Big in Big Things?
In my view, we cannot do this a moment too soon. Our economy depends on our technological leadership more than we realize. Imagine, say energy experts, if Microsoft were a Japanese company, Apple a British company, Google a Chinese company, IBM a German company, Intel a Russian company, and Oracle a French company. What would our standard of living be if we were not the leaders in IT? Take away all those exports, all those good jobs, and all the taxes they generate, and you are looking at a much less prosperous America. Well, that is exactly where we are heading on ET. Remember Jeffrey Immelt’s line: If you want to be big, you have to be big in big things, and the way we are heading we are not going to be big in the next big thing: ET.
Consider this paragraph from the 2009 report by President Obama’s Economic Recovery Advisory Board, based on a study by the Lazard Frères investment bank of the top ten companies in the world, as measured by market capitalization, in the wind, solar, and battery industries: “If the U.S. fails to adopt an economy-wide carbon abatement program, we will continue to cede leadership in energy technology to other nations. The U.S. is now home to only two of the ten largest solar photovoltaic producers in the world, two of the top ten wind turbine producers and one of the top ten advanced battery manufacturers. That is, only one-sixth of the top renewable energy manufacturers are based in the United States.”
These numbers should worry every American. To lose our advantage in technologies that were pioneered in the U.S. may cost us dearly in terms of our standard of living if the trend is not reversed—and soon.
Solar PV Suppliers: Top 10 by Market Capitalization
| Company Name |
Market Cap |
Domicile |
| Kyocera |
$12,224 |
Japan |
| First Solar |
10,834 |
United States |
|
Sharp |
8,853 |
Japan |
|
Sanyo |
2,738 |
Japan |
|
Q-Cells |
2,215 |
Germany |
|
SunPower |
2,045 |
United States |
|
Suntech |
1,821 |
China |
|
Yingli Green Energy |
764 |
China |
|
Motech |
714 |
Taiwan |
|
JA Solar |
566 |
China |
Wind Turbine Manufacturers: Top 10 by Market Capitalization
|
Company Name |
Market Cap |
Domicile |
|
GE |
$106,853 |
United States |
|
Siemens |
49,568 |
Germany |
|
Mitsubishi |
22,024 |
Japan |
|
Vestas |
8,131 |
Denmark |
|
Acciona |
6,385 |
Spain |
|
Goldwind |
5,875 |
China |
|
Gamesa |
3,088 |
Spain |
|
Suzlon |
1,253 |
India |
|
Nordex |
862 |
Germany |
|
Clipper |
127 |
United Kingdom |
Advanced Battery Manufacturers: Top 10 by Market Capitalization
|
Company Name |
Market Cap |
Domicile |
|
Panasonic |
$22,372 |
Japan |
|
Mitsubishi |
22,024 |
Japan |
|
Sumitomo |
10,650 |
Japan |
|
Hitachi |
8,936 |
Japan |
|
Toshiba |
8,306 |
Japan |
|
Johnson Controls |
7,131 |
United States |
|
NGK |
4,970 |
Japan |
|
BYD |
3,777 |
China |
|
Sanyo |
2,738 |
Japan |
|
GS Yuasa |
1,796 |
Japan |
Innovations in solar, wind, nuclear, and other clean power systems and in electric vehicles, the report added,
will, in the view of many on our board, drive the future global economy. We can either invest in policies to build U.S. leadership in these new industries and jobs today, or we can continue with business as usual and buy windmills from Europe, batteries from Japan and solar panels from Asia. The new green economy could be transformational for our country. Compare it to the internet. Fifteen years ago there was no web browser. There was no internet at your fingertips, no ecommerce, no search engines. Now, the internet has transformed our lives: how we learn and inform, how we entertain and communicate, how we buy and sell goods. Today, the internet economy is estimated at $1 trillion with 1.5 billion internet users worldwide—and growing. The new green economy has greater potential. Energy is a $6 trillion market with 4 billion users of electricity—and usage doubling in 25 years. It is perhaps the largest economic opportunity of the 21st century. With the right policies driving innovation and investment, America can retake the lead in energy technology and create millions of new green jobs and industries, preserve millions of indirect jobs and repower our economy.
America needs to be a leading player, if not the leading player, in the emerging wind, solar, and battery industries, not to mention nuclear, which are sure to be major sources of jobs and revenues in the first half of this century. But we are not and we will not be unless we change course now. As the report concluded:
The U.S. suffers from our dependence on foreign oil and long ago lost worldwide leadership in automobiles; we cannot afford to trade an addiction to Middle Eastern oil for an addiction to Asian batteries [italics mine]. Only with the right policies driving innovation and investment can America retake the lead in energy technology and create millions of new green jobs and industries, preserve millions of indirect jobs and repower our economy. This is a defining moment in American history and in our lives as individuals and as political and business leaders.
And it is not clear that our politicians or political system is up to it. Oh, if only we could be China for a day …
Where in the world did that come from? China for a day? How could I, a lifelong believer in liberal democracy, ever even daydream about the benefits of America being China for a day?
