Feb
2
2017

Clean Energy R&D: An Appeal to Impact Investors in the Trump Era

The first full week of President Trump’s tenure exacerbated my fears for our environment. His administration immediately scrubbed any mention of climate change, as well as the Council on Environmental Quality, from the White House website. Additionally, it imposed a media blackout at the Environmental Protection Agency (EPA) and temporarily suspended any new contract or grant. There have even been fears floated that climate change data gathered and stored by the government could be deleted during the Trump administration.

While those headlines (and plenty of others) are a concern to me, the potential for draconian cuts at the Department of Energy is particularly worrisome. If we assume the conservative Heritage Foundation blueprint will inspire the Trump budget, then the cuts outlined in that document would eviscerate many of the Energy Department’s science and energy research programs.1 According to an article in The Hill:

At the Department of Energy, [Heritage’s proposed cuts] would roll back funding for nuclear physics and advanced scientific computing research to 2008 levels, eliminate the Office of Electricity, eliminate the Office of Energy Efficiency and Renewable Energy (EERE) and scrap the Office of Fossil Energy, which focuses on technologies to reduce carbon dioxide emissions.

In the interest of brevity, let’s just focus on the EERE, whose mission is “to create and sustain American leadership in the transition to a global clean energy economy.” The organization’s strategic goals include the growth of a thriving domestic clean energy manufacturing industry; energy efficiency improvements in our homes, buildings, and industries; increased electric power generation from renewable sources; and accelerated development and adoption of sustainable transportation technologies. The EERE pursues these goals by deploying capital through a broad range of business opportunities, initiatives, grants, tech-to-market programs, competitions, research awards, etc. Perhaps surprisingly, third-party evaluations of a portion of the EERE’s research and development (R&D) portfolio found an overall annual return on taxpayer investment of more than 20%. Indeed, the EERE’s website has ample success stories that rival those of any impact investment fund I have ever seen.

What about Solyndra, one might ask? Doesn’t that notorious bankruptcy suggest that the government should let the private market determine winners and losers when it comes to energy technologies?

Solyndra certainly shook voters’ confidence in the government’s ability to proficiently subsidize clean technologies. In response, one might assert that Tesla, another benefactor of taxpayer dollars, has been a similarly spectacular “winner.” But since that is a loaded claim, I would rather point to the process of fracking, a technological revolution whose commercial maturity was dependent on government subsidies. In fact, one geologist, whose company pioneered nat gas extraction from shale, has admitted “I’m conservative as hell. [But the U.S. government] did a hell of a lot of work, and I can’t give them enough credit for that. [The Department of Energy] started it, and other people took the ball and ran with it. You cannot diminish DOE’s involvement.” 2

To be clear: I am not arguing that the government is an energy investing savant. Nor am I an advocate for big government. But it is myopic to suggest that the stimulus bill of 2009 – with its wide-ranging goals, hasty implementation, poor evaluative measures, and attendant failures – is representative of how the government supports clean energy. Even more short-sighted is the belief that the U.S. government no longer needs to support energy innovation.

After all, the energy sector has historically shortchanged its future by underinvesting in R&D. This PwC chart shows that in comparison to every major industry, energy commonly devotes the lowest share of revenue to R&D spending. This report from the Information Technology & Innovation Foundation helps to describe the reasons why:

“Market failures plague the energy innovation process at each stage of development, from lab to market launch. Spillover risks, uncertain returns, and long lead-times all prevent private firms from investing in breakthrough innovations that may hold the key to clean, abundant and secure energy supplies. First-of-a-kind advanced energy technologies must typically prove themselves at full commercial scale before attracting traditional financiers, yet large-scale demonstration projects typically cost more than venture capitalists can finance alone, leaving a large “Valley of Death” that kills off many promising technologies before they can enter the marketplace. That is why only an active partnership between both public and private sectors can secure the nation’s energy future.”

Since the government’s role in fostering and financing energy innovation appears to be on the wane, my contention is that the impact investing industry must step up to ameliorate this funding gap. After all, foundations and other asset owners possess many of the same financing tools outlined in the DOE’s arsenal above. For those who are unfamiliar with the numerous credit enhancements (e.g. letters of credit, over-collateralization, loan guarantees, insurance, reserve accounts) that can help de-risk energy demonstration projects, I’d encourage you to read the GIIN’s useful paper on Catalytic First Loss Capital. One organization doing its part to steer charitable dollars toward innovative technologies is PRIME Coalition. The non-profit enables philanthropists to directly support a curated list of early-stage companies, each of which has the potential to significantly reduce greenhouse gas emissions. Then there is New Energy Nexus, which bolsters clean energy by facilitating collaboration between startups, investors, and other industry supports. In fact, their website contains one of the most exhaustive lists of clean tech and clean energy incubators and accelerators that I have seen to date. There are also angel investor networks (Investors’ Circle, Toniic) and competitions (see Mentor Capital Network for an exhaustive list) that together support clean energy (amongst other impact enterprises). Finally, there are plenty of private fund managers that I can’t explicitly tout here, due to SEC marketing prohibitions, but are nevertheless doing critical work in the clean energy landscape.

I’d like to believe – as many of our asset managers do – that cleantech’s competitive economic fundamentals will continue to stimulate the industry’s growth. I’m hopeful they are right, but must acknowledge that the government will play a much less supportive role for an indefinite amount of time. Applied research, a critical cog that rarely receives any form of commercial investment, will almost certainly suffer. All the more reason for impact investors focused on climate change mitigation to employ a growing combination of the resources mentioned above.

Feel free to contact me if you believe other options ought to be added to this list!


1 Before I am labeled as an alarmist, I must admit that my fear is based entirely on conjecture: the president will not release his budget for another 2-3 months. That said, President Trump hasn’t exactly softened any of this campaign rhetoric, and his appointment of longtime conservative spending hawks to his budgetary teams would seem to further signal his intention to shrink federal expenditures. As such, I think the Heritage proposal is directionally accurate.

2 For a more detailed account of the government’s role in the development of hydraulic fracturing in shale, I’d encourage you to read this 2012 report from the Breakthrough Institute.



Written by Nick Flores




 

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