No, the Private Sector Won’t Pick Up the Slack for Federal Investments in Energy Innovation
By Fahad Siddiqui
There’s a philosophy among some conservative advocacy groups that the federal government should cut back its investments in U.S. energy innovation, and just let the private sector pick up the slack. This thinking inspired the Trump Administration’s proposal to slash innovation spending at the Department of Energy (DOE). The problem with this philosophy, however, is that we have no reason to believe it would work, and every reason to believe that it would leave promising new energy technologies high and dry before they have a chance to get to market. That would mean big losses for American innovators, industries, workers, and consumers.
Venture capital isn’t into it
Attracting private sector funding is a struggle for energy companies, especially at early stages. There are plenty of skilled researchers and entrepreneurs in the energy industry, but few of their ideas get the investment to move beyond the concept phase. In 2016, for instance, only two percent of all venture capital money went to energy startups. And when the Department of Energy launched ARPA-E in 2009, so many energy entrepreneurs were hungry for funding that the agency was only able to invest in one percent of the 3,700 applicants.
Let’s compare the energy sector with the IT sector, which dominates all other industries in terms of snagging private capital. The tech industry’s model makes it extremely attractive to early stage and venture capital investors. The initial investment is minimal — a typical tech startup only needs a garage with a couple of people and some computers. Energy startups, on the other hand, usually require unique materials, access to specialized facilities, and a larger team to handle the distinct aspects of energy tech development. The costs of these operations can quickly add up.
For the few energy technologies that can secure the initial funding, their biggest test is to successfully demonstrate a proof-of-concept. Demonstrations of novel energy technologies are particularly expensive, usually requiring hundreds of millions of dollars. In addition to the prohibitively high amount of capital requirement, demonstration projects often take years to complete. Very few private sector investors have the risk appetite or capacity to invest in a promising but unproven technology with high upfront costs and no immediate revenues — especially when there are opportunities for lower-cost and faster return investments in other sectors like IT.
Industry won’t pick up the slack
The energy industry invests very little in R&D on their own, frankly because the end customer for an energy product can’t tell whether the electrons flowing to their TV or the fuel molecules in their tank were produced in some innovative way. Consumers might be willing to pay more for additional features on an iPhone that they directly interact with, but they are unlikely to agree to higher energy bills when they can’t discern the difference in the product.
You can see the effect of this in the well-established petroleum and utility industries. The major oil & gas companies have not shown interest in developing alternative technologies because their core business model is already extremely profitable. And with regulatory structures that guarantee a rate of return for their services, electric utilities have an additional disincentive for investing in energy innovation. As a whole, established energy industries are extremely risk averse and, as a result, invest the least in R&D among all industry sectors in the U.S.
Can a company compete with a country?
Finally, countries like China, Korea, Japan, and Germany are increasing their public investment and getting ahead in the trillion dollar advanced energy industry. Chinese companies backed by growing public investment have already cornered the global solar market and are increasingly taking the lead in advanced nuclear, electric vehicles, and battery technology. Without state support, the private sector in the U.S. simply cannot compete with these global players.
Federal investments don’t block private funding, they unlock it
Every major energy breakthrough in the last 50 years received significant public support that helped them move from an idea to proof-of-concept to demonstration. The private sector then invested heavily after the risk associated with them was reduced, to the point that these technologies have transformed the energy landscape. But there are still hundreds of promising energy startups in the U.S. that are looking for the same mix of public and private support.
Because of the inherent technological risks, delayed returns on investment, and huge capital requirements, private investors leave a lot of good energy ideas on the table. So if we want the U.S. to remain a leader in the energy industry, it’s absolutely essential that the federal government continues to support crucial DOE programs in applied research, demonstration, and commercialization. Getting government investment “out of the way” of the private sector might sound nice in theory. But in the real world, it just wouldn’t work — and America would fall behind as a result.
Fahad Siddiqui is the Fellow for Clean Energy at Third Way.