Can policy keep cleantech innovation out of the valley of death?

The Breakthrough Institute recently published a series of reports on policy solutions to keeping cleantech innovation out of the valley of death:

"The energy sector as a whole is a roughly $5 trillion market, and it is expected to grow by more than 50 percent by 2035. Supplying this market with clean and affordable advanced energy technologies thus represents an enormous economic opportunity for American entrepreneurs and firms and the US economy as a whole."

"In the past, the United States has driven immense and far-reaching technological transformations. As the pioneering global innovator of the 20th century, the United States built the world’s largest economy because of the ingenuity and creative enterprise of its entrepreneurs and citizens. 

"Each step of the way, proactive public policy has played a crucial role in driving American innovations, from railroads and jet engines to microchips, biotechnology, and the Internet, unleashing long waves of economic growth and shared prosperity. New and advanced clean energy technologies afford the same opportunities to the United States today—if public policy is shaped in a way that allows American innovators to thrive once again."

In recognition of the fact that it takes more time, money and investor patience (see box) to bring innovations in the energy industry than say, internet startups, the Breakthrough Institute advocates:

The creation of the Clean Energy Deployment Administration (CEDA) "a flexible, independent government investment agency—effectively a bank—that aims to unlock the capital necessary to move innovative energy technologies across the Commercialization Valley of Death."

A National Clean Energy Testbeds (N-CET) programme to offer "a second response to the Commercialization Valley of Death".

Some of these ideas are already taking form in the UK, with the Green Investment Bank, and to some extent the Carbon Trust already fulfills some of the areas of weakness identified by the Breakthrough Institute.

But there is one Achilles heal in the UK which has yet to be addressed. As the world's second largest centre for VC funding — at $184m a distant second behind the US according to the Cleantech Group's Q3 2011 report — much of that investment ends up overseas, even if the innovation began in UK universities.

In the UK, there are some really good examples of spinouts from university labs, such as Cavendish Labs at the University of Cambridge and Imperial Innovations at Imperial College. 

This is progress, but the UK tech spinouts seem to face an additional valley of death — the gravitational pull of Silicon Valley and its vast amounts of capital. Enecsys, a successful cleantech spinout from the University of Cambridge backed by Wellington Partners in London, has now got the stage where it feels more comfortable with offices in California. But is this brain/economic drain? Or is it healthy cross-pollination of business opportunities that straddle technology development and policy and renewable energy targets?

Policy in the US has been a key driver in developing the entrepreneurial culture, with tech transfer legislation at the heart.

The Bayh-Dole Act of 1980:

• permitted universities, not-for-profits, and small businesses to obtain title to inventions developed with governmental support

• provided early on intellectual property rights protection of invention descriptions from public dissemination and Freedom of Information Act (FOIA)

• allowed government-owned, government-operated (GOGO) laboratories to grant exclusive licenses to patents.

Paul Kedrosky, senior fellow at the Kauffmann Foundation warns that although Bayh-Dole has driven universities to think more seriously about what they’re doing with their research, its perverse affects have been "considerable and detrimental to innovation".

"By creating this incentive by universities to obtain title to inventions they could profit directly from the inventions even though the inventions were developed with government support.

"Economics 101 tells us that that’s going to create more incentives for them and do more things that have more of a profit incentive. So they’ll do more of those things. And that’s mostly true and universities have become much more aggressive patenters and aggressive exploiters of their own invention portfolio to the point that we’ve seen a large expansion of licensing revenues for larger US HE institutions.

"But it’s had a lot of perversity attached to it. For example, it’s one of the reasons why we’ve seen the emergence patent hold organizations because they are now perfectly happy to buy university portfolios of patents and send revenue back to the university and they stand there as ticker takers or toll takers for people who want to use that piece of technology. But increasingly rather than driving people to commercialise the technology, the universities are becoming gatekeepers and licensers of the technologies and licensing it to organisations that have no intent to commercialise the IP."

Britain and US bank on entrepreneurs on road to economic recovery

The road to economic recovery has been bumpy so far and looks endless at times. Unemployment in the US has historically averaged around 5.7% and jobless rates haven't been this high since the 1980s, a generation-long record that won't make the trophy cabinet. Although the UK's jobless total is slightly less, at 8.3%, putting pay cheques into the hands of the 1.6m people without work is a pressing concern.

 

Although Spain trumps both, with an unemployment rate of 22%.

As George Osborne announces an additional £5bn towards the £30bn National Infrastructure Plan and extra funds to electrify the Manchester to Leeds railway line, the inability of US Congress to cut the budget deficit is another example of the dysfunction of federal politics, along with opposition to public works such as High Speed Rail and Barack Obama's proposals for $60bn for essential infrastructure.

