Cash for Infrastructure

Scattered across a swath of Michigan that’s been devastated by the state’s slowdown in automobile manufacturing, a half-dozen or so companies have begun construction on facilities to build advanced batteries for electric vehicles. In the Southwest, two solar thermal plants, each supported by more than a billion dollars in federal loan guarantees, will soon sprawl across thousands of acres in the desert. From Hawaii to northern Maine, ridgelines have begun bristling with wind turbines, made possible in part by government funding.

Enacted 18 months ago, the American Recovery Act is now delivering $80 billion in loan guarantees, tax credits, and cash grants to projects aimed at developing and deploying energy technologies. Speaking in mid-July at a ground-breaking ceremony for an advanced battery factory in Holland, MI, President Obama promised that the plant would be “a boost to the economy of the entire region.” But beyond spurring new jobs in clean energy, the Obama administration says, the unprecedented injection of federal money into the energy sector is meant to be a first step in creating “a comprehensive strategy that will pave the way toward a clean energy future for our country.” Remaking the nation’s energy infrastructure will, of course, take years. But a year and half after passage of the stimulus legislation, it is worth asking whether the strategy is on track. Do the billions of federal dollars being spent on energy research and commercialization really represent the beginning of a comprehensive plan for a clean-energy future? Or are they simply piecemeal investments that will become irrelevant once federal incentives disappear?

The U.S. Department of Energy, which alone controls $36.7 billion from the stimulus bill, is now spending from $800 million to $1 billion of that money every month on R&D and the commercialization of new energy projects, according to Steve ­Isakowitz, the agency’s chief financial officer. In a recent interview, Isakowitz said it has been a “huge challenge” to spend the money quickly and efficiently. Some programs have been expanded significantly: spending on modernization of the electric grid, for example, soared from less than $200 million to $4 billion. In other cases, the DOE had to fund entirely new programs. The agency spent $350 million, for instance, to start up the Advanced Research Project Agency-Energy (ARPA-E), which backs high-risk research projects. Despite the challenges, he expects the stimulus-related spending to reach $14 billion in 2011 before dropping off to $9 billion in 2012.

Though President Obama and other supporters of the legislation justified much of the spending as a way to create “green jobs” and thus stimulate the economy, many economists dismiss that idea. Even those who strongly support government investment in technology point out that any spending on research and new energy sources will take years to produce economic growth. Daron Acemoglu, an economist at MIT and a leading authority on the link between economic productivity and innovation, says that while he strongly favors increased federal support for energy innovation on the grounds that we need new technologies to forestall climate change, it is “a joke and totally misguided” to think it will help solve the nation’s unemployment problem.

The real value of the stimulus spending has always been in its potential to compensate for years of declining investment in energy R&D and to jump-start commercial use of cleaner energy technologies despite that long decline. The United States spends shockingly little on energy research. In that context, the stimulus bill provided a much-needed boost by allocating $3 billion for energy R&D, including the creation of ARPA-E and a series of research centers around the country. But by far the largest energy expenditures in the stimulus bill support the demonstration and commercialization of new technologies. Loan guarantees, tax credits, and cash grants will supply tens of billions of dollars to advanced battery factories, solar power plants, and biofuel refineries (see “Taking Stock of the Stimulus”)–large speculative projects for which tight credit and depressed financial markets would have made private funding nearly impossible.

These are fragile gains, however. The benefit of increased R&D spending will depend on whether future funding levels remain high or suddenly drop again. Likewise, the fate of the new commercial projects will depend on what happens when federal funding winds down; many of the projects will not, at least in the short term, thrive without various government incentives. For the federal spending to have a lasting impact, the stimulus bill will have to be followed by a practical plan for energy innovation and investment. And as budget hawks in Washington begin to tear apart federal expenditures, any sustainable energy policy will need to justify its government funding in terms of direct, clearly recognizable benefits.

One challenge in designing a practical plan for energy innovation–and convincing politicians and the public of its value–is that no one really knows how to quantify the economic benefits of scientific research. Over the last several decades, economists have convincingly documented how innovation can increase productivity and, thus, economic growth. But little is known about how research leads to innovation or what kind of research is most effective. “The link between R&D and economic impact just doesn’t exist on the micro level,” says Julia Lane, director of the Science of Science and Innovation Policy program at the National Science Foundation. Lane and colleagues at the National Institutes of Health have begun to study the impact of the research spending called for in the stimulus bill. Initially, the group will simply track stimulus-funded R&D, collecting data on how different disciplines are funded and how many jobs are created. In a second, more ambitious phase of the project, they will try to find new ways to quantify the economic, scientific, and social effects of the research over time.

Few in the scientific community doubt the value of federal support for research, but politicians are not so united. Lane says that if scientists can’t demonstrate the impact of their research more clearly, the funding will be in jeopardy. “We ought to be able to have some sense of what investments [in R&D] to make,” she says. It’s hard to make such policy decisions now, she adds, because “the data on how scientific ideas are created, transmitted, and adopted are limited.”