Where it came from was enormous frustration born of traveling from one end of this country to the other over the past four years, looking at almost every conceivable form of energy generation, and meeting all sorts of wacky, wild, and wonderful energy innovators, entrepreneurs, and venture capitalists—from garage mechanics to directors of our premier research institutes—and coming away feeling that we are really primed for a green takeoff, that we have all the necessary ingredients for a real Code Green revolution, but our government has not shaped the market to capitalize on what is naturally bubbling up from below.
Let me offer an example. One day in December 2007, I visited the MIT campus to participate in a seminar on its open-university program. Before I arrived, two different MIT student energy clubs invited me to peel away from the open-university program and come hear what they were doing. One simply blew me away. It was called the Vehicle Design Summit group—a global, open-source, collaborative effort managed by MIT students that had brought together twenty-five college teams around the world, including groups from India and China, to design and build a plug-in electric hybrid. Each team was contributing a different set of parts or designs. And I thought writing for my college newspaper was cool—these kids were building a hyperefficient car! Their aim was to demonstrate that they could build a car with a 95 percent reduction in embodied energy, materials, and toxicity from cradle to grave and provide the energy equivalency of 200 miles per gallon. That’s right: 200 miles per gallon. It’s the Linux of cars! Their other goal, they explained on their Web site—Vds.mit.edu—was “to identify the key characteristics of events like the race to the moon and then transpose this energy, passion, focus, and urgency” into catalyzing a global team to build a clean car. Their tagline? “We are the people we have been waiting for.”
Again, I came away from this encounter just shaking my head: All the human energy and talent is here, ready to launch. Yes, it can go a long way on its own, as the MIT students demonstrate. But it will never go to the scale we need as long as our national energy policy remains so ad hoc, uncoordinated, inconsistent, and unsustained—so that the market never fully exploits our natural advantages. We will always be less than the sum of our parts. Immelt compares us to a team that has made it all the way to the Super Bowl but is still sitting in the locker room and won’t, or can’t, take the field.
A different image comes to my mind when I visit places like MIT. It is the image of a space shuttle taking off. That’s what America looks like to me. We still have all this tremendous thrust coming from below, from a society that is still enormously idealistic, experimental, and full of energy. But the booster rocket of our space shuttle (the political system we have now) is leaking fuel, and in the cockpit (Washington, D.C.) the pilots are fighting over the flight plan. As a result, we cannot generate the escape velocity—the direction and focus we need to reach the next frontier, fully seize the opportunities there, and fully meet the challenges of the Energy-Climate Era.
What is our problem? If the right things to do—most notably raising the gasoline tax and putting a fixed, durable, long-term price on carbon—are so obvious to the people who know the most about the energy business, why can’t we put them in place?
First and foremost are the legacy industries from the Dirty Fuels System, which want to protect their turf and preserve their dominance in the American energy infrastructure. In the best cases, these are just executives, employees, and supportive politicians trying to protect jobs and communities, and give the country the cheapest power for the most growth. In the worst cases, they are greedy companies looking to protect their mother lodes, even though they know their products are as harmful to society and the planet as cigarette smoking. Either way, they have helped to rig the game when it comes to energy policy-making. In too many cases, they have distorted facts, placed misleading ads in many newspapers and television markets, and bought out politicians—all this in order to preserve the Dirty Fuels System. The money from this “energy-industrial complex”—auto companies, coal companies, certain unenlightened utilities, and oil and gas companies—has obscured our ability to tell the ecological truth about the situation we are in and has undermined our ability to engineer the smart policies (at scale) that are needed for us to put an Energy Internet in place.
Their cumulative impact on decision-making is this: Rather than having a national energy strategy, we have instead what the energy expert Gal Luft called “the sum of all lobbies.” Whichever lobby generates the most campaign cash wins. To put it another way, “We have energy politics, not energy policy,” said Nate Lewis of Caltech. And energy politics is like gender politics or race politics or regional politics. It means that the politics of the issues (that is, who will benefit specifically) drive the policy priorities (what is really best for the country as a whole), not the other way around. It is very difficult to produce a coherent and viable long-term strategy in such an environment.
At election time, said Lewis, he likes to ask people this question: “Name five political swing states. People often say, ‘Florida, Ohio, Pennsylvania, Tennessee, and West Virginia.’ Then I say, ‘Step back and eliminate Florida and say those states again: Ohio, Pennsylvania, Tennessee, West Virginia—what do they all have in common? Coal, coal, coal, coal.’ You simply cannot say anything bad about coal and become president of the United States. Then add Iowa and the Midwest and biofuels and pretty soon you have no discussion” about renewable energy at all. What you have instead is a lot of blather about “clean coal” and a lot of money pouring into corn ethanol programs, out of all proportion to what makes national sense.
