sector this year.  Instead of focusing on cultivating businesses that can sustain themselves via customers, government handouts have focused company time and money on lobbyists and grant writers.  And if you haven’t noticed, the handouts are huge, with many in the tens of millions and even hundreds of millions of dollars for a single award.  Some award winners, like ECOtality, are honest enough to admit that their efforts to secure government funding directly attributed to a drop in their revenues. For every company that wins a cleantech grant, there are as many as 10 times the companies that applied and lost.  All those losers spent significant time and money chasing those funds and, in the process, neglecting their real business and real customers.   Lately the discussion in board rooms often has concentrated more on how to win the next government grant and which lobbyist to hire than on how to build a successful and sustainable business. 

At the most basic level, the goal of current U.S. energy policy should be to speed our transition to sustainable domestic energy consumption – a transition that would occur naturally as carbon-based energy sources declined but likely too slowly to avoid the environmental, economic and national security implications.   Presumably, the concept behind hundreds of billions of dollars in grants to the private sector is to enable and encourage acceleration of this change.  As such, it also must presume that government employees can select winners better than the private sector, do so without political influence, and that the projects being funded are absolutely ones that would not have occurred without government funding.  Finally, those same government employees; 1) must be able to select projects that will help accomplish our goal and; 2) must either be able to continue to fund those projects or have effectively analyzed that a one-time grant will be sufficient to incentivize the private sector to take over from there. My Democratic friends may scream at me, but those are an awful lot of largely unrealistic presumptions that defy the history of government grant programs to the private sector. (Synfuels and the National Institute of Standards and Technology’s Advanced Technology Program are just two examples.)  And to add insult to injury, large amounts of the recent cleantech grants will help the competitiveness of foreign corporations as it was awarded to U.S. subsidiaries or joint ventures of those companies (for example, hundreds of millions in battery grants involving LG Chem, Kokam, Itochu Corporation, BASF and Saft).  While the government has long had a role in advancing basic R&D, the concept that the U.S. will jump-start, let alone build, a sustainable energy economy through  government handouts for implementation of manufacturing plants, production facilities or enhanced utility grids is, quite simply, ludicrous.

Government grants to the private sector are great PR and make the cleantech public feel good.  But they don’t provide quick economic stimulus to the economy (see Cleantech Stimulus Not Very Stimulating) and will not provide meaningful acceleration on the path to sustainable domestic energy consumption.  In the end, the only way to have sustainable change is to have a change in the fundamental economics of energy – both in the cost of non-sustainable sources and in the regulatory infrastructure through which carbon based energy companies and utilities earn money. We all saw how quickly things began to change when oil hit $100 a barrel and how quickly they reverted when prices went back down.  Reform the regulatory environment so that utilities can profit from conserving energy instead of from building power plants and watch how things change.   In my home state of Colorado, wind turbine manufacturer Vestas just announced it is furloughing all 500 workers at the plant it built not long ago.  Why?  Vestas notes the challenge of natural gas prices being so low that wind turbines can’t compete.  I guess we need to borrow more money from the Chinese and other foreign governments to further increase our grants to the wind turbine market…or, we can focus on a sustainable solution. 

Nothing can provoke an economic transformation more quickly than the free market appropriately motivated by profit. That, in fact, is largely how we got to where we are today with our reliance on carbon-based energy sources.  And the most sweeping and powerful thing the government can do is to influence the profit motive for the private sector by changing energy economics.  But that is a topic for another blog post.  (And now my Republican friends can scream). 


ECL said...

You are so right. There is plenty of private sector investment money out there. What prevents the VCs from jumping is risk and uncertainty. As a high tech executive I don't need large govt grants; I need them to set long term policy that provides a stable future for growth of high tech markets.


1. Stop these short term renewals of ITC's for renewable energy. Having an ITC that expires in 1, 2, or 3 years and then is not renewed until the last minute halts VC investment in its tracks.

2. Provide a level playing field from a societal value standpoint for energy policy incentives. Historically the govt has played favorites based on lobbying. The current darlings are wind and clean coal with solar not far behind, and lithium batteries on the come. But again, they are making the mistake of picking winners. Just offer the incentives to any renewable energy production and/or storage technology with a low environmental impact. This would give a level playing field to ignored technologies like natural gas, hydropower including non-dam hydrokinetics, and storage technologies other than lithium batteries. What possible rationale could there be for wind getting a higher production tax credit than other renewable sources at 2 cents/kWhr? And make sure the policies address the intermittency of some technologies. The wider our portfolio of attractive solutions the better situated we will be for the future.

3. Implement the price of carbon legislation immediately, but also put a floor on the price of oil. There should be a long term floor of at least $100/barrel on oil. Without that, it prevents long term investments in new technologies because each time those investments get going OPEC drops the price of oil and the new businesses collapse. Energy from shale in Canada is a perfect example; that business has started and stopped several times.

dhorne said...

