July 2003

"Of Yogurt, Energy, and E-Q-Tel"

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2003/08/11)
 

Each day sees new consumer breakthroughs, notably in convenience of consumption. Now, yogurt can be slurped from tubes, gulped from cups, chomped frozen or spooned.

Not so, new energy technologies – birthed in the warm wombs of public grants – they frequently lie stillborn and unknown, the topics of dusty proceedings and crum-bling color photo hype. Once, this was a subject of policyhand wringing. Various means to wean the U.S. off dependence on foreign resources were proposed: Project Independence; a National Energy Act billed as the moral equivalent of war; an unleashing of domestic energy resources development through deregulation. Now the dependency issue is the province of the prophets of sustainable energy and would-be IPO bubble blowers. The U.S. motto seems to be: we’d rather fight than switch fuels. Looming natural gas shortages and possibilities of international tumult do not deter us.

Why is that? Essentially because in our market economy, the future potential of the untried energy technology must compete with the marginal cost of the here and now sources of supply, abetted by ever-more-sophisticated financial technologies for future price risk management. Multi-formed, easier-to-eat with one hand yogurt reaches the consumer; hydrogen technology bubbles in trial technologies but does not reach the marketplace.

The National Renewable Energy Laboratory (NREL) of the Department of Energy thinks it knows the reason and has now published a report, "Bridging the Valley of Death: Transitioning from Public to Private Sector Financing" (the "Report") to explain. Essentially, it is a tale of two cultures that, according to the Report, do not really know each other – although I am inclined to believe that isn’t the case. One culture is the world of funding by the public sector – high risk, long-term research, some shared demonstration projects, hands-off competition, and the” hope that the private sector will exercise its option to further invest in entrepreneurial ventures based on these technologies." The other culture is comprised of private sector investors seeking returns on investment and profits. Of them, the report almost incredulously states, "As venture capitalists like to say – they are, after all, capitalists." In the shadow of alleged "vague understanding" between these groups falls NREL’s dramatically styled, cash flow "valley of death": the period between technology creation(a game at which the public funders will play) and "early commercialization" (which they won’t), where the prospects for an upturn in cash flow are progressively higher and, accordingly, the rate for capital is progressively lower. This is the time of "Market Focused Biz and Product Development," when someone already is trying to squeeze the yogurt into the tube and figure out whether kids will buy it, but no one will fund the uncertain advanced prototype. Angel and venture capital financing may not be available.

The Report offers a hybrid of a government/consultant-speak explanation of one primary source of this problem. It is something called "information asymmetry”: the entrepreneur knowing more about his technology and company’s prospects than investors or strategic partners. Multiple and varied prototypes are necessary. The drivers for new technologies are frequently technical researchers with limited business experience. Result: down in the valley, the private sector investor’s perceptions of resulting risk are too great. So what is a benevolent government to do? Foster "information exchanges," of course! If only we all could get to know and understand each other better…And, anyway, setting up non-profits, web sites and trade fairs is inoffensive fun and not obstructive of the ongoing work of the world. Feel like the old Bell Labs, even though the energy business is most Lucent-like in its bottom line orientation.

It does not do the NREL report justice to mock it for staying with this most traditional and eunuch-like of positions. Its authors know something about the real energy world – indeed, the real business world. There must be value added. In the "valley of death," there is a lack of real market-driven products and a market that is significantly served by commoditized products with low margins and high volatility. In short, there is an uncertain world with high risks, which is therefore not one investors necessarily will spring for. Unfortunately, Federally-sponsored. Spock guides to bringing-up-baby technologies won’t, by themselves, overcome the reflexive fear of failure.

In my view, the cultural chasm delineated by the Report is not, in fact, an accident of the division of the world into brilliant geeks and sleek MBAs. It reflects public policy, as strongly motivated by private corporate interests that, understandably, do not want to find them-selves competing with the outputs of a corporative government sector. Whence, the grudging political acceptance when Uncle Sam and companies (at least, most companies) form "public-private partnerships."

Interestingly, though, when the government really wants some-thing, it procures it. And if the technology is not there to respond to the procurement, it has begun to seek to create it. That is what is happening in the homeland security and defense areas. As an NREL footnote on what is blandly-styled, "novel co-investment partnerships with the private sector" notes: the CIA recently initiated the E-Q-Tel venture fund, and the U.S. Army has initiated a similar venture fund to assist with the development and commercialization of technologies that sup-port their missions by building more effective relations with private sector venture firms and potential innovators. Want a WMD-squirting yogurt tube that you can zap a bad guy with? Don’t wait for Dannon to develop it for you. Give them a call – or tap into innovative "subcultures." The same logic applies to the next new tiger in your tank or spark on your wire.

Which leads to a key question (whose answer is not self-evident): how serious is the government about identifying future sustainable secure sources of U.S. energy? Enough for a tax credit? Maybe. Enough for an E-Q-Tel? Certainly not, if you call it "industrial policy." Possibly yes, if you call it re-establishing America’s secure future through technology procurement.

Somewhere between the "valley of death" and the shadow of the squirting yogurt tube falls the future of America’s global ascendancy, as its fossil resources fade (or threaten to blacken the sky), and its efficient short-term marginal cost pricing renders thoughts about long-term capacity a matter off limits for policy response.

America’s technology engine is entrepreneurial; but its foresight needs to be an energy E-Q-Tel. Yogurt innovation should not outstrip energy innovation.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.