In the heat of the 2008 presidential primary campaign, The Washington Post (January 18, 2008) reported that “a group backed by the coal industry and its utility allies is waging a $35 million campaign in primary and caucus states to rally public support for coal-fired electricity and to fuel opposition to legislation that Congress is crafting to slow climate change. The group, called Americans for Balanced Energy Choices, has spent $1.3 million on billboard, newspaper, television and radio ads in Iowa, Nevada and South Carolina”—all key primary states. One of the ads, the article noted, depicted “a power cord being plugged into a lump of coal, which it calls ‘an American resource that will help us with vital energy security’ and ‘the fuel that powers our way of life.’ ”
Coal has powered America’s growth for almost two centuries. We are going to need to burn coal for the next few decades, at least, absent a surprise breakthrough. We need to do all we can to make that process cleaner by installing supercritical and ultrasupercritical technologies that result in a much more efficient burning process and lower emissions than in traditional coal-fired power generation. But let’s not confuse what is necessary with what is preferable, and let’s not call a pig a rabbit. Coal is never going to be a clean fuel in CO2 terms. It is preferable that we transition away from coal as fully as possible, as alternatives become cost-effective.
Jeff Biggers, author of The United States of Appalachia, wrote an essay in The Washington Post (March 2, 2008) that seemed to be a direct refutation of the plug-into-coal advertisement:
Clean coal: Never was there an oxymoron more insidious, or more dangerous to our public health. Invoked as often by the Democratic Presidential candidates as by the Republicans … this slogan has blindsided any meaningful progress toward a sustainable energy policy … Here’s the hog-killing reality … No matter how “cap ’n trade” schemes pan out in the distant future for coal-fired plants, strip mining and underground coal mining remain the dirtiest and most destructive ways of making energy. Coal ain’t clean. Coal is deadly.
On November 7, 2006, California put Proposition 87 on the ballot, an initiative to establish a $4 billion Clean Alternative Energy Program to reduce California’s oil and gasoline consumption by 25 percent through incentives for alternative energy, education, and training. It was to be funded by a small per-barrel fee on oil that was drilled within California—a standard practice in other states, which oil companies in California, through their collective clout, had managed to evade up until that time. This Proposition 87 would have funded rebates encouraging consumers to buy cleaner, cheaper operating vehicles that use hybrid technology and would have increased deployment of solar, wind, and other renewable energy technologies. The initiative lost after oil companies got together and launched an advertising campaign that deliberately misled California voters into thinking that if they voted for this bill, their gasoline prices at their local pumps would rise drastically— an absurd claim, considering that the gasoline prices in any state have nothing to do with the cost of extracting oil there, but are set by global or national supply and demand balances and refining capacity. That’s why the price of gasoline at the pump in California has gone up steadily, even though Proposition 87 was killed: because global prices have gone up. In total, the oil companies and their allies reportedly spent close to $100 million on ads and lobbying to kill Proposition 87. That is almost as much as Bill Clinton spent to become president in 1992.
The production tax incentives designed to stimulate innovation and long-term investment in solar, wind, wave, geothermal, and biomass energy, which were aimed at enabling these industries to grow competitive with dirty fuels, were not going to be renewed by Congress either after they were scheduled to expire at the end of 2008. It took the Great Recession of 2008, and the $700 billion stimulus bill that followed, to finally get the House and the Senate to renew the federal tax credits for renewable technologies—including wind, geothermal, and solar power both from large-scale solar plants and rooftop solar photovoltaic and solar hot water systems—in late 2008. These tax incentives were the most obvious thing in the world to put in place. Everyone knew how much the wind and solar industries depended on them. Yet throughout 2007 the House and Senate dithered over extending them—due in part to lobbying by the oil and gas industry. The solar tax credit allows homeowners and businesses to write off 30 percent of the cost of installing a solar power system on a residence or commercial building. The production tax credit for wind is 1.8 cents for every kilowatt-hour generated. These credits are critical because they ensure that if oil prices are low, investments in wind and solar power will still be profitable. That’s how you launch a new energy technology and help it go to scale so it can eventually compete without subsidies. It is crazy that it took a near financial meltdown to spur friendly legislators to insert them into the stimulus. Specifically, on October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008, which extended the 30 percent federal tax credit for solar energy systems through 2016 and extended the production tax credit for wind projects, as well as geothermal, biomass, hydropower, landfill gas, and trash combustion facilities until 2010. Until the Great Recession forced Congress’s hand, our representatives counted pennies when it came to building new clean industries, as if the money for wind, solar, and biomass were coming out of their own children’s piggy banks, and yet threw money out the window like a house full of drunken sailors when it came to the old, established, well-capitalized oil, coal, and gas industries—let alone the agriculture lobby.
In the past fifty years, tens of billions of dollars in annual subsidies (which never expire, and so are not subject to congressional review) have been extended to the fossil fuel and nuclear industries. A scathing article in the National Review, entitled “Oil Subsidies in the Dock” (January 17, 2007), listed a few of the tax breaks given just to the oil and gas industry. They include preferential tax treatment for afforded intangible domes tic drilling expenses (primarily labor and material costs associated with finding and exploiting oil and gas fields), the accelerated depletion allowance provided to small oil producers, preferential expensing for equipment used to refine liquid fuels, accelerated depreciation for natural-gas distribution pipelines, accelerated depreciation for expenditures on dry holes, and the exemption from passive loss limitation for owners of working interests in oil and gas properties. Don’t understand all this mumbo jumbo? Neither do I. But you can bet that the lobbyists who crafted these tax breaks know exactly—to the penny—how much they are worth to Exxon Mobil and ConocoPhillips.