But both sides of the Atlantic, hopes are harboured that encouraging entreprenuers and new businesses to flourish will come to the aid of the flagging American and British economies.

At a recent breakfast with the Philip Barton, deputy head of the British mission in Washington DC said that developing and maintaining trade relations with the US was more important than ever, even though global economic focus has shifted to China.

The UK's coalition government wants to slash its 26% corporation tax still further, even though it is lower than the US, to make Britain an even more compelling place for businesses to locate.

That's one way to encourage business. But when you're talking about job creation, it's better to encourage entrepreneurs, according to the National Venture Capital Association.

The NVCA claims that US-based venture-backed startup companies created more than 37,000 new jobs up until October this year in a variety of industries including software, IT, and clean tech/energy.

But the Kauffmann Foundation, which does a lot to train VCs and advocate for their economic impact, goes further and argues that entrepreneurs are the drivers of the economy. New firms create around 3m new jobs a year in the US, it says.

That would be a rate of growth from entrepreneurship that would delight David Cameron, the UK's prime minister. But other than slashing taxes, how does a country like the UK encourage startups?

It's time to go back to college for some pointers from the US. The symbiotic relationship between the venture capitalists on Sand Hill Road and the bright minds at Stanford University is difficult to emulate.

While researching a story on the state of VC funding today, I spoke to Paul Kedrosky senior fellow at the Kauffmann Foundation. He said: "Young companies are the largest net creator of jobs in the United States and have been that way for a long time. There’s no other way it can work – young companies can hardly destroy jobs because they don’t have any! By definition they are walking away from a wall of zero. Companies that have 1000 employees can go either way. It’s a mathematical fact rather than deep economics."

But Silicon Valley's ecosystem is a unique blend of capital, historical accident & design, policy & legislation… and a state of mind.

Kedrosky also took the time to tell me about the coalescence of investment hubs around US universities to create the special ecosystem we see today in Silicon Valley.

The Morrill Land-Grant Act of 1862 created the colleges that were critical in driving the creation of some of these entrepreneurially minded higher learning institutes, such as Stanford University which opened in 1891.

Leland Stanford wanted to create an upscale trade school that would be of use beyond purely academic learning as a counterpoint to the classical learning in Britain, he said.

"Stanford was trying to create something that would teach the practical arts. And that was in response to what he saw going on in the UK and elsewhere: 'This sort of esoteric learning would have been no use to me I’m a practical monopolist and I want something that would have been of use to me'."

This attitude didn't really change until years later, he says.

"People forget that it wasn't meant to be a classical higher education institution because of what happened in the 50 and 60s when it became a recipient of Department of Defense largesse from the semiconductor industry. The reason why Stanford was almost biologically speaking was so receptive to that relationship with industry and had such a permeable barrier with industry which led to so much entrepreneurship is because by design it was a very practically minded institution.

"The institution has become more metastasized within the Silicon Valley ecosystem to the point that now it’s inextricable. There’s a constant flow back and forth and many of the largest and successful companies have links in a meaningful way whether it’s graduates or IP at the back of the institution."

Kedrosky is one of the many who identifies academic contributions in industry and the easy two-way cross-pollination as the factor that encourages Phd alumni to try their luck by spinning out their innovation. While a warm welcome awaits them if they choose to return to academia.

"Stanford has deep in its DNA a consistent ongoing relationship with industry and a path to [academic] tenure could credibly include trips back and forth to the dark side of the private sector and back into the institution. And not only that was that not seen as a bad thing it was seen as something that would add to your capacity to get tenure.

"It’s very rare at HE institutions that you attract the best faculty and create the permeable barrier. You never get the synergies except at places like Stanford in the US."

But is that "permeable barrier" the missing link in encouraging more entrepreneurship from UK universities? No, targeting universities in this way is the wrong approach, says Kedrosky.

"Universities aren’t particularly important in terms of driving entrepreneurship in the US there’s a whole lot of mythology that’s attached to it at certain times. But it kind of becomes a public works project when you say well we want to have an entrepreneurial cluster in cities so we need to put more money into our universities. That’s very much the drunks at the lamppost problem: I get why that’s appealing to policymakers because it’s better than looking for your keys out in the field. It’s much brighter under the lamppost but it’s not directly addressing the problem. It's the classic policy problem – we’d much rather put money into our universities because entrepreneurs are objectionable people."

Read tomorrow's blog for more on policy approaches to entrepreneurship…

San Francisco's green credentials don't measure up on CO2 emissions

When San Francisco scored top marks as the "greenest city" in the US in a survey sponsored by Siemens and conducted by the Economist Intelligence Unit, it came as no surprise, but I had my doubts.

