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."

Cleantech VCs wait for fog to lift after 'chilling effect' of Solyndra

The National Venture Capital Association and Thomson Reuters this month reported that the last quarter marked the lowest amount of venture capital raised in the US since Q3 of 2003.

Cleantech and life sciences lost out to a surge of investments in the software sector, which enjoyed its strongest quarter in almost 10 years, according to the MoneyTree report. The software industry received $2bn while the cleantech sector saw a 13% drop in dollars to $891m in Q3 from the second quarter when $1bn was invested. The number of deals completed in the third quarter also declined.

Another 13 of the 17 sectors monitored by MoneyTree have all been affected by market volatility: telecommunications; semiconductors; media and entertainment all suffered. But cleantech is likely to take a further hit as seed stage funding – critical in maintaining the momentum in R&D — also fell 56%, with $179 million invested across 89 deals in Q3.

More established cleantech companies fared better, with thin film solar manufacturer Heliovolt, based in Austin, Texas, raising $85m - the 4th largest US VC investment in Q3. And a shift of focus to energy storage benefited fuel cell manufacturer ClearEdge Power with $73.5m in later stage funding from Kohlberg Ventures and other undisclosed investors.

Stephan Dolezalek from VantagePoint said that although Q3 2011 was an improvement on last year, there were three macro factors driving the slowdown in cleantech investments: closure of the IPO window, solar panel prices and the "chilling effect" of Solyndra's collapse.

"On a broader view there are really three macro factors that are affecting cleantech investors. The first would be the closing of the IPO window and some concern that that window might not reopen before 2012 elections depending on what happens to budget issues in Europe and the US. So that window opening or not is of significant concern to investors.

"Number two, we’ve had a very obvious and ongoing drop in panel prices that’s based in large part on the strong levels of support that the Chinese government is giving their solar and wind industries. But obviously that wreaks some havoc with the trading multiples of companies both here in the US and Europe.

"Finally, we’ve had the chilling effect of the political battle over Solyndra. When you take all of those combined into account, I would argue that if you put enough fog on the road investors in cleantech have largely slowed down to try to see what happens when the fog lifts."

He suggested that the current political climate in the US was not helping either, with industries in China and the EU better able to whether the economic storms because of long-term national and regional targets.

"Despite the European financial crisis, clean tech everywhere but the US seems to be strong. In Europe it is supported by both the liberal and conservative parties it doesn’t have quite the same Republican/Democratic split that we see here in the US. And from China’s 12th five-year plan, we obviously see that they are supporting clean tech in an extraordinary way and we’re also seeing strong support in Brazil, Australia and India. So the US is probably the one market in which we have a fair amount of pull back."

California cap and trade will 'attract lion's share of cleantech investment'

Mary Nichols yesterday made much ado about the impact that California's cap and trade scheme would have on the development of clean technology.

The chairwoman of the California Air Resources Board yesterday said in her opening remarks: "The programme sends a clear signal to the global investment community that an investment in California's clean technology and clean energy industries will be rewarded, maintaining our status as a magnet for cleantech investment.

"Cap and trade sends a policy signal to the market and guarantees that California will continue to attract the lion's share of investment in clean technology."

Unlike last December's meeting, when there were less than a handful of opposing voices, opponents of cap and trade from steel unions and oil refineries attended in great numbers.

BP America and the Western States Petroleum Association were among those who lined up for their 3 minutes in front of the board to complain about the "10% haircut" for oil refineries because the benchmarking gives free allocation for only up to 90% of emissions.

Carb has this year introduced a best in class benchmarking system so that at least one installation in each sector will be allocated 100% allowances. While examples where given for the cement and glass sectors, perhaps many of California's refineries fear they will flunk the class, even though as Carb staff pointed out the benchmarking in the EU system had been set at a more "ambitious level".

Chris Riley, who described himself as a "concerned citizen employed by Valero" which attempted to spike the cap and trade scheme last year through the ballot box with prop 23.

"I'm concerned about how these emission taxes and in general this will have impacts on our families and higher energy costs that will be incurred consequently what will happen to our jobs."

Lisa Bowman, a ConocoPhillips employee, made an impassioned testimony about how her company had allowed her as a single mother to bring up her children without government support. She asked Carb for "leeway" to meet the regulations on behalf of her employer.