We have paid a huge price for the stop-and-start way our government uses tax credits to support the renewable energy industry. As investors in these renewable energy systems will tell you, short-term tax credit extensions can have very harmful effects on emerging industries, which are trying to attract patient capital in order to scale up manufacturing, system assembly, and delivery of equipment and services. These are large projects that require big, long-term investments, and therefore a long-term, stable tax structure—like the one enjoyed by the oil and gas industry, which still receives tax incentives that were put in place decades ago.
Michael Polsky, founder of Invenergy, one of the biggest wind developers in America, says Congress has no appreciation of the impact it has on a company such as his when it fails to extend the production tax credit on wind. “It’s a disaster,” says Polsky. “Wind is a very capital-intensive industry and financial institutions are not ready to take ‘congressional risk.’ They say, If you don’t get the [production tax credit] we will not lend you the money to buy turbines and build projects.”
It is really sad to think, says Rhone Resch, president of the Solar Energy Industries Association, that in 1997 the United States was the leader in solar energy technology, with 40 percent of global solar production. “Last year we were less than 8 percent, and even most of that was manufacturing for overseas markets.”
When I spoke with Resch in April 2008, he told me about a conversation he’d just had with a European solar manufacturer who was looking to outsource production of his solar panels to America. They would do all the innovation in Europe, he said, but would do the blue-collar assembly in America, where the cheap dollar had made everything half price for companies with foreign currency to spend.
“He told me,” said Resch, “ ‘You are the new India.’ It sent a chill down my spine.”
For all the talk in magazines and by politicians about the energy issue, if you look at our walk and not at our talk, you would have to conclude that the United States has no sense of urgency when it comes to energy research. It’s as if Sputnik has gone up, the nation has been challenged again to reinvent itself, this time in regard to energy, but we’re sleepwalking into the future—still quietly hoping that it’s all just a bad dream from which we’ll soon wake up again, able to fill our tanks with dollar-a-gallon gasoline and drive off with Green Stamps and a set of NFL-logo glasses.
We need to get back to basics. Government’s job is to seed the research that will produce the sorts of fundamental breakthroughs in chemistry, materials science, biology, physics, and nanotechnology that open the way for whole new approaches to solving energy problems, approaches that create new building blocks for energy and easier ways for innovators to put them together. Venture capitalists can then pick off the most promising ideas and try to commercialize them. But to find one really good idea, a green Google, you need thousands of scientists and postdocs experimenting with different options.
“That is what basic research funding is for,” explained Nate Lewis of Caltech. “Basic energy science asks the question: ‘How do we make new things out of new materials in new ways?’ What we try to establish in our labs is the fundamental science engineering that says: ‘Here is a new way to do it. It can be done.’ ” Then the venture capitalists come in and put up money to see if it can be done cheaply and at scale. Often it can’t. “But you need the precompetitive research to seed this garden,” he said. “You need to fund a hundred ideas because you know ninety-nine are not going to work and one will be the next Google. When someone asked Linus Pauling, the two-time Nobel laureate, why he has so many good ideas, he answered: ‘Because I have a lot of ideas.’ ”
No one should be under the illusion that the venture capital community can replace massive government funding at the level of basic scientific research. The venture capitalist’s job is to pick the flowers that are blooming and see if he or she can transplant them so they turn into crops that can scale. But if no one is planting seeds and fertilizing the soil with new scientific breakthroughs—from which new flowers will grow—there will not be much to pick from.
The reason there’s a shortage of VC investing in green is that there has been a shortage of federal funding from the Department of Energy in renewable research, explained George P. Shultz, the former treasury secretary and secretary of state, who since leaving government has taken a great interest in clean energy tech in his role as chair of the Energy Task Force at Stanford’s Hoover Institution. The market does not naturally support basic research, he said, because venture capital firms cannot firmly capture the benefits of basic research—they want to pluck flowers that come from the soil of basic research. Therefore, added Shultz, “non-market sources of support for basic research are needed. Government, along with private foundations, needs to take primary responsibility for basic research. This is probably the most important undertaking of any prospective energy policy and needs to be pursued in a generous and sustained manner. This will be the source of the truly game-changing innovations.”
John Doerr, one of the country’s most successful venture capitalists, who, with his partners at the legendary firm Kleiner Perkins Caufield & Byers, helped launch Google, Amazon, Sun, and Netscape, agrees with Shultz. “With few exceptions,” Doerr said, “VCs don’t, knowingly, fund basic research—though at Kleiner Perkins we’ve done so accidentally on occasions.”
Even an extra $1 billion to $2 billion investment by the federal government in basic science research could make an enormous difference. “The amount of money going into this area for research is a fraction of what is needed,” said Paul Alivisatos, the deputy director of the Lawrence Berkeley National Laboratory. “These days, if you meet a student working in chemistry, physics, or biology and you tell them you want them to work on a solar energy project, their eyes light up. This is what they really want to work on. There are thousands of students who want to work on this problem, but we cannot find the fellowships to support and enable them to do the work that is needed.”