There is, however, plenty of evidence that government funding and policy decisions can, if done correctly, create an environment conducive to innovation. But as Harvard Business School professor Josh Lerner suggests in his recent book Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed–and What to Do About It, government efforts to promote new businesses have a decidedly mixed record. There have been great successes–Lerner describes, for example, the critical role that government involvement played in the early days of Silicon Valley–and dismal failures, such as a program by the Malaysian government to establish a biotechnology zone in what is now known as “the valley of bio-ghosts.”

Lerner’s book doesn’t directly address energy innovation, but the author shows how important venture capital and entrepreneurship are in realizing the potential of new technologies–and he makes a convincing case that government can encourage these activities.

In a recent interview, Lerner said it is too early to grade the success of the energy spending in the stimulus bill, but he worries that the U.S. government has repeated the mistakes of others. In particular, he says, by making large investments in a relatively few companies, federal agencies such as the DOE have effectively picked winners. A better approach, he suggests, might have been to distribute smaller amounts to more companies and “listen to the market” by linking the government investment to such factors as how much private investment a startup has raised. Regardless of such concerns, though, Lerner stresses that government support for new technologies is crucial. “The government certainly has a role to play in both financing and creating an environment that is conducive to energy-related entrepreneurial activity,” he says. “But it needs to be done right.”

Over the last several years, a plethora of books, academic papers, and expert reports have proposed ways to formulate a coherent strategy for energy innovation. Notably, in June the American Energy Innovation Council (AEIC), a Washington-based group of industry executives, issued a “business plan for America’s energy future,” signed by, among others, Microsoft chairman Bill Gates, GE CEO Jeffrey Immelt, and Xerox CEO Ursula Burns. The report calls for tripling annual federal support of what it terms research, development, and deployment (RD&D), from the current $5 billion to $16 billion, of which $1 billion would go to ARPA-E. The business leaders also call for a “national energy strategy board” that should be “external to the U.S. government” and would be charged with supervising an “independent corporation outside of the federal government” that would help commercialize new energy projects. In their plan, this corporation would receive $20 billion over 10 years through a single federal appropriation.

Meanwhile, any comprehensive plan for energy innovation will need to deal with a simple technology fact: most existing alternatives to fossil fuels are currently too expensive to replace them to any significant degree. And yet the transition to lower-carbon fuels must begin immediately if the direst effects of global warming are to be avoided. Many economists favor carbon pricing, in the form of a direct carbon tax or a cap-and-trade system; either would effectively force companies to pay for carbon pollution, raising the cost of fossil fuels and making alternatives more competitive. But even some of the strongest advocates of carbon pricing acknowledge that, as Harvard economist Robert Stavins said in a recent interview, it is “essential but not sufficient.” In other words, we’ll still need energy innovation.

Of course, an “energy miracle” is always possible (see Q&A), but to count on a radical breakthrough is to ignore the immediacy of global warming–and the amount of time it takes to fully commercialize energy technologies. A technology that’s still in a researcher’s lab or on a venture capitalist’s whiteboard is at least a few decades from making a major impact on climate change. If the climate scientists are right, any such solution will be too little, too late.

To reduce carbon dioxide emissions during the coming decades, “it’s all about large-scale deployment of low-carbon technologies,” says Richard Lester, the founding director of MIT’s Industrial Performance Center and head of its nuclear science and engineering department, who has spent the last several years on a project to design a more effective energy innovation system. The problem, he says, is that “those technologies today are too costly.”

One of the central questions in formulating an effective innovation strategy, Lester says, is how to “bridge the cost gap” between cheap fossil fuels and more expensive low-carbon energy sources. “Our conclusion is that there is no possibility of financing this cost gap in the early stage of deployment of these new technologies with the traditional federal budget appropriations process,” he says. “It is just too expensive.” Lester adds, “It really makes sense for the users to pay for it. That will be very unpopular, but I don’t see any way to proceed otherwise.”

The good news is that innovation can bring down the cost of new energy technologies. One of the virtues of the stimulus bill is that it allocates money both to energy research and to deployment; its most creative programs, such as ARPA-E, attempt to combine those objectives. But the success of these investments will be determined by whether they actually turn out to be the initial stages of a comprehensive energy plan. Formulating such a plan will mean studying the growing body of academic research on the most effective ways to encourage innovation. It will mean making some unpopular choices, and it will be expensive.

A year and a half after the stimulus funding began, the mood in Washington has turned frugal. The DOE’s proposed budget for 2011 does request increases for energy R&D, but there’s little talk of spending additional tens of billions of dollars to support the demonstration of new energy technologies. Without such investments, the projects that got their start with stimulus funding could languish. Rather than laying the foundation for a new energy infrastructure, they will continue to represent mere possibilities for clean technology.

David Rotman is Technology Review’s editor.