Enough individual ConocoPhillips employees followed to repeat their concerns about job losses to suggest their presence was not a spontaneous response.

As Carb's charts for mandatory GHG reporting clearly show, refineries are the biggest polluters in the state. California's stringent regulations on refineries makes building a new installation prohibitively expensive, while the refineries themselves claim that they are already working to optimal levels of efficiency. But refineries run a double accounting system for carbon emissions by producing transportation fuels, thereby being involved in the first and second highest source of emissions in the state and reductions are not going to be easy, the refiners say.

Mike Wang, of the Western States Petroleum Association, said: "Our facilities are the cleanest in the world and they produce the cleanest products. What you are hearing from us is can we choose alternatives to the 10% reductions in allocations. Can we achieve the goals of AB32 more easily?"

So far, Carb's rules have been subject to legal challenges from environmentalists, not industry. But that may change once implementation approaches and it will be interesting to see how Californian oil refineries respond to mandates designed to force innovation.

In the EU, the Emissions Trading System is also designed to be a principal driver of the deployment of low carbon technology. The NER300 assists with large-scale demonstration of low carbon energy technologies in Europe and bridging finance also comes from the European Economic Recovery Programme, the Strategic Energy Technology Plan and the Global Energy Efficiency and Renewable Energy Fund.

A report published soon after the EU ETS began showed that anticipation of mandatory emission limits can drive innovation. The report included a case study at the Shell Pernis Refinery in Rotterdam, Europe's largest refinery, where engineers have been capturing 170,000 tonnes of CO2 a year since 2005. The CO2 waste is converted into fertilizer, avoiding the need to import and burn natural gas to generate fertilizer. It's a double accounting benefit from fossil fuel industry.

But Europe's power sector is the great polluter not refineries, and account for 60% of EU ETS emissions. Electricity generation in California produces 20% emissions in the state which mostly burns natural gas to produce electricity.

California is clearly a leader in many market segments of the broad category of cleantech. It already appears to dominate the solar market in the US. Some of this success can be attributed to the state's Renewable Portfolio Standard - the most aggressive (and mandated) target in the US. But it means the state's the power sector is primed for innovation in energy efficiency and cleaner generation.

And the transportation sector could also flourish as the low-carbon automotive industry has followed the money to the west coast where the bulk of VC capital has come from to fund Tesla and Fisker (it also helps that VCs are a perfect test market for the upmarket electric vehicles).

The California Global Warming Solutions Act of 2006 acknowledged its position and potential as a cleantech leader and ordered the Economic and Technology Advancement Advisory Committee was created under to advise Carb on "identifying new technologies… that will assist in the reduction of greenhouse gas emissions."

But yesterday it took 79 testimonies and seven hours to return to the subject of stimulating cleantech when board member, Daniel Sperling, asked whether it would be a good idea for Carb to employ a chief technology officer who could monitor whether the scheme was incentivising innovations in energy efficiency and clean tech. Presumably this person would sit alongside ETAAC's chairman, Alan Lloyd.

Carb staff agreed to look into this "interesting issue" raised by Sperling.

But a report from the Fraunhofer Institute in Germany last year indicated that the connection between cleantech development and climate policies such as carbon trading is not so clear cut.

The authors found that: "the innovation impact of the EU ETS has remained limited so far because of the scheme’s initial lack in stringency and predictability and the relatively greater importance of context factors. … Our analysis suggests that the EU ETS by itself may not provide sufficient incentives for fundamental changes in corporate climate innovation activities at a level adequate for reaching political long-term targets."

Recent low carbon prices of around €10 have hardly helped to stimulate behaviour change and innovation in the EU.

Metrics will be vital to California's scheme but carbon reductions shouldn't be the only thing Carb measures - progress in cleantech innovation and job creation will be vital too.

But new and unforeseen opportunities would inevitably arise from the cap and trade scheme - along with the unintended negative consequences, Nichols said yesterday.

"When the nation is ready to address the growing danger of climate change as I believe it must and it will California's climate programme will serve as the model for a national programme. We believe that if we implement a cap and trade programme in California other states, the federal government and other nations will join with us."

Do flights of fantasy & innovation 'win the future' for the US economy?

Americans love innovation, particularly if they are venture capitalists or politicians.