But what about those who say scientists always want more funding and always complain the government isn’t supporting enough research?
“There can be some truth to that statement, and sometimes it is hard to prioritize—and we’re an entrepreneurial bunch,” said Alivisatos. “But let’s just remember what happened in the latest budget cycle: Seven hundred research proposals for working on solar energy were turned down for fiscal 2008. The [Department of Energy] put out a call for proposals, the response was overwhelming, scientists all over the U.S. responded with research proposals, and the money did not materialize. The DOE is really trying. They thought they would have $35 million to spend on basic solar research. We got $5 million for our project, and we were one of the few to get funded. Think about that potential—think about how many scientists and how many postdoc [students] were ready to work on this problem, and they were all basically turned away. Thousands of scientists who want to work on the energy problem are not able to work on it today.”
Numbers matter, because we need to be thinking about energy innovation in a much more strategic way than we have in the past, explained Steve Chu, the Nobel laureate who ran the Lawrence Berkeley National Laboratory when I interviewed him in 2008 and has since become President Obama’s secretary of energy. Chu revamped the energy research at the lab, breaking down all the traditional silos between physics, biology, materials science, chemistry, and nanotechnology and merging experts in each of these fields into collaborative teams, where each specialty can nurture the other. In his view, the real breakthroughs are going to be found in the intersections of all these specialties, so you want a lot of people in a lot of disciplines working on this problem.
“We need to be supporting the energy research community more broadly, but we also need to be focusing on a few large-scale research centers which have critical mass—where there are enough different scientists working a lot of different projects, so you have lots of different possibilities for collaboration,” said Chu. “When I joined Bell Labs as a young scientist, it was a life-changing experience. You walked into a building with thousands of world-class scientists—working in teams on the same problem. While much of the innovative research will come from our universities, we need a few places with that amount of intellectual firepower working the energy problem under one roof … This problem doesn’t have a simple solution. We have not found the answers yet.
“What makes me really optimistic, though,” Chu told me, “is when I go and hang out with my own students, and talk to students all around the country. They want to work on this problem. They see that the energy problem has become both a national and international crisis, and want to join up to solve it. Sadly, with the almost flat funding in basic energy research, our students are lining up to enlist, but the recruiting stations remain closed.”
Indeed, prior to President Obama’s coming to office and reenergizing the federal government’s commitment to energy research, we were clearly falling behind in very dangerous ways. Before 2009, if you added up all the federal dollars going into energy research—and that would include research on oil, gas, and coal as well as solar—said Daniel M. Kammen, the University of California, Berkeley, energy policy expert, the total would be about $3 billion in government money and about $5 billion in private sector and venture funds, which was about equal to the cost of “nine days of fighting in Iraq” at the height of the war. Energy is a $1 trillion a year industry in America, and that means reinvesting about $8 billion in R & D constituted 0.8 percent of revenues. But even that paltry 0.8 percent of revenues being reinvested in energy R & D had been going up and down like a roller coaster since the first oil shock in the 1970s, and this had wreaked havoc on the energy research world. “No researcher can build a lab and hire the best graduate students when the money is going up and down every year,” said Kammen. “A really good student would be dumb to work in this area, as opposed to biotech or information technology, where they know resources will be there to finish their projects, and where they can also be assured to get a job afterward.”
Compare this with health care, noted Kammen. The national health budget went through a planned expansion that from 1982 to 1990 essentially doubled the budget of the National Institutes of Health. The NIH budget has stayed high ever since—so it is possible—and there wasn’t even a specific health care crisis. “When the federal budget in that area increased, the private sector R & D budget went up by a factor of fourteen to fifteen,” said Kammen, “which changed the whole landscape. Business saw that we were serious and they invested, and now we tout our biotech revolution as a great success.”
Jeffrey Immelt of GE, which has a huge health care equipment business, estimates that the difference in R & D spending between the health care and energy industries over the last twenty years has been about $50 billion in favor of health care. To look at the problem another way, as of 2003 nuclear energy had received 56 percent of total energy research and development funding from the Department of Energy since 1948. Fossil fuels—coal, oil, and gas—had received 24 percent of the total, renewable energy 11 percent, and energy efficiency 9 percent, according to the Congressional Research Service study “Renewable Energy” (May 25, 2005).
Fortunately, this lackadaisical approach to energy research has changed lately, thanks to the Obama administration and the economic crisis. In his first year, President Obama has done more to advance clean power technologies and renewable energy than any president in history. His Environmental Protection Agency took a bold, historic step by declaring carbon dioxide and other heat-trapping gases pollutants that threaten public health. Soon afterward the EPA made another unprecedented move—acting to impose the first-ever limits on greenhouse gas emissions from cars and trucks, a move that will drive further improvements in fuel economy. The American Recovery and Reinvestment Act, President Obama’s initial stimulus package to help the economy recover from the Great Recession, injected more than $60 billion into clean energy investments. These included $11 billion for a bigger, better, and smarter power grid that will move renewable energy from the rural places where it is produced to the energy-hungry cities, as well as for the installation of forty million smart meters in American homes; $5 billion to weatherize homes in low-income neighborhoods, to capture wasted energy; $4.5 billion to green federal buildings and slash the nation’s energy bill; $6.3 billion for state and local renewable energy and energy efficiency efforts; $600 million in green job training programs; and $2 billion in competitive grants to develop the next generation of batteries to store energy.