San Francisco has high rates of recycling, around 75%. Go Giants! But California's incentive to recycle - 5c-10c redemption per can or bottle - acts as a de facto social safety net which either supports low-income households, or the local liquor store or drug dealer, depending on how you catch that particular prism of the issue of "scavenging".

Every City hall worker is proud to tell you that SF's trolley buses are zero emission. But never mind that they flooded the valley next to Yosemite to create the Hetch Hetchy hydropower station, which by all accounts was as beautiful as its more famous neighbour.

Electric vehicle charging points are available outside City Hall, while employees are encouraged to drive their C02 belching machines work by providing preferential parking places. City Hall itself hosts conferences where cold drinks, including water, only come from an aluminum can or plastic bottle. Perhaps it's the mayor's way of "giving something back" when the trash gets taken out for the transients to sift through…

The $20m from hard-strapped federal funds spent on an SF Park scheme * (which encourages motorists to drive into the city) while the SF Muni struggles with an $80m budget deficit and could really use the fares, is an irony of policy misalignment almost worth weeping over.

San Francisco's list of contradictions seem endless. And the fact that the city "won" this accolade from Siemens appeared to sit uneasily … even with those on the City Hall payroll.

Last month, Mayor Edwin Lee announced that SF's greenhouse gas emissions are nearly 12% below 1990 levels…

But the original target set by the Climate Action Plan 2008 requires an extra eight percentage points before the end of next year. At this rate it will miss the 20% reductions below 1990 levels by the end of 2012, and 80% by 2050.

In fact, in terms of CO2 emissions the Siemens report ranked San Francisco 8th out of 27 cities, behind Los Angeles and New York. Although according to the report, SF's GDP emissions are half that of the US average, possibly because "service industries" are favoured over manufacturing:

San Francisco emits 181 metric tons of CO2 for every $1 million of GDP, versus an Index average of 296. And on a per capita basis the city emits 11.4 metric tons of CO2 compared with an overall average of 14.5 metric tons. San Francisco has made further greenhouse gas emissions reductions a top priority. The city has made impressive headway in reducing municipal greenhouse gas emissions … and has outlined a range of carbon-reduction initiatives aimed at non-municipal sources, particularly in the areas of buildings, energy and transport.

Speaking at the Renewable Energy Markets conference in San Francisco last week, the city's green chief, Melanie Nutter, acknowledged that aggressive action would be needed to meet the 12% emissions reduction by 2020. A taskforce would report in January on its strategy, she added.

"We're very proud of what we've done, but we do recognise that we've a long way to go."

But she might have further to go than she and Mayor Lee are prepared to admit.

A Bay Citizen article reprinted in the New York Times at the weekend suggests that the "real decrease in carbon emissions may be only one-fourth the percentage cited by the city".

Mr. Lee and his environmental advisers say the main driver of San Francisco’s carbon emission reductions was the closing of inefficient fossil-fuel power plants at Hunters Point in 2006 and in the Potrero neighborhood in 2010.

We reduced our emissions because we stopped getting so much of our power from local dirty power plants,” said Melanie Nutter, director of the San Francisco Environment Department, which established the city’s carbon accounting system in 2004.

According to Environment Department records, the city’s reduction in carbon emissions from electricity use was so substantial after the plant closings that even with a rise in electricity use and greenhouse gas emissions from private vehicles over the past 20 years, the city, by 2010, had cut overall greenhouse gas emissions by 11.6 percent.

But as the article points out, these power plants were owned by PG&E and Nutter's calculations assume that the electricity produced by the two power plants was used inside the city, an assumption that is wrong.

“The grid is like a giant lake,” said Stephanie McCorkle, the spokeswoman for the California Independent System Operator, which oversees PG&E’s grid. “You can’t tell one electron from another, once they jump on the grid.”

But the article rightly questions the city's methodology. The Bay Citizen analysed San Francisco's carbon footprint using measurement tools developed by Christopher Jones at the CoolClimate Network of the University of California, Berkeley. It found that SF's reductions in emissions could be as low as carbon emissions by 2.7% from 1990 to 2010.

It was a fine piece of journalism and the city's green chief would do well to apply more rigour to its metrics. There should be nothing stopping Ms Nutter from adopting methodologies employed in other world class cities such as London or publishing its inventory and celebrating successes like New York.

I spoke with Nutter before she addressed the REM 2011 conference and said that I had a question for her about policy alignment on transport (see above*). I'm still waiting almost week later for an answer I don't think I'll ever get.

But perhaps Nutter and her new mayor are concerned that the measurements don't add up… and the illusion of San Francisco as a green city will be rightly re-appraised. When it comes to cutting emissions, targets without proper metrics that are a matter of public record amount to mere greenwashing…