The instability around oil pricing is very frustrating for many clean-tech startups and certainly affects our ability to build a defensible business model. This of course becomes critical for successfully attracting venture investment.
But apart from this issue is the difficulty of obtaining grants for less "sexy" projects which would result in significant fuel efficiency improvement as well as better air quality. What I am proposing is: rather than building more efficient cars or better/ greener alternative fuel which takes many years to not only come to market but to be generally mainstream, why not focus on decreasing empty car seats?
OK, don't roll your eyes :-) Is she talking about trying to get us all to carpool? Hasn't that been tried and failed except for amongst a few work commuters?
Yes and no - my startup looks at the issue differently and aims to resolve many of the barriers to ridesharing by offering social opportunities along with the green element.
My aim here is not to plug my company, don't worry. I just want to vent how frustrating it has been to find government funding for a very worthwhile solution. In order to find government funding support, first you have to find a grant proposal to match with and if you have an innovative approach to an old idea, there are no grant proposals to even apply for. Believe me, I have consulted with a lobbyist who has excellent contacts at the EPA, Dept. of Energy, etc. for a year now and still no grant match. I contacted the CA Energy Commision and was told that they were only funding alternative fuels, not transportation efficiency projects.
We started our company when the price of gas was $5/gal and the prediction was that it would go to $10/gal shortly. Then the economy collapsed while we were developing our technology using our own funds and sweat equity. Now we have the application but our customer base is not there.
The interesting thing is that when incentives are provided, ridesharing increases 35%. What a huge improvement in energy efficiency! Unfortunately we can't convince the government to fund this any more than we can get angel/vc funding. Any ideas?

mmiller said...

Is your argument that we should pity companies that spent a lot of time chasing these grants? I'll give cleantech executives the benefit of the doubt on this one: they probably took this risk because their normal revenue streams were frozen, if they existed in the first place. If, on the other hand, they chose to "neglect their real business and real customers" in pursuit of these grants, then they shouldn't be running the companies anyway. (I wonder how many VC portfolio companies this applies to?)

Sure, USFG grants aren't the silver bullet, but any serious plan for disruptive cleantech advancement includes a range of demand-pull and supply-push activities by the government. I agree with getting the price signals right, but focusing only on making carbon-intensive energy more expensive ignores the real challenges of bringing disruptive clean technologies to market.

Anyway, the real-world prospects of your alternative, that the USFG should focus _all_ of its energy on "changing fundamental energy economics," are tenuous at best. I'm looking forward to the next post, when the pathway for this alternative is described in more detail.

Anonymous said...

I'm at a renewable energy company that is currently chasing one of these grants. Fewer than 5% of our people have anything to do with this activity; it's mostly the C-class execs working on it (and if they weren't doing that, they'd be getting in our way).

And yet it's critically important, because we're in a chicken-and-egg situation. We make solar products at a particular $/W, based largely on the MW rating of our factory. At today's $/W, we're not terribly competitive, certainly not against fossil fuels. So our sales are weak while oil is at $75. What would it take to drive down $/W? Economies of scale, for one -- a bigger factory would get us to a $/W that's attractive to a buyer. Sales go up, and now we're in a better position to fund our own next factory.

So that's the situation: Can't get the sales because our product costs are too high. Can't drive down our product costs because we don't have the revenue to build a bigger factory. A gov't grant, in all its winner-picking inefficiency, would get this American manufacturer expanding -- until the politicians implement "market-based" policies (e.g. taxes, tariffs, etc.) that actually drive different behavior.

David Gold said...

In response to the anonymous post from the solar manufacturer. I appreciate you actually helping reinforce the point of my blog post even though you don't seem to realize it. As you state, the low price of the alternative is what makes it hard for you to sell. The only way that changes if it the economics of energy change and that is where the government should focus it's efforts and will the focus of a future blog post. You wouldn't need government handouts and you would have your economies of scale. The handout, if you win it, does not solve your problem it just slightly delays the time until you're back where you started.

Donald Missey said...

Hi David,

I frequently work on mundane calculations related to annual de-rating of gas and wind turbines and other rotating equipment, and the net cost to achieve maximum service life. When I go back and look at the financial models used to justify wind projects in particular, and a number of renewable energy projects in general, they have very unrealistic figures related to both calcs. When these projects need service and/or replacement, they will probably not stand up well to the cost of other energy sources; without new rounds of subsidies, these projects will be dismantled, much like they were in previous rounds of sustainable energy development. Sustainble must mean sustainable across volatile fuel prices, volatile economies and changes in political leadership. We need renewable energy and cleantech, but it needs to be accompanied with the dry, dull economic analysis that makes these projects work in the long haul.

Economics may be dismal, but it is also crucial to advancing our collective success.

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