“It is now possible to discuss in terms of the realities of the 2010 and 2011 budgets real and sustained increases in federal energy spending of a factor of three, five, or even ten,” said Kammen. “So, now we have the moment of investment that the science of climate change and the need for an economic reinvention both demand. Can we evolve this moment from short-term excitement to long-term strategy? It took the health and biotechnology community a decade of discussion and lobbying to argue for, and achieve, a doubling of the federal medical research budget via the National Institutes of Health. Arguably, the key to achieving this increase— and, far more importantly, to making relatively good use of it—was the rapid growth of private sector investment in medical and biotechnology R & D.”
There is no doubt that the generally higher prices of crude oil over the past three years have stimulated more investments in solar, wind, and biofuels by traditional fossil-fuel energy giants, venture capitalists, and start-ups. “For the current run-up to matter long-term, though,” concluded Kammen, “this trend must not only continue, but actually grow, with green energy programs, offices, and divisions the norm across commercial ventures large and small.”
And for that to happen—for the private sector to leverage the public sector’s investments in clean energy research and development and bring them to market—there has to be a meaningful, fixed, long-term price signal. All this investment into energy research, which is so important, will barely make a dent without a steadily rising price on carbon and on gasoline. We must not fool ourselves, as we have done for so many years: Price matters, as I argued earlier. Without a fixed, rising, long-term, durable price on carbon, none of the Obama clean-tech initiatives will achieve the scale needed for them to have an effect on climate change or make America the leader it must be in energy technology. And it still is not clear whether the U.S. Congress will impose such a meaningful price signal, even indirectly through the cap-and-trade legislation. There is no sustained ET market without the price signals that drive consumers to choose the most energy-efficient options and the clear-cut rewards to investors to engage in continuous funding of innovation and deployment of emissions-free electrons. You may get a lot of innovation, but you will not get a lot of commercialization at the scale and variety we need, and ultimately getting innovation to market is what matters.
As David Hawkins, director of climate programs at the Natural Resources Defense Council, put it in congressional testimony (July 7, 2009): “The primary barrier to a clean energy economy is not a shortage of American ingenuity or even a shortage of financial resources to apply to the task; it is the lack of a powerful and sustained set of predictable market rewards that are needed to motivate private sector innovators to invest in bringing low-carbon options to market rather than products and services where the carbon footprint is ignored.”
Only such a market-based system will enable us to quickly turn over our capital stock and displace inefficient homes, vehicles, factories, power systems, and lightbulbs with those using much less energy and emitting much less CO2. That is the only way for the United States to grow sustainably. Although we keep looking for an easy out, there is no way around it: No serious price on carbon means no serious green revolution. Because you will not have consumers demanding these new technologies and therefore you will not have producers who have a consistent set of incentives to provide them. What you will have instead is a lot of companies focusing on using all the new government incentives to make money from renewable energy. They won’t really be looking at the consumer; they will be looking at the incentives. Some will make money, new technologies will emerge—but they will not scale without a meaningful and long-term price signal. Politically, though, this still seems to be a nonstarter for both Democrats and Republicans.
Now you understand why I fantasize about being China for a day. Just one day …
The only silver lining, when you compare how much we are investing in health care research to how little we are investing in energy research, said Joseph Romm, who served as a senior official in the Department of Energy during the Clinton administration, is this: “At least people will live long enough to see how badly we’ve screwed things up.”
To be sure, the last time our leadership did make a significant investment in energy, upping the federal research budget $2.5 billion to over $6 billion from 1977 to 1980, some programs got funded that were not that great, said Kammen. “You don’t always make the right bets, but there have been some spectacular successes. Solar energy science and technology advanced in leaps and bounds as a result of that money. Much of the solar energy technology being deployed today in what has been a boom in the industry was developed during that period.” But the flip side of our lack of steadfastness has been that many of these innovations went into American companies that, lacking domestic market support, were eventually bought by Japanese or European solar companies. So American taxpayers in effect ended up funding other countries’ R & D.
How could this happen? “Ever since 1945, the U.S. economy has had to reinvent itself every ten to fifteen years to keep jobs growing,” said Kammen. “Big new job growth comes from waves of technological innovation—like IT and biotech. The next boom in technology is going to be clean energy, but it just has not penetrated through our macroeconomic policy analysis. Higher economic growth goes to the places that innovate. If you are not building these new [clean power] technologies for export, you are losing out on the next big economic boom—no matter what you say. India and China and Indonesia are all installing new power plants today.” We need to be selling them the next generation— solar, wind, solar thermal, geothermal, and other cutting-edge technologies—which we have an advantage in designing and building.