Venture capitalists such as Kleiner Perkins Caufield Byers claim to be able to "see around corners" to anticipate the "next big thing". To do so, they must risk real-world capital on often untested ideas, ie innovation, that then become real-world profits, sometimes from companies that actually make things and provide services.

President Barack Obama said investment in innovation would be how the US would "win the future" by unleashing the ingenuity of business, leading to the country's Sputnik moment in his state of the union address he gave at the beginning of the year.

I had often wondered whether this focus on innovation was more than contemporary alchemy… the profits from innovation could become real gold for the investors, but what would be the benefit for the wider economy. Would jobs, taxes and other revenues flow out of the country?

Henry R. Nothhaft writing in the San Francisco Chronicle clarified this conundrum for me with a fantastic analysis of what this innovation-only policy means: outsourcing manufacturing to other countries such as China, while the US leads on the gamechanging innovations, creates problems for the economy, not jobs or revenue.

Innovation-only "explains why the $30 billion trade surplus in high-tech products that the United States enjoyed 10 years ago has become a $56 billion deficit," he says.

Consider that in 1980, America produced 42 percent of the world's semiconductors. Today, the United States produces only 14 percent of the world's supply of a device that we invented 53 years ago. And along with the movement of production offshore, 8 percent of R&D spending by U.S. semiconductor firms within the United States also has moved offshore. 

Americans in general appear to find gadgets and shiny new things more appealing solutions to climate change and transport issues. That explains the enthusiasm among VCs and politicians for electric vehicles rather than something a bit simpler to deploy, but less sexy, such as a comprehensive bus system.

Even academics get swept up into these flights of fancy when characterising what "innovation" could do for the future of US transport. Tyler Cowen, who is a professor of economics, lamented in the New York Times at the weekend that companies are being restricted in testing and developing technologies for "driverless" cars. Google has apparently requested a relaxation of laws in Nevada to allow it to test on the state's roads.

Prof Tyler has written in the past about how little benefit the average American may gain from innovation:

Although America produces plenty of innovations, most are not geared toward significantly raising the average standard of living. It seems that we are coming up with ideas that benefit relatively small numbers of people, compared with the broad-based advances of earlier decades…

Which is why his comments in the NYT on Sunday were all the more surprising when he described what I would view as a nightmare scenario on US roads:

The benefits of driverless cars are potentially significant. The typical American spends an average of roughly 100 hours a year in traffic; imagine using that time in better ways — by working or just having fun. The irksome burden of commuting might be lessened considerably. Furthermore, computer-driven cars could allow for tighter packing of vehicles on the road, which would speed traffic times and allow a given road or city to handle more cars.

I can't imagine an arena that an American would find more "irksome" than not having control of  their car. And doing something useful while commuting is not a "radical innovation" in countries that are willing to invest in public transport. Cars driven by computers - sorry to contradict the bright minds at Google - belong in the same category as Jetson-style personal spacecraft.

All this blue sky thinking when VCs talk about innovation can be a bit dizzying, which is why companies such as Solazyme come as a breath of fresh air.

Solazyme, the algal biofuels company, has been a great success story for its VC investors, which include VantagePoint Capital Partners, Braemer Energy Ventures and Lightspeed Venture Partners.

Last week, it started trading on NASDAQ after raising $198m on its IPO which exceeded expectations. Solazyme is focused on transport fuels, and has so far signed three increasingly large deals with the Department of Defense to provide hundreds of thousands of tonnes of algae-based fuel for the US Navy.

Those deals, and last week's IPO are ringing endorsements of the science behind Solazyme's technology. But bringing this innovation to scale is problematic, even for a successful startup such as Solazyme, and doubts remain over the scalability of the production of algal biofuels.

Solazyme said last week that it purchased its first commercial-scale plant in Illinois, funded in part by a $22m grant from the Department of Energy, according to Bloomberg.

But it will need much more capital than that to compete with the heavyweights in the oil and chemical industries. The IPO was part of this strategy but Solazyme will also have to partner with the competition - Chevron and Dow Chemicals and Unilever - are among those in the frame. The traditional companies also rely on innovations from companies such as Solazyme, creating a symbiotic relationship between startup and establishment.

So far, Solazyme, is possibly the closest to a breakthrough start up that can show VCs and presidents that the alchemy of investment innovation - with its magic formula of bringing a new idea to scale -  can turn into real gold for the US economy.