We are not going to remake a $1 trillion energy industry in one generation, though, by spending less than 1 percent of revenues on R & D, when the norm in other industries is 8 to 10 percent.
In case you don’t think this attitude has consequences, let me tell you the story of First Solar Inc., probably America’s premier solar company. Warning: This story will make you cry …
First Solar started in Toledo, Ohio. Unlike firms that use silicon to make solar cells, First Solar generates electricity from thin films of cadmium telluride (a semiconductor made from cadmium and tellurium) coated onto glass. These cadmium telluride solar cells are currently not as efficient as silicon solar cells, but they are cheaper and can operate in more varied climates and light conditions, and they easily blend into a building’s facade. The company’s CEO, Mike Ahearn, picks up the story:
“We started in 1992, when a small group of scientists and engineers came together to develop a technology that could deposit thin films of semiconductor material onto sheets of glass, much like flat panel TV screens, and process these sheets into solar panels capable of absorbing sunlight and converting it to electricity. Their dream was to dramatically reduce the cost of solar electricity, to the point that it could be used to meet much of the daytime electricity needs of the industrialized world and begin providing affordable power to the millions of people on our planet who live today with little or no electricity. For twelve years, our associates struggled to transform patented technology into a workable manufacturing process, enduring technical failures, funding crises, employee attrition, and a host of other start-up problems along the way. When it looked like we were going to have to shut down because of a lack of funds, John Walton, of the Walton Walmart family fortune, who was a First Solar investor, stuck by us through some really difficult times as we perfected the process. It wasn’t until late 2004, after a total investment of over $150 million, that the first small manufacturing line became fully operational.”
This factory line, using a lot of machinery that First Solar initially designed and built on its own, can stamp very high volumes of solar cells and can be replicated anywhere in the world—not an easy trick in the solar business.
“During the three years since completing that first manufacturing line, we’ve increased our annual production rate by over 800 percent, to become one of the largest solar module manufacturers in the world,” said Ahearn. “Our annual revenues have grown from $6 million to over $500 million by the end of 2007, and we’ve cut the cost of solar modules from nearly $3 per watt in 2004 to $1.12 per watt as of the end of 2007, which brings our founding vision into range and shows you the power of combining semiconductor technology with production scale. In November 2007, we became a public company and today have a market capitalization approaching $20 billion. When I was discussing this story with a friend, he remarked, ‘Only in America.’ And it’s true that our story at first glance does seem to have many of the hallmarks of the classic American dream. But in fact First Solar is to a large extent a German success story.”
How could that be? “In 2003,” explained Ahearn, “we began initial production and we started looking around for markets that would give us the scale that we needed, that would drive big volumes, so we could get more efficient. At the time, Japan had the world’s first solar incentive program, dating to around 1990, based on residential systems. It was a highly coordinated effort by the Ministry of Economy, Trade and Industry, which had promoted Sharp and Kyocera and Sanyo and Mitsubishi to be the leaders of the global solar market. And Sharp had a dominant share of the Japanese market. You could see how they got their supply chain, production, and distribution channels all forged into an efficient scalable model that made them the low-cost solar manufacturer in the industry. That Japanese market was bigger than the rest of the world combined and of course was effectively closed to non-Japanese companies.
“So we said, ‘We need our “Japan” if we are going to expand and reduce costs,’ ” said Ahearn. “Where are we going to find a sponsor to scale us up? Here we had invented this incredible technology, it is starting to look like it is going to work, and our scientists and engineers are saying to me: ‘Where are we going to find a market for 25 megawatts?,’ which was our annual production target. And I just kept telling them: ‘You solve the technical problems, we’ll sell the product.’ But then I started looking around and asking myself, ‘Where are we going to sell this?’ We needed to find a way to get high volumes of our product into the marketplace cost-effectively so that we could begin to drive the price to the levels we think are needed to open large markets, close to the average U.S. retail energy price, which was 8 to 10 cents a kilowatt-hour. That meant that we had to eventually sell our solar panel at $1 to $1.25 per watt. At the time, in 2003, our manufacturing costs were over $3 per watt, so we had a long way to go. We really needed somewhere to get some volume going.”
Naturally, this American company, headquartered in Arizona and with its main factory in Ohio, wanted to exploit the American solar market. The problem was—there was no American solar market, and no one in Washington or anywhere else was particularly interested in creating one, even though jobs in the solar industry are pure manufacturing jobs: You don’t mine, you don’t strip, you don’t dig, you don’t drill—you just build stuff while wearing a blue collar.
“We came to Washington and then went to many states in the southwest,” Ahearn recalled. “We said to a couple of American utilities, ‘We will lose money to just get going,’ because we knew that as we scaled, the costs would go down. And we still could not get any takers. At that time we had a hundred employees … We talked to Arizona and Ohio congressmen. They were all opposed to taxpayer subsidies. We did not get a lot of traction. With the backing of John Walton, we told them, ‘We’ll take the risks, just tell us you’ll buy the power.’ We got lower-level guys who would agree, but by the time it worked up to the top, it got nowhere …
“That was when we decided to go to Germany.
“In 1990,” explained Ahearn, “the year of reunification, the German government had created and passed the first feed-in law for solar electricity. The feed-in law is a demand incentive program that has been widely copied by countries outside the U.S. and expanded within Germany to make Germany the world’s largest market for solar products. It started small, but in 2004 the Germans said to themselves: ‘How do we really engage the private sector to get some scale in financing and real investment in technology and equipment?’ They decided to go all the way to the end user—the home or the business—and say to them: ‘What level of feed-in tariff would make you just jump into this?’ So in 2004, they changed their feed-in rates. They told every German consumer: If you build a solar system on your home or office or farmland or landfills—if you build a system anywhere—the local utility has to interconnect it and pay you for the kilowatt-hours your solar system feeds into the grid at a price fixed by national law for twenty years. For twenty years! That is a no-brainer.”
Every year—and this was really smart—new solar projects coming on line in Germany have a feed-in tariff that is 5 percent lower than the previous year’s tariff to account for, and to stimulate, improvements in efficiency. Research around learning curves says that when sales double, you usually get a roughly 20 percent reduction in price. So volume matters here. The more volume, the quicker and further you move down the learning curve toward the price that will scale in China and India.
“After we made the initial market test in Germany, we realized that the feed-in program will create a market that will allow us to scale. Also, we realized that their program had created a center of technological excellence, with a lot of budding innovators,” said Ahearn. “So we ended up employing or partnering with a number of these German scientists and engineers, and their contributions have been critical to our success. Today we purchase over half of the equipment used in our production lines from German manufacturers and count suppliers in eastern Germany as among our most important business partners.”
Meanwhile, back home: “The American market was totally fragmented—you could not imagine scaling a business here,” said Ahearn. “Not only had Germany created its own surge in demand in 2004 that got us launched, but Spain, Italy, France, Greece, and Portugal all adopted very similar feed-in tariff markets. And this produced a big inflow of capital into the whole value chain across Europe. Unlike in America, where government incentive programs stop and start every couple of years and you never know when the subsidies might come on and off, the German program has no time limits and the incentives on existing solar generation projects are guaranteed for at least twenty years. So there was no cliffhanging out there. We had our original production line in Ohio, and then added two more, and then we had to build our next plant. Where should we put it? We decided to build it in eastern Germany—in the city of Frankfurt Oder—540 jobs, good paying jobs. We knew if we built a factory that comes on line in two years in Germany that the market would still be there. If you built it somewhere in the United States you could not be sure of that. Then we went to our German customers and signed long-term contracts with progressive pricing so we knew we could repay the plant investment. You could plan your whole cash flow …”
Because the German market was so developed, thanks to the feed-in law, “a broad network developed there of solar distributors and system integrators, with strong technical abilities, who could help us bring the new product to market efficiently,” said Ahearn. “We formed a German sales and marketing subsidiary and built a sales and technical support team in Mainz that today serves as our global sales and marketing base. We continue to generate well over half of our revenues from Germany … In fact, the 800 percent increase in production that I mentioned comes predominantly from our factory in Frankfurt Oder. It is the largest thin-film solar factory in the world and represents one of the largest foreign direct investments ever made in the solar industry.”
That factory could have and should have been built in Ohio, but “we wanted to be close to our business partners and demonstrate to the German government that we were prepared to provide an economic return to the region based on the investment that the government made in creating the market,” said Ahearn. “Also, eastern Germany is a good place to manufacture. It possesses well-trained people, good manufacturing infrastructure, a stable economy, and good social and political infrastructures. We were also able to obtain financial incentives provided by the European Union and the German government … The German government gave us a shot and we thought we needed to demonstrate a payback to them. They took the first step and wrote a check to validate our theory. So we made ourselves a German company.”
The world—most of the world—took notice, Ahearn told me. “Countries all over the world are now contacting us to build our next factory there, but so far no one has called from the U.S ….”
Between 2006 and 2008, First Solar’s market capitalization went from $1.5 billion to $20 billion. You would think that would get the attention of Ohio’s lawmakers. But it didn’t. When the 2007 energy bill came up for debate, and the question was whether or not to include a national renewable energy portfolio standard, which would have really grown the U.S. market for solar, and to extend the investment tax credit of 30 percent for building solar energy, Ohio’s Republican senator, George Voinovich, voted against both. No Michigan lawmaker dared vote against the car companies, even though they’d been swimming in red ink (and laying off Michigan workers) for years. But when it comes to launching a whole new industry that is creating real jobs, big profits, and new technologies, Republican senators from solar states do not hesitate to vote with their party and against the real interests of critically important local companies.
What did those senators tell you? I asked Ahearn. “What we have consistently heard,” he answered, “is that there is a lot of support for renewable energy but it just got caught up in political maneuvering. At a minimum, there is a leadership void where this kind of petty politics can stand in the way of launching a whole new industry.”
I understand politics. I am not naive. But I also understand a crisis and an opportunity. As my friend the former Stanford economist Paul Romer likes to say, “A crisis is a terrible thing to waste.” But we are well on our way.
Are you crying yet?